COMMUNITYBANKER THE OFFICIAL PUBLICATION OF THE MONTANA INDEPENDENT BANKERS ASSOCIATION SUMMER 2023 2023-2024 MIB BOARD OF DIRECTORS BIG SKY 2023 Convention Wrap-Up
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22 2023 MIB EXECUTIVE OFFICERS Tim Schreiber, President Farmers State Bank tims@farmersebank.com Loren Brown, Vice President Ascent Bank, Helena lbrown@ascentbank.com Amber Brown, Secretary Peoples Bank of Deer Lodge abrown@pbdl.net Clinton Gerst, Treasurer Bank of Bozeman cgerst@bankofbozeman.com Andrew West, Immediate Past President Eagle Bank, Polson awest@eaglebankmt.com Kenny Martin, ICBA State Director First Montana Bank, Helena kmartin@firstmontanabank.com 2023-2024 MIB BOARD OF DIRECTORS Tom Christnacht First Security Bank of Deer Lodge Laura Clark Opportunity Bank, Helena Bill Coffee Stockman Bank, Miles City Daniel Day Bank of Montana, Missoula Shawn Dutton First Security Bank of Roundup Brice Kluth First State Bank of Shelby Scott Mizner American Bank, Bozeman Mike Moore Stockmens Bank, Cascade Joel Rosenberg Three Rivers Bank of Montana, Kalispell Phil Willett Pioneer Federal Savings and Loan, Dillon ASSOCIATE BOARD MEMBER Ryan Fritz Citizens Alliance Bank rfritz@citizensalliancebank.com MIB STAFF Jim Brown, Executive Director Montana Independent Bankers jbrown@mibonline.org ©2023 Montana Independent Bankers | The newsLINK Group, LLC. All rights reserved. Community Banker is published four times each year by The newsLINK Group, LLC for the Montana Independent Bankers and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the Montana Independent Bankers, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. Community Banker is a collective work, and as such, some articles are submitted by authors who are independent of the Montana Independent Bankers. While Community Banker encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at 855.747.4003. Montana Independent Bankers 1812 11th Ave. P.O. Box 4893 Helena, MT 59604-4893 406.449.7444 jbrown@mibonline.org mibonline.org 16 30 6 President’s Message Bank Income and Liquidity Concerns By Tim Schreiber, President 8 Executive Director’s Message MIB: Stronger Than Ever By James E. Brown, Esq., Executive Director 10 From The Top By Derek Williams, Chairman, ICBA 11 Flourish By Rebeca Romero Rainey, President and CEO, ICBA 12 MIB 2023 Awards 14 Portfolio Power Barbell Structure May Be the Right Regimen By Jim Reber, President and CEO, ICBA Securities 16 UnderstandingYour Bank’s 401(k) Fiduciary Liability By Andy Phillips, Benefit & Financial Strategies, LLC 18 Featured Associate Member Citizens Alliance Bank 19 2023 MIB Important Dates 20 Banking Trouble With Liquidity By Andrew West, Eagle Bank 22 Compliance Q&A Summer 2023 By Bill Showalter, Senior Consultant, Young & Associates, Inc. 26 Member News ICBA 40 Under 40 27 The FDIC Was Audited. What Does That Mean for Community Banks? Four Things To Know About the FDIC Audit By Melissa DeDonder, Pinion 30 MIB’s 56th Annual Convention and Trade Show 31 Thank You Convention Sponsors 32 2023 MIB Membership Directory 33 MIB Associate Member Resource Guide 34 MIB Associate Member Banks 35 Bank Training Webinars Contents SUMMER 2023 Cover photo: Amber Brown and Joel Rosenberg from 2023-2024 Board of Directors NOT pictured. Community Banker 5
As we begin to feel things heating up in midsummer, I can’t help but think of the tremendous momentum MIB has built in the last few months and how proud I am to be a small part of it. Since my last message in April, it has been a busy time for MIB board members. For several of us, this included a trip out to Washington, D.C., for ICBA’s Capital Summit in May, followed by a return trip out to D.C. for me as a member of the ICBA Bank Operations Committee in June. Both visits had numerous memorable community banking experiences that I will hold on to for quite some time. Although this article will highlight much of this for you, I shared in far greater detail all that took place when we gathered together in July. The Capital Summit in May included ICBA committee meetings for many of us, general and breakout sessions, and meetings with our state congressional leaders. My time there was kicked off by attending my ICBA Bank Operations Committee meeting whose main topic of discussion was what the U.S. Securities and Exchange Commission was doing in the fight against cryptocurrencies and other digital assets. The committee’s guest for the discussion was Valerie Szczepanik, the Director of FinHub at the SEC, which is the arm of the SEC investigating and bringing enforcement actions against crypto and stablecoin companies. It was an incredibly fascinating meeting filled with vast amounts of information in which Ms. Szczepanik was very cautious not to discuss any items related to ongoing investigations. Interestingly enough, the SEC filed securities charges against two of the largest cryptocurrency companies operating in the U.S. within three weeks after this meeting. Of all the meetings during the Summit, I think the one that will stick with me the most wasn’t even on any Summit agenda. It just so happened that while we were all out in D.C., the Senate Banking Committee held hearings on the collapse of Silicon Valley Bank (SVB) and Signature Bank with testimony being given by each bank’s CEO and Chairmen. It was incredibly interesting being in the audience and witnessing what I can only describe as a modernday tar-and-feathering of the bank executives. I flew back to D.C. again in June for an ICBA Bank Operations Committee meeting with representatives from the Federal Reserve. While I was there, I took advantage of the good timing to attend a weekly “Montana Coffee” session that Montana’s congressmen hold for constituents in D.C. from Montana. I was able to have discussions with representatives from both Daines’ and Tester’s offices and was able to grab a few minutes with Tester to discuss some updates on a few community banking issues. The Committee’s main topic of discussion was the upcoming launch of the Federal Reserve’s FedNow product (their 24/7 bank funds transfer system). In addition to the regular 20 community bank member committee, this meeting included eight officials from the Federal Reserve’s payment division and a significant number of ICBA staff. After listening to the Fed officials discuss how the product would operate and that they would like to see as many banks opt into using the product as possible, I expressed a couple of concerns that I personally had as a community banker — those of income and liquidity. First, with the new product providing direct payment rails between banks that I see effectively replacing BANK INCOME AND LIQUIDITY CONCERNS TIM SCHREIBER, PRESIDENT PRESIDENT’S MESSAGE 6 Community Banker
payment methods just as debit and credit cards in the future, I asked how community banks are supposed to replace the lost revenue that this will create with the loss of interchange fees. Their response was a predictable one that talked about how the new system will bring efficiencies to financial institutions leading to cost savings rather than replacing the income source. I fail to see how those offsetting items could possibly be equal. Second, and perhaps the most frightening aspect of FedNow creating a funds transfer system that operates 24/7 is the liquidity risk it creates. While the Fed does have controls in place to help manage this risk, I asked the group to think about what would have happened had the FedNow system been in place at SVB and other failed institutions this past March. As quickly as deposits ran out of those banks without FedNow, imagine how drastically the speed of withdrawals would have been magnified, giving customers the ability to transfer funds out to other banks via an app on their phones. I stated that my greatest fear of the product was how fast a rogue social media post could spread like wildfire and cause an exodus of deposits that would be absolutely crippling. The way George Bailey (the local banker in the movie It’s a Wonderful Life) calmed his customers’ panic during a bank run may be a thing of the past, but with this product, we could be thrown so far into a modern-day immediate gratification run that no institution could retain any level of response time whatsoever. The Fed’s response to that question was that they would be monitoring anomalies in real-time in the background and would reach out to a predetermined officer at the bank to see if the bank wanted the FedNow connection shut down, at which time they could turn it off. While there are so many concerns I have with this statement, the biggest one is that small community banks would then be relying on the Federal Reserve to monitor and manage their deposits at all hours of day and night, seven days a week. By the time the systems were to be shut down, it could already have been too late. We have much to do as an organization here to stand strong and continue to advocate for what’s in the best interest of smaller community banks. I look forward to discussing this in further detail with you and so much more at our upcoming convention. I realize that although I am writing this beforehand, you will not be reading my words until after we have met. Know that I am very much looking forward to spending those few days with you, building even greater connections, brainstorming new solutions and carving out a better direction together, and I can already promise you that we will have had yet another memorable time. Until then … Tim Schreiber Member FDIC 38368 Whether your loan is large or small, get faster turnaround from our experienced correspondent team. Whatever Loan Amount You’re Looking For, We Can Help. Partner with Bell for: • Purchase and selling of participation loans • Bank stock and ownership loans • Holding company loans and lines of credit • Reg. O loans to bank employees, insiders or directors Craig McCandless Call me at 406.850.3790 Based in Billings, Mont. Serving, Montana, Wyoming and Idaho We have much to do as an organization here to stand strong and continue to advocate for what’s in the best interest of smaller community banks. Community Banker 7
EXECUTIVE DIRECTOR’S MESSAGE Welcome to the post-convention issue of the Community Banker. I am pleased to share that the Annual Convention and Tradeshow was a great success, with many attendees reporting that it was the best MIB convention to date. Attendees had fun participating in a variety of fun activities in Big Sky, like the whitewater rafting and golfing. MIB was fortunate to have ICBA Chair Derek Williams join us. Derek provided a fun and informative keynote address during the closing dinner. He spoke to the need for the continued partnership by and between ICBA and MIB. He also spoke to the benefits both associations provide to Montana’s community banking industry through issue advocacy and member relations services. Derek also notified attendees that the 2024 ICBA national convention will be held in Orlando on March 14-17, so mark those dates in your calendar now. MIB was also blessed to have a great lineup of convention speakers. The education sessions were well received by those in attendance. Timely topics ranged from covering Montana’s economic forecast to the growth of the fintech industry. And, of course, attendees heard from Melanie Hall, Montana’s Commissioner of Banking. Commissioner Hall provided a recap of banking legislation enacted by the 2023 Montana legislative session, including a bill passed to allow banks to provide employee housing. In addition to the great list of speakers and education presentations, the tradeshow and vendor/associate member recognition night was widely attended. Representatives from some 22 member banks were in attendance — the largest turnout for a convention in the last 15 years. What’s more, MIB’s bank members were joined this year by some 67 different associate member businesses, including 20 exhibitors — most of which are faithful MIB associate members. MIB’s associate members have become part of Montana’s community banking family, and we enjoy seeing our friends and partners each and every year. The success of this year’s state convention is also directly attributable to the high level of sponsorship received from MIB’s associate members. To this end, MIB’s board and officers recognize and appreciate the many contributions, monetary or otherwise, our association partners provide, and we thank those who sponsored and attended the convention. Please be sure to check out the page in this issue that lists these sponsors and, in turn, thank them with your business. One of the best takeaways from the convention are the photographs that memorialize our time together. That’s why you will find, within this edition, pictures capturing the essence of the 2023 MIB Convention. I encourage you to turn to those pages and see all the memories created from this fun and exciting convention. Turning now to other association events, in May, MIB traveled to Washington, D.C. for the ICBA Washington Policy Summit. The national summit is another way MIB partners with ICBA to benefit Montana’s community banks. The Summit is the community banking industry’s best opportunity to make known to federal regulators and policymakers what issues are on the minds of Montana’s community bankers. Following in the footsteps of Jefferson Smith, MIB board members traveled MIB: STRONGER THAN EVER JAMES E. BROWN, ESQ., EXECUTIVE DIRECTOR 8 Community Banker
to D.C., including MIB President Tim Schreiber, Shawn Dutton, Kenny Martin, Loren Brown, Scott Mizner and outgoing ICBA State Director Pete Johnson. During their time in our nation’s capital, the group met personally with all four of Montana’s congressional delegation, while taking in a Senate Banking Committee hearing on the failures of Silicon Valley Bank and Signature Bank of New York. The group discussed with Montana’s congressional delegation several national issues of interest. These issues included, but were not limited to: (1) eliminating unfair farm credit services and credit union tax subsidies and proper formulation of the next farm bill credit programs; (2) keeping credit unions within their proper mission and proper oversight of the same; (3) implementing adequate examination and supervision of the too-bigto-fail institutions, particularly in light of the recent bank failures; (4) supporting the SAFE Act, legislation to create a safe harbor from federal sanctions for banking cannabisrelated businesses; and (5) opposing postal banking. ICBA’s Washington Policy Summit is the most effective way to directly communicate the banking industry’s positions on federal policies to those making the policies. Your voice in this regard is important and needed. If you are interested in participating in the 2024 Washington Policy Summit, please contact me. There is a scholarship opportunity for first-time participants. We very much look forward to seeing you at next year’s state convention and tradeshow. The event will be held in Missoula at the Hilton Garden Inn. The dates are slated for July 17-19, 2024. MIB has not held a convention in Missoula since 2018, and we are excited to make a return to the “Garden City” in the summer of 2024. Thanks again to all those who attended this year’s convention. I hope you have a great rest of your summer. MIB’s associate members have become part of Montana’s community banking family, and we enjoy seeing our friends and partners each and every year. “Over my 16-year tenure with Bankers’ Bank of the West, every minute of our work has been dedicated to bringing solid expertise, services, and products to ensure community banks sustain a competitive edge. We’ve certainly grown strong as partners, looking out for each other—and we look forward to continuing that tradition.” Bankers’ Bank of the West LOAN PARTICIPATIONS|MERCHANT SERVICES|ATM DEBIT|WIRES bbwest.com | 800-873-4722 www.bbwest.com President and CEO Bill Mitchell We Champion Community Banking Member FDIC Community Banker 9
Community bankers are so much more than financial providers; we are leaders who strive to use our strengths to do what’s right for our customers and communities. To them, we are advisors, partners and friends, and sometimes that means our actions need to be as much about what we don’t do as what we do. Take lending. While we certainly always consider the underwriting principles that have been proven over the years, we are committed to providing our customers with the best chance of success. In some cases, that means helping them consider alternatives, sharing financial education and offering more options. For instance, I’ve had to turn down customers for loans they thought they wanted, only to have them come back later and thank me for saying no. They realized that they would have struggled with that burden, and they appreciated that I had their best interests at heart. It isn’t always a perfect science, but I do my best to give my customers the help they need when they need it. I’m not alone in this. As community bankers, we share these common values. We don’t want to see a business or a customer fail, not only because of our relationship with them but also because we want the best for our communities. I’m sure we can all share stories about those borrowers we’ve supported who came to us seeking refinancing for an online loan that wasn’t right for them at all. Yet, that’s why we do what we do: shore up the best chance for success for those we serve and help them realize their dreams, not get buried under the weight of them. We do this because, for community banks, lending is so much more than a profit center. By helping our customers grow and thrive, we help our communities do the same. These are the same communities in which we live, work, worship, play and raise our families. By supporting the people and businesses we know and understand, we are supporting our employees and our shareholders, and making our communities better places to live. As you read this month’s issue, I hope you’ll think about the times you’ve made a difference in your customers’ lives, both when you’ve made loans and when you’ve encouraged other approaches. It speaks to the heart of what we do as bankers: We provide the counsel that helps our customers continue to thrive. And that’s the hallmark of a true leader. By supporting the people and businesses we know and understand, we are supporting our employees and our shareholders, and making our communities better places to live. FROM THE TOP BY DEREK WILLIAMS, CHAIRMAN, ICBA QUOTE OF THE MONTH “A good leader is a person who takes a little more than his share of the blame and a little less than his share of the credit.” — Arnold Glasow, humorist and businessman 10 Community Banker
We celebrated Independence Day, and I couldn’t help but reflect on the vital role community banks serve throughout this country. We represent Main Street America, creating a firm financial foundation for our nation’s consumers, small businesses, municipalities, local governments and more. It’s a position community banks take seriously, and one we are honored to hold on behalf of the communities we serve. When we think about the current economic environment, without a doubt, we can say that we’ve weathered this storm before. That’s what makes us unique: we are there for our customers regardless of the economic situation. Megabanks and credit unions nationwide are cutting back on balance sheet areas to tighten their bottom lines, while community banks stand ready to support local businesses and neighbors who are feeling the heightened effects of the ebbs and flows of the economy. Just look at how community banks responded to the global pandemic: introducing tools and solutions to support small businesses in the Paycheck Protection Program (PPP). Or consider the consistent, forwardlooking care that community banks apply to their unique community base. From seasonal businesses and service-based and manufacturing organizations to a wide array of other models, community banks tailor their offerings to the needs of individual customers. That’s because community banks don’t just look to today’s returns, they commit to the long haul as a true partner, helping customers withstand market turbulence and come out successfully on the other side. It’s precisely in an environment like the one we have today that community banks flourish because they double down on relationship banking. That connectionbased approach to finance becomes even more important in difficult economic times because, above all, a community bank’s goal is to make a difference in the financial lives of those they serve. So, as you read this issue, notice that our top lenders share one key attribute: a commitment to the customer relationship. They are helping their customers prepare for a wide variety of economic scenarios in ways that are best suited to that business or person. It’s about helping their customers make the right decisions for their financial lives and supporting them as they go. I’m proud to say that for nearly 250 years, community banks have served at the center of our nation’s finances. That’s because, to put a spin on the well-known John F. Kennedy Jr. quote, community banks ask not what their community can do for them, but what they can do for their community. And that’s a business model that will stand the test of time. Rebeca Romero Rainey is President and CEO of the Independent Community Bankers of America. Community banks … commit for the long haul as a true partner, helping customers withstand market turbulence and come out successfully on the other side. FLOUR I SH BY REBECA ROMERO RAINEY, PRESIDENT AND CEO, ICBA WHERE I’LL BE THIS MONTH I’ll be attending our summer board meeting, looking forward to planning for the future of this independent industry we represent. Community Banker 11
To recognize upcoming leaders in Montana’s banking community, MIB honors exceptional young bankers each year. This award is based on the community banking values of good citizenship, community service and sound banking skills. It recognizes the impact the candidate has on his or her business each day and the difference he or she makes by investing in their community. This year, Cynthia Koch and Thomas Peterson were each presented with the 2023 Outstanding Young Banker Award. Cynthia Koch has worked for Three Rivers Bank of Montana since 2014 and is currently the Assistant Controller. In a recommendation letter, Patricia L. Leichliter, CFO of Three Rivers Bank of Montana, said, “I have never come across a brighter, more intellectually curious and committed employee than Cynthia Koch. One needs no further evidence than the fact that Cynthia completed an AA in 2013 and a BS in accounting in 2020 as a single parent of two children and working full-time in a demanding position.” Family is important to Cynthia. She has involved herself in volunteer opportunities at the elementary school that her children have attended for the last four years. As they have found interest in sports, she has taken on coaching volleyball through Parks and Recreation to share in the experience and mentor other young girls through their passion for volleyball. Seeing the importance of mentorship has led Cynthia to join the Big Brothers Big Sisters of Northwest Montana as a member of the Board of Directors. Thomas Peterson is currently the Loan Officer at First Montana Bank. Thomas earned his BA in petroleum engineering from Montana Technological University and worked in that field prior to getting into banking. He enjoys the relationship-building aspect of the job — with clients and his peers. Kenny Martin, Market President of First Montana Bank, wrote in a recommendation letter, “Tom Peterson exemplifies community banking all day, every day!” Education is important to Thomas. He looks forward to furthering his knowledge of bank operations, credit management and customer development. He also enjoys mentoring and helping the youth in his community by volunteering as a coach for youth sports, both baseball and basketball. 2023 MVP BANK AWARD WINNER: Peoples Bank of Deer Lodge OUTSTANDING VENDOR OF THE YEAR: Grizzly Security 2023 2023 OUTSTANDING YOUNG BANKERS MI B ��� � AWARDS 12 Community Banker
• Down payment assistance • 30-year, low-interest rate mortgages • Quality in-state servicing • Ask your lender about Montana Housing loans HOUSING.MT.GOV facebook.com/montanahousing Follow Montana Housing on Facebook Community Banker 13
PORTFOLIO POWER BARBELL STRUCTURE MAY BE THE RIGHT REGIMEN BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES As yields continue to set cyclical highs during 2023, many community bankers have asked me questions about what their next best purchase should be. Some of them have been surprised to hear an answer that I’ve been giving for the better part of this decade, even though absolute yields and the shape of the curve look nothing like, say, 2015. Since the difference in yields between short maturities and longer ones is still upside down (i.e., the curve is inverted), most bond analysts, economists and the Federal Reserve itself are predicting that we’ll see some economic slowdown, cooling of inflation and eventually some rate cuts. (Although to be sure, they differ greatly as to the timing.) If and when we see a normalization to the shape of the curve, a portfolio structure that would perform well is a “barbell.” Now, let’s review the structure and the advantages of such an exercise for your investment portfolio. REPETITION AND RESISTANCE The barbell is simple to build and easy to evaluate later. It just requires an investor to define what it considers to be suitable short-term and long-term investments. Of course, community bankers have differing opinions on what counts as a long-term investment, but generally speaking, those with durations of five years and greater are considered to be on the high end of the pricerisk scale. Once you’ve identified the target investments, the portfolio manager will simply purchase roughly similar amounts of both and keep the weightings balanced through ongoing monitoring. By having a collection of bonds that are heavy on both ends of the maturity spectrum, you’ve successfully built a barbell. CLASSIC STRUCTURE Among the bonds that meet community banks’ criteria of liquidity and credit quality are those issued by the Small Business Administration (SBA). They are direct obligations of Uncle Sam, and new issue volumes continue to set records, so the SBA market continues to broaden and deepen. Two of the more visible products are 7(a) pools, which are true floating rate instruments, and Development Company Participation Certificates (DCPCs), which are fixed rate pools with long average lives. It makes logistical sense to consider them together for a barbell. For one thing, credit quality is unsurpassed. For another, one would be hard-pressed to find two bonds with more disparate price-risk profiles. For still another, we can address premium risk that attaches to the 7(a)s by pairing them with a DCPC that is available at a price near GUEST ARTICLE At this point in the rate cycle, both ends of the barbell yield much more than they would have a year ago, so an investor today has a big head start over 2022. 14 Community Banker
par. Finally, at this point in the rate cycle, both ends of the barbell yield much more than they would have a year ago, so an investor today has a big head start over 2022. END-OF-CYCLE PROJECTIONS We created a hypothetical barbell portfolio by modeling equal amounts of 7(a)s and 25-year DCPCs. For the record, the actual pools are SBA 540099 at a purchase price of 108.875, and SBAP 2023-25 D 1 at 100.00. We made note of their market values and yields as of April 30, 2023, and in a 100-basis point (1.00%) lower environment over the next year. This rate-cut assumption was driven by both the fed funds futures market and by the Fed’s most recent projections. (At present, market-driven expectations are calling for about five 25-basis point cuts over 12 months, while the Fed is estimating about two.) Here are the more important average weights and measures: Two variables could make these projections either better or worse than actual. One is that we are assuming a parallel shift downward in the yield curve. What’s more likely to happen is steepening, by virtue of short rates reacting more in step with Fed easing, and longer rates moving less in comparison; that would mean the fixed rate pool wouldn’t appreciate in price as much. The other is that DCPCs carry a penalty for “voluntary conversions” (refinancings, for example) for 10 years that is passed through to the investor. Since we can’t assume any penalties will actually be paid, we ignore them for this projection, although the yield could be enhanced by prepayments. As it is, most of the barbell’s yield will be maintained, while the duration remains unchanged, and the positions have about a 3% unrealized gain. That’s a success. STRETCH BEFORE YOU LIFT As always, a word of advice from your trainer. These securities will probably produce very little cash flow in the early stages, especially if the pools are new. As they season, it’s more likely the floaters will have faster prepayments, so you’ll need to monitor your positions to keep the fixed/floating balance in place. So, if your bond portfolio is suffering from a lack of recent energy or isn’t built to run into the headwinds from the Fed’s monetary policy, take a trip to your favorite broker’s financial fitness center. A session in barbell lifting can help flex your community bank’s economic muscle. Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Current Mid-2024 Yield 5.26% 4.76% Effective Duration 3.16 Years 3.10 Years Market Value 104.44 107.40 Strong foundations for your future. Trusted by Montana financial institutions for over 60 years. (406) 443 . 2340 cwg-architects.com 650 Power St. Helena, MT + OPPORTUNITY BANK | BILLINGS HEIGHTS Community Banker 15
UNDERSTANDING YOUR BANK’S 401(K) FIDUCIARY LIABILITY BY ANDY PHILLIPS, BENEFIT & FINANCIAL STRATEGIES, LLC GUEST ARTICLE I’m assuming you offer your employees a robust retirement plan. Just like in banking, ERISA compliance regarding your retirement plan is paramount. Your banking regulator looks for red flags relating to credit or flood determinations or maybe BSA issues. The Department of Labor looks for problems relating to ERISA violations. The Employee Retirement Income Security Act of 1974 sets standards and regulations for private-sector employee benefit plans. The number one key feature of ERISA is Fiduciary Responsibility. We all understand the definition of fiduciary, but do you know who or how this impacts your bank? Fiduciaries generally include the Plan Sponsor/Employer, the Plan administrators, Trustees, Investment Committees and other individuals who have “control” over the plan’s management or assets. As the employer, your bank is most likely the Plan Sponsor, which in and of itself has fiduciary responsibility and liability for managing the plan assets. In many cases, individuals like the CEO or CFO may be listed as a Trustee in the Plan documents. As Trustee, these individuals (can be more than one) also have fiduciary responsibilities and liability. Additionally, some banks have an Investment Committee that could also be considered a fiduciary and thus be responsible for and liable for maintaining proper documentation of their investment decisions and actions taken on behalf of the plan. What does “fiduciary” responsibility mean? Every fiduciary has a duty to act in the best interests of the plan participants and beneficiaries. This includes such things as prudently managing plan assets, offering a diversity in investments and ensuring compliance with all applicable laws and regulations. What steps can help reduce bank and individual liability? 1. Have a clear understanding of its fiduciary duties and obligations under ERISA. 2. Document decisions and processes including minutes from trustee meetings, investment reviews and due diligence processes. This can help demonstrate that the trustee acted prudently. 3. Seek professional advice. This can include engaging investment advisors, legal counsel and consultants with expertise in retirement plans. 4. Conduct regular plan reviews and audits. Review operations, investments and administrative procedures to ensure ongoing compliance. 5. Engage with qualified service providers such as record keepers, investment managers and TPAs (third-party administrators). 6. Consider purchasing fiduciary liability insurance which can help cover legal costs, settlements or judgments resulting from alleged breaches of fiduciary duties. What types of events might cause the Department of Labor to conduct an audit or start an investigation of a retirement plan? Some common triggers are: a. Participant complaints: The DOL may initiate an audit based on complaints or concerns raised by plan participants or beneficiaries. The complaints can relate to issues such as late or improper distribution of benefits, mishandling of participant contributions or other plan administration concerns. b. High Risk Designation: The DOL may target certain plans for audit based on risk assessment criteria. Factors that could contribute to a high risk designation include complex plan structures, prior compliance issues or industry-specific risks. 16 Community Banker
c. Employee Benefit Security Administration (EBSA) initiatives: The EBSA, a division of the DOL, may target industries or issues identified as having a higher likelihood of non-compliance. d. Information from other sources: The DOL may receive information from external sources, such as media reports, whistleblowers or other regulatory agencies, that raise concerns about a specific retirement plan. e. Random selection: Like the IRS, the DOL may conduct random audits as part of its regular enforcement activities. It is important for plan sponsors and fiduciaries to be aware of their responsibilities and ensure compliance with applicable laws and regulations to minimize the likelihood of a DOL audit. Regularly reviewing your plan’s investment options/fees, updating plan documentation, maintaining adequate records, fee benchmarking and staying informed about regulatory changes can help mitigate compliance risks. Just like violations of a BSA audit or Flood Determination audit can lead to fines and penalties, so can breaches of fiduciary duties. Some of the penalties and consequences could include: 1. The EBSA has the authority to investigate fiduciary breaches and take enforcement actions. The DOL may pursue legal action to recover losses on behalf of the plan and participants, impose civil penalties and require corrective actions to be taken. 2. Violations may result in the fiduciary being required to restore any losses incurred by the plan as a result of the breach. This can include returning misappropriated assets, compensating participants for losses and paying for any associated damages. 3. In cases where prohibited transactions occur, such as self-dealing or improper use of plan assets, excise taxes can be significant and may include additional penalties. 4. Plan participants and beneficiaries can bring lawsuits against fiduciaries for breaching their duties. If a lawsuit is successful, fiduciaries may be required to pay damages to the participants or beneficiaries harmed by the breach. 5. Fiduciaries can be held personally liable. This means that their personal assets may be at risk to satisfy any legal judgments or settlements resulting from the violations. Civil monetary penalties can be imposed by various regulatory agencies including the DOL and the IRS. 6. Criminal penalties can be imposed resulting from intentional and willful violations of ERISA. This can include imprisonment. It is important to note that criminal penalties are generally reserved for cases involving intentional misconduct, such as embezzlement, fraud or other deliberate and fraudulent acts. If you suspect violations of ERISA, it is advisable to report the matter to the appropriate authorities, such as the DOL or the DOJ. Andy is a long time Montana resident living in Bigfork, Mt. He can be reached at (480) 688-1011 or andy@benefitandfinancial.com. Representatives offer products and services using the following business names: Bene t & Financial Strategies, LLC — insurance and nancial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC — securities and investments | Ameritas Advisory Services (AAS) — investment advisory services. AIC and AAS are not affiliated with Bene t & Financial Strategies, LLC. Community Banker 17
FEATURED ASSOCIATE MEMBER CITIZENS ALLIANCE BANK Like many of the other community banks throughout our great state, Citizens Alliance Bank has a proud and storied history. Since its inception in 1902, it’s seen its fair share of successes and challenges. Making it through the Great Depression and Great Recession come to mind, speaking to the resiliency of its customers, staff and owners — the Forstrom brothers. The bank has been in the Forstrom family since 1955, when Kelly and Norma Forstrom purchased their first shares of the bank after saving enough of Norma’s school teaching wages to come up with the initial $5,000 down payment. What started as a one-location bank with $3 million in assets, employing six people, has now grown to $1.4 billion in assets with over 200 staff members in 16 communities throughout West Central Minnesota and West Central Montana. More recently, the bank’s long history includes serving Montanans. With the acquisition of First Valley Bank in the quaint town of Seeley Lake in 1998, Citizens Alliance Bank’s Montana story began. While landing in Seeley Lake, MT, may seem like a leap for a rural West Central Minnesota bank to many, the humble, down-to-earth and close-knit nature of the community fits the bank profile like a glove. Headquartered in Clara City, MN, with a population of 1,350, the bank understands rural community banking and the responsibilities that come with it. In these communities, Citizens Alliance Bank staff members aren’t just bankers. They’re active in the local associations, town celebrations, school boards and volunteer fire departments, and they host and support the fundraising efforts for those in their communities who have fallen on difficult times. Those values make it no surprise that the bank saw early success in Montana. That success drove the desire for the bank to expand. Fifteen years later, a 50-mile drive from Seeley Lake landed the Forstrom brothers in Lincoln, MT. Not long thereafter, First Bank of Lincoln was acquired in 2014. Fortunately for Citizens Alliance Bank, mergers come with not only bank assets but also the staff. Amongst the great people joining the team was a one-of-a-kind banker, Kenny Martin, whose quick wit, one-liners and unrivaled ability to develop relationships was the catalyst for further expansion. As President of the Montana Independent Bankers board, Kenny worked closely with other community banks in the state and recognized the value these partnerships and friendships provided. Those partnerships helped introduce him to a young banker in Great Falls who he took a chance by hiring and opening a loan production office in 2017. The office didn’t come with much fanfare. It was tiny. There wasn’t any bank signage on the exterior of the multitenant downtown office building it was housed in. There weren’t advertisements to inform the community the bank was there. It simply started by banking the local lender’s relationships, and the referrals that came from providing a banking experience one can only get at a community bank. Despite officing out of what one of the Forstrom brothers described as a “coat closet,” the customer base was growing significantly. The response from those customers in the Great Falls community made it clear to the bank’s Chairman that the bank needed to reciprocate the support the community was providing. That decision led to the acquisition of land and the construction of a beautiful three-story bank overlooking the Missouri River, with views of the Highwood, Little Belt and Big Belt Mountains. The Great Falls location now employs 14 great team members and is a far cry from the one-employee “coat closet” bank it started as. Joining the Seeley Lake, Lincoln and Great Falls footprint, the bank most recently added the Granite Mountain Bank staff and customers to the Citizen’s Alliance Bank family and are thrilled to have the opportunity to work alongside them in serving the Butte, Philipsburg and Drummond communities. Kenny Martin remarks, “As for that young lender who started a loan production office in Great Falls, it’s been an exciting and memorable journey. I now oversee the six Montana branches of Citizens Alliance Bank and am proud to represent the MIB board as its liaison to associate members. As an associate member myself, I can attest to the value this group of incredible women and men can bring your business and your life. I’ll forever be grateful to that one-of-a-kind banker who introduced me to this network of outstanding people I now call fellow MIB board members. Over the years, they’ve been mentors, supporters and friends. Without them, my career and Citizens Alliance Bank would look much different. Whether you are a member bank or an associate member, trust that this group and the association’s great staff are working tirelessly to advocate in ways that will support your business, your customers and your communities. I’ve experienced it firsthand.” 18 Community Banker
SEPTEMBER 16 U of M Tailgate — Griz vs. Ferris State 4:00-6:00 pm OCTOBER 13 Fall Board Meeting, Bozeman OCTOBER 14 MSU Tailgate — Cats vs. Cal Poly NOVEMBER 1-2 Women in Banking Conference MIB 2023 IMPORTANT DATES SAVE THE DATES Missoula September 16 Bozeman October 14 assistant@thunderdomelaw.com RSVP Montana Independent Bankers T A I L G A T E Community Banker 19
BANKING TROUBLE WITH LIQUIDITY BY ANDREW WEST, EAGLE BANK Throughout history, intrepid men have ventured around the globe and occasionally stared into the abyss, and the abyss has stared back. Sometimes, it was nothing more than a frightening experience, but for others, it ended in disaster or near disaster. Right now, I believe, bankers are staring into the abyss and wondering either quietly or possibly loudly, if we are going to succumb to the abyss or if disaster will be averted. We are at a perilous point in our banking journey as we experience the most severe and rapid interest rate increases the country has seen in well over 35 years. The consequences are not fully known, but preliminary findings are shocking. Of Montana’s 37 banks, 29 saw deposit contraction in the first quarter of 2023. In fact, Montana annualized average deposit growth in Q1 2023 was negative 13.1%. This is not insignificant. Banks that were swimming in deposits during the pandemic are now experiencing a liquidity crunch impossible to predict two years ago. What is driving this exodus? While it is a complex problem with many possible factors, I believe there are two primary causes behind the rapid depletion of liquidity. First and likely the lesser of the two factors is a “flight to safety.” When the FDIC decided to make the depositors of two recently failed banks whole, they sent a signal to customers that the bigger banks were safer because the FDIC would not let these large banks’ depositors lose money. While it is understood the FDIC took this position to prevent contagion, it reinforced the idea of “too big to fail.” The result is that depositors believe their uninsured deposits are inherently safer in bigger banks because the FDIC will cover them regardless of policy limits. This negatively impacted small- and mediumsized community banks as their customers sought the perceived safety of the larger banks. How much deposit runoff is attributable to this factor is unknown and difficult to quantify. It was an undoubtedly difficult decision to make at the highest levels of the FDIC and may have been the correct decision, but the unintended consequence is the creation of a perception that the FDIC will always look after big banks and thus, your money is safer there. Again, difficult to quantify, but impossible to ignore. The second, and likely most impactful, reason behind the tremendous deposit runoff is the rapid interest rate increases instituted by the Federal Reserve Bank to slow inflation that recently hit a 40-year high. The theory was that the increased cost of credit would cool the economy and bring inflation back down to the desired level of 2%. The unintended outcome is that consumers are fleeing traditional banks for alternative products such as institutional CDs and U.S. Treasuries. And who can blame them? It is not unheard of in today’s market to invest in vehicles generating 5% or more on fully liquid accounts. Banks have increased deposit rates, but not steeply or rapidly enough to slow the bleeding. Many banks have been caught by surprise when their customers abandoned ship so quickly. With interest rates extremely high compared to the last 15 years, borrowing has slowed, and banks cannot add enough higheryielding credits to fully offset the now much higher cost of funds. The result is net interest margins are taking a hit, and, if they haven’t yet, they are about to soon. Many banks have been forced to either borrow Fed Funds or utilize the Federal Reserve’s Bank Term Funding Program, neither of which are attractive alternatives. Compared to recent funding costs, these funding sources are exceptionally expensive and depending on each bank’s balance sheet and deposit losses, are going to wreak havoc on the Net Interest Margins across the land. Banks have become liability sensitive practically overnight. And, we haven’t even mentioned the disappearance of non-interest income related to declining mortgage originations. To say it is a challenging time for banks would be an understatement. GUEST ARTICLE 20 Community Banker
While it is understood that high inflation is bad for the country, the side effects of rapid interest rate increases on community banks cannot be ignored by the Federal Reserve. If they keep pushing interest rates higher as is expected, it will exacerbate the situation and community banks will suffer mightily. Additionally, there could be a potential impact on the FDIC’s deposit insurance fund balance which is already below target levels. There is no easy answer to the current situation and never mind the policies that caused the problems in the first place. Community banks cannot be sacrificed in the name of inflation reduction when they had nothing to do with causing the problem and are truly essential to local economies. Historically, the Fed has overcorrected in times like these and now would be a good time to hit the brakes before the situation becomes more damaging than it already is. Community banks are the economic backbone of many Montana and rural communities across the country. Our challenges cannot and should not be ignored in the name of a metric whose achievement could cause more harm than good across our industry. After years of serving our communities, we deserve better. Community banks cannot be sacrificed in the name of inflation reduction when they had nothing to do with causing the problem and are truly essential to local economies. Community Banker 21
COMPLIANCE Q&A SUMMER 2023 BY BILL SHOWALTER, SENIOR CONSULTANT, YOUNG & ASSOCIATES, INC. ECOA. Q: The bank has an application that was entered into the automated underwriting system and received an approve/eligible response. But later that same day, during a conversation with the applicant, the bank finds that the property is a leasehold and, thus, not eligible for the secondary market. The bank does not make such loans. So, is this a denial or an application for a product not offered? Not sure how to handle this one. A: This is a denial to extend credit due to the fact that the bank does not offer the type of credit or credit plan requested. That would be cited as the reason for the adverse action on the denial notice to the applicant. EFTA. Q: If we have debit card transactions outside of the U.S. blocked, would that have to be disclosed to the account/card holder? A: Regulation E requires the bank to disclose any limitations on the frequency and dollar amount of transfers. Blocking transactions not originated in the U.S. would impact the frequency of transfers, at least for some customers. So, this should be stated in the initial EFT disclosure. If this limitation has not been disclosed to current/existing customers, the bank should inform them in writing, which can be a message or an insert sent with a monthly statement. TILA. Q1: We have a loan request for a customer that will be located on 79 acres, but they are building a house. This house will obviously be for consumer purposes but will have a shop that will store farm equipment. The lender from the commercial side of the fence is hoping to do this loan instead of sending it to the consumer. Is that permissible? A1: For Regulation Z purposes, it does not matter which functional area of the bank extends the loan. If the loan is primarily for consumer (personal, family or household) purposes, appropriate disclosures must be given. In this case, that would mean TRID disclosures — Loan Estimate(s) and Closing Disclosure(s). You say that the purpose of the loan is to build a new house for the borrower, along with a shop/building for storing farm equipment, it sounds like it is probably a consumer-purpose loan. The bank can use any reasonable method for determining what the primary purpose is — e.g., what amount of the loan is to build the house vs. to build the shop/storage building. If the amount for the farm storage shop/building is greater than for the house, then an argument could be made that the loan is primarily for agricultural purposes and, thus, exempt from Regulation Z. But, if it is the other way, TRID rules. Whichever way the decision goes, be sure that the file is well documented on what is determined and how the bank made its determination. Q2: A similar situation presented itself while talking with another employee about this scenario. When a customer that is John & Jane Doe Revocable Trust owns 150 acres free and clear but is using proceeds from a loan secured by that property to construct a condo, this would also be considered a consumer/TRID purpose, correct? A2: Sounds like another consumerpurpose loan, and when real estate (dirt) is part of the collateral, TRID is triggered. I suspect your skeptical colleague must be hung up on having a trust (a non-natural person) involved. But, the CFPB explicitly dealt with that some years ago in the Official Staff Commentary on Regulation Z, Comment 2(a)(11)-3, to the definition of “consumer,” by saying, “Credit extended to trusts established for tax or estate planning purposes or to land trusts … is considered to be extended to a 22 Community Banker
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