Pub. 12 2022 Issue 2

BANKER THE ARIZONA OFFICIAL PUBLICATION OF THE ARIZONA BANKERS ASSOCIATION PUB. 12, 2022 ISSUE 2 Banking Video Surveillance Provides Retail Analytics, Falls Under IT Page 22 2022 Colorado & Arizona Banker Summit Page 8

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GET THE SHIELDCANNABISBANKINGPLAYBOOK: ShieldBanking.com/cannabis-banking-playbook To ensure the processes, procedures, technology, and trained staff are in place to serve this industry, bankers need to start with a plan. Having a clear understanding of what is required to serve cannabis businesses and minimize risk to the financial institution will help bankers prepare for the upfront costs associated with cannabis banking and develop the policies and procedures needed to hit the ground running. With regulations varying from state to state, it’s a complex industry with high costs, requiring a considerable investment of time and energy. Compliant banking operations require continuous enhanced due diligence to help guard against risks such as: A Robust Illegal Market. According to New Frontier Data, the legal cannabis market in the U.S. is expected to reach $41 billion by 2025. Unfortunately, the illicit market, valued at $65 billion by some estimates, is shrinking at a slower pace. Financial institutions must ensure that funds coming through their doors are from legal channels. Bad Actors. To ensure bad actors are not attaching themselves to good businesses, enhanced due diligence conducted around underlining beneficial owners will continue to be at a heightened level for the foreseeable future. Legacy Cash. Because the cannabis market existed as a cash business long before legalization and because the industry continues to operate largely as a cash business, a strong BSA/AML programwill help ensure that funds coming into the financial institution are from legal cannabis operations. While the added burden and cost associated with serving this industry may limit the total number of participants in the short term, we expect competition from financial institutions to steadily increase as more states launch legal programs and we get closer to federal recognition. Financial institutions that invest in technology to improve efficiencies and lower costs today will be able to scale as the industry grows and have a competitive advantage when the economics of the industry change over time and new banks and credit unions enter the market. Informed by the experiences of pioneering bankers across a growing number of states with legal medical and adult-use programs, the Shield cannabis banking playbook defines a path forward for financial institutions to serve cannabis-related businesses compliantly while benefiting from the financial rewards of this market. The emerging legal cannabis industry brings significant growth potential, alongwith challenging operational demands and complex regulations. But cannabis banking does not have tomean high-risk banking. Build aWinning Cannabis BankingProgram Cannabis banking, simplified. Shield Compliance transforms how financial institutions manage risk, comply with regulations, and address the operational demands of the legal cannabis industry. Compliance management for financial institution daily operations, including case management and automated reporting. Informed account application process for underwriting and onboarding cannabis business accounts. Compliant mobile payment and payroll solutions to reduce cash transaction dependency. See how Shield Compliance is helping financial institutions earn the benefits of a compliant cannabis banking program. info@shieldbanking.com (425) 276-8235 GET IT TODAY GET THE GUIDE TO COMPLIANT CANNABIS BANKING

Paul Hickman CEO & President Steven Killian Director of Government Relations Kerensa Williams Chief Operating Officer William Ridenour General Counsel 111 West Monroe, Suite 440 Phoenix, Arizona 85003 Phone: (602) 258-1200 2022 AZBA BOARD OF DIRECTORS AND STAFF AZBA STAFF INTHIS ISSUE @2022 Arizona Banker Association (AzBA) |The newsLINKGroup, LLC. All rights reserved. The Arizona Banker is published four times each year by The newsLINKGroup, LLC for AzBA and is the official publication for the association. The information contained in this publication is intended toprovidegeneral information for reviewand consideration. The contents donot constitute legal advice and shouldnot be reliedonas such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your specific circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the association, its board of directors, or the publisher. Likewise, the appearance of advertisementswithin this publication does not constitute an endorsement or recommendationof anyproduct or service advertised. TheArizonaBanker is a collectivework, andas such, some articles are submittedby authorswhoare independent of AzBA.WhileAzBAand thenewsLINKGroup 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 newsLINK Group at 855-747-4003. EXECUTIVE COMMITTEE Jack Barry Immediate Past Chairman Enterprise Bank & Trust Brian Schwallie Chairman U.S. Bank Scott Vanderpool Chairman-Elect Bank of America Don Garner Vice Chairman & Secretary Western Alliance Bank Bo Hughes Treasurer Canyon Community Bank DIRECTORS Bill Callahan Arizona Bank & Trust Neal Crapo Wells Fargo Kevin Cutter Pacific Premier Bank Wayne Gale 1st Bank Yuma Joel Johnson FirstBank Kyle Kennedy Bell Bank Brad Parker PNC Bank Dave Ralston BOK Financial Steve Richins Comerica Bank Tyson Rigby JPMorgan Chase Brian Riley Foothills Bank Brian Ruisinger Republic Bank of Arizona Dina Ryan Citigroup Patrick Strieck BMO Harris Bank Chris Webster Commerce Bank of Arizona Mark Young National Bank of Arizona Michal Plavecky Executive Administrator 6 Rethinking “The Great Resignation” 8 2022 Colorado & Arizona Banker Summit 10 Under the Copper Dome 12 In the Weeds and Standing Tall ASCPA’s Cannabis Special Interest Section — The Year in Review 14 2022 Financial Services Outlook: Trends, Challenges, and Opportunities 20 How Innovative Solutions from BHG Financial Can Help Community Banks Thrive in the Digital Age 22 Banking Video Surveillance Provides Retail Analytics, Falls Under IT 24 Lending at the Intersection of Mission, Technology, and Heart: DreamSpring Earns Innovation Award for Advancing Equity Through Entrepreneurship 26 Leadership Tips: Choosing the Right Products & Services

equipls.com I 480-443-8984  Structure: Your bank might be limited in what it can offer when it comes to unique financing terms. We get that. ELS has over 30 years of experience in providing customized funding options. Whether your customer needs a lease or a finance agreement, ELS has the ability to be flexible and competitive.  Credit Quality: Does your customer lack the sophistication, time in business or struggle to meet your covenants? Because we have our own capital ELS can provide permanent financing putting your customer in the best possible situation for success.  Collateral: As an independent lender/lessor, ELS is flexible enough to deliver our products to virtually any business. ELS can provide solutions for every industry from aircraft to IT.  Size: Have you met your lending limit with one of your better customers? Or perhaps it ’s a small request from a longtime prospect and it ’s time to get your foot in the door. As a niche lender we can provide fast solutions for smaller requests or aggressive terms of any size for your creditworthy clients. Areas where ELS has expertise navigating obstacles Putting the financial pieces together for your bank’s customers. EQU I PMENT LEAS I NG s e rv i ce s . l . l . c .

6 www.azbankers.org Rethinking “The Great Resignation” By Rob Nichols American workers are quitting their jobs in record numbers — leading economists and pundits to dub the period we’re currently living through “The Great Resignation.” According to the Society for Human Resource Management, employees exited their jobs in record numbers over the 10 months between March and December 2021, and the Federal Reserve continues to report ongoing labor shortages nationwide. As of February, there were 11.3 million job openings in the U.S., according to the Labor Department. For many workers, the pandemic prompted the desire to change jobs or careers — a massive period of upheaval that led them to rethink what they wanted and needed in terms of work/life balance, job satisfaction, benefits, and more. But that’s left employers scrambling to fill multiple vacancies and shone an exceptionally bright spotlight on the need to have a strategy in place for recruitment, retention and talent management. The Great Resignation is affecting businesses of all sizes across all industries — and the banking industry is certainly no exception. While some of you may be feeling uneasy about the state of your own workforce, I submit that this is actually a time of great opportunity — because while a lot of people are leaving their jobs, it’s a signal that many talented employees are also looking for jobs and are open to career changes. That’s an opportunity that our industry can’t afford to miss. To help more talented and diverse individuals find their future in banking, ABA is partnering with more than 30 state bankers’ associations and pooling our resources to enhance Bank Talent HQ (www.banktalenthq.com) — the nation’s single best source for banking jobs. Bankers can use Bank Talent HQ to post new job openings, and job seekers will use the platform to find great opportunities in banking. ABA will be busy sharing the real stories of dedicated employees in banking today. One of the things that make our industry so attractive to prospective hires is the incredible range of opportunities that can come with a career in banking. Banks need marketers, IT experts, programmers, data wizards, cyber pros, compliance experts, and human resources gurus — not to mention all the important positions people have long associated with banking, like loan officers or tellers. Bank Talent HQ will help connect more qualified people with our industry and the exciting career path that awaits them in banking.

7 PUB. 12 2022 ISSUE 2 As a corporate trustee, it is our duty to be objective and free up families from the burden and conflicts that arise in dealing with family trust and estate matters. We work with your customers’ investment advisor Josh Moore, M.S. Trust Officer Hannah Malinski, J.D. Trust Officer Rachel Zaslow, J.D. Trust Officer Dave Long, J.D. VP and Branch Manager INDEPENDENT CORPORATE FIDUCIARY ziatrust.com 602.633.7999 The Great Resignation has also prompted many banks to reconsider their benefits offerings. If you’re looking for a way to bring young talent in the door to stay, one strategy I highly recommend is to offer some form of student loan repayment assistance. It’s something we’ve tried at ABA with great success, and in my view, it’s one of the ways banks can distinguish themselves as some of the best employers in the job market. If your bank isn’t offering a student loan repayment option, I encourage you to explore the possibility with your HR director. These programs can be tailored in virtually any way to support your organization’s talent acquisition and retention strategy. The reality is that many young people today are graduating college with the equivalent of a small mortgage worth of student debt. That is a tremendous burden, and stepping up to help your workers tackle this debt can set your bank apart both in recruitment and retention. Beyond offering perks, talented professionals also need ample opportunities to advance within the organization, hone their skills or explore new areas of interest. ABA offers a wide range of online training, continuous learning and certification programs for bankers at all levels of their careers. (You can check out all of these offerings at www.aba.com/ DevelopTalent.) We also support up-and-coming bank talent through our Emerging Leaders Open Committee and our Email Rob at nichols@aba.com. Cultivating the next generation of bank talent is essential to ensuring the continued viability and vitality of our industry. new Emerging Leader Awards, which recognize the next generation of high achieving bank leaders. Cultivating the next generation of bank talent is essential to ensuring the continued viability and vitality of our industry. At ABA, we are committed to bringing you the tools and resources you need to navigate the Great Resignation— and come out on top in the search for talent. w

8 www.azbankers.org 2022 Colorado & Arizona Banker Summit

10 www.azbankers.org By John Fetherston, Director, Veridus Under the Copper Dome In a distinct echo of last year, the 2022 legislative session passed 120 days with no end in sight. While some of the session’s major issues have been resolved — Prop 208 was declared unconstitutional, the Aggregate Expenditure Limit was increased, and the 2.5% flat tax was reaffirmed by the Arizona Supreme Court — the enormous budget surplus remains and so do the disagreements on how to spend it. Since January, the state’s budget surplus has only gotten more immense. What started as a projected $3.2 billion ending balance has grown to closer to $5 billion, with $1.3 billion in ongoing spending ability. While this may seem like a good problem to have, the divided nature of the majority caucuses coupled with their razor-thin margins has made budget negotiations difficult. Many Capitol observers believe that the only path to an agreement will include engaging with Democratic legislators and building a truly bipartisan budget. So far, the 2022 legislative session has been a challenging one for the business community and particularly the financial services industry. While the Arizona Bankers Association has been able to get some important legislation passed and signed, much of this session has been dedicated John Fetherston, Director, Veridus to playing defense against bills attempting to regulate the activities of private businesses. In the proactive column, the Legislature passed, and the Governor signed SB 1363, AzBA’s bill to bring additional certainty to Arizona’s Foreign-Country Money Judgments Recognition Act. By ensuring the Act includes a savings clause, SB 1363 maintains Arizona’s position as a great place for companies from around the world to do business. AzBA also continues to advocate for action to address the state taxation of FDIC premiums that resulted from conforming to the Tax Cuts and Jobs Act. The request is for this fix to be included in the enacted fiscal year 2023 budget. On the defensive side, the Arizona Bankers Association has been actively opposed to efforts to regulate bank activities relating to firearms and ESG policies. HB 2473 is Representative Frank Carroll’s legislation that prohibits the state fromdoing business with any bank that “discriminates” against firearms-related business, while Representative Jake Hoffman has run HB 2637 to prohibit Arizona banks from “discriminating” based on environmental, social or similar values-based criteria. Despite violating basic small-government, free-market principles, both measures have seen significant Republican support due to concerns about cancel culture and a perceived bias from financial institutions towards conservative causes. AzBA has worked closely with pro-business legislators of both parties to keep the bills from moving forward. At the time of this writing, both measures are being held and do not have the votes to pass. The Legislature must pass a budget by the end of the fiscal year on June 30th. Right now, it feels like this year will mirror 2021 and the session will run right up until that deadline. But this is an election year, and many legislators have primary elections to worry about; early ballots are mailed on July 6th, after all. Perhaps this pressure will be enough to keep folks at the negotiating table and adjourn sine die a little more quickly than last year. w

Covid-19 has accelerated the move to electronic payments. There is less need for bricks-and-mortar banking as account holders can complete just about any transaction online. To stay competitive—and retain customers— banks need to find ways to compete effectively with non-bank fintechs, large regional banks and large credit unions. The challenge in everything is to find business partners that offer leading edge technologies and share common goals. When you choose United Bankers’ Bank as your partner, you gain access to background systems that support your business. UBB’s operations team manages a full gambit of payment types for its community bank customers. Through our biometric fingerprint secured UNET system, we run ACH transactions as well as both domestic and international wires. Collectively, our operations and payments teams have more than 425 years of experience in banking, payments and operations. This allows community bankers to focus resources on their customers. By offering instant payments, banks can capture deposits currently held in fintech payment system wallets. First for your Success is the guiding principle for what we do. As the nation’s first bankers’ bank, we were founded by community bankers who pioneered the bankers’ bank model. We’re a full-service bankers’ bank offering the resources and support community banks need to compete, succeed and remain community based. Our business is built on relationships with community banks and the pledge that we will never compete against them. UBB’s operations team manages a full gambit of payment types for its community bank customers. Visit: www.ubbpayments.com Call: 952-885-9461 1650W 82nd Street Suite 1500 Bloomington, MN 55431 Contact: mary.williams@ubb.com FACES OF INSTANT PAYMENTS Mary WIlliams, Executive Vice President, Chief Operations Officer; Paul Rogers, Vice President, Strategic Project Management; Ria Maharaj, Vice President, Operations Manager; and Cassie Orloske, Data Controller and Operations Support Officer.

12 www.azbankers.org The Cannabis Special Interest Section was formed to bring education and information to Arizona CPAs to better serve clients while protecting the public in this burgeoning cannabis and hemp industry. Research shows that in 2021, Americans purchased $24.6 billion worth of cannabis products, a 34% increase over 2020.1 This year the U.S. legal cannabis market is expected to grow by a rate of 18% to $29.2 billion. Analysts forecast that the following states will experience high growth in cannabis sales in the coming year: Arizona (20%), Florida (38%), Pennsylvania (57%), Illinois (58%), and New Jersey (74%). For Arizona, the addition of adult-use sales gave the state’s overall cannabis market a 31% boost over 2020. Arizona’s licensed adult-use stores andmedical dispensaries sold a total of $1.35 billion in cannabis products in 2021, $320million more than the state’s medical-only dispensaries sold in 2020.2 Medical Marijuana Program According to reports filed by the Arizona Department of Health Services (ADHS), Arizona medical marijuana stores sold 147,942 pounds of product in 2021 compared to 211,557 pounds of product in 2020 and 165,722 pounds sold in 2019. According to the Arizona Department of Revenue’s (ADOR) Office of Economic Research, medical marijuana retail sales for 2021 were $758.5 million with total sales tax collected of $63.5 million. As of February 2022, there were 268,309 medical marijuana active cardholders of which 244,523 are qualifying patients. The number of qualifying patients decreased by 19% from February 2021. Adult Use In April 2021, the ADHS awarded 13 new adult-use cannabis retail licenses across eight rural counties. In December 2021, in a transaction facilitated by Highway 33 Capital Advisory, the license was sold, establishing a benchmark for these rural cannabis retail licenses.3 According to ADOR’s Office of Economic Research and Analysis, total adult-use marijuana sales reported, and transaction privilege tax (TPT) and excise taxes collected in 2021 In the Weeds and Standing Tall ASCPA’s Cannabis Special Interest Section —The Year in Review By Josephine Giordano, CPA, ABV, CFE, CFF, CBA, ASA, CDBV, CIRA, CICA, CTP, CCCE were $594,449,941, $50,069,473 and $104,137,763, respectively. Job Growth According to the Leafly Job Report 20224, the legal cannabis industry added 107,059 new jobs in the U.S. in 2021 compared to 77,300 and 32,700 jobs in 2020 and 2019, respectively. Arizona ranked eighth (23,333 jobs) out of the top ten states by cannabis-related jobs as of January 2022. Arizona added approximately 2,600 jobs in 2021. Social Equity Program In December 2021, regulators in Arizona began taking applications for social equity cannabis retail licenses despite ongoing lawsuits seeking to stop multistate marijuana operators from getting the permits. The deadline for would-be applicants to submit the required paperwork was December 14.5 Arizona marijuana regulators received more than 1,500 applications from cannabis entrepreneurs hoping to win one of the 26 highly coveted social equity permits that were up for grabs via lottery in spring 2022. The lottery took place on April 8, 2022. 280E Updates In 2021, over 200 pages of internal documents were released by the Internal Revenue Service (IRS). According to the Marijuana Business Daily, “IRS audits of marijuana businesses have generated far more in unpaid taxes, or revenue, per hour for the agency than audits of mainstream industries.” These documents, which are a must-read for all CPAs, include a participant guide, IRS reference guide, training presentations and audit project documents.

13 PUB. 12 2022 ISSUE 2 Testing/Product Recalls In June 2021, ADHS issued a voluntary cannabis product recall related to a lab’s testing of possible product contamination. According to azcannabisbisnews.com, the lab indicated that the voluntary recall was not the result of any wrongdoing by the products, dispensaries, or brands, but rather an audit-based testing discrepancy between the lab and ADHS. In December 2021, the Medical Marijuana Testing Advisory Council issued its findings and recommendations.6 In February 2022, Arizona regulators sent notices of intent to revoke the licenses of two marijuana testing laboratories for allegedly using procedures that could inflate product potency results. The two labs disputed the findings but have settled or plan to settle with regulators, the Arizona Republic reported.7 M&A Activity Merger and acquisition activity was on the rise in 2021, with almost 3.5 times as many transactions through Dec. 17, 2021 (306 transactions), as during the same period in 2020 (86 transactions). Public companies were buyers in 86% of the deals. That included 209 in the U.S. totaling $10.1 billion in value8 Arizona has certainly had its fair share of transaction activity in 2021. Banking Update According to the Whitney Economics U.S. Cannabis Business Conditions Survey, the lack of access to banking and financial services is one of the main key issues hindering the cannabis market growth. The Secure and Fair Enforcement, or SAFE, Banking Act says federal banking regulators cannot penalize depository institutions for providing banking services to cannabis-related businesses. Championed by Rep. Ed Perlmutter, D-Colo., the House of Representatives has passed the measure six times, most recently in February 2022, before seeing it stall out in the Senate the previous five times.9 Hemp Update In January 2021, the USDA published its final regulations, which became effective on March 22, 2021, for the production of industrial hemp in the U.S. In February 2022, the U.S. Department of Agriculture issued the National Hemp Report. In 2021, the U.S. planted and harvested 54,152 and 33,480 acres, respectively, of industrial hemp. Colorado planted the most outdoor hemp last year, 10,100 acres, compared to Arizona’s 790 acres, but Colorado only harvested about a third of that, 3,100 acres. Montana harvested the most hemp last year, 4,500 acres.10 Most recently, the U.S. Department of Agriculture approved hemp production programs for Alaska, Josephine Giordano, CPA, ABV, CFE, CFF, CBA, ASA, CDBV, CIRA, CICA, CTP, CCCE is the National Cannabis Practice Leader and a Director in the Financial Forensics and Business Valuation Group of BeachFleischman PLLC, Chairperson of the ASCPA’s Cannabis Special Interest Section and author of ASCPA’s electronic newsletter’s Bud Brief. Ms. Giordano has extensive experience as a financial professional, with a diversified background in audit, banking, tax, business valuation, fraud investigation and forensic accounting, bankruptcy, restructuring and turnaround, expert witness, court appointments, and other litigation support services. She can be reached at jgiordano@beachfleischman.com or 602-792-5981. Arizona and Montana. Arizona’s newly approved hemp production plan allows producers to grow and sell new products, such as hemp baby greens commercially.11 Looking Forward Despite the multitude of challenges, Arizona continues to be a state to watch in 2022. As the industry matures and evolves, the economic impact is expected to materialize on both a local and national level. w 1 https://www.leafly.com/news/industry/ cannabis-jobs-report 2 Ibid 3 mjbizdaily.com 12-14-2021 4 https://leafly-cms-production.imgix.net/ wp-content/uploads/2021/02/13180206/LeaflyJobsReport-2021-v14.pdf 5 mjbizdaily.com 12/2/2021 6 https://azdhs.gov/documents/licensing/ medical-marijuana/testing-advisorycouncil/2021-medical-marijuana-testingadvisory-council-report.pdf?v=202110075 7 https://mjbizdaily.com/arizona-crackingdown-on-two-marijuana-testing-labs/ 8 https://mjbizdaily.com/marijuana-mergersacquisitions-sizzled-in-2021-and-poised-for-ahot-2022/ 9 https://www.spglobal.com/marketintelligence/ en/news-insights/latest-news-headlines/ cannabis-company-valuations-rise-as-usreform-efforts-accelerate-62416542 10 https://hempindustrydaily.com/behind-thenumbers-what-usdas-1st-hemp-survey-showsabout-the-industry/ 11 https://hempindustrydaily.com/usdaapproves-hemp-production-plans-for-alaskaarizona-and-montana/ The Secure and Fair Enforcement, or SAFE, Banking Act says federal banking regulators cannot penalize depository institutions for providing banking services to cannabis-related businesses.

14 www.azbankers.org Activity in the financial services industry in 2021 encompassed numerous trends, challenges, and opportunities. While conversations of digital assets dominated much of the first half of the year, environmental, social, and governance (ESG) initiatives later emerged as a top concern— serving as a reminder that shareholder and stakeholder interests aren’t necessarily one in the same. The Great Resignation and the related challenges of an ever-evolving working environment, organizational fatigue, the proliferation of fintech, supply chain issues, and housing matters were also major topics. Though the Current Expected Credit Losses (CECL) took a back seat for many in 2021, 2022 will likely see a flurry of activity no later than the second quarter in terms of accelerating readiness as organizations come to terms with adopting the standard—at least for those for which the standard will ultimately apply. Below, we look to 2022 and beyond with potential next steps organizations can take to prepare for changes related to the following trends: • ESG • Fintech: Non-digital assets • Digital assets • Remote work environment and culture • Mortgage banking • Tax update • Current Expected Credit Losses (CECL) Environmental, Social, Governance (ESG) Relevant Issues: ESG Best Practices As ESG initiatives gain traction, organizations slowly move past recognizing and understanding the need for ESG strategies to implementing best practices. 2022 Financial Services Outlook: Trends, Challenges, and Opportunities By Tullus Miller, Partner, Financial Services Practice

15 PUB. 12 2022 ISSUE 2 Financial services companies that have yet to define their ESG goals and objectives will need to undertake readiness assessments. Human capital, social, and governance matters will likely be a top priority. Evaluating an organization’s data inventory related to these areas can help serve as a cornerstone. Climate impact remains a complex factor for many organizations. The convergence of investor and consumer demand with the overarching possibility of mandated reporting for some companies will likely propel deployment of resources to advance corporate ESG programs. Next Steps: Each company is unique; there isn’t a one-size-fits-all solution. Align, Plan, and Execute No matter the size and scope of your ESG program, aligning goals and incentives, and correlating the framework to consistent ESG reporting, can help move you a step ahead. Your investors, customers, suppliers, and community all have a stake in your success. Your employees have both a stake and a responsibility to make these efforts impactful. Planning and insight, followed by execution, can help produce results for your institution. Fintech: Non-Digital Assets Relevant Issues: Investments and Regulations Global venture capital investment in fintech companies exceeded $200 billion in 2021.The pace of traditional nonventure capital investment is roughly as high as well. With such large amounts of capital invested, fintech companies are succeeding in challenging the traditional business models of old-line brick and mortar financial institutions. This results in a convergence of fintechs in the market that traditional banks serve. In addition, many fintechs service markets that traditional banks have been unable to service. Fintech companies in the Americas received roughly half of these investments, while companies in the rest of the world received the rest. Premoney valuations of fintech companies continue to increase substantially. Fintech companies are subject to various levels of regulation. The regulatory environment depends upon the jurisdiction in which each company operates. However, most regulators and governments around the world have been slow to keep up with the quickening pace of these companies’ activities. Next Steps: Prepare for Investment Growth The pace of investment in fintech companies isn’t expected to slow, at least in the short term. Consolidation and mergers and acquisitions (M&A) are expected to surge, some of which will be international. Fintech companies that focus in the cryptocurrency area are expected to continue their explosive growth. Digital Assets Relevant Issues: Reporting and Tracking Requirements The infrastructure bill attempts to redefine the definition of a broker. This could possibly push cryptocurrency exchanges like Coinbase and others to begin reporting 1099 information to the IRS on behalf of their customers, similar to requirements for traditional brokerages. That’s a starting point, but it will be difficult to assess what regulations will help track information without being overly burdensome to the cryptocurrency space and effectively slow down innovation. 1099 Tracking Some traditional rules will be hard to follow, especially in the decentralized finance (DeFi) space where customers interact directly with a protocol rather than a human service provider. Forcing 1099 tracking or Know Your Client (KYC) rules on these types of platforms may be a near impossible ask. If 1099 tracking is possible, it could be overly burdensome to the industry. Investors who buy and hold as a long-term investment may see similar treatment to buying and selling stock. Those who mine or stake cryptocurrency will likely end up with ordinary income treatment under Tax Notice 2014-21. No specific guidance currently exists for the treatment of non-fungible tokens (NFTs). Digital art purchases may be deemed to fall under the IRS’s definition of a collectible, which has an even higher tax rate than stock or other cryptocurrency if held long-term. Tracking Software Applications Those who trade cryptocurrency probably engage in numerous other activities in the DeFi space such as staking, liquidity pools, or yield farming. Many thirdparty cryptocurrency tracking software applications now exist to help aggregate and track various transactions, including activity on DeFi platforms and NFTs. Transfer of Funds from Banks to Cryptocurrency Exchanges The potential decline in customer deposits is a major issue the traditional banking sector faces. Customers are pulling out a percentage of, or in some extreme cases all, their funds from traditional banks and moving funds to centralized and decentralized cryptocurrency exchanges like Coinbase. Visa announced a new service to help banks determine how to provide services for cryptocurrency and digital asset holders. A Visa study also found that 40% of consumers who already own cryptocurrency would be Continued on page 16

16 www.azbankers.org willing to switch from banks to banks that offer cryptocurrency products. Next Steps: Watch for New Regulations The IRS will likely need to release further guidance. The amount of IRS examinations on cryptocurrency will likely expand with the Biden administration approving an increase in funding to the IRS and the creation of a new digital assets task force. Understand Tracking and Reporting of Digital Assets When you have discussions with your tax preparer, they will want to fully understand your activities. It’s highly recommended to have this information gathered prior to tax time, otherwise you could face a daunting task trying to track historical data and pull tax basis information. Tracking is necessary and important, as signified by the question on page one of Form 1040, requiring taxpayers to check a box if they sold or exchanged any cryptocurrency during the year. Many centralized and possibly even decentralized platforms that act as a medium of exchanging digital assets may suddenly be required to undergo information reporting, such as issuing 1099s similar to requirements for traditional brokerages. This may help alleviate the burden of taxpayers having to find third parties to help track their crypto transactions. The infrastructure bill also amended Internal Revenue Code (IRC) Section 6050i to also include digital assets.This means trades or businesses may now be required to include Form 8300 reporting if more than $10,000 of value in digital assets is exchanged.The prior version didn’t include digital assets. Remote Work Environment and Culture Relevant Issues: Technology, Productivity, and Mental Health Challenges Historically, the financial services industry has been one of the relationships built and maintained through face-to-face interaction. The impact of the COVID-19 pandemic greatly disrupted the industry and necessitated the restructuring of how professionals conduct business. Technology, productivity, and the mental health of teams remain among the biggest challenges as organizations continue in a remote work environment. Technology and Infrastructure While the economy is technologically progressive, the dispersion of teams due to COVID-19 requires managing and providing infrastructure for hundreds, if not thousands, of locations and people as opposed to the limited physical locations offices were typically grouped prior. This explosion of physical locations will continue to provide technical challenges for everyone moving forward. Productivity and Distractions Productivity is always top of mind for managers. The deployment of teams to a virtual workforce will continue to challenge the ability to maintain productivity at an acceptable level. Distractions such as shared workspaces with a significant other, roommate, or children and miscellaneous daily tasks and nonwork-related activities can erode productivity. Mental Health The impact of social isolation provides a major unseen challenge to all team members. Studies show everyone needs alone or downtime, but there can be significant side effects when this time isn’t wanted or is forced. These effects should be a top concern for managers as they may go unnoticed until something drastic happens. Next Steps: Analyze, Plan, Implement, Test, and Optimize Every process has a lifecycle. These phases include analyze, plan, implement, test, and optimize. For many years, businesses paid less attention to the test and optimize phases. Businesses that continue to deploy a remote work culture should Continued from page 15 continuously test, then strip down the process of how the business runs, to reanalyze and create a new plan and implementation of their workforce. A successful program starts with governance at the top and includes strategies to keep your workforce engaged and productive, as well as physically and mentally healthy. Mortgage Banking Outlook Relevant Issues: Housing Shortages, Supply Chain, and Appreciation The mortgage banking industry experienced another strong year in 2021. Historically low-interest rates allowed the refinance wave to continue. COVID-19-related legislative and regulatory action aimed at keeping homeowners in their homes largely succeeded. In a true testament to the industry, forbearance and delinquency rates continue to fall from 2020 peaks, highlighting the hard work of lenders to assist borrowers. Total mortgage originations for 2021 are projected to exceed $4 trillion, the second highest year on record, according to the Mortgage Bankers Association (MBA). A forecasted rise in rates for 2022 is expected to drive a purchase origination market. However, critical housing shortages, supply chain constraints, and home price appreciations are headwinds to growth in 2022. Mortgage Banking Industry Risks and Opportunities in 2022 and Beyond: Housing Supply and Price Appreciation U.S. housing market inventory levels are at historical lows. The MBA origination projections hinge on the ability to construct sufficient housing to meet the growing demand. Supply chain constraints coupled with labor shortages in the construction industry pose serious risks to constructing housing. These factors contribute to the significant home price appreciation experienced in the United States. Price appreciation presents a risk to growth as many buyers are firsttime home buyers.

17 PUB. 12 2022 ISSUE 2 An expected rise in rates due to Federal Reserve tapering may slow price appreciation, though additional housing is needed to calm price increases and stabilize affordability. Demographics Based on U.S. census data, millennials represent the largest demographic in the United States. The millennial cohort is entering their peak homebuying years and will likely fuel the purchase market moving forward. Servicing The Federal Reserve’s taper of bond purchases is generally expected to put upward pressure on mortgage rates. Mortgage lenders, who were able to retain servicing at historically low rates, are well-positioned to benefit as valuation increases, and extended cash flow provide a natural hedge to reduced production income. Technology Of the nonbank mortgage companies completing initial public offerings (IPOs), many referenced their investment in technology as a core strength. Fintech companies emerged on the scene with innovative ideas aimed at improving the customer experience while driving down delivery costs. Into 2022 and beyond, expect to see continued investment in technology that leverages data and automation to innovate and connect with consumers. Private Label Securitization Agency mortgage-backed securities (MBS) continue to dominate securitization volume; however, recent data from the Urban Institute indicates a rise in non-agency MBS. A jumbo mortgage exceeds the governmentsponsored enterprise (GSE) conforming loan limits; a larger share of mortgages qualifies as jumbo as prices rise. The private-label securities (PLS) market presents an opportunity for nonbank lenders as banks look to grow loan portfolios amid a rise in deposits. Regulatory Roundup Suspension of the Federal Housing Finance Agency’s adverse market fee adjustment may prove a welcome sign of recovery. The Biden administration, however, paused talks about ending GSE conservatorship. Under new leadership, the Consumer Financial Protection Bureau (CFPB) is prioritizing fair lending and racial equality. The CFPB’s pricedbased qualified mortgage (QM) loan definition became mandatory as of July 1, 2021. The impact on GSE involvement in the QMmarket remains unclear, though it could provide an opportunity for PLS market expansion. Finally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act and pandemic-related regulations remain in place; however, its impact wanes as mortgage-related forbearances and delinquencies decrease. Continued on page 18

18 www.azbankers.org Next Steps: Prepare for aPurchaseMortgageMarket The forecasted increase in interest rates is likely to continue to put pressure on profit margins. Millennials entering peak homebuying years are expected to drive a purchase mortgage market in 2022 and beyond. Invest in Technology It’s critical to invest in technology to meaningfully connect with today’s consumers while maximizing profitability. Anticipate Growing Demand Mortgage lenders retaining servicing are well-positioned to benefit from expected increases in value. However, housing price appreciation coupled with a significant housing supply shortage are real headwinds to growth. More affordable housing is needed to meet anticipated demand. Monitor New Legislation and Regulations Continue to monitor developments in the legislative and regulatory landscape and the impact on mortgage lending. Tax Update Relevant Issues: Build Back Better Act Proposals The U.S. House of Representatives passedThe Build Back Better Act (BBBA) on Nov. 19, 2021. The bill includes numerous provisions related to health care, climate change, immigration, education, social programs, and, of course, taxes. While the bill still faces hurdles and is subject to change should it make its way through the senate, it’s important to understand the notable proposals that may impact financial services businesses and owners. Notable highlights of the House version of BBBA include: • Expansion of the 3.8% net investment income tax base to include active business income from pass-through entities • Increase in the cap on state and Tullus Miller, Partner, Financial Services Practice Continued from page 17 local tax deduction from $10,000 to $80,000 through 2031 • Permanent implementation of the limitation on excess business loss deduction for noncorporate taxpayers; the limitation under the current law is set to expire after 2026 • Changes to the international tax regime, including Global Intangible Low-Taxed Income (GILTI) tax rate increase, the requirement to calculate GILTI on a country-by-country basis, and reduction in ForeignDerived Intangible Income (FDII) deduction • 1% excise tax on the value of stock repurchases and net of new issuance; stock contributed to retirement accounts, pensions, and Employee Stock Ownership Plans (ESOP) are excluded frombeing taxed • 5% surtax on individuals with modified adjusted gross income that exceeds $10 million • Delay in the effective date for R&D expense amortization requirement over five years — versus immediate deduction — from beginning in 2022 to 2026 • Extension and expansion of green energy-related tax credits Next Steps: Monitor Developments Current proposals don’t include an increase in corporate tax rate; however, the final legislation could look different as lawmakers continue to negotiate as the bill moves through the chambers. Monitor the developments in the legislation and consider tax planning strategies as the final legislation takes effect. CECL Relevant Issues: Adoption of CECL Adoption of the Current Expected Credit Losses (CECL) model is imminent. Currently, only around 200 depository institutions have adopted it, notwithstanding the rekindled efforts to scope out smaller community institutions in Q1 2022, leaving over 9,000 to adopt the model on Jan. 1, 2023, along with thousands of other entities in the financial services sector. The readiness of institutions preparing to adopt varies greatly and covers the spectrum, from ready-to-implement to those still in the preliminary planning phases. However, it’s not all additional work and increased complexity related to adopting a new model. A current Financial Accounting Standards Board (FASB) exposure draft would eliminate troubled debt restructuring (TDR) accounting under CECL. While the proposal includes increased disclosure requirements, the simplification of the accounting and removal of TDRs may be beneficial. Next Steps: If your organization is still in the early phases, you’re not alone, but it’s important to know that remaining time wanes and waiting for a potential adoption exemption is a dangerous proposition. Not only is adoption an issue for internal timelines, but vendors are also reaching capacity in their ability to onboard new users. Prepare and Adopt CECL For institutions further along, there’s still a focus on parallel runs, finalizing documentation, controls, policies, and procedures, as well as evaluating model validation requirements. As such, all institutions should start the year with a proactive stance. We’re Here to Help For guidance in navigating challenges your organization is facing or how to implement the next steps, contact your Moss Adams professional. You can also visit our Financial Services Practice page for more articles and resources. w

19 PUB. 12 2022 ISSUE 2 ONE LAST THING ... Did you know that you can enjoy your association news anytime, anywhere? Scan the QR code or visit: the-arizona-banker.thenewslinkgroup.org Check it out! The new online article build-outs allow you to: • Stay up to date with the latest association news • Share your favorite articles to social channels • Email articles to friends or colleagues There is still a flipping book for those of you who prefer swiping and a downloadable PDF.

20 www.azbankers.org How Innovative Solutions from BHG Financial Can Help Community Banks Thrive in the Digital Age Since BHG Financial’s associate membership with the AzBA, they have created partnerships with 10 Banks in Arizona that have purchased $45MM in high-quality loans. They currently work with over 50 state banking associations, providing high-quality loans and services to the various association members. While BHG Financial is an industry leader in providing high-quality loans since 2001, the company has evolved to encompass a full family of brands all designed around the unique needs of community banks. Fourteen-hundred-plus financial institutions partner with BHG Financial, a testament to their understanding of the community banking industry. It is only augmented by the fact that they are 49% owned by Pinnacle Financial Partners (a bank headquartered in Nashville, Tennessee), making them stand out among a sea of fintechs as a financial services leader with a valuable perspective. Maybe it is their unique perspective that has allowed them to partner with so many community bankers and surround them with proven solutions for successfully navigating a constantly shifting world. The growing importance of technology for banks and their customers Banks are all constantly being reminded of the need to embrace technology and the digital world, while trying to also maintain security, profitability and community relationships. Rather than a one-time, one-size-fits-all service, a community bank needs a true fintech partner that grows with them, fulfilling their needs today while simultaneously predicting and developing solutions for tomorrow’s roadblocks. Right now, this comes down to technology and the modern customer’s desire for a seamless online experience. According to a study by Chase, 99% of Gen Z and 98% of millennials utilize mobile banking daily for tasks that range from reviewing their account balances to checking their credit scores. A similar study by BAI shows that 58% of Gen Z prefer to open deposit accounts online rather than in person, while 75% of millennials would switch banks for a better mobile app. When the pandemic hastened the movement towards digital, BHG Financial was prepared; having always been innovators in financial services, they were able to quickly adapt and thrive. By investing in new technology, the company created a seamless online application process, driving easy customer applications and building loyalty even with the challenges of the pandemic. Currently, 40% of borrowers return to BHG Financial for additional financing. With the risk of identity fraud on the rise, BHG Financial invested in remote ID verification, allowing for quick and By Keith Gruebele, EVP, Institutional Relationships, BHG

21 PUB. 12 2022 ISSUE 2 To learn more about BHG contact Keith Gruebele, EVP, Institutional Relationships, at 954.737.5318 or kgruebele@bhgbanks.com. Or visit our website at bhgloanhub.com/keith. As regulations continue to evolve, banks must continue to prioritize regulatory risk management and compliance. secure customer onboarding. Further, with regulation expected to increase, BHG Financial placed a high level of importance on compliance by leveraging an internal team of industry experts to ensure the company was meeting regulatory requirements. These in-house tools helped BHG Financial nearly double in size since the start of the pandemic, and banks can take advantage of these same proven resources to grow into this new digital age – without having to invest crucial time and millions of dollars. Lend outside your lobby with BHG Connect’s digital lending platform Consumer reports make it clear that people would prefer to manage their finances online. The good news is – with a simple integration – your bank can be a leader in digital transformation. BHG Connect, a suite of lending-as-aservice products, provides an end-to-end digital lending platform co-branded for your bank, allowing you to offer online loans to your customers. According to a BHG Financial analysis, the average community bank has approximately $150 million in untapped consumer loan opportunities within their existing customer base. By providing your customers with the ability to apply for loans quickly and easily online, you can impact your bottom line and build loyalty with your clients. Many customers (87% of Gen Z, according to a Marqueta report) prefer to maintain business with traditional financial institutions over fintechs. By providing a frictionless online experience, you can strengthen your relationships with these customers while still giving them the exceptional customer experience that community banks provide. Keep your bank secure with cutting-edge AI from Vouched Although community banks tend to know their clients well, in this age of digital fraud, it’s never been more important to know your customer. Working with a proven industry partner like Vouched can enhance your fraud prevention and improve KYC/CIP (Know Your Customer/Customer Identification Procedures) requirements to keep your institution safe. Vouched combines cutting-edge AI that visually examines a customer’s identity with a multi-factor risk analysis, allowing your bank to onboard users anytime, anywhere, securely, and instantly. To date, this KYC solution has helped open over one million bank accounts and has been used to fund over $8 billion in loan transactions. Now your community bank can follow your customers across state lines, open accounts for their college-aged kids, and compliantly and safely identify them without ever needing to meet. As a member of the BHG Bank Network, your financial institution can access this tool at a preferred pricing structure. Stay ahead of regulatory shifts with Risk Management Solutions Group (RMSG) As regulations continue to evolve, banks must continue to prioritize regulatory risk management and compliance. Today, these areas are top concerns for executives across the banking industry. BHG Financial has always maintained a very stringent compliance program. They regularly undergo examinations by the FDIC and Tennessee State Banking Commission, making it a priority to ensure that all technology platforms, processes, and procedures are held to the highest standards possible. Their top-tier regulatory team has over 500 years of combined experience, allowing them to effectively assist our banks with all federal and state regulatory agencies. Partnering with BHG Financial allows your bank to access their expertise with zero obligation to execute a work order. Banks can complete a client agreement and have RMSG on deck when situations and questions arise. Further, in the event that work is needed, RMSG can provide you with a quick and free estimate. It’s your turn to experience the BHG Financial advantage The AzBA couldn’t be more appreciative of the partnership BHG Financial has developed with us and our banks across the state. Their technology solutions are tailored to the challenges of the community banks. As our industry continues to evolve, finding a partner like BHG Financial that can provide cost-effective and efficient products and services that support banks’ needs is more important than ever. w

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