MARCH/APRIL 2023 NEBRASKA AGRICULTURE’S FUTURE IS BRIGHT
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233 South 13th Street, Suite 700 Lincoln, NE 68508 Phone: (402) 474-1555 • Fax: (402) 474-2946 nebankers.org RICHARD BAIER President and CEO richard.baier@nebankers.org KARA HEIDEMAN Director of Communications and Marketing kara.heideman@nebankers.org NBA BOARD OF DIRECTORS NBA EDITORIAL STAFF STEPHEN STULL NBA Chair (402) 792-2500 Nebraska Bank Dodge LYDELL WOODBURY NBA Chair-Elect (402) 359-2281 First Nebraska Bank Valley KATHRYN BARKER (402) 333-9100 Core Bank Omaha NICHOLAS BAXTER (402) 341-0500 First National Bank of Omaha Omaha CORY BERGT (402) 434-4321 Wells Fargo Bank, N.A. Lincoln JOHN DAUBERT (402) 323-8008 Security First Bank Lincoln DANIEL FULLNER (402) 454-1000 Madison County Bank Madison CURTIS HEAPY (308) 367-4155 Western Nebraska Bank Curtis KRISTA HEISS (308) 534-2877 NebraskaLand Bank North Platte ZACHARY HOLOCH (402) 363-7411 Cornerstone Bank York DONALD JIVIDEN (402) 759-8113 Heartland Bank Geneva ZAC KARPF (308) 632-7004 Platte Valley Bank Scottsbluff JOHN KOTOUC (402) 399-5088 American National Bank Omaha MARK LINVILLE (402) 337-0323 First State Bank Randolph KRISTEN MARSHALL-MASER (308) 384-5681 Five Points Bank Grand Island BRANDON MASON (402) 918-2332 Bank of the West Omaha JEREMY MCHUGH (402) 867-2141 Corn Growers State Bank Murdock KAYE MONIE (308) 368-5555 Hershey State Bank Hershey JAY PRESTIPINO (402) 392-2616 First Interstate Bank Omaha LUKE RICKERTSEN (308) 537-7181 Flatwater Bank Gothenburg KIRK RILEY NBA Past Chair (308) 784-2515 Waypoint Bank Cozad RYNE SEAMAN (402) 643-3636 Cattle Bank & Trust Seward TRAVIS SEARS (402) 323-1828 Union Bank & Trust Co. Lincoln JOSEPH SULLIVAN III (402) 348-6000 U.S. Bank, N.A. Omaha KELLY TRAMBLY (402) 756-8601 South Central State Bank Campbell WALENTINE O’TOOLE, LLP When time is of the essence, experience counts. Walentine O’Toole blends confidence, experience and knowledge with the personal attention you can expect from a regional law firm. www.walentineotoole.com 402.330.6300 11240 Davenport St. • Omaha, NE 68154-0125 4
Education is the foundation of performance for investment portfolio managers, and that is why The Baker Group continues to bring their history of educational experience to a bond school designed specifically for new portfolio managers and those needing to learn the fundamentals of fixed income investing. The Baker Bond School will give attendees the knowledge to better understand the various types of securities available, how to analyze them effectively, and how to use that knowledge to build and manage a highperformance investment portfolio within the framework of the entire balance sheet. What You Will Learn • Fundamentals of bonds and bond market investing • Understanding the impact of the economy, monetary policy, and interest rates on the bond portfolio • Demystifying the complex world of bond analytics including pricing, duration, convexity, and total return • Characteristics of high performance portfolios and how industry allocations have changed over the years • Introduction to bond types, and the pros and cons of including each in your investment portfolio • How to develop an effective municipal credit analysis process The Baker Group pioneered Asset/Liability Management (ALM) more than forty years ago when they developed the first computer based ALM program designed specifically for community banks in 1979. Since then, we have spent four decades educating financial institutions how to effectively use ALM strategies to manage risk and maximize performance. The Baker Group has developed an Asset/Liability Management School designed specifically for members of the ALCO and those needing to learn the fundamentals of ALM. The Baker ALM School will give attendees the knowledge to better understand the “who, what, why, and how” of ALM and the ALCO process. What You Will Learn • Fundamentals of asset/liability management including what it is and why we do it • Understanding the impact of the economy, monetary policy, and interest rates on the earnings and capital of the institution • Regulatory expectations to ensure you are always in compliance with the latest guidance and prepared for your next exam • Practical methodologies and recommendations for how to develop assumptions that are institution specific and regularly reviewed, stress-tested, and back-tested Baker Schools Great Educational Opportunities 2 August 8-9, 2023 Oklahoma City, OK Omni Oklahoma City Hotel Cost: $495 Baker ALM School Baker Bond School May 10-11, 2023 Oklahoma City, OK Omni Oklahoma City Hotel Cost: $495 12.5 hours of CPE credits will be earned for your attendance. 10 hours of CPE credits will be earned for your attendance. For more information and to register, go to GoBaker.com/alm-school-2023. For more information and to register, go to GoBaker.com/Bond-School-2023. Who Should Attend These schools are designed for Presidents, CEOs, CFOs, and members of the ALCO committee. Directors and anyone else involved in the asset/liability management process will also benefit from The Baker Group schools. Member: FINRA and SIPC www.GoBaker.com | 800.937.2257 Oklahoma City, OK | Austin, TX | Dallas, TX | Houston, TX Indianapolis, IN | Long Island, NY | Salt Lake City, UT | Springfield, IL
CONTENTS EDITORIAL: Nebraska Banker seeks to provide news and information relevant to Nebraska and other news and information of direct interest to members of the Nebraska Bankers Association. Statement of fact and opinion are made on the responsibility of the authors alone and do not represent the opinion or endorsement of the NBA. Articles may be reproduced with written permission only. ADVERTISEMENTS: The publication of advertisements does not necessarily represent endorsement of those products or services by the NBA. The editor reserves the right to refuse any advertisement. SUBSCRIPTION: Subscription to the magazine, which began bimonthly publication in May 2006, is included in membership fees to the NBA. ©2023 NBA | The NewsLINK Group, LLC. All rights reserved. Nebraska Banker is published six times each year by The newsLINK Group, LLC for the NBA 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 NBA, 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. Nebraska Banker is a collective work, and as such, some articles are submitted by authors who are independent of the NBA. While Nebraska 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. 8 PRESIDENT’S MESSAGE: NEBRASKA AGRICULTURE’S FUTURE IS BRIGHT Richard J. Baier, President and CEO, Nebraska Bankers Association 12 WASHINGTON UPDATE: MEETING IN THE MIDDLE(WARE) Rob Nichols, President and CEO, American Bankers Association 16 COUNSELOR’S CORNER: SILICON VALLEY BANK AND THE FEDERAL GOVERNMENT RESPONSE Robert (Bob) Kardell, Baird Holm, LLP 20 TECH TALK: ARE PASSWORD MANAGERS SECURE? Shane Daniel, SVP Information Security Consultant/ Regional Director and Terry Kuxhaus, Senior Information Security Consultant, SBS CyberSecurity 24 MUNICIPAL FINANCES PERSEVERE DURING RECESSIONS Dana Sparkman, CFA, Senior Vice President/Municipal Analyst, The Baker Group 26 TO COMPETE, OR NON-COMPETE? THAT IS THE QUESTION. Prince Girn, JD, Associate General Counsel, Compliance Alliance 28 2023 EDUCATION CALENDAR 6
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PRESIDENT’S MESSAGE Richard J. Baier, President and CEO, Nebraska Bankers Association Nebraska Agriculture’s Future is Bright Just when you thought things could not be more interesting for the banking sector … suddenly, regulators closed Silicon Valley Bank (SVB), subsequently followed by Signature Bank. Before I move into my column for the month, I want to extend a special thank you to the NBA member banks and board of directors, as well as our NBA team members, who worked diligently and contacted customers, coordinated media responses and interview requests, participated in regulatory calls and webinars, and held discussions with elected officials following these bank closures. Nebraska banks should be proud of how our industry responded in a very proactive and positive way! One of the primary causes of the SVB failure was the technology industry concentration of the bank's balance sheet in both its deposit and lending bases. If you have spent time working with businesses in the technology and software development sector, it is clear that these firms tend to be highly volatile and burn cash at a very rapid rate, especially during challenging economic times. Conversely, technology firms that go into default on business loans leave very little in terms of usable collateral (e.g., four laptops and some questionable intellectual property). Nebraska banks of all sizes are blessed to have a diverse customer base which helps them better weather economic turbulence. While some might argue that Nebraska banks tend to have a concentration in ag lending, it is also true that the ag sector is not one-dimensional and is extremely diverse. Each year, the NBA joins our members to celebrate National Ag Week, and we have a lot to celebrate! Following are a few quick facts that you might find useful: 1. In 2022, there were 44,800 farms and ranches in Nebraska, with an average size of 1,011 acres. These farms and ranches utilize 44.8 million acres - or 92% - of the state’s total land mass. 2. Nearly half of Nebraska’s ag land is rangeland and pastureland. 3. Nebraska led the nation in commercial cattle slaughter with over seven million. 4. Nebraska was also the leader for great northern bean production, popcorn production and cattle on feed. 5. Ag cash receipts per capita were $13,515 in 2021. 6. Nebraska was the second largest ethanol producer behind our friends in Iowa, producing 2.3 billion gallons last year. 7. Nebraska exported $9.2 billion worth of ag commodities in 2021. Nebraska banks of all sizes are blessed to have a diverse customer base which helps them better weather economic turbulence. 8
Whatever Loan You Need, We Can Help. 34613 Member FDIC www.bell.bank Reg. O loans | Holding company loans & lines of credit | Equipment financing | Participation loans Whether your loan is large or small, get faster turnaround from our experienced correspondent team. Callie Schlieman Call me at 701.433.7430 – Based in Fargo 34613 AD Nebraska Bankers Association 2022_Callie.indd 1 4/7/22 11:58 AM 8. With exports of $2.3 billion, corn was the state’s top exported commodity. 9. Corn, soybeans and beef were the top three ag exports. 10. Nebraska banks loaned nearly $7 billion for the purchase of ag real estate. And the list goes on. Nebraska is blessed with abundant natural resources, including productive land and water, which allows our farmers and ranchers to raise the food necessary to feed our growing global population. In addition, our ag producers and agribusiness firms lead the world in innovation and ag technology utilization. The future for Nebraska agriculture is bright. Let’s take time this spring to thank and congratulate our Nebraska farmers for a job well done! nedcoloans.org WE PARTNER WITH BANKS TO HELP BUSINESSES THRIVE IN NEBRASKA. • Partner with NEDCO to provide your customers with down payments as low as 10%. • Lower your exposure while participating in larger projects. • Unlike SBA 7a loans, NEDCO handles all paperwork and processing with the SBA. • NEDCO’s long-term fixed rate helps you compete with other lenders only offering conventional financing. • NEDCO 504 loans provide the bank with a 1st lien at a 50% LTV. JASON CULVER Chief Credit Officer 402-483-4651 jason@nedcoloans.org WILL SAILORS Vice President Lending 402-483-4622 will@nedcoloans.org 9
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Rob Nichols, President and CEO, American Bankers Association For community banks seeking to remain competitive in today’s crowded financial services marketplace, innovation is imperative. A relationship with a core provider can make or break an institution’s innovation goals, and for too many community banks, legacy core technologies are holding them back. This is a critical challenge that ABA set out to solve through its Core Platforms Committee, which was founded in 2018 to engage the top players in core processing and to help break down the barriers that impede banks’ ability to offer customers the products and services they want. Since the committee was founded, we have improved the lines of communication with the core providers, and we remain optimistic about the commitments we’ve received from many of these firms to improve in this area. But for many banks, innovation remains a struggle. In fact, it’s estimated that more than two in five U.S. banks are still running core banking processes on legacy systems that were designed nearly four decades ago. In a recent ABA survey, 42% of bankers expressed dissatisfaction with the service they receive from their core provider, identifying several pain points including a limited ability to customize offerings and subpar integration capabilities with other technologies. However, undergoing a complete core conversion is a massive undertaking Washington Update Meeting in 12
the Middle(ware) that comes with significant costs, complexities and risks, and many banks are understandably hesitant to abandon their longtime core provider. So how can community banks bridge the gap? One possible alternative to a “rip and replace” strategy is to employ the use of middleware — a solution that leaves existing core systems in place, while wrapping the core with a new layer of technology, typically an API architecture. This architecture enables banks to reduce reliance on their legacy core to deliver products faster; collect, maintain and use customer data more effectively; and foster partnerships with fintech companies. It’s a strategy that can considerably reduce the timeline for bringing new products and services to the market while reducing reliance on a legacy core system. ABA’s Office of Innovation highlights the case for middleware in a newly released whitepaper, “Exploring Banking Middleware Solutions.” The paper provides an in-depth look at how banks can benefit from incorporating a middleware layer into their core systems and gives a snapshot of the middleware vendor landscape in the U.S., as well as considerations banks should take into account when engaging with a middleware vendor. I urge you to read the whitepaper, which you can access at www.aba.com/middleware, and check out the other resources the Core Platforms Committee has made available at www.aba.com/core. ABA is deeply committed to helping its member banks succeed — regardless of where they are in their innovation journey. Our Office of Innovation works exhaustively to stay on top of the latest trends, connect banks with strategic partners and pave the way for responsible innovation policy in Congress and at the regulatory agencies. Successful innovation is key to the preservation of the broad and diverse community banking sector that makes our nation’s financial services industry the envy of the world. Email Rob at nichols@aba.com. ABA is deeply committed to helping its member banks succeed — regardless of where they are in their innovation journey. 13
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COUNSELOR’S CORNER Robert (Bob) Kardell, Baird Holm, LLP Silicon Valley Bank and the Federal Government Response Silicon Valley Bank On Friday, March 10, 2023, the federal government took over the 40-year-old bank, Silicon Valley Bank (SVB), as it was in the midst of collapsing. SVB had become known as a bank for tech startups and innovation. At the time of the failure, SVB was the 16th largest bank with approximately $200 billion in assets, of which approximately 95% of the assets were uninsured.1 One of the biggest vulnerabilities of SVB was the concentrated client base. The client base was not very diversified in terms of industry, company maturity, or geography. Most clients were tech startups. In fact, SVB boasted that 44% of the companies backed by venture capitalists, which went public in 2022, were SVB clients.2 The lack of diversification in banking clients can lead to amplified stress when an undiversified banking market is stressed, and the bank then becomes much more difficult to manage in terms of risks. Several companies with high concentrations of their capital in SVB submitted regulatory filings, which specifically mentioned the failure of SVB and the possible impact on operations.3 Within two days, the federal government appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver, and the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). The FDIC then immediately transferred all insured deposits of Silicon Valley Bank to the DINB. To add to the complexity of the issues, as of March 14, 2023, the Department of Justice has announced an investigation into the bank collapse.4 Signature Bank Signature Bank (Signature) in New York City, a 24-year-old bank, was also closed by the state regulatory authorities on Sunday, March 12, 2023. Signature was heavily invested in cryptocurrency and maintained a book of assets of approximately $88 billion. Signature catered to law firms and held many very large bank accounts. It was estimated that $79 billion of Signature’s $88 billion in assets were uninsured deposits because so many of the Bank's deposit accounts were over the $250,000 insured by the FDIC. The biggest issue for Signature, however, was that $16.5 billion was in crypto assets, which have not fared well since the demise of FTX. The large amount of capital invested in the crypto assets meant that Signature was also not very diversified. The FDIC established the Signature Bridge Bank, N.A. as a successor to Signature to help depositors access their money.5 16
Government Response On Monday, March 13, 2023, the federal government announced a multi-part plan to secure the depositor’s money in the bank.6 President Biden announced that SVB depositors and Signature Bank depositors would be made whole. The Federal Reserve has also created a new Bank Term Funding Program (BTFP), which will provide land to banks, credit unions, and other depository institutions to provide more liquidity for banks. By offering these short-term loans, the banks will not need to sell assets quickly at unfavorable terms. The BTFP will be able to borrow up to $25 billion from the Exchange Stabilization Fund as a backstop.7 The loans, though, are only available with the personal approval of Treasury Secretary Janet Yellen. The Federal Reserve announced that the discount window will remain open to provide more liquidity to banks. The discount window applies the same margins as the BTFP to a wide array of assets as collateral for loans. Finally, as a last measure, President Biden announced that none of the losses would be borne by taxpayers. The losses will instead be paid by the Deposit Insurance Fund, which is funded by assessments on banks to cover such losses. A Tough Economy for Banks The past three years have been particularly difficult for banks beginning with the pandemic that started in March 2020. This led to a national shutdown, large operating losses for businesses, payroll issues for restaurants and small businesses, the loss of employees to the so-called Great Resignation, and the seemingly always strained supply chain. And, as if the above reasons were not causing enough pressure on banks, the rising interest rates and inflation after years of quantitative easing have increased pressure on banks from all sides. The supply chain issue has been especially tough on Midwest banks, lending to farmers who themselves have been squeezed by the rising gas prices and the rising cost of fertilizer due to sanctions against Russia. In addition to the business pressures, an economic slowdown inevitably leads to increased cases of fraud, investigations, and, ultimately, oversight. Warren Buffet once said that “Only when the tide goes out do you discover who's been swimming naked.” We are now, unfortunately, seeing the results of a falling tide. The Department of Justice is ramping up its investigation of PPP loan fraud or other incentives intended to help cashstrapped businesses during the pandemic.8 The FBI, through its Internet Crime Complaint Center (IC3),9 has published its 17
annual report to announce another record year in losses — $10.3 billion in losses in 2022 compared to $6.9 billion in losses in 2021;10 and, recently, the DOJ revealed charges against 23 individuals for $61.5 million in Medicare fraud.11 Even, Steady Steps in an Unsteady Banking Market Considering the endless reports of economic issues, here are a few steps for uncertain times: • Identifying Exposed Clients The fallout from bank failures will have far-reaching consequences. Many startups around the world are feeling the effects of the failures. One startup, which will feel this broad effect, is Etsy. Any company dependent on the craft site may experience delayed payments which will inevitably have a cascading effect. Several other companies include Roku, Circle, FarmboxRx, Nitro, and there could be many, many more. Identifying clients who may have direct or indirect exposure to bank failures may prevent an unpleasant surprise later. • Communications with Clients Fear and chaos often provide a foothold for fraudsters. Clients may be receiving emails from fraudsters prompting them to click on a link for information about their bank or the status of their deposits or prompting them to apply for a loan from the BTFB. Regular communications with clients during times of uncertainty can avert further scams, issues, and frauds. • Relationships with Companies Identifying key businesses with tight working capital accounts to discuss current and future working capital needs. Many potentially bad banking relationships will have red flags long before the accounts become liabilities. Those accounts may be identified with judicious monitoring and adjusting relevant thresholds for identification and reporting of the accounts. • Relationships with Regulators Although regular communications with regulators are not something naturally sought or maintained by most banks, the regulators may have key information on forthcoming regulations, requirements, metrics, measures, cybersecurity, and industry knowledge. Regulators may have insight as to the cause and fallout of banking failures and information about financial indicators which may be of interest for future engagements. • Relationships with Banking Partners The risks associated with larger loans may be shared with industry partners. Regular collaboration and communication with banking partners may lead to early intervention when necessary. Shared relationships can help distribute and share risk, but distributed communications may also result in red flags being obscured by the disparate knowledge base. • Relationships with Individuals Identifying key accounts which may be near, at, or over the FDIC-insured amount of $250,000 and working with those clients to ensure they are aware of and understand the limits of federal insurance limitations may avoid uncomfortable conversations later. Legal Fallout from SVB Finally, working with counsel to identify and monitor key cases resulting from the failures may provide important information as to the direction and nature of the resulting litigation. While bank collapses have occurred in the past, the collapse of SVB and Signature were caused by previously unanticipated circumstances and may result in new legal analysis, new case law, or nuanced judicial opinions which should be studied and incorporated into banking procedures. For more information, please contact Robert (Bob) Kardell at (402) 636-8313, bkardell@bairdholm.com, or visit www.bairdholm.com. ENDNOTES: [1] https://www.cnbc.com/2023/03/12/former-svb-employee-offersinsight-into-the-banks-failings.html#:~:text=The%20FDIC%20seized%20 SVB%20on,feared%20panic%20over%20the%20firm [2] https://financialpost.com/fp-finance/banking/silicon-valley-bankfallout-explained [3] https://www.hollywoodreporter.com/business/business-news/siliconvalley-bank-stocks-roku-analyst-1235350766/ [4] https://www.washingtonpost.com/business/2023/03/14/justice-deptinvestigating-silicon-valley-bank-collapse/ [5] https://www.fdic.gov/news/press-releases/2023/pr23018.html [6] https://www.lexology.com/library/detail.aspx?g=05d3b3a7-63a3-4eb7885f-1788dc59c3b3 [7] https://www.federalreserve.gov/newsevents/pressreleases/ monetary20230312a.htm [8] https://www.justice.gov/criminal-fraud/cares-act-fraud [9] https://www.IC3.gov [10] https://www.ic3.gov/Media/PDF/AnnualReport/2022_IC3Report.pdf [11] https://www.justice.gov/opa/pr/justice-department-charges-dozens12-billion-health-care-fraud 18
Since 1857, Cline Williams has devoted attention to the unique needs of the banking and nancial services industries. Since then, we have provided our clients with the resources they need in the areas that are most important to them – from lending and collections, to regulatory compliance, to mergers and acquisitions, and so much more. We’re more than a law rm. We’re a partner for your bank. LINCOLN I OMAHA I AURORA I FORT COLLINS I HOLYOKE LINCOLN BRUNING endacotttimmer.com 402-817-1000 Legal advice. Community banking experience. Colorectal cancer is the third most common cancer among Nebraskans. Early detection saves lives, so doctors recently lowered the recommended screening age from 50 to 45. BCBSNE health benefits cover screenings and preventive treatments at no extra cost. OVER 45? GET SCREENED Visit NebraskaBlue.com to connect with a coach and schedule a screening today. An independent licensee of the Blue Cross and Blue Shield Association. 19
Tech Talk Are Password Managers Secure? Shane Daniel, SVP Information Security Consultant/Regional Director and Terry Kuxhaus, Senior Information Security Consultant, SBS CyberSecurity, LLC The recent LastPass breach reminds us there is no way to stay 100% safe online and highlights some of the risks associated with using a central vault to store passwords and other secrets. However, password managers (PMs) remain the most secure way to protect passwords, even though they are not perfect. PMs allow you to store strong, unique passwords for all the dozens or hundreds of websites, web applications, and services a user utilizes regularly. Additionally, PMs: • Enable the user to log in without typing the password every time, protecting them from keyloggers • Allow users to utilize stronger passwords that don’t need to be written down • Encourage users to use different passwords for every account • Provide some protection against credential harvesting phishing emails, as they will not populate credentials into spoofed sites While keeping all your passwords in one location is an inherent risk with PMs, the trade-off is worth the risk. Most PMs utilize 256-bit Advanced Encryption Standards, zero trust (your master password is encrypted before leaving your device), and two-factor authentication (2FA) to protect password vaults. Types of Password Managers There are three types of PMs: device-based, cloud-based, and on-premise. Each class is an exercise in balancing the equation of security and convenience. For example: • Device-based solutions run locally on a device that limits sharing the password vault on multiple devices, do not detect weak or reused passwords, and do not have the security controls a commercial PM does. • Cloud solutions work with multiple devices and detect weak or reused passwords; however, your data is on someone else’s server. • On-premise solutions may appear to be the safest option, but they provide complications in maintaining in-house IT infrastructure and data backups which may increase the cost. 20
Note: Using your browser's “Save Password” feature to save passwords is not considered a safe or recommended way to store passwords. While some inherent risk stems from the mere use of any PM solution, understanding the risk of each solution should be obtained during the due diligence and vendor management process. Any risk remaining after the solution selection should be addressed in the IT risk assessment to ensure the solution’s risk score is acceptable to your organization’s risk appetite. Things to Consider When Changing Password Managers If your organization currently utilizes LastPass as a password management solution, it is absolutely appropriate to evaluate alternate PM products and solutions, as there are many viable password management vendors in the market. However, it is recommended that your organization only switches PM providers after doing your homework. Keep in mind your current investment with the incumbent provider. For example, even if you believe it’s in your organization’s best interest to switch PM providers, what does that transition look like? Does your current PM provider make it easy for you to transition all your sites and passwords to another platform, or will that transition be time-consuming and complicated? Alternatively, your organization may wish to shift from a cloudbased password manager to a device-based or on-premise version. Still, it is recommended that you evaluate the pros and cons of making such a switch. For example, if you currently have users utilizing a cloud-based PM and want to shift to an on-premise PM, what functionality will your users lose in that switch? If you are evaluating your password management solution, it is recommended that you do the proper homework (vendor due diligence and IT risk assessment) on alternative PM solutions to ensure appropriate security controls and risk mitigation measures are in place. Only once you’ve done the appropriate homework can you determine the best path forward for your organization based on an informed business decision. SBS CyberSecurity does not partner with nor endorse any password management vendors or solutions. SBS helps business leaders identify and understand cybersecurity risks to make more informed and proactive business decisions. Learn more at www.sbscyber.com. 21
1. Data Backup and Recovery Backing up your data is crucial but not all backups are the same. It is critical that you have an offsite data backup solution, keeping your data protected and stored outside your network. 2. Endpoint Detection Response (EDR) Traditional antivirus software is not sufficient protection for your financial institution. Antivirus requires regular database updates of the current virus signatures to be effective. The protection afforded by AV software is only as good as the vendor’s updates. Often, threats are discovered only after the damage is done. EDR uses artificial intelligence to detect threats without having to rely on virus signatures. 3. Multi-Factor Authentication (MFA) Two of the best methods for establishing extra lines of defense for your online accounts are using strong passwords and setting up 2-factor or multi-factor authentication (also known as 2FA or MFA). Using different passwords for each of your accounts is another best practice to hinder an attacker and keep your data, accounts and network safe. Your business is exposed to a variety of risks every day. Improving your cybersecurity can feel like a daunting task, but there are a few ways you can get started quickly. If you are unsure where to start, our security experts offer six low-cost, easy solutions that you and your team can implement to boost your security right now. For more information: Scan to contact us today OR: Call: 308.381.1000 Email: hisinfo@hamiltonisbusiness.com Visit: HamiltonIsBusiness.com 6 Low-Cost Ways to Improve Your Cybersecurity ADVERTISEMENT © 2022 Nedelco, Inc. Hamilton is a registered trademark of Nedelco, Inc. dba Hamilton Telecommunications. Third party trademarks mentioned are the property of their respective owners. 4. Third Party Patching Keeping your devices, browsers and other tech up to date is one of the best, first lines of defense against cyberattacks. Security patches and updates fix any technical bugs and essentially “lock” your software and devices before bad actors can make a copy of the “key.” 5. Avoid Suspicious Emails With phishing, hackers attempt to gain access to your information or credentials through your email inbox. Phishing scams may seem like a relic of the past but have become one of the main culprits behind countless cyberattacks. Here are a few quick tips. If the email address, link or contents look suspicious: • Do not engage with the message or sender. • Do not open the email, click on links or provide information. • Contact your IT support immediately. 6. Book a Free Consultation Hamilton is here to help mitigate and eliminate cybersecurity threats to your financial institution. We offer services from training, to network penetration tests and vulnerability assessments. Contact us today to book a free consultation and learn how our cybersecurity solutions can help minimize vulnerabilities and protect your business data.
ACH Audit BSA Audit Lending Compliance Audit Deposit Compliance Audit Directors’ Examination Interest Rate Risk Review Home Mortgage Disclosure Act (HMDA) Review Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act Audit Loan Review Internal/External Penetration Test Internal/External Vulnerability Assessment Social Engineering Assessment IT Security Audit Business Continuity Management Audit AUDIT SERVICES mibanc.com/audit Contact Jake at 888-818-7206 Jake Wolfe jwolfe@mibanc.com Need help with Loan Reviews? Lending Services Operational Services Audit Services A full line of correspondent services and correspondent bankers ready to serve. WHY? 800-347-4MIB mibanc.com MEMBER FDIC Andrew Lee Tim Burns Stacy Snyder Ron Hobson Chris Bryan
Municipal Finances Persevere During Recessions Dana Sparkman, CFA, Senior Vice President/Municipal Analyst, The Baker Group As we move through 2023, the possibility of a recession is at the forefront of most investors’ minds. Fortunately, most municipalities are in a good starting place for a downturn. Tax revenue has soared recently, and federal aid has also helped to boost the balance sheet of state and local governments. Many issuers have reported record-high budget surpluses and/or all-time high reserve levels. Municipal bond defaults have been very low at only 0.04% in 2022, down by over 21% from 2021 levels according to Bloomberg data. Further, municipalities generally have weathered economic downturns very well, largely due to resilient tax revenues.Chart 1 Most local governments rely heavily on ad valorem, or property, tax revenue as shown in the chart above. Property tax revenue rarely declines on a broad basis, but when it does, it tends to lag the economy. Federal Reserve Economic Data (FRED) reveals that while median home sales prices fell by over 6% in 2008 and 2009, property tax revenue increased at the same time, was flat in 2010, and fell by only about 1% in 2011 before it continued a positive trajectory. This is the only time total property tax revenue has declined since at least 1992. Given the recent boom in home prices, it is unlikely that assessed valuations would decline if we encountered a mild recession in 2023.Chart 2 Sales tax revenues, the second largest source of tax revenue for both state and local governments, also declined for the only time since 1992, during the Great Recession: 5.6% in 2009 and 2.3% in 2010. Sales tax revenue experienced a slowing of the growth rate, but not a decline, during the 2001 and 2002 recessions. However, income tax revenues, a major revenue source for state governments but not usually local governments, are highly correlated with economic activity. In two of the last three recessions, aggregate income tax revenues declined significantly: 11.3% in 2002 and 17.6% in 2009. Despite these declines, state revenues recovered quickly and have since grown tremendously. On the other hand, economic downturns can worsen existing credit issues and impair elastic revenue streams. Moody’s reports that the frequency of municipal bond defaults increased during and after the Great Recession, with an average of five new issuer defaults per year from 2008–2017 compared to an average of two new defaults per year over the past 50 years. According to Moody’s, there were 38 defaults from 2008–2017, excluding Puerto Rico. From 2018–2021, 24
there has been only one default of a Moody’s-rated issuer. However, when expanding the view to include both rated and non-rated issuers, there were 57 issuers that defaulted in 2021 and 52 issuers in 2022, according to Bloomberg. This demonstrates the additional risk associated with nonrated municipal bonds, with most of those defaults in the healthcare and development sectors. In fact, healthcare and development bonds together have accounted for more than 70% of all municipal bond defaults each year since 2018. Issuers without tax support in the healthcare sector have had a volatile few years since the beginning of the pandemic. Margins have been pressured further by inflation and high labor costs amid a nursing shortage. Credit quality of development districts can vary widely depending on location and primary revenue sources. In some areas, commercial real estate values are depressed as the “work-from-home,” or hybrid work models, weaken demand for office space. Also, bonds issued by Tax Increment Financing (TIF) districts or other development districts may be repaid from a narrow, economically 100 % 80% 60% 40% 20% 0% States Local Governments ▪Property Taxes ▪Individual Income Taxes ▪Corporate Income Taxes ▪Sales Taxes ▪Other 33% 35% 2% 17% 5% 67% 1Tax Revenue Breakdown for State and Local Governments - Q3 2022 sensitive revenue stream. For example, TIF bonds are usually secured by a tax on an increase in the assessed valuation of that district following a project or improvement. If the value of that area remains flat or declines, revenues may not be sufficient to repay the bonds as planned. In other cases, development bonds may be secured by a tax derived from sales in a specific area, which could be disproportionately affected by an economic downturn depending on the types of businesses in the district. While past performance is no guarantee of future results, most municipalities are well-prepared for a downturn and may not even see much, if any, decline in tax revenues. However, idiosyncratic risks remain particularly within the healthcare and development sectors, and other weak credits may be further impaired by a recession. Investors should cautiously monitor holdings of these types of bonds, particularly if they are nonrated and don’t carry any additional bondholder protection. Dana Sparkman, CFA, is Senior Vice President/ Municipal Analyst in The Baker Group’s Financial Strategies Group. She manages a municipal credit database that covers more than 150,000 municipal bonds, providing clients with specific credit metrics essential in assessing municipal credit. Dana earned a bachelor’s degree in finance from the University of Central Oklahoma as well as the Chartered Financial Analyst designation. Contact: 405-415-7223 or dana@GoBaker.com. 2
To Compete, or Non-Compete? That is the Question. Prince Girn, JD, Associate General Counsel, Compliance Alliance On Jan. 5, 2023, the Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking (“the proposed rule”) to essentially implement an all-out federal ban on non-compete clauses in employment contracts. Non-compete clauses generally restrict a person’s ability to work for a competing employer, whether by name or in general. Many times, these clauses will carve out a radius in which a person is prohibited from working with competing employers and will have limits on the duration of the ban. However, this potential ban goes further than just your average non-compete clauses that you may be used to seeing or hearing of. There are other clauses in employment contracts that the proposed rule seeks to ban, clauses that are sometimes so broad in scope that they can be considered “de facto” noncompete clauses: • Non-disclosure agreements (NDAs) — also known as “confidentiality agreements” — which prohibit the worker from disclosing or using certain information; • Client or customer nonsolicitation agreements, which prohibit the worker from soliciting former clients or customers of the employer (referred to in this NPRM as “non-solicitation agreements”); • No-business agreements, which prohibit the worker from doing business with former clients or customers of the employer, whether or not solicited by the worker; • No-recruit agreements, which prohibit the worker from recruiting or hiring the employer’s workers; • Liquidated damages provisions, which require the worker to pay the employer a sum of money if the worker engages in certain conduct; and • Training-repayment agreements (TRAs), a type of liquidated damages provision in which the worker agrees to pay the employer for the employer’s training expenses if the worker leaves their job before a certain date. The latest move by the FTC may be traced or influenced by the recent attitudes towards these types of clauses and their overall chilling effects on the labor market and economy. The attitudes that the FTC may be particularly focused on may come from the current Biden Administration and recent enforcement actions by the U.S. Department of Justice Antitrust Division (Antitrust Division). On July 9, 2021, President Biden signed the Executive Order on promoting competition in the American economy as part of a “whole-of-government effort to promote competition,” in which the order explicitly encourages the FTC to “exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Recently, the Antitrust Division has criminally prosecuted employers for executing wage-fixing and no-poach agreements against companies and individuals. Those attitudes may have paved the way for not only the FTC to bring forward this proposed rule but also bring its own enforcement against companies and their executives for imposing non-compete clauses just one day before the proposed rule. Further, to support the move, the FTC cites data that bolsters the central arguments of these types of clauses. The data the FTC presents supports the notion that non-compete clauses significantly reduce earnings for workers and cause exploitation, stifle entrepreneurship and new ideas, and reduce overall economic and marketplace freedom. Additionally, the FTC cites that there are other methods to protect competition without imposing undue risks to workers and burdens on the economy. Putting the ban in a nutshell, it would bar employers from imposing non-compete clauses in employment contracts. It would also require employers with noncompete clauses in effect before this rule to rescind all non-compete clauses that were to exist at the time the law was to go into effect. With respect to the abovementioned rescission of priorexisting clauses, the rule would require the existing clauses to be rescinded within 180 days of the publication of the final rule and that employers provide notice to all currently employed and former employees, informing them that the non-compete clause is no longer effective and that they are no longer subject to it. There could be some potential limitations to the proposed ban, however. In the proposed rule itself, it suggests alternatives to the proposed rule for which the FTC seeks public comment on. 26
For example, the proposed rule would not cover non-compete between franchisors and franchisees. The FTC seeks comment on whether such clauses should be covered between franchisors and franchisees and, if covered, whether there should be a categorical ban on such clauses or a rebuttable presumption of unlawfulness, or whether different types of clauses should be subject to different standards or exemptions. The FTC seeks similar comments on similar considerations regarding senior executives and treating low/high-wage workers differently. Although the proposed rule has no immediate effect, employers may consider taking proactive measures to demonstrate good faith compliance should the rule go into effect or lean towards the attitudes/trends of the FTC and other agencies regarding these clauses, even if the rule were to not go into effect. These proactive measures may include prohibiting the use of noncompete clauses in contracts, using non-compete clauses in the meantime but making sure they are specific in scope and not overburdensome, and auditing current contracts. If the bank chooses to audit current contracts, it should be doing a careful review looking for non-compete clauses and de facto noncompete clauses as described previously, and get a head start on determining what action to take with the identified clauses should the rule go into effect. Prince Girn, JD, serves Compliance Alliance as Associate General Counsel. He received his bachelor’s degree in political science from the University of California, Davis and received his Juris Doctor from San Joaquin College of Law. Prince is as a member of our expert Hotline team where his knowledge in areas of lending, real estate, and credit procedures makes him an asset for our member banks. He is also a writer for the Bankers Alliance monthly magazine and other state banker publications. You may also be interested in these: Compliance Alliance Click or scan to watch a sample training At C/A, we’re known for top-tier training and education — more than 80 training segments a year. Special Audit Projects Reach us online at: info@bankersalliance.org or (833) 683-0701 Peer-to-Peer Discussions Bundled Services Outsourced Support Staff Augmentation Full CMS Oversight C M Y CM MY CY CMY K The data the FTC presents supports the notion that non-compete clauses significantly reduce earnings for workers and cause exploitation, stifle entrepreneurship and new ideas, and reduce overall economic and marketplace freedom. WE’RE YOUR PARTNER IN BANKING. 2120 South 72nd Street, Suite 1200, Omaha 402.391.6777 www.crokerlaw.com 27
2023 Education Calendar MAY NBA Annual Convention May 3–5 La Vista, NE BSA/AML Compliance Management Workshop May 22 Lexington, NE BSA/AML Compliance Management Workshop May 23 Lincoln, NE JUNE Annual Golf Outing June 8 Hastings, NE Bank Robbery Safety Tips Workshop June 14 Virtual Bank Compliance School June 26–30 Manhattan, KS JULY Agricultural Lending School July 10–14 Manhattan, KS New Account Documentation & Compliance Workshop July 18 Kearney, NE New Account Documentation & Compliance Workshop July 19 Lincoln, NE For more information about these live and online education events and training tools, contact the NBA Education Center at (402) 474-1555 or nbaeducation@nebankers.org or visit the NBA website at https://www.nebankers.org/ education. AUGUST Young Bankers of Nebraska Conference August 3–4 Lincoln, NE Real Estate Lending Compliance Conference August 15–16 Lincoln, NE School of Trust & Financial Services August 21–24 Kearney, NE Call Report Workshop August 23–24 Virtual Regulation B Workshop August 28 Lincoln, NE Fair Lending Essentials Workshop August 29 Lincoln, NE 28
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