2023 • Issue 3 The Nebraska Independent Banker LOAN REVIEW BEST PRACTICES: KEY TO COMBATTING CREDIT RISK IN STRESSFUL TIMES Worldwide Demand Buyers of U.S. Debt Come In Many Shapes and Sizes
I always enjoy when Tim Burns visits our bank. The knowledge he has of the banking industry and the services MIB provides to community banks, helps our bank to be able to offer additional products and services to our bank customers. We consider Tim, and MIB, to be an important part of our banking family. Tim Burns with customer Kurt Pickrel of Fullerton, Nebraska Bank Stock Loans — Acquisition, Capital Injection, and Shareholder Buy Back/Treasury Stock Purchase Officer/Director/Shareholder Loans ( Reg-O) Participation Loans Purchased/Sold — Commercial, Commercial Real Estate, Agricultural, and Special Purpose Loans Leases Midwest Image Exchange – MIE.net™ Electronic Check Clearing Products Information Reporting – CONTROL Electronic Funds Cash Management and Settlement Federal Funds and EBA Certificates of Deposit International Services/Foreign Exchange Safekeeping Directors’ Exams Loan Review Compliance Audits IT Audits Lending Services Operational Services Audit Services WHY ? Kurt Pickrel, President First Bank and Trust of Fullerton mibanc.com MEMBER FDIC Contact Tim Burns 402-480-0075
G � VALLEY BANK WHAT IS YOUR TIME WORTH? • WORKDIRECTLYWITH THEOWNERS • RECEMLOANAPPROVAL WITHIN2 OR3 DAYS •AVOIDANNOYING COVENANTS • UM/TED ORNO ORIGINATION COSTS • LOW INTEREST RATES Bank Stock and Bank Holding Company Stock Loans Done the Simple Way Bank mergers, acquisitions loans and refinances E11chd1 01itorinsur1dtoatleast$250,000 Foder,I O.posil lnunnc• Corporation• www.dc.go• up to $50 million Call Rick Gerber or Ryan Gerber at l-866-282-3501 or email rickg@chippewavalleybank.com ryang@chippewavalleybank.com EQUAL HOUSING LENDER
©2023 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 nicbonline.com The Nebraska Independent Banker is a Publication of The Nebraska Independent Community Bankers Association Issue 3 • 2023 INSIDE TAKE A LOOK 7 14 24 NICB Executive 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 6 President’s Message Celebrating One Year: Reflecting on Progress and Commitment To Advocacy By Dexter Schrodt, President and CEO, NICB 7 Flourish By Rebeca Romero Rainey, President and CEO, ICBA 8 Worldwide Demand Buyers of U.S. Debt Come In Many Shapes and Sizes By Jim Reber, President and CEO, ICBA Securities 11 Multi-Factor Authentication How Having a Layered Defense for Your Bank Can Help to Combat Cyber Threats By Mike Gilmore, Chief Compliance Officer, RESULTS Technology 13 Core Banking Software Provider, FPS GOLD, Endorses RESULTS Technology Endorsement will help community banks reduce risks and achieve operational efficiency. 14 Loan Review Best Practices Key To Combatting Credit Risk In Stressful Times By David Ruffin, Principal, IntelliCredit/QwickRate 17 How Does Recent Bank Drama Impact the Value of Community Banks? By Lindy Ireland, Vice President and Shareholder, BCC Advisers 18 Compliance Q&A By Bill Showalter, Senior Consultant, Young & Associates, Inc. 21 Bank Training Webinars 22 Slip, Trip and Fall Prevention By Travelers 24 SECURE 2.0 Offers New Type of Emergency Savings Account By Lisa Haberman, Ed.D., ChFC®, CLU®, Ascensus 26 NICB Endorsed Partners 26 Associate Members 2023
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 www.bccadvisers.com ▪ ▪ ▪ ▪ ▪ ▪ ▪ NEBRASKA INDEPENDENT BANKER 5
TITLE PRESIDENT’S MESSAGE CELEBRATING ONE YEAR: Reflecting on Progress and Commitment To Advocacy By Dexter Schrodt, President and CEO, NICB A s I reflect on my first year serving as the President and CEO of the Nebraska Independent Community Bankers, I am filled with a sense of gratitude, pride, and accomplishment. It has been an incredible year advocating for the needs and interests of our community bank members, and I am thrilled to celebrate this significant milestone. When I assumed this position a year ago, I knew that I had a significant responsibility on my shoulders. Community banks are the backbone of our state’s economy, providing essential financial services to agriculture, local businesses, and individuals; they play a vital role in fostering economic growth and stability in our communities. Therefore, it was imperative for our association to amplify their voices and ensure that their concerns were heard at all levels of government. Advocacy has been the cornerstone of our association's mission, and over the past year, we have intensified our efforts to champion the causes that matter most to our members and represent the interests of our member banks. Through our collective efforts, we have made substantial progress in shaping policies and regulations that directly impact community banks and the communities they serve. One of our key achievements has been fostering a stronger relationship with legislators and policymakers. We have actively engaged with policymakers at all levels of government, providing them with valuable insights into the unique challenges faced by community banks. By establishing open lines of communication and cultivating meaningful partnerships, we have been able to effectively advocate for policies that promote a thriving community banking sector. Our association has also been at the forefront of addressing regulatory burdens on community banks. We have tirelessly advocated for regulatory relief, emphasizing the need for tailored regulations that consider the distinct nature and size of community banks. Through our advocacy efforts, together with our partner state associations and the ICBA, we have successfully influenced regulatory agencies to look at more proportionate and reasonable rules, allowing our member banks to focus on what they do best — serving their local communities. In addition to shaping policies and regulations, we have been committed to promoting the vital role community banks play in supporting economic growth and development. We have actively participated in advocacy efforts that highlight the community impact of our member banks' lending activities, job creation, and financial literacy initiatives. By effectively communicating the value of community banking, policymakers more clearly see the importance of making decisions that do not negatively impact our industry. Looking ahead, I am filled with optimism for the future of community banking and our association's role in shaping it. Our commitment to advocacy remains unwavering, and we will continue to be the resolute voice for community banks across the state. We will strive to strengthen our relationships with policymakers, deepen our engagement with regulators, and ensure that our member banks have a seat at the table where decisions affecting them are made. As I celebrate my first year with the NICB, I want to express my heartfelt appreciation to our Board of Directors, our member banks, and all those who have supported the association in our advocacy endeavors. I am confident that with our collective efforts, we will continue to make a lasting impact on the community banking industry. I am immensely proud of the strides we have made in the past year, and I am excited about the opportunities that lie ahead. The success of our community banks is not only crucial for their individual growth but also for the prosperity of the communities they serve, and therefore our state. We have actively participated in advocacy efforts that highlight the community impact of our member banks’ lending activities, job creation, and financial literacy initiatives. 6 NEBRASKA INDEPENDENT BANKER
Community bankers know the people and needs behind [small businesses], and that personal connection creates a recipe for mutual success. If there’s one universal truth about small businesses, it’s this: No two are the same. Whether it’s an agricultural entity, a business consultancy, a retail establishment or a host of other options, you’d be hard-pressed to find a replicated set of financial needs. Fortunately, community banks operate in the same fashion. Though you share common values in relationship-first banking, your models are based on the needs of the communities you support. That’s what makes you so uniquely poised to serve small businesses: You are small businesses yourselves. Your ability to look at each organization independently allows you to underwrite not based on a one-size-fits-all approach, but on the individual needs of the business and the local community. Yet the small business relationship extends beyond any transaction. Community bankers are there for their small business customers as lenders, financial advisors and overall business supporters. For instance, I recently visited my local dry cleaner, who always greets me by name, and he apologized that services had been delayed a week because his boiler went out and he had to close. Then, without knowing what I do for a living, he went on to tell me how thankful he was for his community bank, which was able to lend him the money he needed to get back up and running. He shared that without this bank he would have been out of operation. This is but one example of the significant impact you have on the nation’s small businesses. Think about walking down Main Street of any community and how small businesses are the embodiment of that community. Whether the business is a large employer, a local gift shop or a hotel that’s growing, community bankers know the people and needs behind the business, and that personal connection creates a recipe for mutual success. So, as you consider how to celebrate May’s Small Business Month, I invite you to take a look at the resources unveiled as part of our national campaign and those in the Tell Your Story toolkit. Both provide turnkey materials to help you share your stories and the work you do in supporting small businesses in your communities. Telling this story matters, particularly as we continue to differentiate community banks from megabanks and credit unions. The impact you have on the small businesses you serve speaks volumes about where your priorities lie and what it means to be a community bank. And that’s a story worth shouting from the rooftops throughout Main Street America and beyond. Rebeca Romero Rainey is the President and CEO of ICBA. Connect with Rebeca on Twitter @romerorainey. FLOURISH By Rebeca Romero Rainey, President and CEO, ICBA NEBRASKA INDEPENDENT BANKER 7
I think we can all agree that there has been plenty to be concerned about in the last, say, five years. Some are environmental issues, some are social and, for community bankers, plenty are economical. What gets a lot of play in the business, and even mainstream media, is our growing national debt. There’s no doubt that the mountain of borrowings that keeps our federal government liquid and solvent is greater than ever before. It’s not surprising to me that there’s spirited debate about debt limits, or if Congress will ever in our lifetimes find a way to slow our dependence on deficit spending. Related to this conversation is the concern that, to paraphrase Blanche DuBois, we have always depended on the kindness of strangers. It seems self-evident that foreign central banks have propped up our debt market for decades, buying dollar-denominated securities by the trillions, thereby keeping our borrowing costs manageable, and potentially even encouraging our bad behavior by going ever deeper in debt. But is any of this true? Walked, Then Ran First, let’s try to get our minds around the situation. The Federal government first borrowed money before there was a Federal government, when the Dutch and the French loaned money to the Continental Congress to help finance the Revolutionary War. Treasury borrowings, as we know them today, sort of date back to World War I, with the issuance of “Liberty Bonds,” which was just after the creation of the Federal Reserve Bank. As we have seen, the Treasury and the Fed have a long history of collaboration. By Jim Reber, President and CEO, ICBA Securities WORLDWIDE DEMAND Buyers of U.S. Debt Come in Many Shapes and Sizes 8 NEBRASKA INDEPENDENT BANKER
Even at the start of the 21st century, total Treasury debt was “only” $3 trillion at a very manageable 30% of GDP. Just four years ago, our borrowings were about $17 trillion at 77% of GDP. Today? We’re over $24 trillion, nearly 100% of GDP. While it would be tempting to blame a lot of the more recent growth on COVID and the fiscal response to that, the reality is each administration of the last quarter century has contributed to the current debt stockpile. And, now that rates are at a 15-year high, our interest payments alone are now over $900 billion per quarter. As Craig Dismuke, Market Strategist for Stifel, is fond of saying, “Interest is an expenditure that doesn’t create jobs.” Bedrock Option Now, for some hopeful commentary. The owners of our Treasuries are a diverse lot, with diverse objectives. Investors include the savings bond/retail buyers, institutional money managers who run mutual funds, depositories, our central bank, and yes, other sovereign central banks. What’s interesting to note is that the percentage of our debt owned by China, Japan, Germany and the rest of the foreign investors has declined substantially in the last decade, from about 42% to less than 30%. The Federal Reserve, meanwhile, has picked up the pace and has essentially absorbed the pro-rata share of the pie in the last decade. So it would be wrong to conclude we’re hostage to foreign governments’ largesse. Still, that leaves around half of our total debt in the hands of private investors. Who are these people? Most are names you’ve heard of, and maybe even invested your personal or retirement money with. Large mutual fund families, state-sponsored retirement funds and life insurance companies are examples. In aggregate, they have owned nearly half of the total debt pie for most of this century, so their collective appetite for full faith and credit investments has mirrored Uncle Sam’s appetite for more borrowing. A lot of this can be attributed to the aging of the population and the advent of “targeted date” funds. Keeps the Wheels Turning If you’re of a certain vintage, you may already be invested in these vehicles. Targeted date funds are built for individuals who have an eye on a retirement date, whether it’s five or fifteen years from now. Each fund will gradually reallocate its assets out of riskier sectors (e.g., equities) and into debt securities (including Treasuries) as the target date approaches. Collectively, retirement funds (and individuals acting on their own) that gradually, systematically, add more Treasuries to their portfolios may continue to keep up demand to absorb the ever-increasing supply. So how does this rubber hit the road for Main Street? For starters, demand for U.S. debt helps keep a lid on our Federal deficit by subsidizing interest costs. It probably also keeps community banks’ net interest margins a bit lower than otherwise, even if most banks’ portfolios contain no Treasuries at all. Still, the global need for Treasury bills, notes and bonds may just possibly sync up with our growing deficit, and ultimately be supportive, long-term, of commerce as we know it. Unlike DuBois, the U.S. Treasury doesn’t depend on the kindness of strangers; rather, the global need for safe, liquid debt securities. ... the global need for Treasury bills, notes and bonds may just possibly sync up with our growing deficit, and ultimately be supportive, long-term, of commerce as we know it. Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. NEBRASKA INDEPENDENT BANKER 9
IT COMPLIANCE & SECURITY FOR COMMUNITY BANKS Watch our video! www.resultstechnology.com/bank-solutions/ Managed IT Cybersecurity Backup & Business Continuity Audit & Exam Support IT Planning & Budgeting Security Awareness Training RESULTS Technology is a family-owned, award-winning provider of managed IT compliance, infrastructure & cybersecurity services for banks. We have been helping banks reduce risks and achieve operational efficiency for more than 20 years. RESULTS Technology | 12022 Blue Valley Parkway, # 524, Overland Park, Kansas 913.928.8300 | info@resultstechnology.com www.resultstechnology.com
MULTI-FACTOR AUTHENTICATION HOW HAVING A LAYERED DEFENSE FOR YOUR BANK CAN HELP TO COMBAT CYBER THREATS As a leader and decisionmaker at your bank, you know that technology is a double-edged sword. It helps you work effectively, learn more about your customers, and make better decisions. But the online world also has the potential to destroy a business you’ve worked so hard to build. We live in a digital world — there’s no way to run a business without technology. So, the only option is to protect yourself as best as you can. One of the most effective ways to do this is with multi-factor authentication (MFA). You’ve probably heard about it before, and if you’re tired of hearing about it, don’t leave just yet! We’re going to debunk the common complaints about MFA and explain why it’s the single most important thing you could do for your bank’s security today. “But It Adds an Extra Step to All My Applications.” The biggest complaint with multi-factor authentication is that it bogs people down. You open up your email; you have to put in a code. If you want to access a document in Google Drive; you have to open an app and request a “token” (a number) to key in. While it may add a few seconds to your day, not implementing MFA could get you in legal trouble. The Federal Trade Commission recently updated the Safeguards Rule, which “requires financial institutions under FTC jurisdiction to have measures in place to keep customer information secure.” MFA is one of those measures. In addition, the Federal Deposit Insurance Corporation (FDIC) strongly recommends MFA as well as a Managed Service Provider (MSP) that is experienced with banks and the special security needs that they require. And if that wasn’t enough to convince you, most cyber insurance requires the use of MFA. Luckily, a good MSP knows how to properly implement MFA to make it fast, easy, and secure. To get the security benefits of MFA without excessive inconvenience, there are strategies you can use. At RESULTS Technology, we recommend using push notifications. This way, you won’t have to wait or search for a code; it simply pops up on your screen with the option of remembering your device for 90-180 days. This takes away the constant code inputting and time drag. Is It Really That Effective? Yes, But Nothing Is Foolproof! When MFA was first gaining steam, Microsoft claimed it could stop 99.99% of data breaches. But like most things, especially when it’s concerning cybersecurity for banks, cybercriminals quickly got to work finding ways around it. So while you can’t have a near-perfect guarantee, MFA is still highly effective. Many bank employees may think that the biggest cybersecurity risk comes from a customer’s account being hacked or from someone accessing the bank’s main data frame. But hackers aren’t interested in those hard-to-reach targets. Instead, they might find an employee’s email login information and, without MFA, make it into their account. But that’s not their target — your employee’s compromised account is just the Trojan horse. With the credibility of an employee’s account, they’ll send emails to coworkers and customers. Once they have an email address and password, the attacker can eavesdrop on your email accounts. With the credibility of your employee’s account, they can quietly collect private data from your customers or internal staff for months without detection. Through this process, they can request private information, rewire payments to go into their own account or infect thousands of more computers with a phishing email. The possibilities are endless when it comes to social engineering. If they’re successful, your bank will risk everything from lost income due to reputational damage — in the age of information, mistakes are amplified, which could put your company at an extreme disadvantage. But with multifactor authentication as a layer of your cyber defense, you could stop the criminal before they have a chance to wreak havoc. By Mike Gilmore, Chief Compliance Officer, RESULTS Technology NEBRASKA INDEPENDENT BANKER 11
Mike Gilmore is the Chief Compliance Officer of RESULTS Technology and a Certified Information Systems Auditor (CISA) with more than 30 years of experience in the banking industry. RESULTS Technology provides IT services to community banks across the Midwest. In his role as CCO, Mike provides compliance and risk assessments, audit and exam support, and policy documentation. He can be reached at mgilmore@resultstechnology.com. Do I Need a Paid Service, or Can I Get the Same Security for Free? If you’re feeling the strain of cyber threats but don’t have the resources to have a cybersecurity provider, most apps and tools have an MFA feature. To improve your security today, you should go through each of your vendors — VPN, Gmail, Outlook, Dropbox, DocuSign — anything you access online, and implement MFA. You won’t have to spend any money, and your cyber posture will have straightened up immediately. The downside to these free options is that there’s no guarantee of how secure the authentication process is. You won’t be able to track what devices are being used or who has access. Another downside is that they will all vary in how they’re implemented and used, so you’ll need to remember to audit your MFA security often to ensure it’s always in use. You’ll also have to log in and do the authentication for each app separately, which can be frustrating. Free options work in a cinch but shouldn’t be the extent of your MFA strategy. This is especially the case since not all systems provide a free option. Instead, try to collaborate with an IT provider that specializes in cybersecurity for banks. They’ll set up a paid version of MFA that coordinates between all your applications and gives you insight into the following: • What devices are connected to your accounts? • Who is accessing the system? • Is there unauthorized access? • Where are people logging in? A paid service will also allow you to remember devices for a few months at a time and set up an automated authentication process, so you don’t have to do any extra steps. Multi-Factor Authentication Is a Worthy Investment — Make the Most of It. When it comes to cybersecurity for banks, there’s no silver bullet. You need multiple layers of defense, and MFA should be one of them. It only takes a few seconds to do this extra step — and it could save you from a world of hurt. These days, you need MFA to protect yourself against rising cybercrime. If you neglect this essential security measure, you’re opening yourself up to the full brunt of reputational damage in the age of social media. In addition, the time you spend verifying your identity is nothing compared to the cost and hassle associated with recovering from a data breach. Please reach out if you have any questions or need help at (913) 347-6497 or visit www.resultstechnology.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 12 NEBRASKA INDEPENDENT BANKER
CORE BANKING SOFTWARE PROVIDER, FPS GOLD, ENDORSES RESULTS TECHNOLOGY Endorsement will help community banks reduce risks and achieve operational efficiency. On March 30, 2023, FPS GOLD announced the endorsement of RESULTS Technology to promote technology services specifically designed for banks. FPS GOLD offers core processing and eBanking software solutions designed for financial institutions across the United States and partners with vendors who support their mission to “help financial institutions compete, profit and thrive.” RESULTS Technology is a family-owned, Midwest company that specializes in providing IT infrastructure, compliance and cybersecurity services to the banking industry. The selection comes after a thorough vetting process. RESULTS was selected because of their FFIEC compliance expertise and their uncompromising dedication to keeping banks’ IT infrastructure safe. “We’re thrilled to form a business partnership with RESULTS Technology. This will bring together the strengths and expertise of two great companies. With a shared commitment to innovation and excellence, we’re confident that our partnership with RESULTS Technology will open up new opportunities for growth and success for our client base,” said Matt De Visser, President and CEO of FPS GOLD. FPS GOLD continually researches promising new products and services. Each endorsed partner must meet stringent quality standards and provide services that help its customers compete, profit and thrive. “This endorsement is a full-circle moment for us. Our founder, John French, was involved in the development of banking technology for decades. He loved everything about the community bank industry and would be so excited about this partnership,” said Kurt Huffman, President of RESULTS Technology. “FPS GOLD’s distinguished track record of over 50 years of experience in community banking and their dedication to customer service make them a perfect partner for RESULTS.” ABOUT RESULTS TECHNOLOGY RESULTS Technology is an award-winning provider of managed IT infrastructure, compliance & cybersecurity services to the community banking industry. RESULTS Technology is owned by the John French family. John French was the former owner of Bankline, a bank service organization that provided data processing services to the banking industry in the 1980s. Bankline is now part of FIS. In addition to the endorsement from FPS GOLD, RESULTS has also been endorsed by core providers Data Center, Inc (DCI) and Automated Systems, Inc. (ASI), and the Community Bankers Association of Kansas. RESULTS regularly completes the SSAE18 SOC2 audit. This audit is the gold standard for the validation of a service organization’s operations and procedures. ABOUT FPS GOLD FPS GOLD offers core processing and eBanking software solutions designed for financial institutions across the United States. Headquartered in Provo, Utah, FPS GOLD has a distinguished track record with over 55 years of experience, cutting-edge products, and customer service with a personal touch. NEBRASKA INDEPENDENT BANKER 13
LOAN REVIEW BEST PRACTICES Key To Combatting Credit Risk In Stressful Times By David Ruffin, Principal, IntelliCredit/QwickRate Uncertainty seems to be the only constant on the economic horizon these days. Despite benign risk metrics across the country’s credit portfolios, there is an almost industry-wide sentiment that credit stress looms ahead. According to the Risk Management Association (RMA) Annual Community Bank Survey, 84% of community bankers indicated that credit risk was a top concern. One thing we do know is that effective and efficient loan reviews can help you understand your portfolio and identify potential risk exposures. And — more importantly — risk that’s already emerging. It’s this early detection that helps institutions minimize losses. Also encouraging is that automated technology is making it possible to achieve these goals with amazing agility. Now is the time for community banks to move from a sluggish, decades-old loan review process to an approach that will help you proactively identify potential credit weaknesses, gain deep knowledge about the subsegments of your portfolio, learn where the vulnerabilities exist, and act to mitigate risk at the earliest opportunity. It’s time to consider credit review approaches that facilitate an expansive range of best practices like the ones outlined below. 1. TRUST YOUR REVIEWS TO PROFESSIONALS WITH DEEP CREDIT EXPERIENCE — NOT JUST JUNIOR CPAs. Your reviewers should be seasoned experts, skilled in the qualitative and quantitative axioms of credit, with hands-on experience in lending and risk management. Because their experience will drive better reviews and deliverables, it’s a good idea to ask for bios of people assigned to your institution. 2. CONFIRM YOUR REVIEW INCLUDES PARALEGAL PROFESSIONALS TO CONDUCT SEPARATE DOCUMENTATION REVIEWS. With growing evidence of degradation in back-shop support, it is essential that your loan reviews include specialists with technical expertise in regulatory/legal compliance, lending policy adherence, policies, collateral conveyances, servicing rules, etc. — working in tandem with seasoned credit professionals. 3. INSIST ON SMART, INFORMED SAMPLING. Relying solely on random samples and reviewing only the largest credits is insufficient today. To uncover vulnerabilities in specific segments of your portfolio, rely on a selection process that helps you choose very informed samples indicating possible emerging risk. David Ruffin is Principal of IntelliCredit, a division of QwickRate. He has extensive experience in the financial industry including a long and pronounced emphasis on credit risk in a variety of roles that range from bank lender and senior credit officer to the cofounder of IntelliCredit and its technology that is revolutionizing a decades-old loan review process. For more information, visit intellicredit.com or email info@intellicredit.com. 14 NEBRASKA INDEPENDENT BANKER
4. SEGREGATE AND DIFFERENTIATE EXCEPTIONS IN DOCUMENTATION, CREDITS AND POLICY. These exception types all have diverse characteristics, and they need to be quantified separately in order to correct the various deviations effectively. 5. QUANTIFY BOTH PRE- AND CLEARED EXCEPTIONS. In the best of times, many loan reviews show almost no bottom-line degradation in loan quality for the portfolio as a whole. But on close examination, you may find significant numbers of technical and credit exceptions indicating that the quality of your lending process itself may need to be tweaked. 6. UNDERSTAND YOUR OWN BANK’S DNA. In this complex economic environment, it is imperative for institutions to analyze their own idiosyncratic loan data. Arm your loan review team with the ability to automatically drill down into your portfolio and easily examine trends and borrower types — to inform risk gradings, assess industry and concentration risk, etc. Seasoned reviewers will be incredibly valuable in this area. 7. OBSERVE PRICING BASED ON RISK GRADES, COLLATERAL VALUATIONS AND LOAN VINTAGES. Common risk characteristics are shared by loans originating around the same time and credits that tend to migrate as a group. Isolating and analyzing those can answer the important question, “Are you being paid for the risk you’re taking?” 8. PAIR LOAN REVIEWS WITH COMPANION STRESS TESTING. Lately, regulators are encouraging stress tests as a way to learn where risk may be embedded. Companioning the tests with loan reviews is a productive way to gain this knowledge. Start at the portfolio level and do loan-level tests where indicated. 9. TRANSPARENTLY REPORT AND CLEAR EXCEPTIONS IN REAL-TIME. Benefit from using fintech efficiency to remove huge amounts of time, team meetings and staff intrusions from the traditional approach to reviewing loans. Using an online loan review solution, teams can see exception activities and clearances as they happen. 10. ENSURE THAT REVIEWERS INTERPRET RISK GRADE PARAMETERS ACCORDING TO YOUR INSTITUTION’S DEFINITIONS. Measures used to qualify credits in the “pass” risk-grade category are specific to your institution. Reviewers should use only this touchstone to interpret pass grade requirements for any credit — without interjecting personal biases. 11. COMPLY WITH WORKOUT PLAN REQUIREMENTS PRESCRIBED BY INTERAGENCY REGULATORS. Workout plans are typically designed to rehabilitate a troubled credit or to maximize the repayment collected. Regulators now require institutions to examine these plans independently as a standard loan review procedure that reflects a healthy degree of objectivity. 12. DELIVER COMPREHENSIVE MANAGEMENT REPORTS AND APPROPRIATE HIGH-LEVEL BOARD REPORTS WITH PUBLIC/PEER DATA. Management should receive prompt and thorough loan review reports and board members should be provided high-level reports with appropriate, but less detailed, information. Public data or analyses of your institution’s performance as compared to peers should accompany reporting. 13. CONDUCT LOAN REVIEWS AS A HIGHLY COLLABORATIVE AND CONSULTATIVE EXERCISE — COUNTER TO “JUST ANOTHER AUDIT.” An effective loan review is not an internal audit experience. It’s an advisory process, and this approach is extremely important to its ultimate success. Substantive dialogue among participants with differences of opinion is key to favorable outcomes for the institution. 14. TAKE ADVANTAGE OF A TECHNOLOGY PLATFORM TO AUTOMATE EVERY POSSIBLE ASPECT OF THE LOAN REVIEW PROCESS. Best practices call for the efficiency that comes with automating the loan review process to the maximum extent possible, without sacrificing substance or quality. Today, technology drives the race against loan risk, making early detection of vulnerabilities faster, easier and more complete. In Summary Loan reviews that adhere to industry best practices are critical to an institution’s risk-management strategy and should be regarded as such. It’s a one-two punch: (1) deeply qualified reviewers and (2) automated technology that, when combined, deliver a more efficient, less intrusive loan review process that will help combat the looming credit stress ahead. Loan reviews that adhere to industry best practices are critical to an institution’s risk-management strategy and should be regarded as such. NEBRASKA INDEPENDENT BANKER 15
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HOW DOES RECENT BANK DRAMA IMPACT THE VALUE OF COMMUNITY BANKS? I don’t know about you, but recent developments in banking have me flashing back to 2007 — when we saw large banks reap the consequences of some risky activities — and community banks were pulled into the fallout. The recent downfall of certain large banks (you know the ones I mean!) has made a big splash in public bank stock prices, the overall economy, and public sentiment toward banking. So, how has this impacted the value of privately owned community banks? Several bankers have called to ask exactly this. How does the current banking environment play out in a bank valuation? Let’s explore. The first thing to consider is the valuation date. During the first part of this year, most of our firm’s bank valuations were as of a date late in 2022 (for gifting, ESOPs, buy/sell agreements, etc.). Since appraisal standards require that a valuation be performed on the basis of what was “known or knowable” as of the valuation date, a late 2022 value does not show the effect of recent developments. But as we pull ahead to more recent dates, the effects creep in. Public banking stock prices are down, no question. However, many community banks are insufficiently comparable to public banks, and no weighting is placed on a Guideline Public Company Method. Uncertainty, however, IS a factor that has a valuation effect. Most notably, this shows up in the Discounted Cash Flows Method — a forward-looking method based on a bank’s forecast. Uncertainty is synonymous with risk in the valuation world. But, for what it’s worth, uncertainty has been a bigger player in bank valuations since 2020 for other reasons: a worldwide pandemic, rising interest rates, and economic concerns (the list is longer, but these are the top three). So, a different reason, but more of the same. Recent banking transactions also are an indicator of value, but it is hard not to notice that far fewer banks are changing hands. The recent bank drama may have a slight bearing here, but the big driver is those unrealized bond losses. While unrealized losses are sitting on a bank’s balance sheet, value is unaffected (a valuation measures the value of operations, not investments). But most owners are not interested in selling a bank in this environment and realizing those losses. I will leave you with this: the recent large bank drama is viewed as transitory. This too will pass but the standard of fair market value takes a longer look. The value of larger banks is likely to be somewhat suppressed because of higher comparability to public banks, while community banks are less affected (this seems fair, doesn’t it?). If you are a community bank, the value of your bank is still most associated with the cash flows you will achieve in the future. Your value ties to your profitability, asset strength, and growth. For more information, please reach out to Lindy at lindy@bccadvisers.com or visit www.bccadvisers.com. By Lindy Ireland, Vice President and Shareholder, BCC Advisers If you are a community bank, the value of your bank is still most associated with the cash flows you will achieve in the future. Your value ties to your profitability, asset strength, and growth. NEBRASKA INDEPENDENT BANKER 17
COMPLIANCE Q&A By Bill Showalter, Senior Consultant, Young & Associates, Inc. TISA Q: We have recently made a change that our online banking logins will expire after 18 months if a customer has not logged in. This may trigger them to begin being assessed paper statement fees, if they sign up for e-statements (there is no cost), as the paper statement fee is determined by an online account being established and maintained. The $3.00 paper statement fee is listed as one of our fees on our fee chart; however, customers don’t know that they have to log in every 18 months to keep their online account from expiring and therefore start incurring the paper statement fee. I feel that this should be disclosed in some way, but I’m not sure how best to do it. We can push a message to all online account holders. Would that be acceptable? A: Yes, the bank should have been disclosing this all along on its TISA account disclosures for the account affected because Regulation DD requires the financial institution to disclose both the amount of any fee that may be imposed in connection with the account (or an explanation of how the fee will be determined) and the conditions under which the fee may be imposed. Failing to log in at least every 18 months, in this case, is the condition under which the fee may be imposed. So, the conservative approach would be to send a corrective disclosure to your existing customers disclosing both the fee and the condition (logging on, etc.). Also, you need to make sure the TISA account disclosures for affected accounts include this information for future customers. ECOA Q: My understanding of when providing an appraisal to an applicant is that if there is an application that has multiple first-lien dwellings, then the appraisal disclosure and appraisals would not need to be given to the customer. This is because Regulation B provides that this requirement applies to an “Application for credit that is to be secured by a first lien on a dwelling.” Am I correct on this issue? A: No, you are not. I find no exception to this requirement for transactions secured by more than one dwelling. As long as there is at least one dwelling with a first lien (mortgage or deed of trust), the requirement to provide a copy of any appraisal/valuation would apply. FCRA/PRIVACY Q: We recently made several minor changes to our Privacy Notice, but one more significant change under the section “Reasons we can share your personal information.” In that section, we changed from stating that “We do NOT share information with our affiliates for their everyday business purposes” to “Yes, we do share.” The bank owns 50% of a title agency that we share information with. My question is, do we need to mail the revised privacy notice out to our customers or could we include a statement message letting our customers know where to locate the most recent privacy notice on our website? A: Your question hits on an intersection of two regulations — Regulation V (Fair Credit Reporting) and Regulation P (Privacy). Regulation V lays out the requirements for sharing consumer information among affiliated entities, while Regulation P does the same for sharing consumer information with non-affiliated entities. They are joined to an extent because Regulation V (and the FCRA itself) allow its opt-out notice to be “coordinated and consolidated” with another similar notice — such as the Regulation P privacy notice. Regulation P explicitly provides for including the Regulation V/FCRA notice as an integral part of its model privacy notice. With that said, Regulation V requires that a bank give a consumer appropriate notice — either in writing or, if the consumer has agreed, electronically — before sharing the consumer’s information with an affiliate so that the affiliate may market to the consumer and give the consumer a reasonable opportunity to opt out of this sharing before the sharing occurs.
All of this argues against merely using something like a statement message. There would not be room for the required language — and there is nothing in the rules that explicitly allow merely providing a web address (where the full notice may be accessed) as a substitute for the required notice. The best route would be to send revised privacy notices to affected consumers and provide them with the required opportunity to opt out of the sharing before the sharing with any affiliate commences. FOLLOW-UP Q: If there is no option to opt-out, could we just post the revised privacy notice on our website? FOLLOW-UP A: No, the rules require providing it in a manner that ensures that the consumer/ customer actually receives it. Generally, it is not considered reasonable to presume that all customers regularly access the bank’s website. TISA Q: We are going to migrate customers from their current accounts to our new accounts. In the change letter, do we need to state all the negatives such as maintenance fees increasing, a new paper statement fee, no free checks, and no free cashier’s checks? We will be sending the TISA account disclosure with the letter. A: The bank cannot simply rely on customers reading the account disclosures. Regulation DD provides that if a financial institution provides notice through revised account disclosures, the changed term must be highlighted in some manner. For example, financial institutions may note that a particular fee has been changed (also specifying the new amount) or use an accompanying letter that refers to the changed term. So, your cover letter will need to point customers to the changes that increase their costs (or reduce their earnings — interest rates). RESPA/TILA/PRIVACY Q: We are purchasing a small number of residential loans from another financial institution. We have confirmed that the selling bank will be sending out a Notice of Servicing Transfer Letter. Do we have to send out our own Notice of Servicing Transfer Letter as well? In addition, are there any other required notices that have to be sent to the borrowers — for example, our privacy notice, first payment coupons, etc.? A: Either separate mortgage servicing transfer notices, or one combined notice, may be sent — as long as the proper notice is given in the proper time, as required by Regulation X (RESPA). If the seller is not including your bank’s notice information in its notice, then your bank will have to send its own buyer’s notice. There is also a mortgage transfer notice required by Regulation Z since the bank is acquiring the loan itself, as well as the servicing of those loans. The bank’s privacy notice should also be sent since this is the beginning of these borrowers’ customer relationship with a new-to-them bank. Other notices or documents might be required by your state’s laws, but you need to check with your legal counsel on that issue. CRA/INTERSTATE BRANCHING Q: We have one branch in a neighboring state and the loan-to-deposit ratio for that branch was 33% at the end of 2022. The Section 109 Host State Loan to Deposit Ratio for that state, as of June 30, 2021, is 69%. NEBRASKA INDEPENDENT BANKER 19
MINDY KOEHLER Senior Registered Institutional Sales Associate mkoehler@dadco.com Your Nebraska source for all of your bank’s portfolio needs! • Municipal bonds – Nebraska and nationwide • Corporate bonds • Agency bonds • CMOs • CDs • Whole loans (both buying and selling) We have a combined 57 years of experience working exclusively with banks, insurance companies, and registered investment advisors. JON MORTEN Senior Vice President, Institutional Sales jmorten@dadco.com TYLER MORTEN Senior Vice President, Institutional Sales tmorten@dadco.com 5701 S. 34th St., Suite 202 Lincoln, Nebraska 68516 (800) 955-2557 | (402) 420-8200 We are supposed to be lending there at a level that is at least one-half of the Host State Loan to Deposit Ratio for that state. Since we failed this first Section 109 test, we have to show the bank is reasonably trying to help meet the credit needs of the communities served by our interstate branches. First off, is this that big of a deal? Second, should the bank be doing additional advertising, outreach, etc. to try and generate more loans? A: Yes, it is a big deal. The regulators could require the bank to close the interstate branch if both tests are failed: LTD ratio is below the threshold (which you say it is) and the branch is not adequately meeting local credit needs. Determining and documenting the latter is what you need to concentrate on. The FDIC’s examination manual has a section on these requirements (as do the examination manuals from the other regulators). TILA Q: With rates increasing, our adjustable-rate mortgages (ARM) are coming back into play. Is there a rule regarding how to calculate the annual percentage rate (APR) for ARM loans to use for advertising? We want to advertise our 5/1 ARM, with a fixed rate period APR (for five years). We notice that other banks’ APRs seem to be lower than ours. We want to be sure we are advertising correctly but not scaring folks away with a too-high APR number. A: How to compute the APR for an ARM depends on what type of ARM it is. For a plain vanilla ARM (no initial discount/premium), the lender is required to assume that the initial rate will remain in effect for the loan term (since future changes are not known). This is the method to be used for an ARM with an initial fixed-rate period only if that initial rate is computed using the same formula (e.g., index plus margin) that will be used for future rate changes. For an ARM with an initial discounted/premium rate, the lender is required to compute a composite APR based on the initial rate for the time it is to be in effect and the rate for the remaining loan term once the discount/premium goes away (which might take more than one rate change to accomplish depending on the magnitude of the initial discount/premium amount compared to any periodic rate change caps). Young & Associates provides banks and thrifts with support for their compliance programs, independent reviews, and in-bank training, as well as a full menu of management consulting, loan review, IT consulting, and policy systems. 20 NEBRASKA INDEPENDENT BANKER
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