EXPANDING FAIR BANKING ENFORCEMENT 2022 NICB CONVENTION & TRADE SHOW SNAPSHOTS Issue 4, 2022 The Nebraska Independent Banker
• No fee • No pre-payment penalty • P&I payments • Collateralized • Guarantors may be required • Competitive rates • Fixed or Floating • Minimal fee • No pre-payment penalty (after year 1) • Interest only first 5 years • Collateralized • Guarantors may be required • Competitive rates • Fixed or Floating • Origination fee: 1.5%-3% • Begins amortizing in year 6 • No collateral • No guarantors • No prepayment for first 5 years Other terms and conditions may apply. Advantages. Hybrid Stock Loans Designed to bridge the gap between a traditional stock loan and subordinated debt, our “Hybrid” bank stock loan provides an alternative lending product for community banks. Traditional Stock Loan Hybrid Stock Loan Subordinated Debt* For additional information or to discuss further, call your relationship manager or MIB at 1-800-347-4642. *Offered through our investment subsidiary - First Bankers’ Banc Securities, Inc. Member FINRA & SIPC. INSTITUTIONAL USE ONLY. MEMBER FDIC ACH Audit BSA Audit Lending Compliance Audit Deposit Compliance Audit Directors’ Examination Interest Rate Risk Review Home Mortgage Disclosure Act (HMDA) Review Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act Audit Loan Review Internal/External Penetration Test Internal/External Vulnerability Assessment Social Engineering Assessment IT Security Audit Business Continuity Management Audit AUDIT SERVICES mibanc.com/audit Our Team is ready to help. Contact Jake Wolfe at 888-818-7206 Jake Wolfe jwolfe@mibanc.com Need help with Loan Reviews?
©2022 The Nebraska Independent Community Bankers are proud to present The Nebraska Independent Banker as a benefit of membership in the association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertisements within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Nebraska Independent Community Bankers or its publisher, The newsLINK Group, LLC. Any legal advice should be regarded as general information. It is strongly recommended that one contact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by The newsLINK Group, LLC. Nebraska Independent Community Bankers 1001 S. 70 Street, Ste 101 Lincoln, NE 68510 (402) 474-4662 www.nicbonline.com The Nebraska Independent Banker is a Publication of The Nebraska Independent Community Bankers Association Issue 4, 2022 4 President’s Message Looking Ahead to 2023 By Dexter Schrodt, President and CEO, NICB 6 Flourish By Rebeca Romero Rainey, President and CEO, ICBA 8 Fourth Quarter Rally Some Suggestions on How to Wrap Up 2022 By Jim Reber, ICBA Securities 10 From The Top By Brad M. Bolton, Chairman, ICBA 12 Expanding Fair Banking Enforcement By William J. Showalter, CRCM, CRP, Senior Consultant, Young & Associates, Inc. 16 2022 NICB Convention & Trade Show Snapshots 18 Saving Community Banks: Cooperation and Planned Succession 21 Upcoming Webinars 22 Discussing Community Banks and Bankers Helping Bankers with Matthew Smith 26 What Banks Need to Know About CIS Controls By Mike Gilmore, Chief Compliance Officer, RESULTS Technology 29 A Word on Wi-Fi By Chris Tuzeneu, Vice President of Information Security, CivITas Bank Solutions, an affiliate of Bankers’ Bank of the West 30 NICB Endorsed Providers 30 Associate Members INSIDE Take a Look 6 18 29 NICBExecutive Committee Chairman Rick Heckenlively Points West Community Bank Sidney Chairman Elect Dave Ochsner Commercial Bank Nelson Vice Chairman Jim Niemeier Citizens State Bank Friend President/CEO Dexter Schrodt Secretary Kelly Lenners First State Bank Nebraska Pickrell Treasurer Arnold Lowell CerescoBank Ceresco Immediate Past Chairman Corby Schweers Elkhorn Valley Bank Wayne
PRESIDENT’S MESSAGE Dexter Schrodt Looking Ahead to 2023 President and CEO, NICB After much planning, it was great to get the first NICB annual convention under my belt. Coordinating an event like that was something I had never done before, and I’m so glad it all came together for our membership. I had seen glimpses of the collegial nature of our members at our Area Meetings earlier in the year, but the annual convention really showed that our members love interacting with both one another and with our partners. We must look to build on this asset by encouraging more of our members to be active at these events so they, too, can experience that Nebraska’s association for community banks is a community in itself. I’m looking forward to solidifying this message through member outreach in the coming year, and I’m hopeful we can increase the number of banks in attendance at next year’s convention. Looking ahead to next year, there is considerable room for improvement in how the NICB reaches and interacts with our members so that they see the value in the association. We will be enhancing our email communications to ensure the membership is kept up to date, while at the same time not burdening inboxes multiple times a week. Admittedly, it is a fine line to walk, but by making the communications relevant to the receiver, we can provide information they value. As the industry and regulatory compliance continue to evolve, the need for relevant training will persist. The NICB is fortunate to have a great partnership with Community Banker Webinar Network that we can utilize to provide value to our members and their employees. Their topical webinars and webinar series are among the best in the industry, and we are fortunate to offer them exclusively in Nebraska. Additionally, we will be partnering with the ICBA, which will be relaunching its banker education programming as well as a leadership program for bankers. It will be exciting to offer these benefits to our members as they look to provide compliance training, professional development, or leadership training to their employees. With today’s staffing concerns, it will be beneficial to have multiple on-demand and virtual training options for our member banks. Finally, with the 2023 legislative session beginning in early January, I am very much looking forward to connecting with our lawmakers in this new role and advocating for our members and their communities. The timing will be perfect; with a new incoming Chair of the Banking, Commerce, and Insurance Committee, as well as over half the members being new to the Committee, building connections this year will be critical for the years to come. As of this writing, it is looking to be a fairly quiet session for our industry, but you never know what the first ten days of bill introduction will bring. As I continue to settle into this role and move the NICB forward, I want our members to know they can contact me at any time, regarding anything. The NICB’s role is to be a resource for our membership on anything they may encounter in their business, and a cheerleader for what our members do in their communities. Please do not hesitate to reach out with any issues or to celebrate any achievements, and I look forward to seeing you in 2023! NEBRASKA INDEPENDENT BANKER 4
Diana Poquette Account Executive 402.499.1011 dpoquette@unicogroup.com Financial Institution Bonds Property & Casualty Cyber Risk Directors & Officers INSURANCE FOR BANKS Financial Institution Bonds Social Engineering Extended Coverage Enhancements No Annual Forms Cyber Risk Updated Benefits and Enhancements Dependent Business Interruption Cyber Extortion Directors & Officers Broad Form With Regulatory Coverage 3 Year Policy Savings Employment Practices Liability Bankers Professional Liability Property & Casualty General Liability Commercial Property Umbrella Liability Workers’ Compensation COVERING ALL OF NEBRASKA , KANSAS AND MISSOURI Diana Poquette Account Executive 402.499.1011 dpoquette@unicogroup.com Fina cial Institution Bonds Property & Casualty Cyber Risk Directors & Officers INSURANCE FOR BANKS Financial Institution Bonds Social Engineering Extended Coverage Enhancements No Annual Forms Cyber Risk Updated Benefits and Enhancements Dependent Business Interruption Cyber Extortion Directors & Officers Broad Form With Regulatory Coverage 3 Year Policy Savings Employment Practices Liability Bankers Professional Liability Property & Casualty General Liability Commercial Property Umbrella Liability Workers’ Compensation COVERING ALL OF NEBRASKA , KANSAS AND MISSOURI Diana Poquette Account Executive 402.499.1011 dpoquette@unicogroup.com Financial Institution Bonds Property & Casualty Cyber Risk Directors & Officers INSURANCE FOR BANKS Financial Institution Bonds Social Engineering Extended Coverage Enhancements No Annual Forms Cyber Ri k Updated Benefits and Enhancements Dependent Business Interruption Cyber Extortion Directors & Officers Broad Form With Regulatory Coverage 3 Year Policy Savings Employment Practices Liability Bankers Professional Liability Property & Casualty General Liability Commercial Property Umbrella Liability Workers’ Compensation COVERING ALL OF NEBRASKA , KANSAS AND MISSOURI
“While there’s no cyber or data security silver bullet, by bringing the theoretical into a true banking environment, we can begin to establish action plans that speak to real-world attacks.” FLOURISH By Rebeca Romero Rainey, President and CEO, ICBA Rebeca Romero Rainey, President and CEO, ICBA Cyber and data security have long been areas of emphasis for community banks, but in today’s escalating digital environment, that focus has grown. In fact, our 2022 CEO Outlook Survey ranked data security as a top concern, and as the digital sphere continues to evolve, all signs point to that level of concentration increasing. When I think about the work community banks are putting into heightening security protocols and protecting their customers, I’m struck by the fact that so much of cyber preparedness stems from navigating conceptual circumstances. Fraudsters continually evolve their techniques to find new ways to prey on consumers and small businesses, and as they do, we must remain vigilant in serving as the first line of defense. But the question remains: How do we stay on top of their tactics and safeguard against a hypothetical, moving target? While there’s no cyber or data security silver bullet, by bringing the theoretical into a true banking environment, we can begin to establish action plans that speak to real-world attacks. For example, by participating in tabletop exercises, bankers can get a first-hand account of where their preparedness plans shine and where they fall short. By taking cyber and data security from the conceptual into the concrete, we are able to find the chinks in our armor and shore up our defenses before a hacker gains entry. Because a good defense begins with a strong offense, ICBA has partnered with the Cybersecurity and Infrastructure Security Agency (CISA), a division of the U.S. Department of Homeland Security, to offer tabletop exercises tailored specifically to community banks. These exercises enable you to bring all areas of your bank into the cyber and data security fold and, in the process, create a deeper understanding about what you are preparing for, how it will impact all facets of your bank, and how you can be ready to respond to what may come your way. In addition, ICBA also has created a Cyber and Data Security Resource Center. Updated regularly with new tools and resources, this center offers insights, tips and even customer support tools for community banks. It helps you not only to prepare, but also execute your cyber plans and introduce new education, training and resources as needed. In today’s environment, cyber and data security is about constant vigilance. This can feel like a daunting task, but by working in bite-sized pieces, you keep it top of mind on a standing basis and build a culture of cyber and data preparedness. That cyber and data security-first mentality will go a long way in helping to protect you and your customers from emerging threats. Where I’ll be this month I’ll be participating in our fall leadership meeting as we strategize for the coming year and consider ways to help community banks both manage risks and embrace new opportunities. Connect with Rebeca Connect and follow me on Twitter @romerorainey NEBRASKA INDEPENDENT BANKER 6
itpacconsulting.com | 402.420.1556 The threats change. The need for robust security doesn’t. Ransomware continues to be a persistent threat—and an evolving one. While phishing remains the attack vector responsible for the majority of ransomware incidents, cited in 54% of cases, the next three leading causes are poor user practices, lack of cybersecurity training, and weak password/security protocols. For financial institutions, simple awareness, training, and diligence can go a long way to reducing the risk of a ransomware incident. Banks will always be a focal point for criminals, and as technology evolves, criminals evolve. If you have questions about the evolving threat landscape and how your institution can be more secure, call ITPAC today. Threats Evolve
FOURTH QUARTER RALLY By Jim Reber, ICBA Securities Some Suggestions on How toWrap Up 2022 The word “rally” can be used for a number of purposes and in different contexts. For instance, it could mean a longdistance auto race over varying surfaces involving stages and checkpoints. It could mean a gathering of supporters to generate enthusiasm and momentum for an individual or cause; we’ve seen plenty of these during this election cycle. It can also refer to a comeback from some type of challenge. It may be an improvement in one’s health. It could be a spurt of energy to enable the completion of a task. Finally, it might be an analogy for sports or other competitions in which a participant or team overcomes a deficit to snatch victory out of the grasp of defeat. This final example is the general theme of this column. I hasten to say that the community banking industry, by most measures, is doing quite well. I’ve consistently heard from bankers across the country this year that “earnings are good.” So if there’s any catching up to do, it’s not in banking fundamentals. It has to do with – you guessed right – rising interest rates and the attendant drop in market values for your bonds. Here are a few ideas that may be worth considering as we approach year-end. Funding Options Suddenly, shockingly in some cases, community banks are having to consider using wholesale funds to manage their liquidity. This is an exercise that faded in relevance in 2019 as loan demand was beginning to wane, and has been in oblivion since. Not now: FHLB’s issued more debt in the third quarter than they did in the first two quarters combined, most of which was used to finance new advances to community banks. And with a little effort, a bank can lock down attractive (which I admit is relative) terms on longer-duration borrowings. Even with 5%-plus yields available on shorter assets, low-4% costs can be secured for FHLB floating rate advances swapped to fixed for five or so years. If you’re not inclined to execute a rate swap, traditional three- to sevenyear advances are generally less expensive than brokered CDs. This is, in part, compliments of the inverted yield curve. “Income Deferral” This subheading is shorthand for “sell assets at a loss in this fiscal year, reinvest into higher-yielding bonds, and make back the loss before your original bonds mature.” All accountants worth their salt (I think I’m one of them) understand that pushing income into the future is a wise move from tax planning and cash flow standpoint. And, since all community banks own liquid assets at belowmarket rates (i.e., have unrealized losses) in a year in which they’re probably ahead of budget, the table is set for a classic holiday feast: tax swap. What makes this strategy viable in many cases is the ability to book a net-of-tax loss since selling bonds is considered an ordinary event for a community bank. When the proceeds are reinvested into tax-free instruments, the net loss is often recouped in short order. Your brokers are capable of modeling a number of possible transactions to determine the best course of action. If you do go down this path, here are a couple of possible sales items that may work for you: • Short bullet bonds or out-of-the-money callables • Short (< five year) municipals (which are the domain of retail investors) • Odd lot MBS with several years of seasoning NEBRASKA INDEPENDENT BANKER 8
Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Quarterly Bank Industry Update ICBA Securities’ exclusive broker Stifel presents its quarterly Bank Advisory and Strategic Services webinar on Dec. 8 at 10 a.m. Central. Bank profitability, industry risk and the M&A environment will be discussed. One hour of CPE is offered. Contact your Stifel rep for more information. And for all you S corps, this strategy works even better as your higher marginal tax rates allow you to avoid more income tax liability. Look Around You If you’re inclined to sell out of some losing positions but need to limit the impact on this year’s earnings, remember there may be other pieces of your balance sheet that can be sold at a profit. Not the least of these are floating rate assets such as SBA 7(a) loans. The guaranteed portion of a 7(a) loan will likely adjust each quarter based on prime, which is 100% correlated with fed funds. They command large premia in the secondary market; it’s not uncommon to see a bid of over 110 cents on the dollar. Plus, the lender/seller is required to retain the unguaranteed portion of the loan and to service it as well. SBA lender service providers can guide a community bank through the secondary market process. Far from making up lost ground, using some of these ideas can more correctly press your advantages into 2023 and beyond. In a year of positive earnings pictures and solid credit quality, the fourth quarter could be the ideal time to set the stage for robust future periods. This holiday season, community bankers may be donning their rally caps. B A NK E R S ’ B A NK • OF THE WEST • WHERE COMMUNITY BANKS BANK TRACI OLIVER TARA KOESTER KELLY MALONE WE CHAMPION COMMUNITY BANKING YOUR ADVOCATES: Nebraska’s correspondent team BBWEST.COM 411 South 13th Sreet | Lincoln, Nebraska | 402-476-0400 NICBONLINE.COM 9
FROM THE TOP “While hard-earned, the knowledge we have cultivated over years of circumventing attacks means that we have a depth of understanding about cyber and data security that the general population doesn’t — and those are lessons we can share.” When it comes to fraud, you don’t know what you don’t know, and what you don’t know can greatly influence your bottom line. But the effects of fraud are felt far beyond budgetary impact; our reputations are at risk. Customers expect their bank to keep their money safe, and though they are often the gateway for fraud, they are inclined to blame us if we can’t fix the problem. So, we are in a unique position as community bankers – between a rock and a hard place – trying to thwart attacks and keep the banking experience positive for our customers. We have to stay on top of emerging threats through continuous staff education and technology enhancements. Solutions like dual authentication and customer card controls can help in sidestepping some of the risk, and continuous cyber training for bank staff can help them remain vigilant against phishing emails and more. Fortunately, this work arms us with fraud prevention expertise. While hard-earned, the knowledge we have cultivated over years of circumventing attacks means that we have a depth of understanding about cyber and data security that the general population doesn’t – and those are lessons we can share. We, as community leaders, have an opportunity to provide value-added insights to our municipalities, small businesses, schools and beyond. If we share our experiences, advise employers to train their employees and offer greater information to consumers, we are taking our work one step further in helping to protect our communities These efforts don’t have to be new initiatives. Consider holding quarterly meetings with your small business customers: how can you incorporate some cyber and data security education into those sessions? Or think about your team’s roles on various boards and committees and how they can raise this topic as an agenda item. Or explore ways to introduce these concepts in school or public presentations. This type of education is important, and it’s something we all should be doing. Because with cyber and data security, as with everything else in community banking, it all comes back to relationships. If our customers are unsure about an email My Top Three Cybersecurity Tips For Community Banks: 1. Explore bank and Sheltered Harbor for a more secure digital fingerprint. 2. Incorporate dual authentication for transactionbased processing. 3. Ensure your cyber insurance coverage matches the breadth and complexity of your business. By Brad M. Bolton, Chairman, ICBA or text message and decide to call us before acting on it, that’s the first step in stopping the attack and a clear sign that sharing information is paying off. That’s the power of the relationship shining through and trumping anything the dark web can throw at us. When our customers know we will help protect them against fraud, they gain peace of mind from that relationship that only we, as community banks, can provide. Brad M. Bolton is president and CEO of Community Spirit Bank in Red Bay, Ala. Connect with him on Twitter at @BradMBolton. NEBRASKA INDEPENDENT BANKER 10
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In March 2022, the Consumer Financial Protection Bureau (CFPB) made a significant revision to its examination manual for Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). The main intent of this action is, as the CFPB states in its press release, “to better protect families and communities from illegal discrimination, including in situations where fair lending laws may not apply.” While this action is coming from the CFPB, which directly regulates large financial institutions, other federal supervisors can be expected to pay close attention to it. They may even follow the CFPB lead and adjust their supervisory approach in dealing with discrimination issues. Background In the late 1960s, the Fair Housing Act (FHA) was passed by Congress to prohibit discrimination in housing-related services, including lending, on the basis of specified bases. Less than a decade later, Congress enacted the Equal Credit Opportunity Act (ECOA) to take similar action regarding all types of credit, on the basis of a similar set of factors. These “prohibited bases” – including race, sex, and age (other than the legal capacity to enter into a binding contract) – are deemed to be irrelevant to a borrower’s creditworthiness. Federal banking supervisors and other federal agencies have used these tools over the years to try to reverse inequalities in credit markets. However, they have not had similar legal avenues for dealing with concerns over discrimination related to other financial services, though some have argued that general civil rights laws might apply. EXPANDING FAIR BANKING ENFORCEMENT By William J. Showalter, CRCM, CRP, Senior Consultant, Young & Associates, Inc. “Unfairness” in UDAP/UDAAP The Federal Trade Commission (FTC) has had jurisdiction over “unfair or deceptive acts or practices” (UDAP) since at least the 1970s. The FTC spelled out three elements to the concept of “unfairness.” Those three elements are: • The act or practice must cause or be likely to cause substantial injury to consumers. • Consumers must not reasonably be able to avoid the injury. • The injury must not be outweighed by countervailing benefits to consumers or competition. The FTC issued interpretations and enforcement actions over the years that developed the scope of these concepts (as well as the “deceptive” concept). However, Congress determined after the financial crisis of 2008 that consumer protection policy and enforcement needed to be changed. As a result, the Dodd-Frank Wall Street Reform Act of 2010 moved much of the consumer protection rulemaking and interpretation responsibility from the individual financial regulators and placed it in a new federal agency – the Consumer Financial Protection Bureau (CFPB). This law also added another element to UDAP – the “abusive” concept, which has added a letter to the acronym giving us UDAAP (unfair, deceptive, or abusive acts or practices). The CFPB is building on the UDAP structure that the FTC built. In fact, the Dodd-Frank Act ensconced much of the previous FTC policy concepts in federal law. The statutory elements of what constitutes “unfairness” are the same three (listed above) originally developed by the FTC. NEBRASKA INDEPENDENT BANKER 12
Unfairness Is Discrimination Some have advocated for applying the “unfairness is discrimination” theory to fill what they see as important gaps in the existing patchwork of anti-discrimination laws, which currently leave large parts of the economy unregulated and unprotected from a variety of discriminatory practices, including those with a disparate impact. Then-FTC Commissioner Rohit Chopra said at a conference in 2020, “Discriminatory practices often are three for three [under the unfairness elements], causing grievous harm that cannot be avoided.” Mr. Chopra is now Director of the CFPB. CFPB UDAAP Exam Manual This has led to the revisions announced in the spring to the CFPB UDAAP examination manual. By revising its examination manual rather than going through the formal rulemaking process, the CFPB did not have to put the changes out for comment beforehand. The revisions have just been announced as an accomplished fact, effective immediately (in March). Now that the CFPB explicitly recognizes discriminatory practices as “consumer harm,” they are considered as “unfair,” and the product scope covered by standards in fair lending laws has expanded beyond just credit to include any financial product or service. The UDAAP examination procedures provide general guidance on: • The principles of unfairness, deception, and abuse in the context of offering and providing consumer financial products and services; • Assessing the risk that an institution’s practices may be unfair, deceptive, or abusive • Identifying unfair, deceptive or abusive acts or practices (including by providing examples of potentially unfair or deceptive acts and practices); and • Understanding the interplay between unfair, deceptive, or abusive acts or practices and other consumer protection and antidiscrimination statutes. The exam procedures deal with the three elements of unfairness, much of which is not new. The first prong, substantial injury, usually involves monetary harm. Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury. Foregone monetary benefits or denial of access to products or services, like that which may result from discriminatory behavior, may also cause substantial injury. The CFPB notes that actual injury is not required in every case. A significant risk of concrete harm is also sufficient. Trivial or merely speculative harms are typically not sufficient for a finding of substantial injury. Similarly, emotional impact and other more subjective types of harm also will not ordinarily amount to substantial injury. However, in certain circumstances, such as unreasonable debt collection harassment or discriminatory conduct, emotional impacts or dignitary harms may amount to or contribute to substantial injury. The exam procedures then deal with the second element of “unfairness,” whether the consumer may reasonably avoid the injury. An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury. A key question, according to the CFPB, is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those most desirable to them, and avoiding those that are inadequate or unsatisfactory. For an injury to be reasonably avoidable, consumers must have practical means to avoid it, and the actions that a consumer is expected to take to avoid injury must be CONTINUED ON PAGE 14 NICBONLINE.COM 13
reasonable. There are many instances where consumers simply have no mechanism to avoid injury. For example, consumers typically cannot avoid the harms of discrimination. Regarding the third element – injury outweighed by consumer or competitive benefits – to be unfair, the act or practice must be injurious in its net effects. That means the injury must not outweigh any offsetting consumer or competitive benefits produced by the act or practice. Offsetting consumer or competitive benefits of an act or practice may include lower prices to the consumer or a wider availability of products and services resulting from competition. A discriminatory act or practice is not shielded from the possibility of being unfair, deceptive or abusive even when fair lending laws do not apply to the conduct. For example, not allowing African-American consumers to open deposit accounts, or subjecting African-American consumers to different requirements to open deposit accounts, may be an unfair practice even when ECOA does not apply to this type of transaction. Conclusion Financial institutions directly supervised by the CFPB should treat this exam manual update as a regulation change. They should update their risk assessments, policies, procedures, processes, internal controls, audit processes, staff training, and so forth to incorporate the new application of antidiscrimination standards to areas other than credit. Financial institutions supervised by other federal agencies would be well advised to at least begin to look at this issue since the regulators tend to generally move in the same direction. William J. Showalter, CRCM, CRP, is a Senior Consultant with Young & Associates, Inc. (www.younginc.com), with over 35 years of experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also develops and conducts compliance training programs for individual banks and their trade associations and has authored or co-authored numerous compliance publications and articles. Bill can be reached at (330) 678-0524 or wshowalter@younginc.com. www.bccadvisers.com ▪ ▪ ▪ ▪ ▪ ▪ ▪ CONTINUED FROM 13 NEBRASKA INDEPENDENT BANKER 14
Covid-19 has accelerated the move to electronic payments. There is less need for bricks-and-mortar banking as account holders can complete just about any transaction online. To stay competitive—and retain customers— banks need to find ways to compete effectively with non-bank fintechs, large regional banks and large credit unions. The challenge in everything is to find business partners that offer leading edge technologies and share common goals. When you choose United Bankers’ Bank as your partner, you gain access to background systems that support your business. UBB’s operations team manages a full gambit of payment types for its community bank customers. Through our biometric fingerprint secured UNET system, we run ACH transactions as well as both domestic and international wires. Collectively, our operations and payments teams have more than 425 years of experience in banking, payments and operations. This allows community bankers to focus resources on their customers. By offering instant payments, banks can capture deposits currently held in fintech payment system wallets. First for your Success is the guiding principle for what we do. As the nation’s first bankers’ bank, we were founded by community bankers who pioneered the bankers’ bank model. We’re a full-service bankers’ bank offering the resources and support community banks need to compete, succeed and remain community based. Our business is built on relationships with community banks and the pledge that we will never compete against them. UBB’s operations team manages a full gambit of payment types for its community bank customers. Visit: www.ubbpayments.com Call: 952-885-9461 1650W 82nd Street Suite 1500 Bloomington, MN 55431 Contact: mary.williams@ubb.com FACES OF INSTANT PAYMENTS Mary WIlliams, Executive Vice President, Chief Operations Officer; Paul Rogers, Vice President, Strategic Project Management; Ria Maharaj, Vice President, Operations Manager; and Cassie Orloske, Data Controller and Operations Support Officer.
2022 NICB CONVENTION & TRADE SHOW The 2022 NICB Convention & Trade Show was held October 20-21 in Lincoln, NE. Attendees enjoyed many networking activities and an amazing lineup of speakers. A big thanks to our sponsors who made this event possible. We hope to see you at our next event. For more information, please visit nicbonline.com. 16 NEBRASKA INDEPENDENT BANKER
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SAVING COMMUNITY BANKS: COOPERATION AND PLANNED SUCCESSION The U.S. has undergone tremendous economic changes for more than 40 years. Those changes affect the middle class, and they also affect community banks. As income inequality has grown over the last 30-40 years, legislative changes have encouraged bank consolidation, and the number of community banks has decreased. According to an article by J.C. McKissen on the Inc. website, larger national banks either purchased these banks or merged with them. The article points out that the decrease in banks has made it harder for entrepreneurs to get the money they need. These budding entrepreneurs often depend on banks to smooth the inevitable bumps of growing a business while maintaining enough liquidity to pay the bills when they come due. The same is probably true for other customers, especially those in smaller communities. In September 2011, the U.S. had 7,436 banks. In September 2021, the number was 4,914 banks. There are more statistics. According to the samco-amc.com website, 1984 was a turning point. More than 10,000 community banks failed, merged or have been acquired since then. Most of those that remain have assets under $100 million. The banks that acquire them are usually about four times larger than the banks being acquired. Why Are Community Banks Going Away? In One Word: Legislation According to Oscar Perry Abello, in May 2020 on the nextcity.org website, there were 13,000-14,000 U.S. banks between the 1930s and the 1980s, but most were very small. In 1988, more than 12,000 banks had assets of as much as $300 million. Only 3,000 banks could say the same in 2020, but there were five times as many banks with $20 billion or more in assets. The problems started with deregulation in the 1980s. By 1990, 46 states made it easier for banks to operate across state lines. In 1994, President Clinton signed the Riegle-Neal Interstate Banking and Branching Efficiency Act. The act removed federal restrictions on banking across state lines. In 1999, the Gramm-Leach-Bliley Act repealed the Glass-Steagall act that had separated commercial banking from investment banking, and big banks began merging with investment banks. NEBRASKA INDEPENDENT BANKER 18
The Great Recession motivated lawmakers to create additional rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act are examples. Compliance has favored large banks because community bankers don’t have the same resources as their peers at larger banks. The new rules caused any bank with less than $50 million to become unprofitable. Banks can be a powerful tool within communities. However, big banks and community banks have different roles. The biggest companies can absorb adverse circumstances; smaller companies sometimes can’t. Computerized banking has made branch banking and interstate banking possible, but it has also created competition between bankers that didn’t exist before. For example, suppose you have two banks in adjacent counties owned by two friends. The two friends are probably close enough physically to have lunch occasionally, and if they have a different set of customers, there’s no conflict of interest. But now, suppose that one or both open a new branch in the other banker’s county. If they get together for lunch, they can’t talk about banking anymore because they are competitors as well as friends. Out-of-state ownership creates a similar scenario. Different regions in the U.S. have different risks. A small banker can diversify by trading risks with bankers in other geographical areas, but big banks can handle the problem by buying risk instead of trading it. It makes sense for an effective banking system to provide resources for as many people as possible. What doesn’t make sense is directing all the help to the top instead of the bottom. Even though the internet has made it easy for people to bank online, that doesn’t mean internet banking always meets customer needs. In particular, small towns with community banks thrive; small towns without them don’t. There is no substitute for a face-to-face business relationship with someone who decides to help you because they know you, not because a computer algorithm identified you as a safe bet. People at big banks understand the importance of the community bank system, but preserving it is another matter. Where community banks focus on relationships, big banks focus on transactions that use credit scores and models. Since it costs as much to write a big loan as a small one, and big loans generate more interest, big banks focus on the big loans. They also focus more on income from fees and investments than interest from loans. Another problem is that big banks can centralize their operations far away from their customers. Although a big bank can focus on relationships, that’s a hard focus to maintain from a distance. It’s easy to forget about serving people you’ve never met. Also, banking systems must grow to survive and maintain economies of scale. When an interstate bank decides to expand, they don’t buy branches that belong to big banks. Instead, they buy the local community bank even though they know it’s needed. An abstract need to support community banks is not as important to them as the immediate need to please a boss by helping an already large banking system grow even larger. In contrast, it’s much easier for a community bank to pay attention to relationships because the people who work there are often personally invested in their community. They might have another business or a farm to run on the side. They often know their customers personally. Many of their decisions are made to benefit the entire community. Also, they often counsel potential customers about what to do to achieve their goals. When COVID-19 came along, the entire country shut down. Community banks stepped up to the challenge of helping customers. Even though the network of community banks was smaller than it had been decades earlier, it was still large enough to help with the rollout of government money through the Paycheck Protection Program (PPP). Small lenders outperformed large lenders in round one; 60% of PPP loans came from lenders with less than $1 billion in assets. (Big lenders caught up in round two.) But that help CONTINUED ON PAGE 20 NICBONLINE.COM 19
came at a price: a negative effect on liquidity. Community banks ended up with a lot of money that wasn’t earning interest. Lower net interest margins mean reduced net earnings. In turn, the banks ended up with less money than they would have had otherwise to support their communities. The fact that banks were hurt for helping out their communities was certainly not intentional. Everyone was scrambling at the time. Nevertheless, it’s important to make sure community banks do a better job from now on as they advocate for themselves. What happens when the network of community banks across the country becomes too small to be effective? People will leave rural America for big cities because they won’t have enough reason to stay where they are. If we don’t want that to happen, it is time to start working to protect the community banks that are still here. Maybe it’s time to study what North Dakota has done relative to community banks. The Bank of North Dakota supports community lenders in a way that happens nowhere else. As a result, North Dakota led the nation by having a higher market share of deposits and PPP loans relative to population size than any other state. North Dakota has protected its community banks, and when the pandemic came along, those banks responded more effectively than other states with fewer community banks. What Can Community Bankers Do To Safeguard Their Banks? It used to be that bankers passed their banks on to their families. When bankers struggle to stay in business, their children move into other businesses. That is why Job No. 1 has to be returning community banks to profitability. Community bankers can also help themselves by using important strategies such as succession planning. That way, when the day comes to hand off control of a bank to someone else, the bank can be transferred to a new owner with the same priorities and motives as the previous owner. Bankers can also help each other survive by joining associations and participating in programs that allow them to work more effectively. As a group, bankers can also lobby on a government level to protect their interests. For example, big banks should split off the investment side of their businesses. Federal and state governments could cap the market share size of deposits that banks can have in states. The government could focus on reducing regulatory complexity and applying the same rules to any organization that starts acting like a bank. “Shadow banks” operate like banks but don’t play by the same rules even though their assets are substantially larger than the banking industry’s assets ($52 trillion versus $17 trillion). That’s not fair. Capping deposits would give customers in states like New York and California more choices; according to Abello, JP Morgan Chase had a 32% market share in New York. Three banks in California (Bank of America, Wells Fargo and JPMorgan Chase) had a 50% market share. No other banks had anything comparable. Finally, another change that would help community banks is making it easier for communities to start new banks. The FDIC approves new banks, but the number of new banks has been small or nonexistent every year since 2010. Legislation has harmed community banks. It’s time to change the playing field by pooling resources within the industry and advocating with lawmakers. CONTINUED FROM PAGE 19 NEBRASKA INDEPENDENT BANKER 20
3 - J A N 4 - J A N 5 - J A N 1 0 - J A N 1 1 - J A N 1 2 - J A N 1 7 - J A N 1 8 - J A N 1 8 - J A N 1 9 - J A N 2 4 - J A N 2 5 - J A N 2 5 - J A N 2 6 - J A N 3 1 - J A N 1 - F E B 2 - F E B 7 - F E B 8 - F E B 9 - F E B 1 4 - F E B 1 4 - F E B 1 5 - F E B 2 1 - F E B 2 2 - F E B 2 2 - F E B 2 8 - F E B F i n a l A T R / Q M R u l e s : G u i d a n c e , A T R O p t i o n s & P o l i c y U p d a t e A d v a n c e d I s s u e s i n D o r m a n t A c c o u n t s , U n c l a i m e d P r o p e r t y & E s c h e a t m e n t T h e A B C s o f R D C P r o t e c t i n g t h e S B A G u a r a n t e e S t a r t t o F i n i s h B S A O f f i c e r P a r t 1 : B S A U p d a t e f o r B S A O f f i c e r s I R A & H S A U p d a t e : D i s c o v e r W h a t ' s N e w & C h a n g i n g 2 0 2 3 C a l l R e p o r t U p d a t e B e n e f i c i a l O w n e r s h i p F i n a l R u l e : D e t a i l s & D e a d l i n e s B e g i n n i n g S e c u r i t y O f f i c e r : D o s , D o n ' t s & C o m p l i a n c e C a s h F l o w A n a l y s i s P a r t 1 : D e b t S e r v i c e C o v e r a g e , G l o b a l C a s h F l o w & M o r e C r e d i t R e p o r t i n g R i s k s i n t h e B a n k i n g E n v i r o n m e n t 2 0 2 2 H M D A S u b m i s s i o n D u e M a r c h 1 , 2 0 2 3 : U p d a t e s , C h a l l e n g e s & R e a l - L i f e E x a m p l e s Q u a l i f y i n g B o r r o w e r s U s i n g P e r s o n a l T a x R e t u r n s P a r t 1 : S c h e d u l e s B & C C T R L i n e - b y - L i n e : A c c u r a c y & I n s i g h t A n t i - M o n e y L a u n d e r i n g A c t : U p d a t e & L e s s o n s L e a r n e d M o r t g a g e D e f a u l t s : W o r k o u t s , A l t e r n a t i v e s , F o r e c l o s u r e s , S h o r t S a l e s & M o r e R e g u l a t o r y U p d a t e f o r t h e C r e d i t A n a l y s t T o p F i v e M a r k e t i n g T r e n d s f o r 2 0 2 3 & B e y o n d M a s t e r c a r d D e b i t C a r d C h a r g e b a c k s : R u l e s , R i g h t s & C h a l l e n g e s S A R L i n e - b y - L i n e : C o m p l i a n c e & D e c i s i o n - M a k i n g C a s h F l o w A n a l y s i s P a r t 2 : D e e p e r A n a l y s i s , B a l a n c e S h e e t & E x t e r n a l F a c t o r s Q u a l i f y i n g B o r r o w e r s U s i n g P e r s o n a l T a x R e t u r n s P a r t 2 : S c h e d u l e s D , E & F B S A f o r F r o n t l i n e S t a f f F i v e R e a s o n s t o P r e p a r e f o r 1 0 7 1 R u l e s : S m a l l B u s i n e s s R e p o r t i n g f o r W o m e n & M i n o r i t y O w n e d B u s i n e s s e s C o m p l i a n c e O f f i c e r s : A d v a n c e d D e p o s i t & C o n s u m e r C o m p l i a n c e T r a i n i n g T D R C o m e b a c k : Q u a l i f i c a t i o n U n d e r C E C L & E n d o f C A R E S A c t B a n k i n g M i l i t a r y P e r s o n n e l : M L A , S C R A & R e c e n t C i t a t i o n s U P C O M I N G W E B I N A R S Visit fin-ed.info/nicb for 200+ Bank Training Webinars x NICBONLINE.COM 21
DISCUSSING COMMUNITY BANKS AND BANKERS HELPING BANKERS WITH MATTHEW SMITH Matthew Smith is the director of innovation initiatives at the Independent Bankers Association of Texas (IBAT). He was a community banker for 18 years and worked indirectly with IBAT for 12 years. Now, he reports directly to Christopher Willison, IBAT’s CEO. Matthew has a B.S. in business administration and an MBA from Wayland Baptist University. PLEASE TELL US ABOUT IBAT AND THE ROLE IT PLAYS IN TEXAS. We help small banks with compliance, advocacy, education and much more. We also go to Austin and Washington, D.C., as advocates to ensure legislation supports community banks. Finally, we identify vendors that associate members have endorsed so that when community banks reach out to us, we can provide them with a vetted list. We are involved in Bankers Helping Bankers, which supports community bankers throughout the U.S. There are currently 30 state associations signed up to help community banks. Bankers Helping Bankers is a safe place because there is no vendor involvement. Bankers can access data that shows the short list of what technologies are integrated with the core and has open message boards that allow community banks a place to talk and ask questions openly. Many community banks want and need to create efficiencies. The Bankers Helping Bankers program helps these community banks to manage their transformation with fintech and offer services that generate revenue they haven’t been able to offer before. HOW DID YOU GET INTO BANKING? I did everything the hard way. I had a child, got married and decided I needed to figure life out. My wife and I worked and went to school full-time while our child was still young. I became a community banking administrative assistant and worked my way up. It was hard, but it helped me become who I am today. HOW LONG HAVE YOU BEEN WITH IBAT? As of October 2022, it’s been about seven months. IBAT hired me because I was a community banker and understood community banking needs. Community bankers listen to me because I am one of them. WHAT ARE YOUR MAIN JOB RESPONSIBILITIES? I help banks with the Bankers Helping Bankers program. When I asked Christopher Williston what I would do, he said I would make sure community bankers have the information they need to make educated decisions. YOU HAVE A STORY ABOUT BABIES, BANKERS AND A RIVER. WOULD YOU PLEASE TELL US THAT STORY? Two guys are sitting by a river fishing and enjoying the day. A baby suddenly comes floating down the river. They jump up, rush into the river and save the baby. When they started talking to each other, wondering why the baby was in the river, they saw another baby in the water. As more and more babies come down the river, one of the guys keeps running into the river to save the babies, but the other guy starts running up the river bank. “What are you doing?” yells the first guy. The second one yells, “I’m going to find out who is throwing babies in the river, and then I’m going to stop them.” I’m like the second guy. It’s my job to make sure no more charters go away. THE NUMBER OF U.S. BANKS IS DECREASING. WHAT ROLE HAS LEGISLATION PLAYED, AND HOW DID THE GREAT RECESSION AND COVID-19 CONTRIBUTE TO THE TREND? The Consumer Financial Protection Program (CFPB) was started in 2010 and 2011 in response to the Great NEBRASKA INDEPENDENT BANKER 22
Recession. Sen. Elizabeth Warren never led CFPB, but she served as a senior adviser and influenced how it was set up and who was hired. Key roster assignments went to people with credentials from the financial sector. When these senior staffers at CFPB left the organization to work in the financial sector again, they helped big banking and securities firms understand how to navigate the rules they’d written. The agency became a revolving door between government and industry. Community banks didn’t cause the banking problems legislators were trying to solve, but bad legislation placed a costly burden on community banking and decreased revenue. The new rules weren’t a problem for big banks. They can absorb the cost, pay the fines and hire the staff because they have the budget. Community banks can’t. Then COVID-19 and the pandemic shutdown came along. Community banks ensured that every person in the U.S. got their paycheck through the paycheck protection program (PPP). Money moved at the community bank level, not the mega-bank level. It was unprecedented. What we are seeing now is a grassroots trend. People saw how banks stepped up and wanted to ensure that the local community bank would not disappear. WHY IS IT BAD THAT THERE ARE FEWER COMMUNITY BANKS? WHAT IS THEIR ROLE IN SMALL-TOWN COMMUNITIES? Big banks don’t see the value in loaning local small businesses the money they need to grow and build. They won’t make loans for less than a specific dollar amount. But if the big banks don’t do those loans, who will? Who will continue to support local businesses and school districts? Are big banks going to put their name on a scoreboard or hand out water at a community event? We need community banks because small businesses can’t get loans anywhere else. In places without a community bank, small businesses are not doing well. The entire community withers because it loses jobs that could have kept people there. To see it, all you have to do is look at the main street in a town with a community bank, then in a town without one. The one with the community bank will be vibrant. The one without is going to be the complete opposite. WHAT CAN COMMUNITY BANKS DO TO PROTECT THEMSELVES? In 2022, BankDirector released a Bank M&A survey. The survey asked bankers to identify the three main reasons they might be forced to sell. Their answers were: • Inability to provide a competitive return; • Inability to keep up with the digital evolution; and • Inability to operate efficiently. Fintechs can help solve all three things, but some Fintechs harm more than they help. Since consultants don’t necessarily do what is right for community banks, they need someone to help them identify the good guys. A big part of competitive returns, digital evolution and efficient operations involves developing a more diversified income stream. Bankers Helping Bankers can identify good partners and connect community banks with good fintechs. If a community bank wants to go down a specific path, we help them with a playbook and tell them about other banks that are doing the same thing. That way, they can find efficiencies, implement better workflows and robotic processes, offer digital bank services, and connect with Banking as a Service (BaaS) banks. One of the stories I tell on the stage is a catastrophic story about VyStar Credit Union that is still playing out. Very recently, it was the 13th largest credit union in the nation and had $12.4 billion in assets and 822,000 customers. Management wanted to convert to direct banking on the internet, so they talked to consultants about a digital-forward cloud-based solution. In April 2021, VyStar invested in a fintech named Nymbus Credit Union Service Organization (CUSO). They invested $20 million, the largest fintech investment on file. In July 2021, three months after that investment, VyStar selected Nymbus as their mobile online banker, and in October 2021, Nymbus moved into VyStar’s office. May 13, 2022, was conversion day. The site went down, and VyStar’s internet banking was dead in the water. It stayed down for 12 days, until May 25. Vystar told the customers access was back, but we collected screenshots from customers that said differently. We have one where the customer’s position in line was 93,162. VyStar members filed the first set of complaints on June 3, 2022. On June 6, a screenshot showed someone’s position in line was 2,466. On July 4, 2022, someone said VyStar hates its members and that it sent them into ruin to increase its member base. Months later, VyStar members are still experiencing technical issues. People could not access their account information, and the credit union missed payments and deposits. One member called VyStar the Deathstar, and others promised to end their membership. Vystar was supposed to acquire Heritage Bank; the management at Heritage Bank backed out of the deal and said, “We aren’t going to let you slaughter us.” This story about Nymbus and Vystar shows that consultants don’t necessarily do what is right for community banks. Nymbus is an example of bad fintech. If VyStar were a community bank instead of a credit union, we would have told its management, when the information would have done some good, that Nymbus had zero live customers using its mobile online banking system. CONTINUED ON PAGE 24 NICBONLINE.COM 23
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