President’s Message Celebrating and Reflecting on Recent Events Artificial Intelligence The Benefits and Challenges for Financial Institutions SEPTEMBER/OCTOBER 2023
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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 LYDELL WOODBURY NBA Chair (402) 359-2281 First Nebraska Bank Valley BRADLEY KOEHN NBA Chair-Elect (402) 420-0560 Midwest Bank Norfolk/Lincoln KATHRYN BARKER (402) 333-9100 Core Bank Omaha NICHOLAS BAXTER (402) 341-0500 First National Bank of Omaha Omaha CORY BERGT (402) 875-4732 Wells Fargo Bank, N.A. Lincoln JILL DAVIS (402) 434-1690 U.S. Bank Lincoln CURTIS HEAPY (308) 367-4155 Western Nebraska Bank Curtis KRISTA HEISS (308) 534-2100 NebraskaLand Bank North Platte ZACHARY HOLOCH (402) 363-7411 Cornerstone Bank York JEFF KANGER (402) 858-1253 First State Bank Nebraska Lincoln 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 AARON OTTEN (402) 371-0722 Elkhorn Valley Bank & Trust Norfolk KEVIN POSTIER (402) 723-4441 Henderson State Bank Henderson JAY PRESTIPINO (402) 392-2616 First Interstate Bank Lincoln LUKE RICKERTSEN (308) 537-7181 Flatwater Bank Gothenburg RYNE SEAMAN (402) 643-3636 Cattle Bank & Trust Seward TRAVIS SEARS (402) 323-1828 Union Bank & Trust Co. Lincoln STEPHEN STULL NBA Past Chair (402) 792-2500 Nebraska Bank Hickman/Dodge KELLY TRAMBLY (402) 756-8601 South Central State Bank Campbell NICHOLAS VRBA (402) 727-0213 RVR Bank Fremont ANDREW WITT (402) 504-4000 Dundee Bank Omaha 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. ASSURANCE / TAX / ADVISORY forvis.com Moving FORward requires VISion FORVIS is a forward-thinking professional services firm committed to unmatched client experiences. We anticipate our client’s needs and outcomes, preparing them for what’s next by offering innovative solutions. Created by the merger of BKD and DHG — a merger of equals — FORVIS has the enhanced capabilities of an expanded national platform and deepened industry intelligence. With greater resources and robust advisory services, FORVIS is prepared to help you better navigate the current and future dynamic organizational landscape. We are FORVIS. Forward vision drives our unmatched client experiences. Introducing FORVIS, forward vision from the merger of BKD and DHG FORVIS is a trademark of FORVIS, LLP, registration of which in the U.S. Patent and Trademark Office is pending. 4 Nebraska Banker
PRESIDENT’S MESSAGE I always enjoy when Tim Burns visits our bank. The knowledge he has of the banking industry and the services MIB provides to community banks, helps our bank to be able to offer additional products and services to our bank customers. We consider Tim, and MIB, to be an important part of our banking family. Tim Burns with customer Kurt Pickrel of Fullerton, Nebraska Bank Stock Loans — Acquisition, Capital Injection, and Shareholder Buy Back/Treasury Stock Purchase Officer/Director/Shareholder Loans ( Reg-O) Participation Loans Purchased/Sold — Commercial, Commercial Real Estate, Agricultural, and Special Purpose Loans Leases Midwest Image Exchange – MIE.net™ Electronic Check Clearing Products Information Reporting – CONTROL Electronic Funds Cash Management and Settlement Federal Funds and EBA Certificates of Deposit International Services/Foreign Exchange Safekeeping Directors’ Exams Loan Review Compliance Audits IT Audits Lending Services Operational Services Audit Services WHY ? Kurt Pickrel, President First Bank and Trust of Fullerton mibanc.com MEMBER FDIC Contact Tim Burns 402-480-0075
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 CELEBRATING AND REFLECTING ON RECENT EVENTS Richard J. Baier, President and CEO, Nebraska Bankers Association 10 WASHINGTON UPDATE ADVOCATING FOR ACRE: HOW CONGRESS CAN HELP RURAL AMERICA Rob Nichols, President and CEO, American Bankers Association 13 COUNSELOR’S CORNER IMPEDIMENTS TO A SUCCESSFUL LOAN CLOSING Aaron B. Johnson, Baird Holm 17 ARTIFICIAL INTELLIGENCE THE BENEFITS AND CHALLENGES FOR FINANCIAL INSTITUTIONS Julia A. Gutierrez, Director of Education, Compliance Alliance 22 TECH TALK CUSTOMER CYBERSECURITY AWARENESS: SHARING A CULTURE OF SECURITY Eric Chase, Client Services Information Security Consultant, SBS CyberSecurity, LLC 26 IS YOUR BALANCE SHEET RECESSION READY? Dale Sheller, Associate Partner, The Baker Group 30 2023-2024 EDUCATION CALENDAR CONTENTS 10 17 6 Nebraska Banker
Member FDIC Traci Oliver Eric Hallman Tara Koester Bankers’ Bank of the West We champion Community Banking bbwest.com | 800-873-4722 www.bbwest.com YOUR NEBRASKA RELATIONSHIP MANAGERS As a bankers’ bank we strive to help with every level of service and expertise. That is why we service anything from loan participations, merchant services, ATM/debit and much more, because we aim to answer your questions with, “…yes, we can do that too!” 7 Nebraska Banker
PRESIDENT’S MESSAGE Celebrating and Reflecting on Recent Events Richard J. Baier, President and CEO Nebraska Bankers Association NBA Friends, Fall is always my favorite time of year as it brings brilliant colors, cooler weather and football season, which is especially exciting if you are a Kansas City Chiefs fan like I am. Fall is also a busy time for our NBA team with the NBA Nebraska Tour, the American Bankers Association (ABA) Annual Convention, annual NBA Benefit Plans renewal discussions, the NBA Regulatory Issues Summit and the NBA Bank Investment, Funding and Economics Outlook Conference, not to mention planning for the upcoming legislative session! 8 Nebraska Banker
Rather than focus this column on a single topic, I want to celebrate some recent successes and address a few specific issues. 1. Congratulations to NBA Vice President of Administration Karen Yelden, who recently celebrated her 40th anniversary with the NBA. We were able to honor Karen’s amazing service with a special celebration that included NBA staff, NBA Leadership Program alumni and Karen’s family and friends. 2. Thank you to Chad Adams from Adams Bank & Trust in Ogallala, who was a featured presenter during the NBA Nebraska Tour. Chad shared valuable lessons and insights related to a cybersecurity incident their bank experienced earlier this year. While I recognize sharing their bank’s event was a bit of a humbling experience for Chad, his presentation was especially engaging and beneficial to those in attendance. I can’t thank Chad enough for sharing his perspective with our members. 3. Former Nebraska banker Jeff Schmid (Mutual of Omaha Bank, now CIT Bank) was recently named the new President of the Federal Reserve Bank of Kansas City (KC Fed). I had an opportunity to join Jeff for a meeting in Kansas City, where he shared his vision and priorities for the KC Fed. Four topics Jeff emphasized during our discussion resonated with me: (1) the important value of the bank charter regardless of size, geography or customer base; (2) the need to continue eliminating regulatory friction; (3) the emphasis on helping the industry find ways to engage the next generation of bank investors and board members; and (4) the necessity for banks who want to succeed over the long term to find ways to actively participate in the faster payment evolution. 4. Congratulations to the Nebraska bankers who recently accepted new leadership roles with the ABA during the recent ABA Annual Convention! Derek Randecker with Dayspring Bank (Omaha) was appointed to the ABA Emerging Leaders Council, Jeff Kanger with First State Bank Nebraska (Lincoln) was appointed to the ABA Government Relations Council and Adam Boryca with Homestead Bank (Cozad) was appointed to the ABA Membership Council. 5. Special thanks to the members of Nebraska’s congressional delegation who continue to be active participants in the efforts to draft and pass the next U.S. Farm Bill. Special thanks also to Rep. Don Bacon for cosponsoring the SAFE Banking Act in the U.S. House of Representatives. 6. NBA members opened 21 in-school savings bank branches in 2023. Kudos to these banks and all the banks that are dedicated to promoting financial literacy and supporting the next generation. If your bank would like to establish an in-school branch, reach out to Jennifer Davidson at the Nebraska Council on Economic Education at jdavidson2@unl.edu or contact Kara Heideman at the NBA at kara.heideman@nebankers.org. 7. Congratulations to the 11 NBA member banks who have had their accounts certified by the Bank On National Advisory Board. Bank On certified accounts are financial products with low fees and minimal balance requirements designed to serve the needs of both the unbanked and underbanked of our economy. To learn more about how to obtain certification of your current or future account offerings, please visit joinbankon.org. I want to close by thanking you for what you and your banks are doing to help your customers and communities grow and thrive! LINCOLN BRUNING endacotttimmer.com 402-817-1000 Legal advice. Community banking experience. 9 Nebraska Banker
WASHINGTON UPDATE Advocating for ACRE How Congress Can Help Rural America Rob Nichols, President and CEO American Bankers Association 10 Nebraska Banker
This simple, commonsense solution does not require the creation of new government payments or programs — quite the opposite. It provides an avenue for increasing competition and generating growth in rural communities efficiently and organically. It also levels the playing field between all agricultural lenders, which will result in more choices and lower rates for rural borrowers. ABA has been a vocal proponent of this bill, and we were pleased to see such a significant response from lawmakers in this Congress. The ACRE Act already has 20 bipartisan cosponsors in the House and has been introduced in the Senate by Sens. Jerry Moran (R-KS) and Angus King (I-ME). Lawmakers now have an opportunity to help sustain and grow rural America by sending this bill to President Biden’s desk. That’s why ABA is urging bankers and their customers to get in touch with their members of Congress and urge them to pass the bill. Bankers can contact their lawmakers easily through ABA’s grassroots platform, SecureAmericanOpportunity.com. The association has also prepared a toolkit, accessible at www.aba.com/ACREtoolkit, that provides an issue backgrounder, talking points and key points that bankers can use when explaining to lawmakers why this law is needed. Our nation needs a thriving agricultural sector. With your help, we can help remove one of the roadblocks standing in the way of the nation’s farmers and ranchers. Email Rob at nichols@aba.com. Farmers and ranchers today face numerous challenges: from the skyrocketing costs of materials to supply chain disruptions to difficulties purchasing rural land — all while interest rates are rising. As a result, many are relying more on credit than ever before. For those who are young, beginning or socially disadvantaged farmers, these obstacles can seem insurmountable — in fact, 69% of young farmers say that access to capital is a top challenge to beginning a career in farming. Fortunately, there is a simple solution that can help make credit more accessible to these agricultural borrowers: the bipartisan ACRE Act, a bill that ABA is aggressively championing in Congress. Formerly known as ECORA, this bill would amend the IRS code to level the playing field for banks — especially community banks — by allowing lenders to exclude from gross income any interest they receive on loans that are secured by farm real estate or aquaculture facilities. The bill also allows for the exclusion of interest on certain home mortgage loans in rural communities. Removing the taxation of interest will bring down the cost of making these loans, making them more affordable for farmers, ranchers and rural homeowners. In fact, ABA estimates that this important legislation could expand access to affordable agricultural and home loans to more than 4,000 rural communities across the U.S. and deliver approximately $1.4 billion in annual interest expense savings to farmers and ranchers in 2023 — savings that can make a crucial difference to the nation’s producers. 11 Nebraska Banker
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Impediments to a Successful Loan Closing Aaron B. Johnson Baird Holm COUNSELOR’S CORNER I have represented lenders and borrowers in CRE and C&I loan transactions for over two decades. The goal of outside counsel is always to accurately reflect the “business” deal of the parties, properly allocate risk and get the transaction closed as efficiently as possible. Of course, there are a number of variables that come into play in any given transaction, which can result in closing delays and/or post-closing headaches. Nonetheless, I have noticed a few basic issues which come up with some frequency: 1. Lack of Specificity at Term Sheet/ Commitment Letter Stage: Key facility terms and covenants, financial or otherwise, should be reflected with specificity on the front end to avoid extended negotiations and delays on the back end. For instance, a commitment letter for an ABL facility may provide for a borrowing base of 85% eligible accounts receivable plus 50% eligible inventory without a substantive definition of all components of eligibility. While several of these components are pretty standard, the list varies a bit across lenders, and there are often nuances based on the borrower’s business. Historic borrowing base calculations should be run based on the lender’s eligibility categories, and these calculations should be shared with the borrower and any outside counsel engaged by lender to ensure the loan documents accurately reflect borrowing base terms. Similarly, at the term sheet stage, the financial covenants may be presented somewhat generically, without any definition around the various inputs. The parties need to understand any adjustments to GAAP definitions that are to be used in connection with these covenants. For an EBITDA-based covenant, what additional add-backs and adjustments are intended? Will the borrower be making permitted acquisitions during the term of the credit facility that need to be addressed? What other non-recurring gains or losses may need to be reflected? Again, historic and pro forma covenant calculations run as part of lender underwriting should be shared with outside counsel for use in drafting. 13 Nebraska Banker
2. Lack of Coordination Regarding Due Diligence and the Closing Checklist: In the current environment, it seems like lenders and borrowers need to move from the commitment stage to loan closing quicker than ever before. The first step to a successful closing should always be a detailed closing checklist, setting forth all items that will be required conditions precedent to closing and the party’s responsibility for each such item. The lender should walk through the checklist with counsel and the borrower to ensure everyone is on the same page. The party managing the checklist, whether counsel or the lender, should send checklist updates on a weekly basis to reflect items received. It is a simple concept, but I have seen a number of situations where the parties are waiting on a thirdparty item, such as a survey, Phase I or landlord waiver, simply because there was a miscommunication and the item was requested late. 3. Limited Borrower Engagement: This relates to (2) above and, in my view, is critically important. Simply put, the borrower needs to be engaged throughout the closing process, whether through internal counsel, external counsel or a financial officer. Questions invariably come up during diligence and preparation of loan documentation, and it is important these questions be addressed promptly from the borrower side, particularly when the parties are working under an aggressive closing timeline. Where disclosure schedules are included within the loan documents, the borrower should be the party preparing. I have seen a number of situations where the borrower provides documentation that may be responsive to a disclosure request (such as providing copies of leases or material contracts) but leaves it to the lender or its counsel to actually compile and populate the schedule. This is not only inefficient, from a time and cost standpoint, but can lead to errors in the documents. 4. Misunderstanding of Lender’s Internal Requirements: This ties in with (2) and (3) and is another issue I see often. At my firm, there are a number of financial institutions we work with routinely and with whom we have developed customary processes and procedures and/or developed form loan documents and checklists. However, there are others who we work with only periodically or engage us only for a specified matter due to certain unique circumstances associated with a particular loan. In these situations, counsel may be unaware of certain lender requirements. For instance, a lender may have specific title endorsement, survey, KYC and beneficial ownership requirements, require specific SOFR or related index rate language or require, as a matter of course, delivery of review memoranda or borrower legal opinions. Lenders should not assume these requirements have been previously communicated to outside counsel or that the requirements are “standard.” Similarly, as counsel, we do not want to assume that what was “good” for a prior transaction is “good” for the present one. Communication on the front end regarding lender-required items and the inclusion of the same in the closing checklist will avoid issues later. As outside counsel, you never want to get a call from your bank client six months after a loan closing with a list of open audit exception items from the closing. 5. Use of Hybrid Loan Documents: When I refer to “hybrid” loan documents, I mean a situation where some of the documents evidencing or securing loans to a particular affiliated borrowing group have been prepared 14 Nebraska Banker
internally by the lender, using third-party software, and other documents have been prepared by outside counsel or where certain existing loan documents are to be crossdefaulted and/or cross-collateralized with new loans to the same borrowing group. Often, a lender will start with internally prepared documents and engage outside counsel as the facilities increase in size or otherwise become more complex due to cross-collateral or other issues. This creates a few challenges. Fundamentally, it can be difficult to understand the overall structure, outstanding credit exposure and collateral. A significant amount of time may be required to review the existing paperwork in order to determine the current status and to work through any modifications that may be necessary. For example, a mortgage may have been recorded in connection with a term loan from 2000. The intent of the lender was for that same mortgage to secure a new credit facility to the same borrowing group in 2020 under a dragnet clause. However, that mortgage specified a 2015 maturity date for the secured debt and was not modified in connection with the 2020 credit extension. Second, there will likely be inconsistencies between internally and externally prepared documents. While third-party loan document software serves a purpose, it is pretty inflexible. There is limited ability to build out covenants and related definitions within a software-prepared document set. Thus, there may be a situation where there are ambiguities or inconsistencies among loan documents, differing default triggers or related issues, all of which can create difficulties in the administration of the credit facilities. Given the foregoing, in these situations, I always try to roll all outstanding loans under a common loan agreement when possible to ensure consistency and make the loan document set more cohesive. I also explicitly modify or ratify mortgages, other collateral documents and guaranties whenever additional secured loans or modifications to existing facilities are made in order to eliminate any potential ambiguities. I recognize that many of the above points may be obvious; however, sometimes, the simplest of steps are the easiest to overlook. Ultimately, as lender’s counsel, our goal is to provide a smooth closing process, which helps you solidify the relationship with your borrower client. Hopefully, this article serves as a helpful reminder for your next loan transaction. Aaron B. Johnson has a broad-based transactional practice, focusing on commercial lending, real estate, corporate finance and general business matters. Aaron regularly represents lenders and borrowers in various types of financing transactions, including acquisition and construction financing, asset-based lending, syndicated credit facilities, tax credits and working capital lines of credit. He has experience in all aspects of commercial real estate development, including land acquisition and disposition, negotiation of design and construction documents, tax increment financing and leasing and related matters. Aaron also routinely advises clients in a variety of industries on mergers and acquisitions, corporate governance, debt and equity financing and general commercial matters. 15 Nebraska Banker
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 16 Nebraska Banker
The technologies of artificial intelligence (AI) are becoming an integral piece of the world we live in. These technologies are being deployed across a plethora of fields ranging from simple devices, such as cell phones, to more complex technologies, such as autonomous vehicles or the diagnosing of diseases. AI is even rearing its advancing technological head into the playing field of banking. It is a constantly evolving technology that many industries are jumping into while others are slowly pushed into in their efforts to thrive. For banks, it’s critical to embrace the advancements of the future but also to consider the security and regulatory requirements and overall risk to the organization and its customers. What is Artificial Intelligence? Artificial intelligence is a term that commonly references the various technological capabilities that allow for the analysis of data and the identification of patterns to make decisions and impact an outcome. Some examples of these AI-type activities or branches include machine learning, natural language processing, robotics process automation and speech and object recognition. Machine learning is a branch of AI and computer science that focuses on the use of algorithms and data to imitate human learning patterns, while gradually improving accuracy. With machine learning, the system learns and improves as new data is made available. Another branch of computer science and AI is natural language processing. This branch Artificial Intelligence The Benefits and Challenges for Financial Institutions Julia A. Gutierrez, Director of Education Compliance Alliance continued on page 19 17 Nebraska Banker
of AI enables computers to process human language, received through text and spoken words, and to understand the meaning and intent. It basically allows a computer system to understand the semantics of conversational language. The AI branch of robotics process automation, also known as software robotics, is the use of applications and systems to perform human-like tasks. It uses intelligent automation technologies and rulebased software to perform business process activities at a more efficient volume, reducing the need for human resources or involvement in the task. Finally, the AI branch of speech recognition enables a system to identify and process human speech into a written format. Speech recognition may also be referred to as automatic speech recognition, computer speech recognition or speech-to-text. This AI technology is often confused with voice recognition which focuses on identifying an individual user’s voice. However, speech recognition focuses on translating speech from verbal to text. Each of these artificial intelligence branches are utilized throughout financial institutions and countless other industries around the world. The Benefits of Artificial Intelligence Artificial intelligence is used in various fields and applications ranging from online shopping, advertising and machine translation enabling cross-language communication, to improving the overall operations and cost efficiency of financial institutions. The use of AI technologies in financial institutions can drastically reduce operational costs while significantly increasing productivity. With its broad range of uses, AI can potentially aid financial institutions in reducing costs associated with products and services, and it can enhance the overall customer experience as it bridges the gap between customer convenience and relationships. AI can benefit a financial institution’s lending process as it can expand credit access, assist in financing decisions, decrease underwriting times and costs and enhance both the borrower and lender experience. AI can be beneficial throughout other areas within financial institutions, such as identity validation and real-time anti-fraud monitoring. The opportunities and benefits when it comes to AI and financial institutions seem to be endless. But there have to be challenges, right? Artificial Intelligence Challenges Artificial intelligence isn’t perfect. Like any other enhancing technology, AI comes with its own set of risks and challenges. Some of those risks and challenges include system integration and a gap in skills. With system integration, the data behind AI is equally as critical as the technology itself. In order for the utilization of AI to be beneficial and effective, the data quality and quantity need to be accurate. This involves organizing data and preparing for integration. This means that financial institutions with a core processor will have to coordinate between their core system and their AI technologies. This can often be a complex and costly undertaking and financially burdensome, especially for small financial institutions and community banks. Financial institutions may also run into a more complicated integration process if their core processors and AI solutions vendors are competitors of the same or similar products and services. This challenge often leads to increased fees and costs for integration. Even if financial institutions are able to work out all the kinks related to system integration, there is always the challenge of obtaining expertly trained staff who are knowledgeable in building and deploying AI solutions. continued from page 17 19 Nebraska Banker
With the rapid advancement and use of AI technologies, it has led to a shortage of skilled AI experts in the broader labor force. While this is a challenge that is expected to improve in the future, at present, it leaves financial institutions competing with large tech companies such as Apple or IBM when recruiting for AI talent. An even more challenging area associated with artificial intelligence and financial institutions is meeting compliance expectations on technologies that are surrounded by so much regulatory uncertainty. Financial institutions are expected to identify and manage all risks related to AI and how it is used within the organization. It’s not enough for financial institutions to simply employ the technologies of AI, but rather they are expected to understand the data or inputs that drive the outcomes. Financial institutions are expected to ensure that all data used within the various branches of AI align with regulatory compliance requirements. For example, if the machine learning branch of AI is used in the decision-making for credit, the bank should understand and be prepared to explain what the contributing factors were that the AI system used to make that decision (i.e., what data was inputted to receive the outcome/ decision). It is critical that financial institutions are not only able to understand and explain this process, but also that all the data used within the AI system meet regulatory requirements. This means ensuring that the AI system isn’t using information that may violate consumer or fair lending laws. Financial institutions that are utilizing AI should have processes in place that allow for the identification of risk, both new and emerging, as well as controls for managing that risk. Because of the rapidly evolving technologies of AI, there is always the challenge of changes in risk level or even unidentified risk developing. Financial institutions need to be prepared to rise to the occasion when it comes to meeting those regulatory and risk challenges, whether that be through an increased frequency of monitoring and reviewing established controls or contracting with external vendors to conduct robust third-party risk management. The use of AI technologies within financial institutions has captured the interest of regulators and policymakers alike. A couple of key concerns are always the safety and soundness of financial institutions and consumer protections. While AI is constantly growing and advancing, many of the banking laws and regulations currently on the books are still a little behind the times, leaving some areas of regulatory uncertainty. Nevertheless, regulators acknowledge the benefits of AI and support responsible innovations by financial institutions. In 2021, the agencies (Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve Board) issued RFIs (requests for information) on the use of artificial intelligence by financial institutions. In 2022, the OCC (Office of the Comptroller of the Currency) issued supervisory expectations for how banks should manage risks associated with AI. And most recently, in April 2023, a joint statement was issued by the agencies on the enforcement efforts against discrimination and bias in automated systems. The 2023 statement outlines some of the challenges of AI and serves as a reminder that financial institutions must embrace responsible innovation. Conclusion For financial institutions to thrive in the industry and remain relevant in the market, they must continue to be forwardthinking and responsible in their innovation efforts. Artificial intelligence is an ever-evolving technology and convenience of the world in which we live. Financial institutions must engage in the balancing act of supporting new and innovative technologies for their consumers while also acknowledging the risks and challenges of such growth. It is imperative to fully understand the technologies that our institutions rely on for its operation and that we remain abreast of any arising issues in the regulatory world. Artificial intelligence is the future, and it’s filled with risks and rewards. Julia A. Gutierrez serves as Compliance Alliance’s Director of Education, developing curriculum and presentations as well as presenting at various schools and seminars, both live and in a livestream/hybrid format. Julia has over 20 years of financial industry experience with the Compliance Alliance team. Scan the QR code to read the joint statement on enforcement efforts against discrimination and bias in automated systems. https://files.consumerfinance.gov/f/ documents/cfpb_joint-statementenforcement-against-discriminationbias-automated-systems_2023-04.pdf The use of AI technologies in financial institutions can drastically reduce operational costs while significantly increasing productivity. 20 Nebraska Banker
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October marked the 20th anniversary of National Cybersecurity Awareness Month (NCSAM), an initiative established by the National Cyber Security Alliance and the Cybersecurity and Infrastructure Security Agency (CISA) of the U.S. Department of Homeland Security. NCSAM aims to provide professionals with online safety education and awareness to keep up with the constantly evolving cyber threat landscape. Although NCSAM serves as an excellent reminder to prioritize cybersecurity awareness, it’s crucial to continue educating individuals throughout the year to achieve full effectiveness. Educating both your employees and customers supports a strong cybersecurity culture. This will help establish trust that your organization takes cybersecurity seriously and is dedicated to doing what’s best for everyone involved. The Importance of Customer Education Due to IT and cybersecurity-related regulations, financial institutions use security standards to detect, protect and respond to cyber events. But are you sharing this information with the customers you serve who are not as regulated? Many organizations tend to overlook the potential risks posed by their customers. Poor cybersecurity practices of customers can result in a compromise that affects your bank. A malicious attacker successfully accessing your customer’s information can set them up for a corporate account takeover (CATO) scenario. Customer compromise is tough to combat and can often lead to reputational and monetary damage to your business. TECH TALK Customer Cybersecurity Awareness Sharing a Culture of Security Eric Chase, Client Services Information Security Consultant SBS CyberSecurity, LLC 22 Nebraska Banker
Sharing a strong culture of cybersecurity has benefits beyond mitigating cyber risks; it builds confidence amongst your employees and customers that you have made it a priority. Develop a Training Plan Your customers will benefit from a training plan that includes basic cybersecurity knowledge, best practices and tips. To keep it simple, create a plan based on the same security awareness topics already shared internally, including: • Social engineering and phishing: A good start for a training plan is to teach customers about the various social engineering attacks, giving extra attention to phishing. Introduce the idea of the Golden Rule of Email, which is to treat every email like it is a phishing attempt. Additionally, provide information about the dangers of phishing emails, explain how to identify and handle a suspicious email and suggest controls they can use to protect against this common threat. • Physical security: Educate customers about physical security threats and best practices. • Access controls, including passwords: Educate customers on the importance of strong authentication mechanisms. Stress the importance of length vs. complexity when it comes to passwords and encourage the implementation of multi-factor authentication (MFA) whenever possible. • Remote access security: Educate customers on the importance of securing remote workers through the use of VPNs, wireless network best practices, quality antimalware programs, etc. • Use of encryption: Educate customers on the importance of data encryption. • Mobile device security: Educate customers about security controls for mobile devices, including strong passwords, biometric authentication, encryption, antimalware programs and Wi-Fi connectivity. • Malware awareness: Educate customers about defending against malicious software. • Importance of anti-virus and firewalls: Stress the importance of firewalls and the use of malicious program detection programs. • Security awareness: Stress the importance of ongoing security awareness training and staying up to date about modern attacks. • Incident response plans: Stress the importance of corporate customers building a plan to fail well (an incident response plan) if they are compromised. Using multiple delivery channels to provide education can help ensure your customers see it throughout the year. Delivery channels can include: • Providing relevant cybersecurity tips, news stories and alerts on your website • Incorporating cybersecurity tips into your on-hold message when customers call your business or on physical statements or invoices • Including a monthly tip in your newsletter or social media accounts to keep cybersecurity top-of-mind • Encouraging your customers and employees to follow your organization or other cybersecurity organizations on social media • Placing posters, articles or other educational materials in the entryway, break room, bathroom or other meeting areas • Providing cybersecurity resources, control suggestions or self-audits during account opening • Hosting an event, such as: ▪ For business customers, plan a lunch and learn event focusing on the latest cybersecurity tips and trends. ▪ For the community, host a cybersecurity awareness day for community members to shred sensitive In today’s market, with cybersecurity being a deciding factor for consumers when making choices, being transparent and forthcoming about your cybersecurity practices and culture can build customer trust and attract new clients. 23 Nebraska Banker
documents, listen to short presentations and play cyber-themed games or trivia. ▪ For your board, have a guest speaker discuss the trends they are witnessing and the risks associated with generating increased buy-in. Sharing a Strong Cybersecurity Culture Getting out in front of your customers and talking about the importance of cybersecurity is a win/win/win: 1. You are helping to create stronger customers that are more resistant to cyberattacks, benefiting both you and your customer. 2. You show your customers they are more than just a number. You’re strengthening relationships and demonstrating care about their well-being. 3. You have an opportunity to showcase new products, services or features and boost the usage of current offerings. Discussing cybersecurity with your customers allows you to highlight the measures your organization is taking to safeguard their information. In today’s market, with cybersecurity being a deciding factor for consumers when making choices, being transparent and forthcoming about your cybersecurity practices and culture can build customer trust and attract new clients. SBS aims to simplify the process of educating your customers, board and community about cyber safety throughout the year. The Security Awareness Toolkit provides a comprehensive range of grab-and-go resources, including cyber tips, social media posts with graphics, event ideas and more. This toolkit makes it easy to demonstrate your dedication to sharing a strong cybersecurity culture. To get your Security Awareness Toolkit, visit sbscyber.com. Eric Chase is an Information Security Consultant at SBS CyberSecurity (SBS) and an instructor for the SBS Institute, leading the Certified TRAC Professional (CTP) course. Eric received a Bachelor of Science in Computer Network Security from Dakota State University(DSU). He continued his education at DSU with a Master of Science in Information Assurance. He is currently working toward his Certified Information Security Manager (CISM) certification. Eric is passionate about assisting clients to become skilled and knowledgeable TRAC users and enjoys assisting them with their Information Security Program. 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 24 Nebraska Banker
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Is Your Balance Sheet Recession Ready? Dale Sheller, Associate Partner The Baker Group 26 Nebraska Banker
I recently joked that I have read an article every week for the past year that says a recession is starting the next month. But where is that recession? Everyone — or maybe some of us — remembers the common rule of thumb that two consecutive quarters of negative gross domestic product (GDP) growth equals a recession. However, determining a recession is not quite that simple. The official recession determination is made by the National Bureau of Economic Research (NBER), which is a committee made up of eight economists who use many factors in making that determination. The NBER states their traditional definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” As of September 2023, the NBER hasn’t declared an official recession since the COVID-induced recession of April 2020. A recession typically has plenty of negative consequences, including a rise in the unemployment rate as well as stagnate or declining incomes. As a result, consumer spending declines, which further impacts businesses and their bottom lines. The early phases of an economic downturn often coincide with increases in interest rates as the Federal Reserve uses monetary policy to pump the brakes on an overheating economy to help control inflation. The Federal Reserve’s monetary actions have a major impact on institutions’ balance sheets, specifically with loan and deposit pricing. As the Fed raises rates, the cost of credit increases and deposit rates increase (usually at a slow pace), therefore incentivizing less borrowing and more saving. These macroeconomic and interest rate dynamics play a major factor in overall performance and balance sheet management. No one has the crystal ball on when the next recession will begin, how long it will last, and how severe it will be. However, given the recent decline in inflation levels due to the Fed’s aggressive tightening cycle, it does feel as if we are getting closer to the peak in interest rates and closer to the end of the current economic cycle. Whether this current Fed tightening cycle ends in a recession or a soft landing, the Fed’s latest Dot Plot points to a path for lower interest rates in the future. Balance sheet managers and ALCOs should never try to time the peak of interest rates. Rather, they should best prepare the balance sheet for the next recession and/or falling interest rates. Here are some considerations for preparing the balance sheet for the next recession: • Interest Rate Risk: Whether the current tightening cycle ends in a recession or a soft landing, there is a high likelihood for some level of lower rates in the future. Utilizing your Interest Rate Risk Model to identify any exposures to falling interest rates is critical. Managing your asset sensitivity and asset duration through effective investment selection and strategy is key. Being reactive is not a strategy. • Credit Risk: Asset quality problems of some magnitude accompany recessions. Ensure current loan pricing and structure is appropriate given the deal and current environment. Avoid chasing loan demand late in the cycle by tightening credit underwriting standards. • Liquidity: Historically, during recessions and falling rate scenarios, deposit levels increase and liquidity levels grow. Ensure your assets are fully deployed to optimize your earning asset mix while keeping a cushion of unencumbered liquid assets. Lastly, every institution should have ample contingent liquidity sources for those unforeseen liquidity events and needs. • Stress Testing: Stress testing should be done on a regular basis. It is important to consider higher impact, lower probability scenarios when creating stress scenarios. Stress testing can be conducted on various aspects of the institution, including on capital, liquidity and interest rate risk. “How can we better prepare for a possible recession?” I encourage you to put this question as an agenda item for your next ALCO meeting. Every institution’s balance sheet and risk profile are unique. There is no one-size-fits-all strategy, but being proactive and having a plan (as well as contingency plans) is essential. Dale Sheller is an Associate Partner in the Financial Strategies Group at The Baker Group. He joined the firm in 2015 after spending six years as a bank examiner with the Federal Deposit Insurance Corporation. Sheller holds a bachelor’s degree in finance and a master’s degree in business administration from Oklahoma State University. He works with clients on investment portfolio strategies, interest rate risk management, liquidity risk management and regulatory issues. Sheller regularly speaks at educational seminars nationwide and serves as a faculty member for multiple banking schools. Contact Dale at (800) 937-2257 or dsheller@gobaker.com. 27 Nebraska Banker
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