THE MEEK … Inherit a Prominent Place in Bond Portfolios 2024 • Issue 4
WHY ? Tim Burns with customer Jami Schmidt Bank Stock Loans — Acquisition, Capital Injection, and Shareholder Buy Back/Treasury Stock Purchase Officer/Director/Shareholder Loans ( Reg-O) Participation Loans Purchased/Sold — Commercial, Commercial Real Estate, Agricultural, and Special Purpose Loans Leases Midwest Image Exchange – MIE.net™ Electronic Check Clearing Products Information Reporting – CONTROL Electronic Funds Cash Management and Settlement Federal Funds and EBA Certificates of Deposit International Services/Foreign Exchange Safekeeping Directors’ Exams Loan Review Compliance Audits IT Audits Lending Services Operational Services Audit Services mibanc.com MEMBER FDIC Contact Tim Burns 402-480-0075 The customer service that MIB provides to our community bank is exceptional. Tim Burns, our relationship manager, listens to our needs and helps our bank meet our goals. Their website protal we use for reports is very user-friendly and easy to navigate. We appreciate the relationship we have with MIB today! Jami Schmidt/CFO Henderson State Bank Henderson, NE
4 ©2024 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. The Nebraska Independent Banker is a collective work, and as such, some articles are submitted by authors who are independent of the Nebraska Independent Bankers Association. While the Nebraska Independent Banker encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at (855) 747-4003. Nebraska Independent Community Bankers 1201 Lincoln Mall, Ste. 103 Lincoln, NE 68508 (402) 474-4662 nicbonline.com The Nebraska Independent Banker is a publication of The Nebraska Independent Community Bankers Association Issue 4 • 2024 TAKE A LOOK INSIDE 14 16 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 FLOURISH Connected as Independent Community Banks By Rebeca Romero Rainey, President and CEO, ICBA 6 We’ve Moved! 8 Putting Your Institution’s Best Foot Forward for a Lower-Rate Environment By Kent Musbach, Senior Vice President, and Marc Gall, Senior Vice President and Asset/Liability Strategist, BOK Financial Capital Markets 10 Bank Training Webinars 11 How Positive Pay Helps Fight Check Fraud By Jason Young, Senior Director of Enterprise Banking, CSI 13 We Want to Feature You in Our Next Issue of The Nebraska Independent Banker! 14 The Meek … Inherit a Prominent Place in Bond Portfolios By Jim Reber, President and CEO, ICBA Securities 16 Risks of Using AI in BSA/AML Compliance By Sharvelle Washington, Assistant Vice President, Compliance & Risk, Bankers’ Bank of the West 18 NICB Endorsed Partners 18 Associate Members 2024
Rebeca Romero Rainey is the president and CEO of ICBA. Connect with Rebeca on X @romerorainey. FLOURISH When you enter ICBA’s headquarters, you are greeted with a large U.S. map that contains a peg for each community bank and a singular cord linking them all together. It not only demonstrates our collective impact; it also represents the strength of our financial system, built on thousands of local economies around the country and fueled by community banks. Much more than surface-level connections, community bank relationships run deep. With detailed knowledge of the communities in which they live, play and work, community bankers make informed decisions using insights beyond standard credit models. Consider a new small business that doesn’t make sense on paper but that you, as a financial steward of the community, know meets a community need or will be in demand. This type of insight can only be derived from being part of the community — not thousands of miles away in some ivory lending tower. That sense of presence, of connectedness, makes all the difference. CONNECTED AS INDEPENDENT COMMUNITY BANKS By Rebeca Romero Rainey, President and CEO, ICBA 4 NEBRASKA INDEPENDENT BANKER
At our Capital Summit, we heard from Dave Fishwick, whose story was featured in the movie, “The Bank of Dave.” His message was a reminder of how unique our model is outside of America’s borders, how paramount it is that we defend it with fervor, and how important the work we do to protect relationship banking is. It’s the foundation of everything we do! Community banks need to flourish so we can continue to fight for the little guy and stand up for what matters in our communities. We need to be there so our customers have access to the financial services they need when they need them most. The current environment threatens this paradigm. One-size-fits-all regulations don’t support our efforts. An uneven playing field puts us at a disadvantage. Mounting and constricting regulations hinder our ability to tailor our offerings. The taxpayer-subsidized acquisition of taxpaying community banks further diminishes our numbers while stripping away a vital community tie. Now, more than ever, as we think about the impact of our banks, we need to stand up and fight. We can’t take our independence for granted, and independence requires action. It’s up to us to amplify our voices far and wide and make sure the leaders of this nation pay attention. I hope you now take time to revel in the role you play in our country’s financial wellness and recommit to your independence. Because it’s bankers like you who are making the country better, one community at a time. NEBRASKA INDEPENDENT BANKER 5 100 South Phillips Avenue, Sioux Falls (605) 335-5112 advantage-network.com THE TEAM WITH 150+ YEARS’ EXPERIENCE Here at The Advantage Network, our team has more than 150 years of combined banking experience.That means we have the expertise and industry know-how to help financial institutions like yours with debit card services, card production, marketing support, ATM services, fraud monitoring, and everything in between. From conversion onto the Network to daily operations, we’ll be there every step of the way. Scan the QR code to learn more, or give us a call and let’s start a conversation!
WE’VE MOVED! NICB’S NEW LOCATION 1201 Lincoln Mall, Ste. 103 Lincoln, NE 68508 6 NEBRASKA INDEPENDENT BANKER
Balance sheet strategies backed by experience. You’re working diligently to best position your balance sheet, and we know what you’re up against in the current environment. As you navigate complex strategies to maintain liquidity and margin, we can help you develop solutions backed by our own experience so you can confidently move your operation forward. We can help get you there because we’ve been there. Budgeting Profit projections ALCO Capital planning Decay/beta analysis Regulatory Investment portfolio Investment mix Interest rate risk Loan pricing Asset duration Liquidity management Brokered funding LEARN MORE AT BOKFINANCIAL.COM/INSTITUTIONS BOK Financial® is a trademark of BOKF, NA. Member FDIC. Bank dealer services offered through BOK Financial Capital Markets, which operates as a separately identifiable department of BOKF, NA. BOKF, NA is the bank subsidiary of BOK Financial Corporation. Investment products are: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE We go above. So you can go beyond.
PUTTING YOUR INSTITUTION’S BEST FOOT FORWARD FOR A LOWER-RATE ENVIRONMENT By Kent Musbach, Senior Vice President, and Marc Gall, Senior Vice President and Asset/Liability Strategist, BOK Financial Capital MarketsA fter transitioning from near-zero rates to one of the fastest rate-hiking cycles we’ve ever seen, financial institutions are now in the position of waiting for rates to fall. As we wait for the Fed’s next move, it’s important for management teams to understand how lower rates will impact their institutions’ income statements and take steps to better position themselves for the lower-rate environment likely to come. Many Financial Institutions Funding Their Balance Sheet Short First, let’s consider where we are now. Federal and consumer spending have been driving economic growth, despite the higher interest rates. This growth, in turn, has the markets thinking the Fed will delay rate cuts until later this year or possibly into 2025. Funding short has not yet worked out, with funding continuing to roll at nearly the highest cost on the curve. Coupled with continued deposit migration within the bank, cost of funds is continuing to rise at many institutions. 8 NEBRASKA INDEPENDENT BANKER
Understanding the choices that your institution made and then making informed decisions is how your institution can and will put its best foot forward. Managing Expectations for Rate Cuts To manage margin this year, one question to ask is if your institution will need to offer the highest interest rate in the market for deposits or one that’s “just close enough” to that rate to keep existing customers. We find that, if the rates are close enough, the incumbent tends to win because consumers don’t want to deal with the hassle of moving their money. This strategy may allow your institution to manage the upward pressure in cost of funds (COF). Additionally, management teams may consider what realistic reprieve in COF may come from the first few Fed cuts. Many institutions have not raised non-maturity account rates in line with non-bank alternatives (ex. money market mutual funds). Consequently, community banks may be reluctant to reduce rates on these accounts, as they will still be below alternate funding costs. Investment Portfolio Conundrum Some institutions may have decided that they’re not taking any risk by accumulating cash. However, we challenge that thought: If the Fed starts cutting rates and your institution doesn’t get a meaningful and immediate COF improvement, your institution’s earnings on that cash are going to drop immediately. And so, institutions that are asset-sensitive or holding cash today need to consider the immediate margin compression that could occur once the Fed starts cutting rates. In the meantime, locking into investments closer to cash rates today can help hold yield until the COF starts to decline. A balanced investment strategy could allow your institution to add a mix of securities that average a yield close to Fed funds with an allocation to call-protected assets. We urge management teams to consider the trade-off of investing in only the highest yield options compared to the potential benefits of adding assets with call protection that could result in an unrealized gain when the Fed lowers rates. Finally, it’s important to keep in mind that repeating the past is unlikely, but it’s still essential to learn from it. Understanding the choices that your institution made and then making informed decisions is how your institution can and will put its best foot forward. Kent Musbach is a senior vice president and Marc Gall is a senior vice president and asset/liability strategist for BOK Financial Capital Markets. Contact BOK Financial Capital Markets at (866) 440-6514 to discuss the latest economic outlook and timely considerations. We can help guide a unique, well-conceived strategy that considers many variables and potential outcomes. The opinions expressed herein reflect the judgment of the author(s) at this date, and are subject to change without notice. The information provided has been obtained from sources believed to be reliable, but not guaranteed. Forward-looking statements contained herein are based on current expectations and the economy in general, and are not guarantees of future performance. Likewise, past performance is not a guarantee of future results. BOK Financial® is a trademark of BOKF, NA. Member FDIC. Bank dealer services offered through BOK Financial Capital Markets, which operates as a separately identifiable department of BOKF, NA. BOKF, NA is the bank subsidiary of BOK Financial Corporation. Investment products are: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE NEBRASKA INDEPENDENT BANKER 9
www.fin-ed.info/nicb Empowering Financial Marketers: Harness the Power of AI in Your Marketing Strategy Three Key Risk Assessments in Your ERM Program: ERM, IT & Internal Controls Annual MLO Training & SAFE Act Compliance Loan Documentation for All Legal Entities Deposit Operations Year-End Wrap-Up & Update Auditing Call Reports: Compliance, Regulator Expectations & Best Practices When a Depositor Dies: Actions to Take, Mistakes to Avoid Executive Total Compensation: Strategies to Motivate & Incent the Right Behaviors Traditional & Roth IRAs Part B: Distributions, Taxation, Withholding & Penalties Auditing Consumer Real Estate Files Chapter 7 & 13 Consumer Bankruptcies: Special Rules, Cramdowns & Risks BSA Officer & Staff Year-End Wrap-Up Taking the Mystery Out of Loan Stress Testing Harnessing ITMs & VTMs: Risks, Implementation Considerations & Compliance Robbery: Plan, Prevent, Prevail The Board Secretary's Role: Organizing, Planning, Tracking & Maintaining Accurate Minutes Electronic Payment Fraud: When Is Your Institution Liable? ACH Disputes Part 1: Reg E vs. ACH Rules Before 60 Days 1 -OCT 1 -OCT 2-OCT 3-OCT 7-OCT 8-OCT 9-OCT 10-OCT 15-OCT 16-OCT 17-OCT 21 -OCT 22-OCT 23-OCT 24-OCT 29-OCT 30-OCT 31 -OCT x In partnership to grow Nebraska's community banks. BANK TRAINING WEBINARS Live & On-Demand Managing Loan Concentrations: CRE & More Lending Exam Targets Locked: Preparing Your TRID, Fair Lending & CRA Programs for Increased Scrutiny Form 1099 Reporting: Third-Party Vendors, Foreclosures, Debt Forgiveness & More Hottest IRA Issues: Reporting, Compliance & Required Minimum Distributions Legal Issues of Checks Consumer RE Appraisals: Ordering, Controls, Thresholds, USPAP Requirements & Compliance 10 Reg CC Myths Return to Sender: Selecting Relevant ACH Return Reason Codes When a Borrower Dies: Actions to Take, Mistakes to Avoid Corporate Tax Returns: Analysis, Limitations & Red Flags What Are the UDAAP Risks in 2025? ACH Disputes Part 2: Reg E vs. ACH Rules After 60 Days 4-NOV 6-NOV 7-NOV 12-NOV 13-NOV 14-NOV 18-NOV 19-NOV 20-NOV 21 -NOV 25-NOV 26-NOV
Check use has declined for years as consumers gravitate toward faster, more digital transactions. Yet despite the slow and steady phasing out of checks, the financial sector has seen a recent uptick in check fraud. FinCEN reported 680,000 instances of known check fraud in 2022, and those trends continued into 2023, with experts estimating a whopping $24 billion in losses. 40% of community bankers who responded to CSI’s 2024 Banking Priorities Executive Survey listed check fraud as one of the top types of fraud they encounter, only narrowly losing out to card and wire transfer fraud. Only half saw their prevention measures as very effective. Why is check fraud on the rise, and what can banks do about it? This article explores the problem and how positive pay can help stem the tide. Why is Check Fraud Increasing? Fraudsters have sought to manipulate paper checks for about as long as checks have existed, but recent years have seen a surprising increase in fraud with a modern twist. For many, the resurgent trend became most evident during the distribution of COVID-19 relief checks, as fraudsters exploited the confusion and emotion of the moment. But it didn’t stop there, as check fraud has spread to areas like social security checks, unemployment benefits, paychecks and more. Fraud in particular domains will inevitably increase when there aren’t enough safeguards to prevent it. In addition, instances of fraud tend to grow when the economy begins to dip or enter uncertain territory, like throughout a pandemic or times of intense inflation. Although check use has decreased, the average dollar amount of the typical check has increased and is often used for more considerable expenses like paying employees or bills. So, it’s a ripe opportunity for fraudsters to make more in a shorter period. How Can Banks Prevent Check Fraud? As with all forms of fraud, the best defense against check fraud is staying alert and knowing the signs. For instance, consumers may be less inclined to mail a check if they are aware of the risks. They may be less likely to rely on checks altogether if they have the technology, training and convenience to pay another way. However, education isn’t limited to customers. Bank personnel should be better trained to spot bad checks. If they know some red flags, they will be better equipped to prevent them. Similarly, some tellers may need to say no when a pushy fraudster (under the guise of a dissatisfied customer) urges them to overlook red flags. Technology can also help in the constant effort to prevent fraud. For instance, an institution can update its remote deposit capture solution to enable real-time updates and alerts to its fraud team. Data visibility can help ensure bad checks are stopped, and good ones aren’t cashed multiple times. Implementing positive pay is another critical strategy. What is Positive Pay? Positive pay is an optional feature that banks can add to their existing core banking platform that tracks the checks issued and paid on selected commercial accounts, or the bank’s official checks account. It helps detect fraudulent checks by comparing ones to be cashed with ones already issued in the system and a predetermined set of parameters. It’s also a form of insurance against fraud, losses and other liabilities to an institution. The system compares the account number, check number and dollar amount of each check presented against a list provided by the company to protect against forged, altered or counterfeit checks. Payee names may also be included on the list of issued checks. If the payee’s name from the check image does not match the payee’s name from the issued check file, exceptions can be generated. When the information doesn’t match the check, the bank notifies the customer through an exception report, withholding payment until the company advises the bank HOW POSITIVE PAY HELPS FIGHT CHECK FRAUD By Jason Young, Senior Director of Enterprise Banking, CSI NEBRASKA INDEPENDENT BANKER 11
to accept or reject the check. The bank can also flag the check, notify a representative at the company and seek permission to clear it. Positive pay adds a layer of security by requiring verification of key details, minimizing the risks of unauthorized or altered checks being paid. For instance, altered checks will typically be entered outside the account-specified parameters with different names or amounts. Exploring How Positive Pay Detects Check Fraud Positive pay evaluates checks for various discrepancies that may indicate a fraudulent check. In general, the system looks for exceptions like: • Paid Not Issued Item: The check number of the paid item does not match any issued item that was uploaded. • Duplicate Check Number: Two or more paid items have the same identification number. • Mismatched Account: The amount of the paid item does not match the amount of the issued item. This could indicate a counterfeit check wherein the amount was fraudulently altered. • Voided Item: A paid item matches an issued item marked as void and should not have been paid. • Payee Name Mismatch: The payee’s name from the check image does not match the name provided in the issued check file. • Stale Checks: The check was not cashed within the days to post specified in the account options. • The Amount Exceeds The Limit: The check exceeds the dollar amount defined in the account options. • Low/High Check Number: The check number of the paid item is lower or higher than the check number range defined in the account options. Sometimes, a flagged item may result from an error, like a misread check or incorrectly entered information. If a check gets flagged, the amount is correct and the check is legitimate, the institution or their customer can approve the exception. What Accounts are Eligible for Positive Pay? Positive pay can be offered to any demand deposit account, making it a versatile solution for financial institutions and their clients. While it can be implemented across a range of accounts, accounts with large balances and a high volume of transaction activity will benefit the most from the service. Institutions may find positive pay especially beneficial for corporate, commercial and multiple cash management customers, as these entities often engage in a significant volume of check-based transactions. Keeping Up with Current Trends The surge in check fraud will likely dwindle as check use continues to phase out of practice. In the meantime, a healthy mix of education and well-implemented technology makes a significant difference. Bankers everywhere should continue to keep an eye on these fraud trends for years to come. Want to know what else is on bankers’ minds this year? Scan the QR code to read CSI’s interactive 2024 Banking Priorities Executive Report. Positive pay can be offered to any demand deposit account, making it a versatile solution for financial institutions and their clients. https://www.csiweb.com/docs/banking-priorities-2024/ 12 NEBRASKA INDEPENDENT BANKER
We Want to Feature You in Our Next Issue of The Nebraska Independent Banker! The Banker Showcase shines a light on those employees that make a difference. To be featured, please email Dexter at dexter@nicbonline.com. Member FDIC Traci Oliver Eric Hallman Tara Koester Bankers’ Bank of the West We champion Community Banking bbwest.com | 800-873-4722 www.bbwest.com YOUR NEBRASKA RELATIONSHIP MANAGERS As a bankers’ bank we strive to help with every level of service and expertise. That is why we service anything from loan participations, merchant services, ATM/debit and much more, because we aim to answer your questions with, “…yes, we can do that too!” NEBRASKA INDEPENDENT BANKER 13
There are a whole lot of anomalies in community banking in the waning stages of this restrictive Fed cycle. One of the overriding themes is the sheer duration of the process. We’re now fully one year past the last tightening, which has left the effective overnight rate at 5.375% since July 2023, and given rise to the “higher for longer” sound bite. The past six tightening cycles have averaged well under a year between the last hike and the first ease. We will be soon approaching another record: the longest-ever pause between the last hike and the first cut is 15 months, from June 2006 to September 2007. There are myriad implications on community bank operations from this year-plus hibernation. Being a representative of the broker-dealer industry, I’d like to point out the attractive yields available in most any investment sector that banks care about. Baked into this decadent batter, however, are three obstacles for portfolio managers. Hills To Climb The first is this persistently inverted yield curve, which is now more than 2 years old. This makes decision-making dicier: Extend, and forego current income for future total return benefits, or stay short and invest at today’s higher yields, and accept some reinvestment risk? There are a whole lot of anomalies in community banking in the waning stages of this restrictive Fed cycle. The Meek … Inherit a Prominent Place in Bond Portfolios By Jim Reber, President and CEO, ICBA Securities The second is the still-to-be-determined outcome of the great deposit shuffle, which really began with Silicon Valley Bank’s demise in March 2023. The disintermediation of core deposits continues. Many community banks have, for the first time ever, entered the brokered deposit market. FHLBank system advances nearly tripled between March 2022 and March 2023, from $375 million to $1.04 trillion. The third is the hefty unrealized losses as quantified in the AOCI account at virtually all depositories. As of the end of June, those losses are still in the neighborhood of 12% of face value. This number has actually gotten a bit worse since the Fed hit the pause button, as yield spreads have remained historically wide and the effect of the inverted curve has taken root. Simply Elegant Here’s what estimable investment managers have noticed: It can pay to rid oneself of option risk. That’s a complicated way to say that the simplest bonds may have the best relative value in mid-2024. So far this year, a large percentage of bonds purchased by community banks have been treasury and non-callable (“bullet”) agencies. This may be the first year in a generation for high-performing portfolios to hold more treasuries than municipal bonds. The current appeal of treasuries and agencies is due to the nominal yields, which investors sense may be short-lived. Add to this the lock-in benefits of a bond that cannot be redeemed early, and you’ve got a winner. 14 NEBRASKA INDEPENDENT BANKER
Many portfolio managers are building in some future ability to swap out of these highly liquid instruments for others with better market yields once the yield curve assumes its normal shape. Also, munis continue to be prohibitively expensive for C corporations. Investment grade tax-frees trade at levels that are “through the curve” (i.e., lower than treasuries) for most maturities out to 10 years. Born To Run Mortgage-backed securities (MBS) continue to play a significant role for community bank balance sheets. In aggregate, MBS still comprise the majority of all positions in bond portfolios. The runup in their sector weightings took place between 2019 and 2021, and as a group their unrealized losses are well over 10%. Those positions are paying down at a torturously slow pace as new mortgage rates remain elevated. Still, their appeal in the current market stems from the ready supply of product at prices deeply discounted to par. One day, there could be an acceleration of refinance activity, and MBS with purchase prices in the mid-to-low 90s will show a big bump in book yields if mortgage rates drop 200 basis points (2%). A popular example is the “Hybrid ARM.” Hybrids are issued by your favorite government sponsored enterprises (GSE), namely Fannie Mae, Freddie Mac and Ginnie Mae. They have 30-year amortization periods, and a fixed rate period between three and 10 years that you can pick. After the “roll date,” the remaining face value will float annually. And this: they’re available at well over 5% yields, and no premium risk. Best News Yet We have established that the highest-yielding bond portfolios have a healthy dose of the most simplistic bonds. What else is a departure from convention is that the shorter the collection of investments, the better the performance. According to Stifel, as of June 30, the top quartile portfolios have an effective duration of only 3.5 years. The bottom quartile’s duration is a full year longer and has tax-equivalent yields that are exactly one-half of the top 25%’s: 3.87% versus 1.94%. There will be a day when investment fundamentals will normalize. Positively-sloped curves, for example, will force managers onto a different branch of the decision tree. However, for the time being, less is more, and simple delivers relative value. NEBRASKA INDEPENDENT BANKER 15
RISKS OF USING AI IN BSA/AML COMPLIANCE By Sharvelle Washington, Assistant Vice President, Compliance & Risk, Bankers’ Bank of the West A rtificial Intelligence (AI) is transforming the banking industry, including compliance with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. While AI offers significant advantages, such as enhanced efficiency and improved detection of suspicious activities, it also introduces unique risks. We will explore these risks and provide insights into how community banks can manage them effectively. Understanding the Role of AI in BSA/AML Compliance AI technologies, such as machine learning and natural language processing, enhance BSA/AML compliance by: • Automating Transaction Monitoring AI processes vast amounts of transaction data to identify patterns indicative of money laundering. • Customer Due Diligence (CDD) AI streamlines the CDD process by quickly analyzing customer data and identifying high-risk individuals. • Fraud Detection AI systems detect anomalies and flag potentially fraudulent transactions more accurately than traditional methods. Key Risks of Using AI in BSA/AML Compliance While AI offers many benefits, it also comes with significant risks: • Regulatory Uncertainty The use of AI in compliance is a relatively new area, and regulatory frameworks are still evolving. This uncertainty can create challenges for community banks in ensuring that their AI-driven compliance programs meet current and future regulatory requirements. • Lack of Transparency AI systems, especially those using complex machine learning algorithms, often operate as “black boxes” with decision-making processes that are not easily understood. This lack of transparency can make it difficult for compliance officers to explain and justify the AI’s decisions to regulators and stakeholders. • Data Privacy and Security AI systems require large volumes of data to function effectively. Managing and protecting this data is crucial, as any breach could lead to significant privacy violations and regulatory penalties. • Over-Reliance on Technology While AI can significantly enhance compliance efforts, over-reliance on technology without adequate human oversight can lead to missed risks. Human judgment is essential to interpret AI findings and make informed decisions. Managing AI Risks in BSA/AML Compliance To effectively manage the risks associated with AI, community banks should implement strategies to mitigate or reduce the associated risks: • Staying Well-Informed of Regulatory Changes Regularly monitor regulatory developments related to AI and BSA/AML compliance. Engage with regulators to understand their expectations and ensure that your AI systems meet compliance requirements. • Enhancing Transparency Utilize AI explainability tools to understand and articulate how AI systems make decisions. Maintain thorough documentation of AI models, including their design, data sources and decision-making processes. • Ensuring Data Privacy and Security Encrypt data both in transit and at rest to protect it from unauthorized access. Implement strict access controls to ensure that only authorized personnel can access sensitive data. • Maintaining Human Oversight Implement a “human-in- the-loop” approach where human experts review and validate AI-generated alerts and decisions. Train compliance staff on how to effectively work with AI systems and interpret their outputs. Conclusion AI holds great promise for enhancing BSA/AML compliance but also introduces significant risks that need careful management. By understanding these risks and implementing robust risk management strategies, community banks can leverage AI to strengthen their compliance programs while safeguarding against potential pitfalls. This article is based on discussions with compliance officers and research conducted across the U.S. over the past year. 16 NEBRASKA INDEPENDENT BANKER
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 BUILD YOUR BRAND, CONTACT US TODAY! (855) 747-4003 | sales@thenewslinkgroup.com NEBRASKA INDEPENDENT BANKER 17
NICB ENDORSED PARTNERS • Bankers Compliance Consulting — Dave Dickenson • Barret Graduate School of Banking — Memphis, Tennessee • Community Bankers Webinar Network — Financial Ed • Dell Computers • ICBA Securities — Jim Reber • ICBA Bancard • NICB-CBAK Liquidity Program • SHAZAM — presented last year at Area Meetings • Spectrum Financial — Fee Income with Credit Insurance Products/Services, Identity Theft Program, Flood Determinations — Scott Votava • Travelers Insurance • UNICO Group — Diana Poquette • The Advantage Network • BancMac • Bankers’ Bank of the West • Bankers Compliance Consulting • Bankers Healthcare Group • Barret Graduate School of Banking • Bell Banks • BKD LLP • John E. Cederberg, CPA • Central States Health & Life Co. • CivITas Bank Solutions • Computer Services Inc. (CSI) • Cross Financial • D.A. Davidson & Co. • FIPCO — Compliance • Federal Reserve Bank of K.C. (complimentary) • FHLBank Topeka • FNB Omaha Correspondent Banking • FIPCO • First National Capital Markets • FPS Gold (Core) • ICBA Bancard & TCM Bank • ICBA Securities • ICBA • ITPAC Consulting LLC (IT audits) • Kirk Gross Company • Labenz & Assoc. LLC (CPAs) • Maple Street Inc. • Midwest Independent BankersBank • Modern Banking Systems • Money Handling Machines Inc. • NFP Executive Benefits • Perry, Guthery, Haase & Gessford PC LLO • Purple Wave Auction • QwickRate • RESULTS Technology • Scantron Technology Solutions • SHAZAM • Spectrum Financial • Taylor and Martin Appraisal Services • Travelers Companies Inc. • UMB Bank N.A. • UNICO Group • United Bankers’ Bank ASSOCIATE MEMBERS 2024 SOCIAL ENGINEERING NETWORK MONITORING BY COMMUNITY BANKERS FORCOMMUNITY BANKS CivITas Bank Solutions was born from the needs voiced by community banks for affordable real-world technology and information security solutions. Anne Benigsen President David Philippi VP - Business Development Chris Tuzeneu VP – Information Security PENETRATION TESTING VULNERABILITY SCANS info@acivitas.com www.acivitas.com 18 NEBRASKA INDEPENDENT BANKER
1201 Lincoln Mall, Ste. 103 Lincoln, NE 68508 This magazine is designed and published by The newsLINK Group LLC l (855) 747-4003 Complete Coverage for Banking Institutions Diana Poquette Commercial Risk Advisor 402.499.1011 dpoquette@unicogroup.com Covering all of Nebraska, Kansas and Missouri Property & Casualty Financial Institution Bonds Cyber Risk Directors & Officers General Liability Commercial Property Umbrella Liability Workers’ Compensation Social Engineering Extended Coverage Enhancements No Annual Forms Updated Benefits and Enhancements Dependent Business Interruption Cyber Extortion Broad Form With Regulatory Coverage 3 Year Policy Savings Employment Practices Liability Bankers Professional Liability
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