2023 • Issue 5 The Nebraska Independent Banker The Human Firewall SANTANDER US CEO TALKS BUSINESS STRATEGY, INDUSTRY CHALLENGES
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
©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 5 • 2023 INSIDE TAKE A LOOK 9 20 22 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 4 President’s Message Embracing the Harvest Season By Dexter Schrodt, President and CEO, NICB 6 Flourish By Rebeca Romero Rainey, President and CEO, ICBA 9 The Human Firewall By Mike Gilmore, Chief Compliance Officer, RESULTS Technology 12 Data-Driven Strategies For Banks Start Here By Paula S. King, CPA, Abrigo 16 Is Your Bank Ready to Accelerate Payments with the FedNow Service? By Greg Aumann, Submitted by CSI 18 Remember the Munis Don’t Go To Sleep on a Profitable Bond Sector By Jim Reber, President and CEO, ICBA Securities 20 2022’s Top Third-Party Sender Audit Findings By Matthew Wade, AAP, APRP, CPA, EPCOR 22 Santander US CEO Talks Business Strategy, Industry Challenges By Rob Blackwell, Chief Content Officer, IntraFi 26 NICB Endorsed Partners 26 Associate Members 2023
TITLE PRESIDENT’S MESSAGE EMBRACING THE HARVEST SEASON By Dexter Schrodt, President and CEO, NICB As the vibrant colors of autumn paint our landscapes and the air turns crisp with the promise of change, there is an undeniable sense of anticipation that sweeps through our communities. It’s harvest season — a time of reaping what we’ve sown, celebrating the fruits of our labor, and preparing for the future. In many ways, the journey of community banks mirrors the rhythm of this season as we, too, embrace growth, nourish our relationships, and prepare for what lies ahead. Community banks are the heart and soul of the towns they serve. Like the diligent farmers tending to their fields, community banks nurture their relationships with customers, local businesses, and the community as a whole. As the harvest season unfolds, it reminds us of the importance of our role — providing the resources and guidance needed to help our community members flourish. One of the most remarkable aspects of harvest season is the sense of community it fosters. Neighbors come together to help each other, sharing their experiences and knowledge. At community banks, we also understand the power of community. We cherish the relationships we build with our customers, often spanning generations. These relationships are the foundation upon which we grow and thrive. Just as a farmer’s commitment to nurturing the land is unwavering, our dedication to cultivating trust with our customers is unshakable. Whether it’s providing advice on financial planning, assisting with loans, or simply being there when needed most, community banks are here to ensure our communities thrive. Community banks are the heart and soul of the towns they serve. 4 NEBRASKA INDEPENDENT BANKER
We invest in our communities, supporting local businesses and individuals to ensure their financial well-being during all seasons of life. In the financial world, as in farming, innovation plays a pivotal role. The tools we use and the services we offer must adapt to the changing needs of our community members. Just as modern farming techniques improve crop yields, community banks continuously refine their services, incorporating technology and innovation while never losing sight of the values that define us. As the days grow shorter and the leaves fall, we know that winter will soon follow. Just as farmers store away their harvest to sustain them through the cold months, community banks are always looking ahead. We invest in our communities, supporting local businesses and individuals to ensure their financial well-being during all seasons of life. Harvest season serves as a powerful reminder of the cycles of life and growth that our communities experience. Community banks, like the dedicated farmers tending to their fields, are committed to nurturing our communities, embracing innovation, and fostering relationships that will sustain us through every season. As we celebrate this bountiful time of year, let us remember the essential role community banks play in helping our communities flourish and prepare for the promise of tomorrow’s harvest. NEBRASKA INDEPENDENT BANKER 5
So much of what we’ve seen in the last six months is banks doubling down on what they’re good at doing: helping their customers and communities in ways that nobody else can. As we enter budget season, the adage “You can’t save your way to prosperity” hits home. With regulatory and financial pressures, community banks face tough decisions as they allocate resources for 2024. I was just speaking with a banker who reiterated that it’s been a while since we’ve been in this interest rate environment, and its impacts on the cost of credit and renewals send us down a path of unknowns. So, when we begin budgeting, we have to find a meaningful way to anticipate what lies ahead. But with this uncertainty comes an opportunity to look at solutions with a new perspective. The current economic environment has bank management teams laser-focused on how we grow and create new revenue, all while managing expenses. The reality is that interest expenses will be significantly higher moving into the coming year, so we need to be asking, “What are we doing on the other side of the income statement to grow revenues?” Now’s the time to think outside the box to ensure we continue to grow. Whether it’s stories of banks continuing to increase deposit balances based on trusted relationships in the community or others who are introducing different types of deposit products or identifying continued loan growth despite economic challenges, so much of what we’ve seen in the last six months is banks doubling down on what they’re good at doing: helping their customers and communities in ways that nobody else can. Community banks are building on their tried-and-true relationship-based business models, exploring opportunities for new sources of revenue generation, whether of payment products, specialty or niche areas of finance, or seeking other solutions that speak to individual customer bases. So much of what we do in budget season is “put your head down, plug in the numbers and proceed forward.” But pulling out of the weeds allows us to see how we can take advantage of this time and think creatively about how we’re innovating for the future of our organizations. And we’re not in it alone; we have a network of community banks on which we can rely. In fact, ICBA has just launched ICBA Community (community.icba.org), a digital platform to help community bankers network and share information. I encourage you to use it to get insights into creative ways your peers are managing this budget cycle. Because, as community bankers, we have the benefit of learning from one another. Let’s leverage that connection to identify strategies to prosper, even as we’re faced with challenges. We are stronger together than we are individually, and that will serve us well as we prepare for what’s next. Rebeca Romero Rainey is the President and CEO of ICBA. Connect with Rebeca on X @romerorainey. FLOURISH By Rebeca Romero Rainey, President and CEO, ICBA 6 NEBRASKA INDEPENDENT BANKER
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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
A recent study by a security awareness training platform showed that the average rate at which employees of small banks clicked on phishing emails was 25% (the rate for bigger banks is even worse!). Ransomware (malware that encrypts your data and only provides a decryption key if you pay a ransom) continues to be a threat to banks. This malware can hide in links in emails, as hidden code in email attachments or even embedded in seemingly safe websites. If technology can’t filter out all the sources of malware, it is critical to train employees on how to recognize and avoid these hidden traps. A well-designed Security Awareness Training program turns everyone in your company into a “human firewall.” What Does an Effective Training Program Look Like? An effective Security Awareness Training program should illustrate with real-life examples the danger of social engineering and the importance of constant vigilance to avoid malware infections. The training should be attended by everyone in your organization who has access to the internet, repeated at least annually (we recommend every six months) and should be part of the standard onboarding process for new employees. To ensure that the training “takes,” the program should include regular social engineering tests. The easiest way to do this is to use a service to send your own unannounced phishing emails to see who “clicks.” In the programs that we administer at RESULTS Technology, we typically see about a 15% hit rate on phishing emails sent out before training is initiated. This dramatically drops to less than 5% after training is completed. Over time, the hit rate creeps back up, so it is important to refresh training regularly. Here are a few training tips to pass along to get your program going: • Do not open attachments unless you are 100% certain of the sender and the purpose of the attachment. When in doubt, pick up the phone and call. • Never click embedded links in messages without hovering your mouse over them first. • Look for “fake” domains. Note that www.microsoft.com and www.support.microsoft.software.com are two different domains (and only the first is an actual Microsoft site). • Always check the email “From” field to validate the sender. The ‘From’ address may be spoofed. • Do not “unsubscribe” — it is easier to delete the e-mail than to deal with the security risks. • Do not respond to spam in any way. Use the “Delete” button. • Do not open any email attachments that end with .exe, .scr, .bat, .com or other executable files you do not recognize. • Always check for so-called “double-extended” scam attachments. A text file named “safe.txt” is safe, but a file called “safe.txt.exe” is not. • Alert coworkers and friends of suspicious emails. RESULTS provides its employees with a Microsoft By Mike Gilmore, Chief Compliance Officer, RESULTS Technology THE HUMAN FIREWALL NEBRASKA INDEPENDENT BANKER 9
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. TOP 100 Outlook Plug-In called Catch Phish. This gives them a quick, easy way to analyze a potential phishing attempt and report it to the rest of the staff. • Do not whitelist your own domain; this allows actors to bypass spam filtering by impersonating your domain. • Do not respond to chain emails; that alerts potential malicious actors that you are receptive to targeted emails. • Let employees know that they are being tested. There’s nothing as embarrassing as being the one employee caught in a phishing test. You can even have a little fun with it. At RESULTS, if someone clicks on a phishing test, they are the lucky recipient of our Big Mouth Billy Bass trophy that sings “Take Me to The River.” It’s embarrassing but fun. • If you suspect a malicious sender, you can utilize header analyzers like one from MX. This can be a valuable tool to verify a sender's address. Scan the QR code to verify an address. https://mxtoolbox.com/EmailHeaders.aspx • If you are expecting an attachment but are not 100% sure of its safety, there is another free tool by VirusTotal that will help analyze its safety. Scan the QR code to analyze an attachment. https://www.virustotal.com/gui/home/upload Do not provide it with any potentially sensitive PII documents as that is always a concern, but if you want to be sure if something is safe or not, this is a fantastic tool. Remember, even with the best firewall, antivirus and fully security-patched systems, you are still vulnerable to malware and phishing attempts. Proper security awareness training is key to a comprehensive cybersecurity program. As always, don’t hesitate to contact us if you need help or have questions. 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 10 NEBRASKA INDEPENDENT BANKER
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Practical advice for using data to develop and support institution goals. Answering three questions ahead of strategic development discussions can ensure data drives your financial institution’s efforts. How To Develop Banking Strategies Using Your Data Everywhere bank leaders look, it seems, someone is talking about how financial institutions should leverage their data and analytics to develop strategies for leapfrogging competition and reducing risk. So why aren’t more financial institutions already using their abundant data about customers and products to drive new offerings or deals, influence pricing and serve customers better? Three areas that are vital for using data to inform and execute winning business strategies often become roadblocks to success: • First, clearly identifying what information is needed to support and achieve the institution’s goals is essential. • Second, efficiently generating those insights from your data is a requirement for a sustainable process. • Finally, periodically assessing performance against institutional strategies creates a method for measuring success so leaders can pivot or seek more insight before plans get off track. Financial institution leaders can use their answers to the following three questions to clear potential barriers and ensure a data-driven approach to strategic planning. 3 Questions To Foster Data-Driven Strategies What are your short- and long-term strategies, and what questions must you answer to support and achieve those strategic goals? Creating data analytics and reports alone are not the strategies; rather, they are the critical inputs to assist decision-makers in developing and executing those strategies. Staff producing the reports must communicate with management and inquire about what management wants to glean or achieve from the data insights. A pertinent question could be, “What critical questions do you need to answer?” Then, determine which reports/insights can answer those questions and better inform decisions. By Paula S. King, CPA, Abrigo DATA-DRIVEN STRATEGIES FOR BANKS START HERE 1 12 NEBRASKA INDEPENDENT BANKER
The goal isn’t the production of reports but producing insights and information that are critical to developing and executing strategy. It’s providing the decision-makers with meaningful insights so they can execute appropriately. For example, say your management and board’s strategy for the upcoming year is to grow the CRE loan portfolio by 10%, and the institution needs to consider expanding into new markets to achieve this goal. Before finalizing this goal, management should consider the following: • Historical trends • Current CRE concentrations • Market analysis • Loan pricing considerations • Real estate industry performance • Peer comparisons Reports, insights and data analytics that will assist management in determining whether this is a viable strategy include: • Historical CRE growth trends over the last five years, further segmented by industry, collateral type and location: Analyzing this data will set the stage for the institution’s expectations for the 10% growth (e.g., is past performance a good indicator of future performance, and what needs to be adjusted if growth has not met expectations historically?) • CRE Concentration Report: Analysis should be performed on concentrations, as a percentage of capital, in terms of: 1. Collateral type such as multifamily, retail, office, etc.; 2. Owner versus non-owner occupied; and 3. Individual or related group of borrowers. This analysis will identify CRE types where the institution may be already bumping up against its in-house policy concentration limits. Management may need to adjust its strategy to grow within areas where there is still room for growth without jeopardizing these limits. • CRE geographic heat map: Where are the majority of your borrowers and collateral located, and where should the institution concentrate its marketing efforts? • CRE portfolio credit attributes: These should include historical interest rate and credit performance trends (e.g., how has this portfolio performed over time, and has the pricing reflected the risk taken?). • Industry borrower data: How has the commercial real estate market performed, and how is it performing today by collateral type in your region/market? Decisions that can be gleaned from industry data include areas in which to focus your growth as well as loan decisioning, such as loan pricing, based upon industry performance and level of risk determined by a review of this information. It’s not enough to produce the above analyses. The institution should prepare a formal written report that interprets the above insights and compares these insights to the growth strategy. The report should include a conclusion as to if this CRE growth strategy is viable AND how management plans to achieve this growth. Consider Interrelated Goals to FineTune Strategy Using Data Another constructive approach for ensuring you have the right data insights to identify and support strategic initiatives is to evaluate the financial institution’s goals/issues as a whole by ranking them and considering how they are interrelated. This exercise may reveal the need for bigger-picture data analysis. Start with an inventory of your goals/ issues and rank them in descending order. Identify any interrelated goals or issues, then determine the data analytics that will provide the insights. For example, your top goal for next year might be to expand your lending geographic footprint. Be very specific regarding this goal, including the targets for particular percentage growth, loan types, industries, and locations. Another goal that should go along with this goal to expand is to identify funding sources (e.g., add the FHLB or focus on certain types of deposits and/or on the depositor base by offering deposit incentives). Obviously, these two goals are interrelated — without excess liquidity, the institution will need to provide additional funding to meet the target to expand the lending footprint. So, in this situation, the institution will add reports showing the makeup of deposits (e.g., core vs. non-core, migration of deposits from core to transactional accounts, any trend in movement of funds out of the institution, top 10-20 depositors and associated volatility, borrowers without deposit relationships, etc.). From these reports, the institution can determine whether it makes more sense to gather deposits and how to do it through incentives or better technology, for example, or whether the institution needs to target alternative funding sources. Do you have the right technology? The biggest hurdle in gaining data insights and making informed decisions is not having the right technology for efficiently and accurately reporting and monitoring data insights and, ultimately, making better strategic decisions, which will not only impact enterprise risk but can support growth and revenue recognition. Even today, for example, financial institutions may piecemeal their data insights, typically cobbling data from a variety of data systems and reports (e.g., core-generated, less-than-ideal core report writers and third parties) and ultimately, transferring the data into Excel for board and management reporting. 2 NEBRASKA INDEPENDENT BANKER 13
Evaluating Business Intelligence Options Here are several questions to consider when evaluating the technology used for reporting and monitoring data insights: • Is it easy to use, or must staff be technically well-versed in order to use it? Ease of use is a must, particularly in banks with limited staff and bandwidth. Look for a solution with a natural language slant — one that uses straightforward data field names and keywords to generate data insights. Included artificial intelligence (AI) capabilities allow the data solution to learn a user’s interest in certain types of data insights and can suggest bank data analytics based on that user’s patterns. • Is the majority of your institution’s data housed in the solution or data platform? Will you have the option to bring in other data sources to get a fuller, bigger picture, or are insights constrained by the limited data housed with the provider? • Are the insights derived from the tool reflective of up-to-date or real-time data? Historical data serves a purpose and can tell a financial Institution where they have been and how they have historically performed (e.g., in CECL calculations and loan performance), but stale information is not the best to use for strategic planning. A solution that can provide insights based on the most recent available data that you can provide is better. • Does the solution provide dynamic insights? Is there a drill-down feature to gain a more granular understanding of the data? For example, in analyzing a loan portfolio, can you easily and quickly drill down into a geographic concentration, then further identify the most significant loan type, and then further, the FICO score distribution within that loan type and within that geography? This allows for immediate insight to make better decisions as well as reporting to your board of directors on how to move forward with the loan portfolio focus. Using technology to access in minutes what might have previously taken you hours or days to gather fosters nimble decision-making. • Does the solution provide dashboards customized to specific groups within the financial institution (e.g., a lender performance dashboard that automatically updates as the financial institution uploads its data)? • In addition to reports, does the solution have the ability to monitor and alert staff when actual data metrics within the financial institution fall out of range with policy thresholds, minimum/ maximum KPIs, concentration or other limits set? • Does the solution provide access to peer and industry data for creating visual comparisons and providing loan decisioning insights? • Finally, does the solution provide quick and easy options for accessing the data (e.g., emailing, uploading to other documents, creating pdfs and presentation features that allow for direct presentation to management and board groups)? A business intelligence solution that transforms the financial institution’s raw data into the insights leaders need without expensive data scientists or complex technical infrastructure supports timely strategic decisions. How is your strategy working out based on your performance? Finally, banks should monitor performance against strategy using the reports and insights identified above at least quarterly. Findings should be reported to the board of directors at least quarterly, too. This periodic monitoring can provide the understanding necessary to regroup if falling behind on your strategy or to consider whether a strategy change is needed. Data-Driven Strategies in Changing Times Effectively planning for a financial institution’s growth, risks, and regulatory exams or reporting depends on quality data and analysis. The importance of data-driven strategies is magnified when circumstances are changing or are bound to change (such as with the eventual shift from higher interest rates to decreasing interest rates). However, many financial institutions, especially smaller banks, lack BI or business intelligence staff and complex technical infrastructures associated with “big data” options. Nevertheless, financial institutions of all sizes can execute plans developed using data (much of it already in their various systems) by identifying the relevant information, utilizing the right technology, and periodically comparing performance with strategic goals. Paula S. King, CPA, is Senior Advisor for Abrigo Advisory Services, assisting financial institutions with CECL, credit processes, model validations, and recently, the SBA’s Paycheck Protection Program forgiveness process. A former banker and bank co-founder, she has held executive positions (CFO, Chief Risk Officer and Chief Compliance Officer) and has more than 25 years’ experience across all aspects of banking including financial and asset/liability management, credit, services and product development and director responsibilities. 3 14 NEBRASKA INDEPENDENT BANKER
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IS YOUR BANK READY TO ACCELERATE PAYMENTS WITH THE FEDNOW SERVICE? By Greg Aumann, Submitted by CSI T he Federal Reserve’s FedNow® Service, which launched July 20, 2023, promises to revolutionize money movement by enabling more banks to process instant payments and provide unparalleled convenience to consumers and businesses alike. Unlike traditional payment methods that can take hours or even days to complete, real-time payments process within seconds and allow payment recipients to access funds right away. This article explores the benefits of FedNow instant payments and the steps banks can take to participate. Benefits of the FedNow Instant Payments The FedNow Service is an instant payment network designed to allow individuals and businesses to send and receive payments in real time, 24/7. FedNow introduces an alternative to existing payment systems. The resulting competition will encourage technological advancements, lower transaction costs and foster a more robust and modern payment ecosystem. The primary benefit of the FedNow Service is the ability to process payments instantly, which enables financial institutions to stay competitive in a rapidly evolving market. With the reliance on digital banking, consumers expect their transactions to be quick and seamless. By offering instant payments, banks can attract and retain customers who prioritize convenience and speed. With the FedNow Service, financial institutions can also eliminate the need for costly intermediaries and streamline their payment processes. By processing payments in real time, banks can minimize the need to hold onto funds for extended periods, resulting in lower operating costs and improved liquidity. In addition, to mitigate the risk of fraud and errors that are often tied to traditional payment processing methods, the FedNow Service integrates robust security measures. Real-time payment monitoring and validation systems allow for instant detection of suspicious activities, facilitating immediate action to prevent and rectify instances of fraud. Preparing to Participate in the FedNow Service As the FedNow Service continues to gain traction and expand its reach, financial institutions should embrace this transformational technology to stay ahead in the market. The era of instant payments has arrived, bringing numerous opportunities for institutions to enhance their services, drive innovation and deliver exceptional value to their customers. Here are a few ways banks can prepare to participate in the national instant payment network from the Federal Reserve: • Upgrade Technological Infrastructure To leverage the benefits of the FedNow Service, banks must ensure they have the necessary technological infrastructure in place. This includes upgrading existing payment systems to handle real-time processing and integrating with the FedNow network. To that end, banks should assess their current infrastructure, identify any gaps and work toward enhancing their capabilities. • Provide Customer Education Introducing FedNow Instant Payments to customers will require proactive education and communication efforts. Banks should familiarize customers with the new system’s benefits 16 NEBRASKA INDEPENDENT BANKER
and functionality. Education and communication will build trust and encourage adoption, so it should be provided through various channels, including websites and digital banking platforms. • Explore Collaboration and Partnership Opportunities The successful implementation of the FedNow Service will require collaboration among banks, payment processors and technology providers. Banks should partner with financial technology providers specializing in real-time payments, leveraging their expertise and infrastructure. Collaborative efforts will accelerate the integration process and provide customers with seamless experiences. How Financial Technology Partners Can Help Prepare Banks for the FedNow Service In the fast-paced world of financial technology, banks often rely on partnerships to enhance their capabilities and stay ahead of industry developments. Regarding the FedNow Service, banks can significantly benefit from the support and expertise of their core banking technology partners. Banks should work with their core banking partner to ensure seamless integration of their existing systems with the FedNow network. This involves developing and implementing necessary APIs to facilitate real-time payment processing. By collaborating on technical integration, financial technology partners can help institutions minimize disruptions and streamline the adoption of the FedNow instant payments. Technology partners should also collaborate with banks to enhance the user experience for their customers using FedNow Instant Payments, including developing intuitive and user-friendly interfaces and payment platforms that enable customers to send and receive real-time payments seamlessly. Technology partners should stay at the forefront of technological advancements and market trends to offer innovative solutions that help banks leverage the full potential of the FedNow Service. The New Era of Instant Payments The FedNow Service’s real-time capabilities empower banks to provide their customers with faster, more efficient services while driving economic growth and innovation. By preparing their technological infrastructure, focusing on security and compliance, educating customers and fostering collaborations, banks can ensure a smooth transition to the new era of instant payments, meet the growing consumer demand and encourage competition and innovation in the payment industry. Gain additional insight into bankers’ thoughts on real-time payments and where they ranked on their list of priorities by downloading CSI’s 2023 Banking Priorities Executive Report at www.csiweb.com/bp23. Greg Aumann is a Sr. Product Manager for ACH, Wire and FedNow. He is responsible for ensuring the applications remain competitive and compliant in today’s rapidly evolving payments landscape. Greg also holds accreditations as an AAP — Accredited ACH Professional and CTP — Certified Treasury Professional. In addition, Greg is an active participant in payment industry work groups working to help advise the industry on the future of payments. Greg is also a member EPCOR’s Education Committee working to help provide guidance, direction and support for EPCOR’s Payments Education offerings. NEBRASKA INDEPENDENT BANKER 17
REMEMBER THE MUNIS “As you get older, three things happen: the memory goes, and I forget the other two” — Erma Bombeck Being one who can empathize with the late, great humorist Ms. Bombeck, I thought it might be interesting to discuss a segment of the fixed-income universe that has served community banking well over the decades. It’s been many months since I’ve covered it for two practical reasons. The first is that it doesn’t present relative value in the current cycle, and the second is that, because of the first, portfolio managers haven’t been buying many of them recently. I’m speaking of the municipal bond market. It is a maxim of community banking that the more munis a bank owns, the higher performing the portfolio will be. This has been true for decades and in whatever part of the rate cycle we’re currently residing. But since we haven’t visited muni-land for a while, now is a perfect time for a sector update, complete with reminders about nuances and opportunities with state and local government bonds. Value Measures Tell me if you’ve heard this: The interest rate curve is inverted. It’s now been 16 months and counting since we’ve had a positively sloped curve and that includes the muni sector. A buyer has to invest in a 12-year or longer muni to get a higher yield than a one-year bond. Also, the retail sector continues to gobble up the majority of supply, which is barely running in place. A number of governmental borrowers in 2023 have delayed issuance, probably hoping for some relief on rates. Mom-and-pop investors will typically have higher marginal tax brackets than corporations, and that translates into higher tax-equivalent yields — hence the retail demand. The current impact is such that on the short end of the curve (i.e., 10 years and in), munis produce lower tax-equivalent yields than comparable maturity treasuries. In bond-speak, this is known as “trading through the curve.” Although this is an anomaly, it has persisted for most of 2023. Hence, the relative value, or lack thereof. Still the Favorite Notwithstanding the preceding paragraph, a hallmark of a high-performing bond portfolio remains a high allocation of munis, although that’s changing some. According to Stifel, top-quartile portfolios had 31% of their dollars in munis in June 2023, compared to 42% a year earlier. Interestingly, the top quartile also had a dramatic drop in its effective duration year-over-year from 5.3 years to 4.2. The shape of the curve again has played a role, as the dollars reallocated out of the munis space went into short-duration taxables such as treasuries, agencies and Small Business Administration (SBA) floaters. Still, in spite of the conundrums facing portfolio managers in 2023, the muni market remains fundamentally attractive. The curve will one day regain its positive slope. It’s expected that muni supply will again begin to increase as COVID stimulus money is spent and populations grow. And credit quality remains solid; there have been far more credit rating upgrades than downgrades, and even perennial whipping boys New Jersey and Illinois have been awarded upticks by the ratings agencies. Buy Cheap, Sell Dear I wouldn’t be doing my job if I didn’t offer some suggestions. If you agree that the municipal bond market is indeed expensive, then perhaps you may consider a sale of By Jim Reber, President and CEO, ICBA Securities Don’t Go To Sleep on a Profitable Bond Sector 18 NEBRASKA INDEPENDENT BANKER
some of your holdings. The three- to five-year sector may actually produce lower take-out yields than shorter maturities. It’s also becoming more evident that the banking industry is having a solid earnings year in spite of margin compression, so a loss-earnback extension swap may have some interest. Recall, too, that the TEFRA penalty (remember that little acronym?) will start to take a bigger bite out of your tax-equivalent yields as your cost of funds continues to rise. This is especially true for your General Market bonds, which have a much higher TEFRA hit than Bank Qualified munis. It’s déjà vu all over again and could be more reasons to at least temporarily allocate out of some tax-free bonds. On the other hand, 6%+ tax-equivalent yields are available now for those S Corps willing to invest for 20 years or so. Ultimately, the message of this column is that “munis matter.” If you’ve put that sector on autopilot because of perceived lack of value in the new issue market, take a look at your portfolio and ask your brokers for some bids on shorter maturities. You may find an inexpensive source of liquidity. Now that we’re refreshed on some of the finer points of municipal bonds, I’m thinking of Mark Twain’s observation: “A clear conscience is a sure sign of a bad memory.” www.bccadvisers.com ▪ ▪ ▪ ▪ ▪ ▪ ▪ Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. NEBRASKA INDEPENDENT BANKER 19
2022’S TOP THIRDPARTY SENDER AUDIT FINDINGS By Matthew Wade, AAP, APRP, CPA, EPCOR Per the ACH Rules, just like participating financial institutions, Third-Party Senders (TPS) are required to conduct an annual ACH Compliance Audit. The EPCOR Audit team performs TPS audits each year, which often result in repeated findings and recommendations from one audit to the next. In this article, we will look at the audit issues we most often encountered throughout 2022 and the corresponding recommendations to assist TPSs in developing a strong ACH risk management program and promote ongoing ACH Rule compliance. #1 Failure To Perform an ACH Audit Easily, our number one audit finding is the failure of the TPS to perform an ACH Compliance Audit each of the past six years. As already stated, the ACH Rules require a TPS to have an ACH Compliance Audit conducted annually, and per Subsection 1.2.2.2, Proof of Completion of Audit, a TPS must retain proof of its annual audit for six years from completion of the audit. If the TPS was being audited for the first time in 2022 or had only begun its audit regiment a few years prior to 2022, the TPS was not able to exhibit proof of completion of prior audits for each of the past six years. EPCOR TPS audit reports for these TPSs gently remind the TPS to have the audit performed every year and to retain such documentation in accordance with Subsection 1.2.2.2. #2 Failure To Conduct an ACH Risk Assessment The second most frequent audit finding/recommendation was the failure of the TPS to conduct an ACH risk assessment. Even before Nacha added TPSs to the risk assessment requirement in Subsection 1.2.4, Risk Assessments, EPCOR auditors have advised TPSs to perform an ACH risk assessment as part of creating an overall ACH risk management program for their organization. With the formal amendment to the ACH Rules found in Supplement #3-2021, Nacha placed the explicit requirement for TPSs to conduct an ACH risk assessment and added the effective date of Sept. 30, 2022. During 2022, EPCOR noted that the majority of TPSs had not established an ACH risk assessment. The primary reason for this omission was a lack of awareness of the requirement (ODFIs, you should be educating your TPS clients). However, a failure to understand the purpose of the risk assessment and/or its role in the overall ACH risk management program for the organization was also noted. #3 Failure To Establish an ACH Risk Management Program Another frequent audit finding was the failure of the TPS to establish an ACH risk management program. This requirement also comes from Subsection 1.2.4 and goes hand-in-hand with the first two audit findings already discussed. Generally, an ACH risk management program is defined as a set of policies, procedures, limits, assessments, reviews (audits) and reporting protocols that govern the overall ACH activities of the TPS. The information presented may highlight some ACH compliance topics/ issues that you aren’t aware your TPS needed to follow. 20 NEBRASKA INDEPENDENT BANKER
While TPSs have a large degree of flexibility in the composition of their ACH risk management program, the general objectives of the program should include: 1. Assessing the risks of the activity (risk assessment); 2. Creating comprehensive know-your-customer (KYC) and onboarding due diligence (policies/procedures); 3. Establishing controls over Originator and Nested TPS activity (limits); 4. Setting up monitoring and reporting systems (reporting); and 5. Providing for periodic audits. Specifically, Subsection 2.2.3, ODFI Risk Management (which also applies to TPSs), requires the TPS to perform due diligence on each Originator (and Nested TPS) to assess the nature of the Originator or Nested TPS’s ACH activity implement and enforce exposure limits for each Originator or Nested TPS, and monitor ACH Return activity. All these duties are to allow the TPS to determine that the Originator or Nested TPS has the capacity to perform its ACH Rules obligations. #4 Failure To Maintain Proper Agreements A fourth audit finding that is frequently noted is noncompliance with Subsection 2.2.2.2, ODFI Must Enter Origination Agreement with TPS of the ACH Rules. Specifically, it is 2.2.2.2(h) and (i) that are of paramount importance to the TPS. Letters (h) and (i) of Subsection 2.2.2.2 require the TPS to enter into ACH Origination Agreements with each Originator, or Nested TPS, respectively. While audits almost always determine that TPSs have contractual agreements with the client Originators and/or Nested TPSs, what is often discovered is that the agreements fail to include the specific minimum ACH provisions found in Subsection 2.2.2.1(a-f) of the ACH Rules. Nacha provides some leniency on this Rule in that old agreements without the required minimum provisions are permitted to be carried forward. However, as agreements are revised or repapered, the TPS should ensure the agreement provisions detailed in Subsection 2.2.2.1 are properly included. Such flexibility aside, it has been EPCOR’s audit recommendation for the TPS to add the required provisions as soon as possible. We often suggest creating an “ACH Addendum” that can be added to the existing agreements without a complete repapering project. Notable Mention Findings Other less frequently cited audit findings still worth noting for TPSs include: • Failure to establish exposure limits; • Failure to act on Notifications of Change (NOCs); • Incorrect assignment of Standard Entry Class (SEC) Codes; • Inadequate authorization language; • Lack of monitoring of Originator Return Rates; and • Best practice suggestions for the establishment of a formal ACH Management Policy and the establishment of procedures to acquire authorizations or other ACH-related documents from Originators and/or Nested TPSs. If you work for an ODFI and are reading this article, I hope this has given you some insight into deficiencies some of your TPSs may have regarding ACH Rules compliance. It is highly recommended that you request confirmation of an annual ACH Compliance Audit from your TPS client and even go further to request the ACH audit report so you can supplement your due diligence process and see what compliance issues your TPS may be experiencing. The information presented may highlight some ACH compliance topics/issues that you aren’t aware your TPS needed to follow. If you’re a TPS, I hope this article has been thought-provoking and opened your eyes to potential issues and areas to consider making changes to ensure you are compliant with the ACH Rules. Just remember your financial institution is your ally. If you feel like you need additional education or guidance from them, reach out and work together to come up with a solution that works for everyone. Matthew travels throughout EPCOR’s footprint to conduct consulting, audit and risk assessment engagements related to ACH, Wire Transfer, Third-Party and other paymentsrelated services. As part of these services, Matthew provides recommendations related to compliance with ACH Rules, payments-related regulations and regulatory guidance. Matthew also provides education and shares best practices with financial institutions and Third-Party Senders to support their efforts towards maintaining compliance, improving operational processes and mitigating risk and fraud. Matthew graduated from the University of Kentucky in 1997 with a B.S. degree in Accounting and Management. Matthew has 23 years of professional experience, including 15 years in the financial services industry with a strong emphasis in audit, ACH and financial analysis. NEBRASKA INDEPENDENT BANKER 21
Regional banks have come under major stress in recent months, and while the situation appears to have stabilized, they face challenges ahead. That includes grappling with rising interest rates, attracting and keeping deposits amid tough competition from money market mutual funds and a potential recession. To gain a better sense of how regionals are navigating the current environment, I recently spoke with Tim Wennes, CEO of Santander US, for an episode of Banking with Interest. We discussed deposit competition, whether federal regulators will raise capital requirements, the bank’s approach to auto lending, how to target Gen Z customers and much more. What follows is our conversation, edited for length and clarity. The past few months have been challenging for banks between $50 billion and $250 billion in assets. Santander US is in that category. What has been your experience? We’ve navigated the challenges quite well. As a wholly owned subsidiary of a global systemically important bank, our capital and liquidity requirements are similar to those of large global U.S. banks, so we're in a strong position. Also, our deposits have been relatively stable, as nearly two-thirds are FDIC-insured, and we have a very diversified deposit base. That’s important because deposits are going to contract under quantitative tightening. This already started happening last year. Deposits are even more competitive today than they were pre-March, which means liquidity will become increasingly important. That’s going to constrain loan growth — not just for regional banks, but for all banks. By Rob Blackwell, Chief Content Officer, IntraFi From a deposit standpoint or a credit card standpoint, getting in early is important. But in the auto business, when somebody needs a car, they’re going look for a loan that may or may not come from where they typically do business. Same with a mortgage. SANTANDER US CEO TALKS BUSINESS STRATEGY, INDUSTRY CHALLENGES 22 NEBRASKA INDEPENDENT BANKER
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