President’s Message Serving Members Through Innovative Services and Partnerships JANUARY/FEBRUARY 2024
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233 South 13th Street, Suite 700 Lincoln, NE 68508 Phone: (402) 474-1555 • Fax: (402) 474-2946 www.nebankers.org NBA BOARD OF DIRECTORS RICHARD BAIER President and CEO richard.baier@nebankers.org KARA HEIDEMAN Director of Communications and Marketing kara.heideman@nebankers.org 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 BMO 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 Omaha 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 4 NEBRASKA BANKER
PRESIDENT’S MESSAGE WHY ? Tim Burns with customer Jami Schmidt 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 mibanc.com MEMBER FDIC Contact Tim Burns 402-480-0075 The customer service that MIB provides to our community bank is exceptional. Tim Burns, our relationship manager, listens to our needs and helps our bank meet our goals. Their website protal we use for reports is very user-friendly and easy to navigate. We appreciate the relationship we have with MIB today! Jami Schmidt/CFO Henderson State Bank Henderson, NE
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. ©2024 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 SERVING MEMBERS THROUGH INNOVATIVE SERVICES AND PARTNERSHIPS Richard J. Baier, President and CEO, Nebraska Bankers Association 10 WASHINGTON UPDATE AGAINST A RISING TIDE OF REGULATION, BANKS MUST ROW TOGETHER Rob Nichols, President and CEO, American Bankers Association 13 “AN ILL WIND THAT BLOWS NO GOOD” ECONOMIC HEADWINDS AND ASSET AND LIABILITY MANAGEMENT Elizabeth Madlem, Vice President of Compliance Operations and Deputy General Counsel, Compliance Alliance 16 COUNSELOR’S CORNER RECENT COMMUNITY BANK M&A TREND: DIVESTITURE OF INSURANCE AGENCIES Kevin P. Tracy and Katie L. Kalkowski, Baird Holm, LLP 20 COMMERCIAL LOAN ACCOMMODATIONS AND WORKOUTS Annika Schoch, Endacott Timmer PC LLO 24 TECH TALK 7 STEPS TO BUILDING AN INCIDENT RESPONSE PLAYBOOK Kelley Hesse, CBFI, CBSM, CBSTP, Information Security Consultant, SBS CyberSecurity 30 2024 EDUCATION CALENDAR CONTENTS 10 24 6 NEBRASKA BANKER
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PRESIDENT’S MESSAGE Serving Members Through Innovative Services and Partnerships Richard J. Baier, President and CEO Nebraska Bankers Association The Nebraska Bankers Insurance & Services Company (NBISCO) was formed in 1981 as the NBA’s for-profit subsidiary with the sole mission of offering insurance products and services to NBA-member banks. NBISCO’s mission has evolved over the years to include preferred vendors, program administration and growing employee benefit programs, all with a focus on helping NBA members better compete and remain profitable in a highly regulated and evolving industry. More recently, NBISCO has expanded existing business lines and launched new products based on input and the needs of our members. Following legislative changes in 2019, the Nebraska Department of Banking and Finance contracted with NBISCO to administer the state’s Single Bank Pooled Collateral (SBPC) program. The SBPC program allows participating banks to pledge collateral against their entire portfolio of public deposits rather than pledging per entity, thereby saving the bank both time and money. The SBPC program now counts 27 Nebraska banks as participants and offers services to more than 400 public depositors across Nebraska, representing total covered public deposits of more than $2.3 billion. Participants in the program experience firsthand how the SBPC program is a highly efficient and effective method to pledge against public deposits. More information about the program is available at nebankers.org/nepooledcollateral. In late 2023, NBISCO signed an agreement with the Kentucky Bankers Association to jointly market the Bank Performance Report. This comprehensive report uses data from quarterly call reports to rank the overall performance of banks headquartered in each state and is available in printed and electronic or electronic-only options. Custom reports are also available. Currently, nine Nebraska banks subscribe to this service and rely on the quarterly reports to do in-depth peer analysis and comparisons. To learn more, visit www.bankperformancereport.com. Most recently, NBISCO announced a new partnership with Zelle Human Resource Solutions to launch resourceHIVE,TM a subscription-based virtual HR service. This partnership is one method to address a request we routinely receive from our member banks: successfully complying with the rapidly changing HR industry. Zelle’s Lincoln-based staff has more than 10 years of experience in both HR and financial services. The resourceHIVETM Together, we can find strategies to better support your customers, communities and employees. 8 NEBRASKA BANKER
team can replicate and/or supplement your current HR efforts. On the web-based platform, questions are answered quickly and efficiently by a real person who is fluent in the language of HR. Other services include a resource library of HR policies and documents, compliance and audit support, virtual training for bank staff and leadership, exit interviews, virtual meetings with bank HR staff and many others. The resourceHIVETM service packages represent substantial savings from other HR service alternatives. Visit thehivehr.com to learn more or request a product demonstration. I am highlighting these new and expanded NBISCO services not as a marketing effort but rather to reinforce that your NBISCO/NBA staff take member input very seriously. We routinely discuss existing and new products and services our bank members can embrace to reduce costs, increase revenue and better meet customer expectations. If you have recommendations for specific bank products or services, I encourage you to share your feedback with any member of our NBISCO/NBA team. Together, we can find strategies to better support your customers, communities and employees. 9 NEBRASKA BANKER
WASHINGTON UPDATE Against a Rising Tide of Regulation, Banks Must Row Together Rob Nichols, President and CEO American Bankers Association Whenever a new election cycle comes along, it’s not uncommon to hear pundits make mention of “red waves” or “blue waves,” denoting potential power swings in Congress. But as bankers contemplate the future of our country and the policy environment that will shape the future of our industry, there’s another wave that we need to talk about: a tsunami of complex regulation that is hitting the banking sector as we speak. To be sure, the tide turned quickly: last year’s turbulent spring ignited a rulemaking frenzy at the banking agencies. Suddenly, new proposals sprang up to increase bank capital levels, impose a new long-term debt requirement and make the resolution planning process more complex. Simultaneously, the CFPB imposed long-awaited small business reporting requirements under Section 1071 of the Dodd-Frank Act — which went far above and beyond what was outlined in the statute. The Federal Reserve issued a proposal to cap interchange fees under Regulation II, and the FDIC is now pursuing significant changes to its corporate governance guidelines. Against all that, the agencies finalized a long-awaited update to the Community Reinvestment Act framework — a staggeringly complex, 1,500-page final rule that creates significant 10 NEBRASKA BANKER
new requirements that have the potential to fundamentally alter banks’ business strategies. Meanwhile, in Congress, banks are facing the resurgent threat of the so-called “Credit Card Competition Act,” which would apply Durbin Amendment-like provisions to credit cards — the equivalent of lawmakers taking money from banks and putting it into the cash registers of megaretailers. Taken together, these policies place a tremendous cost and compliance burden on banks of all sizes — at a time when they are already facing a tough operating environment due to a protracted period of high interest rates and ongoing geopolitical tensions. These policies will also have devastating effects on consumers. Banking is, after all, a business — and in order for banks to offer the full range of financial products and services to meet the needs of communities, they need to be profitable and have an operating environment that supports growth. The current regulatory landscape will do the opposite. Banks that are already considered well-capitalized by regulators’ own admission will be forced to hold even more capital in reserve — which means less capital will be available to lend to the local small business looking to expand or to the young family looking to buy their first home. Simultaneously, changes to the fee income streams upon which banks have long depended could spell the end of free or low-cost checking products and popular rewards programs that consumers value. What’s perhaps most concerning, however, is the fact that regulators don’t seem to understand the full impact of their actions. As we observed with the Reg II rulemaking and the so-called “Basel III endgame” proposal, regulators are failing to adequately assess the potential costs of the individual regulations on banks and consumers — let alone contemplate what the cumulative impact of all these rules would be. ABA is sounding the alarm. We need to make sure policymakers in Washington — from members of the administration to lawmakers in Congress to the regulators holding the rulewriting pens — understand that the regulatory burden has a real-world cost, not just for banks, but for consumers, small businesses and the American economy. If you’re reading this, I urge you to help us tell that story. Join our Bank Ambassador program to rekindle relationships with your congressional delegation and help educate policymakers about banking. Stay informed and send a letter about an issue that will affect your bank through ABA’s grassroots platform, SecureAmericanOpportunity.com. Make a plan to come to the nation’s capital in March for the ABA Washington Summit and tap a colleague or two to come along. The sobering reality for banks right now is that rougher seas are likely ahead — but our best hope is to row together. Email Rob at nichols@aba.com. To learn more about the Bank Ambassador program, email ABA’s Laura Lily at llily@aba.com. ASSURANCE / TAX / ADVISORY FORVIS is a trademark of FORVIS, LLP, registration of which is pending with the U.S. Patent and Trademark Office. FORward VISion counts Our vision is helping make yours a reality. Whether you’re looking to stay compliant, manage risk, or grow strategically, our forward-thinking professionals can help you prepare for what’s next. forvis.com/financial-services FOR unmatched industry insight, VISion matters 11 NEBRASKA BANKER
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“An Ill Wind that Blows No Good” Economic Headwinds and Asset and Liability Management Elizabeth Madlem, Vice President of Compliance Operations and Deputy General Counsel Compliance Alliance Financial institutions are facing headwinds on account of burgeoning non-performing assets, corporate malfeasance, a slowdown in the economy and a mismatch between the maturity profile of assets and liabilities. Severe liquidity strains caused the failure of Silicon Valley Bank, Signature Bank and First Republic Bank. Yet despite weaker economic conditions, sharply higher interest rates, high inflation, financial market stress and concerns over a potential recession, the banking industry demonstrated resilience. How? Asset and Liability Management (ALM) is a common phrase thrown around a board room when in discussions about the viability and future of a bank. It is the practice of mitigating financial risks resulting from a mismatch of assets and liabilities, a combination of risk management and financial planning. Not only is it vital for the sustainability and longevity of financial institutions within the financial landscape, but it solidifies the important roles that banks play in maintaining the stability and growth of economies. Liquidity risk has become an increasingly important parameter for the assessment of a financial institution. But with a new age of depositor behavior and the evolution of regulations, achieving a dynamic, integrated ALM program is challenging for banks of all sizes. 13 NEBRASKA BANKER
Financial institutions need to recognize that change is necessary for how they tackle managing liquidity and interest rate risks. 800.228.2581 MHM.INC Now more than ever people want self-service options. With our core integrated ITMs we can make this a reality both in the lobby and in the drive-up of your branch. SELF-SERVICE BANKING Low interest rates lasted years, resulting in complacency among financial institutions regarding deposit balance behavior. Then, during the past two rising rate cycles, deposit balances grew, coupled with an unusual systemic deposit inflow from 2020-2021 as a result of COVID-19 pandemic-related government fiscal stimulus. But those early 2023 bank failures proved that depository behavior is changing. One of the more important lessons surrounded concentration risk. Prior, deposits were considered one of the safest products in the liability structure of a bank. But, as the industry quickly learned, some types of depositors are more sensitive than others. Large concentrations of a particular type of client create a higher risk of deposit flight, as was the case with SVB. As a result, banks are needing to diversify their funding basis. The ALM function covers a prudential component and an optimization role within the limits of compliance. Prudential meaning the management of all possible risks and rules and regulations, with optimization covering the management of funding costs, generating results on balance sheet position. But the industry is riddled with change: business cycles becoming aggressive, global ecosystems and third-party risks becoming more complex, regulations rapidly changing, more stringent compliance enforcement — financial institutions are going to be forced to adopt an agile ALM framework with 14 NEBRASKA BANKER
a broader perspective scoping out broad objectives of the bank’s asset/liability portfolio, as dictated by the Board in order to address new situations where a policy does not yet exist. With the adverse interest rate environments, it has been found that most ALM systems and processes are not providing accurate and explainable outcomes scaled to meet transaction processing requirements. They lack flexibility to support interest rate risk reporting, scenario modeling requirements and “what if” analysis and are unable to scale to account for a bank’s contract and account volume of deposits and loans. There exists a lack of transparency in the underlying calculation logic, resulting in unexplainable and independently unverified data. It is important for banks to assess the three pillars within an ALM program to include: ALM Information Systems, ALM Organization and ALM Processes. These pillars address the four key components examiners test on: board and senior management oversight policies; procedures and risk limits; management information systems; and internal controls and audit. ALM Information Systems addresses Management Information Systems and information availability, accuracy, adequacy and expediency. Information is the key to ALM strength. ALM organization requires a strong commitment from the board and senior management to integrate basic operations and strategic decision making within risk management. The ALCO decision-making unit monitors market risk levels compared to board-set risk limits, articulates the current interest rate view and view on the future direction of interest rate movements to strategize for future business opportunities, and reviews the results of and progress in implementation of the decisions made. Lastly, the ALM process encompasses a scope of liquidity risk management, management of market risks, trading risk management, funding and capital planning, and profitplanning and growth projection. While the above is not all-encompassing, it does assist financial institutions in knowing that their ALM foundation is robust and agile to respond to evolving needs, and that it is modeling the balance sheet, projecting net interest income and economic value of equity, all while performing scenario analysis and stress testing to assess the impact of key performance indicators. This means also hiring a quality ALM professional who understands the need to replicate the portfolio from a sensitivity point of view when modeling 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 a balance sheet or replicating cash flow, including complex structured products and embedded optionality. It requires accuracy and reliability to demonstrate what is happening right now within a portfolio. As stress testing and scenario analysis demands continue, banks need to be able to respond consistently to multiple scenarios via their credit stress models. It should account for evolving requirements, meaning the bank should be able to run a scenario analysis, including stress testing non-interest-bearing checking accounts if there is a move to a higher interest rate. Financial institutions need to recognize that change is necessary for how they tackle managing liquidity and interest rate risks. ALM and liquidity are two essential parts of the bank’s overall model risk management structure. Ensure the board has at least one director with a solid understanding of balance-sheet management concepts. Be proactive in identifying risks and updating policies and procedures before implementing new products or activities. Reevaluate and communicate guidance and risk tolerances to bank personnel. With the economic landscape, particularly that of community banks changing significantly, it directly correlates to a heightened need for attention to ALM risk management strategies and processes. 15 NEBRASKA BANKER
Recent Community Bank M&A Trend: Divestiture of Insurance Agencies Kevin P. Tracy and Katie L. Kalkowski, Baird Holm LLP Sale and merger transactions involving community banks were infrequent in 2023. Transaction volumes were lower than prior years, both regionally and at the national level. However, the merger and acquisition market related to insurance agencies, both those affiliated with community banks and those not affiliated with community banks, saw increased activity in 2023. This article identifies some reasons for these divergent trends and discusses factors that owners and management of community banks should consider when exploring the possible sale of an affiliate insurance agency. Part One: Recent M&A Market Activity Lack of Community Bank Activity There was minimal community bank acquisition and sale activity in Nebraska in 2023.1 Transaction volume was similarly significantly reduced on a national level compared to 2022. Many reasons led to this lack of activity. Most prominently, increased economic uncertainty and the Federal Reserve’s response to inflationary conditions created a difficult transaction environment. As economic uncertainty increased, community bank buyers became more conservative in their valuation of target institutions. To the extent buyers were previously willing to ascribe value to earnings projections, they became less willing to do so. Instead, buyers increased their COUNSELOR’S CORNER 16 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!” focus on the current tangible book value of target institutions as the primary focus for valuation. As readers of this article are well aware, community bank balance sheets have been stressed in 2023 due to rising interest rates. These higher rates have required would-be buyers to place more scrutiny on target bank’s allowance for loan losses. Additionally, and perhaps more importantly for the bank transaction market, rising rates have led many community banks to experience unrealized losses in the value of their securities portfolios. These unrealized losses created a chasm between the valuation expectations of would-be buyers and owners of community banks. Given the current environment, buyers argued that held-to-maturity securities should be marked to market for purposes of transaction valuations, while sellers countered that such losses are temporary in nature and a full market valuation adjustment is unwarranted. There are numerous ways to find a middle ground on this issue, and transaction activity on a national level has picked up during the second half of 2023 — perhaps signaling that buyers and sellers have begun to agree on an approach. 17 NEBRASKA BANKER
Increased Insurance Agency Activity While the community bank transaction market was relatively quiet in 2023, transactions involving independent insurance agencies were numerous. Sellers of insurance agencies have found many willing buyers, including several national insurance conglomerates that are aggressively expanding. Competition among buyers, coupled with increased insurance premium prices in the industry, produced increased sale premiums for insurance agencies in 2023. Capitalizing on these trends, some community banks with affiliate agencies have chosen to sell such agencies2 at these elevated valuations and contribute the sale proceeds to bank capital to strengthen their balance sheets.3 This has been a popular capital-raising strategy across banks of all sizes in 2023.4 There have also been several insurance agency acquisitions from non-financial institution sellers in Nebraska and the surrounding states in 2023. Part Two: Factors to Consider when Contemplating Selling an Affiliate Agency Local and national buyers will likely continue to call on Nebraska banks with affiliate insurance agencies in 2024 in hopes of putting together transactions. These transactions present exciting capital-raising opportunities but may also present post-closing operational risks for the selling bank. To assess these risks, potential sellers should consider a number of factors when contemplating whether to pursue a transaction. 1. Impact on Bank Earnings Affiliate insurance agencies may provide a boost to bank earnings from a non-core business segment.5 While an immediate capital injection from transaction proceeds is appealing, it is important to also assess the loss of future earnings. Pro forma financial statements should be prepared to reflect the overall impact of the transaction and should be evaluated by bank management and its external accountants. Banks should also consider the amount of bank business generated by insurance agency customers. Incremental bank business may be lost if agency customers move their insurance business elsewhere following a transaction. 2. Scope of Restrictive Covenants Customer relationships are the foundation of any insurance agency business. Agency buyers will require non-competition and non-solicitation agreements from sellers in acquisition transactions. While a deal is unlikely to be completed without some restrictive covenants, there is usually some room to maneuver. A seller bank must carefully consider the scope of the restrictive covenants to which it can agree. In doing so, a seller bank needs to consider not only its own future business plans as they relate to the insurance industry but also whether any non-compete provision would burden a future acquirer or merger partner of the bank. To the greatest extent possible, these restrictive covenants should exclude the activities of future transaction parties from their scope. Without this exclusion, a potential future acquirer of a seller bank that operates its own insurance agency business may be unwilling to pursue a transaction during the restricted period. Members of bank management may also be required to sign restrictive covenants if they are equity owners of the affiliate agency or provide services to the agency. These individuals also must consider, among other things, whether their restrictive covenants would prevent them from providing services to a future bank acquirer with insurance agency operations. 3. Future of Shared Employees Many individuals providing services for bank-affiliated insurance agencies are not direct employees of the insurance agency itself. When an insurance agency is a division of the bank, such persons are likely to be employed by the bank. If the insurance agency is a subsidiary of the parent holding company, such persons are likely leased employees from the affiliate bank. An agency buyer, particularly an out-of-market buyer, will likely require that these individuals become employees of the buyer following the closing of a transaction. Sellers must consider whether the bank will require the services of these individuals following closing. If any will be required, the selling bank should make this known to a potential buyer at a very early stage. 4. Shared Information Technology and Co-Mingled Records Banks must consider how the insurance agency’s technology and records would transfer to a potential buyer. If the information technology resources are provided to the insurance agency by the bank, the bank should contemplate whether (and for how long) this service will continue following closing. Many insurance agencies utilize servers, computers, phone systems and other equipment owned or leased by affiliate banks. Additionally, some banks co-mingle the digital records of the bank and its affiliate insurance agency through storage on common servers. In these instances, the seller bank will need to consider whether segregation of such information is possible and ensure that it can be done without jeopardizing bank records and data. Oftentimes, transaction parties will negotiate a Transition Services Agreement whereby the seller bank 18 NEBRASKA BANKER
LINCOLN BRUNING endacotttimmer.com 402-817-1000 Legal advice. Community banking experience. While the community bank transaction market remains slower than in prior years, community banks with affiliate insurance agencies may have an opportunity to sell affiliate agencies at elevated valuations. will assist for a period of time post-closing to ensure the smooth transfer of information technology and agency records. Sellers often over-promise and under-charge for their services in these agreements. It is important to set reasonable buyer expectations for the scope and duration of these services and sellers should not be afraid to be aggressive with the rates to be charged for these important services. 5. Other Shared Assets Affiliate insurance agencies are often physically located within bank branches, and buyers will typically require a lease of such space for at least a transition period. A selling bank should consider whether it would be difficult to lease such space to another party if the buyer would not renew the lease in the future. Additionally, as future business relationships are unpredictable, seller banks must consider the circumstances in which they would want to terminate a buyer’s lease early. Any lease should also include terms regarding the use of office furniture, equipment, parking stalls and any other assets owned by the seller bank to be used by the buyer following closing. While the community bank transaction market remains slower than in prior years, community banks with affiliate insurance agencies may have an opportunity to sell affiliate agencies at elevated valuations. The benefits of these transactions must be weighed against the operational challenges they produce. Banks with affiliate agencies should consider the previous factors when evaluating divestment opportunities in 2024. 1The Nebraska Department of Banking and Finance issued only one approval order related to a community bank merger in 2023. 2Community banks operate affiliate agencies in a variety of ways. Some operate agencies as business segments of the bank itself. Others house insurance agency businesses in an operating subsidiary of the bank or as a subsidiary of a parent bank holding company. 3Bank holding companies also may consider using proceeds from such sales to redeem shareholders seeking liquidity. Current bank valuations present a “sell-high; buy-low” opportunity to bank holding companies able to fund redemptions through insurance agency sale proceeds. 4In April, Truist completed the sale of 20% of its insurance brokerage business to Stone Point Capital for $1.95 Billion and has subsequently discussed the sale of the remainder of such business to Stone Point. See Liz Hoffman, Truist is in Talks to Sell its Insurance Business for $10 Billion, SEMAFOR (Oct. 9, 2023, 5:47 P.M.), https://www.semafor.com/ article/10/09/2023/truist-in-talks-to-sell-insurance-business-for-10-billion. Recently, CB Financial, the parent holding company of a much smaller bank, Community Bank, of Carmichaels, Pennsylvania ($1.27 Billion in assets), announced the sale of its insurance agency subsidiary to World Insurance Associates for $30.5 Million. See John Reosti, CB Financial Joins Parade of Banks Divesting Insurance Units, AMERICAN BANKER (Dec. 4, 2023, 3:51 P.M.), https://www.americanbanker.com/news/cb-financialjoins-parade-of-banks-divesting-insurance-units. 5See the following related American Banker article for further discussion. Allissa Kline, Banks’ Insurance Units are Fetching Top Dollar, but Selling Brings Risk, AMERICAN BANKER (Oct. 3, 2023, 9:00 P.M.), https://www.americanbanker.com/news/banks-insurance-units-arefetching-top-dollar-but-selling-brings-risk. 19 NEBRASKA BANKER
Commercial Loan Accommodations and Workouts Annika Schoch, Endacott Timmer PC LLO 20 NEBRASKA BANKER
Commercial real estate is an ever-changing, dynamic sector where owners and financial institutions oftentimes face challenges, especially during economic downturns and times of financial stress. Borrowers may find themselves having troubles meeting their obligations, which leads to the need for loan accommodations and workouts. There are many different types of loan accommodations, some of which include: interest rate modifications, payment deferrals, term extensions and principal forbearance. Loan workouts include, but are not limited to: loan restructuring, debt settlement, and sometimes the sale of the property. Loan accommodations offer short-term relief and are a better option for those facing temporary difficulties. On the other hand, loan workouts afford more long-term solutions for properties navigating serious financial distress. Both loan accommodations and workouts, if properly utilized, can provide a sustainable answer for both financial institutions and borrowers facing financial difficulties. The strongest financial institutions and borrowers are those who have the ability to manage ever-changing economic conditions, labor issues and inflation. In an effort to help commercial real estate (CRE) borrowers navigate these difficulties, the regulators updated and expanded the 2009 Policy Statement. As luck would have it, the updated statement included a new section on loan accommodations. On Oct. 30, 2009, the Federal Financial Institutions Examination Council (FFIEC) agencies adopted the Policy Statement on Prudent 21 NEBRASKA BANKER
Commercial Real Estate Loan Workouts to better help financial institutions understand risk management and accounting practices for CRE loan workouts. Understanding this is crucial, as 98% of banks engage in CRE lending, and of those banks, CRE lending is the largest loan portfolio type. The estimated dollar volume of CRE loans is $3 trillion. COVID-19 played a large role in the steep decline in the demand for commercial real estate. The pandemic caused the effect to be felt across many sectors, including hospitality, office, retail and entertainment. Due to the transition to working from home, the office sector has proven to be especially vulnerable. Because of this shift, some borrowers are finding it difficult to refinance. Oftentimes commercial loan accommodations and workouts are in the best interests of both the financial institution and the borrower. Due to the anticipated benefit, the 2009 updates encourage financial institutions to work with credit-worthy borrowers. In light of their efforts, the financial institution will not be criticized for implementing CRE loan accommodation and workout arrangements, even if the efforts result in modified loans with overall weaknesses. This is true for institutions that perform thorough reviews of their borrower’s financials. Working collaboratively, financial institutions and borrowers will likely preserve relationships, mitigate losses for both parties and develop sustainable solutions that are in the best interest of both parties. This is true even if the financial institution has secured collateral that has a value less than the outstanding loan because if the borrower has the financial ability to repay their loan according to reasonable terms, the loan will not be subject to adverse classification. Within the diverse area of commercial real estate, it is clear that loan accommodations and loan workouts serve as critical options for borrowers struggling to meet their financial requirements. Success is often achieved when financial institutions and borrowers collaborate and work together toward common goals. As the commercial real estate industry adapts to the ever-changing economy, understanding these options becomes crucial for sustaining an adaptive real estate market. Annika Schoch is an associate attorney at the law firm of Endacott Timmer PC LLO in Lincoln, Nebraska. For more information about the firm, visit endacotttimmer.com or call (402) 817-1000. 22 NEBRASKA BANKER
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TECH TALK 7 Steps to Building an Incident Response Playbook Kelley Hesse, CBFI, CBSM, CBSTP, Information Security Consultant, SBS CyberSecurity 24 NEBRASKA BANKER
What is an Incident Response Playbook? One of the biggest regrets of people who have faced an incident without a solid incident response plan (IRP) is not preparing beforehand by brainstorming different scenarios of highly impactful incidents. Enter the incident response playbook. An incident response playbook provides cybersecurity instructions for organizations like a sports playbook that lays out plays and instructions for athletes. A sports playbook is designed to help athletes break down and practice plays; it gets revised as needed, and the end result is a book of tested plays that will be used in the game. An incident response playbook is used in the same method and is designed to provide a step-by-step walk-through for your organization’s most probable and impactful cyber threats. The playbook will ensure that specific steps of the incident response plan are followed appropriately. It also serves as a reminder if specific 25 NEBRASKA BANKER
steps in the incident response plan are not in place. If you decide to create your own incident response playbook, it is important to note that it should be included within your IRP. Why is an Incident Response Playbook Important? Creating an incident response playbook tailored to your organization allows you to document ways to mitigate the most risk posed to your organization by the riskiest threats, including, but not limited to, ransomware, malware, password attacks and phishing. Identifying relevant threats that could be extremely impactful to your network and then creating walkthrough scenarios on how to counteract those threats helps your business continuity and incident response teams focus on what needs to be addressed first. On the following page, you will find the seven steps to create an incident response playbook appropriate for your organization. Step 1: Identify Riskiest Threats Study your organization’s technology risk assessment(s) and other audit activities, such as penetration tests and vulnerability assessments, to find your organization’s top five riskiest threats (cyber or otherwise). Step 2: Identify Common Attack Vectors Research the common attack vectors around the top five threats based on your risk assessment(s) and audit activities, as discussed in Step 1. Understanding how hackers perform such attacks in today’s environment, including the tools they deploy and methods they use, will help you build out better incident response scenarios (which we’ll discuss in the next few steps). A prime instance of being up to date on an attack vector rings true when discussing one of today’s scariest incident response scenarios: ransomware. Although ransomware has been on the rise over the years, the most prominent ransomware attack methods have changed. Attackers will always use whatever tools are convenient to attack an organization’s network. Just like everything else in the cybersecurity field, attack vector methods are constantly changing, making it even more important to stay educated on recent attack trends. Step 3: Create Scenarios Take the top five riskiest threats (cyber-threats or otherwise) identified in the first two steps and create a scenario for each, covering how that threat may affect your organization. These scenarios should incorporate your research about how those threats are realized (step 2) and allow you to document a realistic scenario about how the threat (i.e., ransomware) may happen to you. For example, while ransomware is the “threat,” the scenario likely includes an employee receiving an intriguing email, clicking on the email and inadvertently installing ransomware on the network. Outlining these scenarios will be your pivot step in preparing for a tabletop walkthrough, which leads us to our next step. Step 4: Perform Tabletop Walkthrough Before performing an official tabletop test, perform a tabletop walkthrough of each scenario on your own or with your team. This first-stage tabletop walkthrough allows you to work through different scenarios and find how they mimic real-world instances. For example, if your organization needs to be wary of phishing emails, a part of your phishing scenario should discuss the possibility of malware delivered by the phishing email spreading to other computers in the organization. Taking that additional step with your incident response scenarios can be beneficial because it puts in perspective what your organization needs to consider in addition to just phishing email awareness (how do we stop malware from spreading?) and allows you to discuss what steps in reacting and recovering from these scenarios may need to be improved. 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. 26 NEBRASKA BANKER
LET’S GET STARTED www.dbeinc.com 800-373-3000 sales@dbeinc.com EXPERIENCE THE DBE DIFFERENCE ATM | ITM | TELLER CASH AUTOMATION | COIN + CURRENCY | ATM MARKETING VIDEO + DIGITAL BANKING | SERVICE | REMOTE SERVICES + PATCHING SERVICES Step 5: Modify Scenarios Make any necessary changes to the walkthrough scenarios based on your initial tabletop walkthrough. Keeping your organization’s walkthrough scenarios up to date is important to performing tabletop tests (next step) and helping to think through how to respond to incidents before they happen. This step will also ensure that your organization keeps up with the ever-changing field of cybersecurity. Step 6: Perform Tabletop Testing Your playbook should be ready for an official tabletop test with representatives from your incident response and business continuity teams. Tabletop tests are critical to an organization because they reveal where your incident response and business continuity plans need to be improved and allow those teams to communicate through conflict effectively. There is no better way to mimic a possible incident than to test relevant scenarios based on your organization’s risk assessment(s), penetration tests, vulnerability assessments and other audit activities. Tabletop tests should be performed at least annually (more often if needed), and documenting the results of your testing is extremely important each time a test is performed. Documentation not only proves your organization is staying up to date on testing its incident response and business continuity plan but also outlines areas for improvement and shows that you’re continually exercising your team’s ability and communication effectively. Step 7: Review the Incident Response Plan After you perform an official tabletop test of your playbook, it is time to revisit your incident response plan. Based on your testing, you should have several questions that need answers or edits to make to your incident response plan. Keeping your IRP updated with recent changes is good practice; it ensures your plan is better prepared if an incident occurs. Keep Evolving Your Playbook As your organization grows and expands, so do your risks and vulnerabilities. It’s a good idea to evolve your playbook as your organization evolves. Revisit your audit activities every time they are performed. This will ensure that you stay current on what your organization’s network needs to improve on. In addition, continue to assess the top threats your organization faces compared to the vulnerabilities revealed during your audit activities. Re-analyze your IRP and tabletop walkthroughs and update these with newfound scenarios based on updated threats that may affect your organization. 27 NEBRASKA BANKER
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2024 EDUCATION CALENDAR MARCH School of Lending Principles March 4-8 Kearney, NE Supervisor Boot Camp March 13-14 Lincoln, NE CEO Executive Forum March 28 Lincoln, NE APRIL Spring Agri-business Conference April 2-3 Kearney, NE School of Banking Fundamentals April 8-12 Manhattan, KS Opening Business Accounts in Nebraska Workshop April 9 Virtual Cybersecurity Workshop April 11 Virtual MAY NBA Annual Convention May 8-10 La Vista, NE Operations School May 14-16 Manhattan, KS BSA/AML Compliance Management Workshop May 21-22 Virtual Relationship & Business Development School May 21-23 Lincoln, NE Business Cash Flow Analysis Workshop May 29-30 Virtual JUNE Advanced School of Banking — Year 2 June 3-7 Manhattan, KS Annual Golf Outing June 6 Hastings, NE FDIC Directors College June 11 Lincoln, NE Preparing for Your Next IT Exam Workshop June 13 Virtual Bank Compliance School June 24-28 Manhattan, KS The Active Shooter Seminar June 25 Virtual JULY Agricultural Lending School July 8-12 Kearney, NE New Account Documentation & Compliance Workshop July 16-17 Virtual 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. You may also visit the NBA website at nebankers.org/education. 30 NEBRASKA BANKER
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