THE ARIZONA Keep It Long Enough, It Will Come Back In Fashion Buydown Program Considerations They Opened Your Email. Now What? BANKER OFFICIAL PUBLICATION OF THE ARIZONA BANKERS ASSOCIATION PUB. 13 ISSUE 2
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The U.S. cannabis market is poised for substantial growth, with projections from New Frontier Data estimating it to reach $72 billion annually by 2030. This growth is primarily driven by the legalization of adult-use cannabis programs in 23 states, including Arizona, where total annual sales are expected to reach $2.2 billion by 2030. Lending is part of a holistic approach to providing banking services to the cannabis industry that helps financial institutions attract the best operators, build a strong book of deposits, and unlock higher yield earning assets. It is also an opportunity for banks to go beyond serving retailers and meet the demand for banking and lending by the broader wholesale market as well. The Shield Compliance Cannabis Lending Guide helps bankers navigate the compliance, reputational, and credit risks associated with cannabis operators and cannabis-related collateral, and unlock the financial rewards of this industry. Shield Compliance: A Leader in Cannabis Banking. Since its inception, Shield has partnered with more than 65 financial institutions and monitored 7.5 million transactions including $32.6 billion in deposit volume. For the 12-month period ending June 30, 2023, Shield’s financial institution customers have earned $31.5 million in fee income. As of June 30, 2023, these financial institutions have $920.5 million in deposit balances and $166.4 million in loans outstanding from over 5,000 cannabis-related businesses representing more than 13,000 active cannabis licenses. Let Shield Compliance help your financial institution unlock the benefits of serving the legal cannabis industry. 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. info@shieldbanking.com (425) 276-8235 Earn the benefits of a compliant cannabis banking program with Shield Compliance. DOWNLOAD THE CANNABIS LENDING GUIDE: ShieldBanking.com/cannabis-lending-guide GET THE GUIDE TAP INTO THIS $72 BILLION DOLLAR OPPORTUNITY GAIN EARNING ASSETS WITH CANNABIS LENDING
IN THIS ISSUE @ 2023 Arizona Banker Association (AZBA) |The newsLINK Group, LLC. All rights reserved. The Arizona Banker is published four times each year by The newsLINK Group, LLC for AZBA and is the official publication for the association. The information contained in this publication is intended to provide general information for review and consideration. The contents do not constitute legal advice and should not be relied on as 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 advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. The Arizona Banker is a collective work, and as such, some articles are submitted by authors who are independent of AZBA. While AZBA and The newsLINK Group encourage 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. 111 West Monroe, Suite 440 Phoenix, Arizona 85003 Phone: (602) 258-1200 2023 AZBA BOARD OF DIRECTORS AND STAFF 6 WASHINGTON UPDATE America’s Banks Are Stronger Together By Rob Nichols, President and CEO, American Bankers Association 8 Section 1071 Final Rule — What You Need to Know By Victoria E. Stephen, Compliance Alliance 11 Congratulations AZBA! 2023 Hermes Awards Winner! 12 Keep It Long Enough, It Will Come Back In Fashion: Buydown Program Considerations By Elizabeth Madlem, Bankers Alliance 15 Congratulations! AZBA 2023 Communicator Award Winner! 16 Are Password Managers Secure? By Shane Daniel, SVP Information Security Consultant/Regional Director and Terry Kuxhaus, Senior Information Security Consultant, SBS CyberSecurity 18 They Opened Your Email. Now What? By Neal Reynolds, President, BankMarketingCenter.com 20 S&P Webinar: U.S. Banks To Stockpile ‘Precious’ Deposits With Recession Forecast By Tim Weatherhead, S&P Global 22 Helping Small Businesses Go International By Jay Kenney, SVP and Southwest Regional Manager, PCBB Paul Hickman CEO & President Steven Killian Director of Government Relations Michal Plavecky Executive Administrator Kerensa Williams Chief Operating Officer William Ridenour General Counsel AZBA STAFF Jack Barry Enterprise Bank & Trust Bill Callahan Arizona Bank & Trust Neal Crapo Wells Fargo Bank Frank Coumides KS State Bank Wayne Gale 1st Bank Yuma Peter Hill Goldwater Bank Joel Johnson FirstBank Kyle Kennedy Bell Bank Dave Matthews First Western Trust Christine Nowaczyk BOK Financial Brad Parker PNC Bank Steve Richins Comerica Bank Tyson Rigby JPMorgan Chase Craig Robb City National Bank Dina Ryan Citigroup Patrick Strieck BMO Chris Webster Commerce Bank of Arizona Mark Young National Bank of Arizona DIRECTORS Brian Schwallie Immediate Past Chairman U.S. Bank Scott Vanderpool Chairman Bank of America Don Garner Chairman-Elect Alliance Bank of Arizona Bo Hughes Treasurer Canyon Community Bank Brian Riley Vice Chairman Foothills Bank Brian Ruisinger Secretary Republic Bank of Arizona EXECUTIVE COMMITTEE
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America’s Banks Are Stronger Together By Rob Nichols, President and CEO, American Bankers Association he U.S. banking system has long been the envy of the world. The reasons for this are many, but at the core, it’s because our nation has cultivated a vibrant, thriving financial services sector made up of banks of all sizes, charters, business models and risk profiles. Each one of these institutions has an important role to play in the overall economic ecosystem: from the community bank guiding a family through the purchase of a first home, to the midsize bank helping a small business manage its cashflows, to the regional bank providing commercial loans to promote the building of new retail centers and office spaces, to the large, globally active institution that supplies credit to multinational firms that provide thousands of jobs in the U.S. The breadth and diversity of our financial services sector is something no one should ever take for granted. That’s why ABA joined forces with the nation’s 51 state bankers associations to deliver a powerful message to members of Congress in the aftermath of the Silicon Valley Bank (SVB) and Signature Bank failures in March: the U.S. banking system remains the deepest and most resilient in the world, and policymakers in Washington need to keep it that way for the good of the country. That message continues to hold true in the wake of the unfortunate failure of First Republic Bank in early May. The sudden and swift collapse of these institutions is something that both banks and bank policymakers can and must learn from. But in recent days, there have been some in Washington who have seized this opportunity to advance misguided policy proposals — many of which have nothing to do with the failures of these banks. These include proposals that would make it significantly harder for community banks to compete and new capital requirements for larger banks that would limit their ability to lend at a time of economic uncertainty. The policy response to these failures should not place America’s competitive, thriving banking system at risk. Rather, we must seek solutions that preserve that competitive landscape and ensure that banks of all sizes with diverse The breadth and diversity of our financial services sector is something no one should ever take for granted. WASHINGTON UPDATE 6 THE ARIZONA BANKER
business models are allowed to compete and succeed in serving the needs of their communities. To achieve that goal, we all must stand together as an industry and resist efforts to divide us. Past experience has taught us that we are stronger and most effective in our advocacy when we speak with one voice and that there can be harmful consequences when we don’t. In the days to come, there will be many conversations about the future of banking regulation, about potential changes to the deposit insurance system and what we can do to preserve the depth and diversity of our banking system. By speaking with a united voice on these and other issues, we can move our industry forward and work with policymakers to understand what happened at SVB, Signature and First Republic. But, even more importantly, we can reinforce the overwhelming strength and resilience of the U.S. banking sector and lift up the work our nation’s banks do every day to make our communities better. w Email Rob at nichols@aba.com. 7 THE ARIZONA BANKER
Section 1071 Final Rule What You Need to Know By Victoria E. Stephen, Compliance Alliance hether you were counting down the minutes until its release or hoping it would be put off as long as possible, it’s finally here — the Section 1071 Final Rule. The Final Rule caps a more than 10-year wait from the enactment of the original statute which prescribed these requirements in the 2010 Dodd-Frank Act, and it was released a mere day before the CFPB’s publication deadline. Surprisingly, perhaps, there were several changes from the Proposed Rule to the Final Rule that should provide some much-needed relief to community banks. However, the majority of the rules were finalized as proposed, so for those institutions who fall within the rules’ scope, it will still be quite the mountain to climb until compliance day. What Changed from Proposed to Final? Many were happy to see that the final rule contained some key changes from the proposal issued in September 2021. According to the CFPB, the changes reflect the consideration of more than 2,100 public comments on the Proposed Rule, as well as extensive public input predating the proposal. Threshold Increase Undoubtedly, the biggest and most welcome change from the proposal is the threshold increase. Whereas the Proposed Rule called for institutions to be covered when making as few as 25 covered loans per year, the Final Rule increases this all the way to 100 per year. To be clear, this still covers a large majority of bank small business lending, and those under the threshold should note that the CFPB made clear that “Lenders originating less than 100 loans per year will still be required to adhere to fair lending laws.” Of course, we always knew that banks are subject to fair lending laws regardless of the number of loans originated, but the question will be how the CFPB and/or other regulators may interpret this assertion in this new Section 1071 world. Phased Implementation Probably the second most welcome change is the phased implementation, which means that even for those institutions that are covered, some do not have to collect and report until 2026 and 2027, respectively. Specifically, the Final Rule includes compliance date “tiers” for when a covered financial institution must begin collecting and reporting data: Tier Annual originations in 2022 & 2023 Data collection start date Data reporting start date Tier 1 2,500 or more covered credit transactions Oct. 1, 2024 June 1, 2025 Tier 2 500–2,499 covered credit transactions April 1, 2025 June 1, 2026 Tier 3 100–499 covered credit transactions Jan. 1, 2026 June 1, 2027 Note that even if your institution originated fewer than 100 covered originations in 2022 or 2023, if you originate at least 100 covered originations in 2024 and 2025, you still must collect and otherwise comply with the rule starting on Jan. 1, 2026. Additionally, the bank must have a method to determine how many covered credit transactions it originated in order to determine its appropriate compliance tier. If the bank happens to not have readily 8 THE ARIZONA BANKER
available information needed to make this determination, the Final Rule says that it can use “any reasonable method to estimate its covered originations” for 2022 and 2023 and provides several examples of this. Visual Observation Requirement A third important change from the Proposed Rule is that the bank will no longer be required (or allowed) to collect a business owners’ demographic information by way of visual observation or surname. This made many breathe a huge sigh of relief as the idea of trying to collect ethnicity and race through these means raised a variety of concerns during the time of the Proposed Rule. So, under the Final Rule, this information will only be able to be collected directly from the applicant(s) and not through any other means. What Data Points Does This Cover? It is interesting that the original 2010 Dodd-Frank statute which enacted the 1071 rule required 13 data points, which have now ballooned in the Final Rule to be reportable through 81 data fields. One notable change in the data points for the final rule is the addition of “LGBTQI+” business status. Whereas in the Proposed Rule there were two separate data points for business status — one for women-owned and one for minority-owned — the Final Rule just includes one data point for business status which encompasses all three of these: … The Bureau notes that proposed § 1002.107(a)(19), “women-owned business status,” has been combined with proposed § 1002.107(a)(18), “minorityowned business status,” and the final § 1002.107(a)(18) 274 data point now addresses “minority-owned, womenowned, and LGBTQI+-owned business statuses.” As a result, the data points in proposed § 1002.107(20) and (21) have been renumbered as final § 1002.107(19) and (20). … p. 274: https://files.consumerfinance.gov/f/ documents/cfpb_1071-final-rule.pdf While we can’t reasonably cover them all here, the remaining data points were similar to the Proposed Rule and may be reviewed in the CFPB’s Data Points Chart. What Transactions Are Covered? Covered Credit Transactions Very generally, a covered credit transaction is an extension of business credit under Regulation B, but with certain exclusions, some specifically for purposes of Section 1071, such as: • Trade credit; • HMDA-reportable transactions; • Insurance premium financing; • Public utilities credit; • Securities credit; • Certain incidental credit; • Factoring; • Leases; • Consumer-designated credit used for business or agricultural purposes; • Purchases of a credit transaction; • Purchases of an interest in a pool of credit transactions; and • Purchases of a partial interest in a credit transaction (such as a loan participation agreement). Despite the length of this list of exclusions, the definition is still extremely broad and covers a wide variety of transactions, including closedend loans, open-end lines of credit, credit cards, merchant cash advances and various credit products used for agricultural purposes. Covered Originations A very important thing to note in this area is that “covered originations” for purposes of determining institutional coverage and compliance dates is narrower than the above. A common question we have been getting on the hotline is whether extensions and renewals should be counted. For this purpose, extensions, renewals and certain other loan amendments are not considered covered originations, even if they increase the credit line or credit amount of the existing transaction. What Else Should I Be Thinking About? Firewall A very unique aspect of this rule is the so-called “firewall” provision, which bears mentioning here. In general, employees and officers should be prohibited from accessing the following responses if that employee or officer is involved in making any determination about the application: • The applicant’s minority-owned, women-owned, and LGBTQI+- owned business statuses; and • Its principal owners’ ethnicity, race, and sex. There are limited exceptions to this firewall requirement, including a notice allowance, and the Final Rule also prohibits the bank from disclosing this demographic information to other parties, again, with limited exceptions. 9 THE ARIZONA BANKER
Safe Harbors Interestingly, the Final Rule has a safe harbor for certain incorrect census tracts, NAICS codes, and application dates. It also has a safe harbor regarding incorrect determinations of small business status, covered credit transactions and covered applications. For example, if the bank initially determines that an applicant is a small business, but then later concludes the applicant is not a small business, the bank would not be in violation if, at the time the bank collected the demographic data, it had a “reasonable basis for believing that the application was from a small business.” Action Plan Now that the Final Rule has arrived, there are a variety of questions and action steps our members should be considering, such as: • Is my bank covered under the new Final Rule? If so, what is the bank’s mandatory compliance date? • How will this affect the bank’s Compliance Management System (CMS)? What policies, procedures and other governance documents or materials may need to be amended? • Is everyone well informed of the changes and their effects, including the Board, senior management, business lines and other stakeholders? • What type of training is planned and for whom? • What do the bank’s business lending processes look like currently and what change management will be required to implement these changes correctly and in a timely manner? • Has the bank established relationships with any vendors? Do the modules or other software offered need to be tailored to meet the bank’s needs? • What will the institution be employing for data integrity purposes? • What does a tailored project implementation plan look like for my institution? Other Resources In addition to the Final Rule itself, the CFPB published a bevy of other accompanying materials. One is a Fact Sheet, which outlines the history of the Section 1071 rulemaking and the various policy objectives driving it. Another is a Policy Statement which indicates “… that the CFPB intends to focus its supervisory and enforcement activities … on ensuring that covered lenders do not discourage small business loan applicants from providing responsive data, including … ECOA-mandated demographic data requests …” The CFPB also published a Filing Instructions Guide, which provides an overview of the filing process, instructions for what to enter in each data field, validation requirements that must be met before the register can be filed and additional resources to assist with inquiries. A Data Points Chart provides a visual guide to the various data point fields and their respective regulatory references, along with a brief description and filing instructions for each. An Executive Summary lays out an overview of the main facets of the Final Rule. Compliance Alliance will be publishing its own summary of the Final Rule very soon. Finally, a Key Dates chart provides a visual representation of the three compliance tiers and their respective mandatory compliance collection and reporting dates. Note that there are some additional tools on the CFPB’s resources page, and more may be added in the future. We’re Here to Help! It goes without saying that this is just an extremely brief overview of all the Final Rule entails. As you approach your compliance date, or just work to determine whether your institution may be covered at all, we’re here to help! Feel free to reach out to our compliance hotline by chat, email or phone and one of our advisors will be happy to walk through your questions with you. w Our Mission Is to Help You Succeed Partner with us for: • Loan participation purchases and sales* • Bank stock financing • Bank executive and employee financing www.bell.bank | Member FDIC Tracy Peterson Call me at 480.259.8280 Based in Phoenix Ariz. Serving Arizona, Colorado and Kansas 38544 *We do not reparticipate loans. 10 THE ARIZONA BANKER
Congratulations AZBA! To view this year’s winners, please scan the QR code. https://enter.amcpros.com/hermes/ winners/ 2023 Hermes Awards Winner! Hermes Creative Awards honors the messengers and creators of the information revolution. Armed with their imaginations and computers, Hermes winners bring their ideas to life through traditional and digital platforms. Each year, competition judges evaluate the creative industry’s best publications, branding collateral, websites, videos, and advertising, marketing, and communication programs. We are very pleased to announce that THE ARIZONA BANKER magazine was awarded the Hermes Gold for print media.
Keep It Long Enough, It Will Come Back In Fashion Buydown Program Considerations By Elizabeth Madlem, Bankers Alliance he early 2000s are reemerging with their crop tops, lowrise jeans, flip phones and mortgage buydowns. Deja-vu! Pre-crisis teaser rates have been reborn into mortgage buydowns, both temporary and permanent. With the housing markets remaining pricey and rates still higher than they have been in years, many buyers are looking for assistance in any form. And as the refinancing market cools down, mortgage originators are becoming increasingly more creative in finding innovative ways to bring business through the door. And this has led to lender, builder, and seller concessions to help close deals. Buydowns generally are going to refer to when a borrower pays “points” upfront to reduce the mortgage rate to a level that places their monthly payments in a range they can afford. It is thought that the rate has been “bought down” from its original rate for the entirety of the mortgage by paying a lump sum upfront. The more recent trend has been for these to be seller-paid rate buydown concessions, with the seller offering to reduce to buyer’s mortgage interest rate for either the first few years (temporary) or for the duration of the loan (permanent). The seller is either contributing to the buyer’s closing costs or paying for a temporary rate buydown. What the market is seeing now is an influx of temporary buydowns, with the most common ones being a “2-1” and “1-0,” meaning a 2% interest rate reduction in the first year and a 1% interest rate reduction in the second year, or a 1% interest rate reduction in the first year only, respectively. Sellers, builders, lenders, or a combination of all three put-up money to cover the difference in interest rate payments between the original mortgage rate and the reduced mortgage rate. So for a 2-1 example, the mortgage rate is reduced by 2% for the first year and then will step up by 1% in the second year, and another 1% in the third year to reach the actual mortgage rate at origination. It essentially works as a subsidy for the first two years of the mortgage before reverting to the full monthly payment. And the benefits are there for consumers — it can make purchasing a home more affordable (even if temporarily) and can “buy time” for borrowers to refinance into a lower rate should interest rates fall. With permanent rate buydowns, generally, it will be a seller paying a portion of the buyer’s closing costs 12 THE ARIZONA BANKER
that are used towards buying mortgage discount points, with each point reducing the rate on average by about 0.25 percentage points, costing 1% of the loan amount. So if a borrower bought a $500,000 home with a 20% down payment, the mortgage amount would be $400,000, with each point costing $4,000. With permanent buydowns, borrowers are historically slower to refinance, given the cost/benefit decisions taking place with recouping upfront money put down for the loan versus refinancing costs associated with a new loan. But one of the biggest issues with buydowns, either temporary or permanent, is proper disclosure on the Loan Estimate (LE) and Closing Disclosure (CD). For disclosure purposes, there are specific Regulation Z contemplated buydowns: third-party buydowns reflected in a credit contract; third-party buydowns not reflected in a credit contract; consumer buydowns; lender buydowns reflected in a credit contract; lender buydowns not reflected in a credit contract and split buydowns (see 12 CFR 1026, Supp. I, Paragraph 17[c][1]—3 through 5). Regulation Z provides numerous scenarios that determine whether the terms of the buydown should be reflected in the LE and CD. Generally, the following buydowns are reflected in the disclosures: third-party buydowns reflected in a credit contract; consumer buydowns; lender buydowns reflected in a credit contract and split buydowns (consumer portion only). Otherwise, a third-party buydown not reflected in a credit contract, a lender buydown not reflected in a credit contract, and a split buydown (not third-party e.g., seller’s portion) are not included. With most of the criteria for determining whether a buydown is reflected on the LE and CD being dependent upon a credit contract, it is important to note that Regulation Z does not define a credit contract. But it is stated as being a contract that forms a legal obligation between the creditor and the consumer, as determined by applicable State law or other law. So whether or not a buydown agreement would be considered a credit contract or legal obligation between the creditor and consumer depends upon what “State law or other law” consider to be a legal obligation. Whether a buydown agreement is actually modifying the terms of a note or contract is going to depend on how it is structured and whether that note or contract ultimately reflects that lowered interest rate. Counsel should be included in any final determinations, as well as investor requirements. So where should the terms of the 13 THE ARIZONA BANKER
buydown be reflected in the LE and CD? Unfortunately, the commentary does not provide an “item-by-item” list of what parts of the LE and CD the buydown should be reflected in. The key requirement to remember is that if the buydown is required to be reflected, it must be reflected in the finance charge and all other disclosures affected by it. That includes the “Finance Charge” on page five of the CD (except for sellerpaid buydown fees as those are considered seller’s points); the “Annual Percentage Rate” on page three of the LE and page five of the CD; the “Projected Payments” table on the first page of the LE and CD; and the “Product” on the first page of the LE and CD reflecting a step rate. There are different ways proper disclosure can be done, dependent upon the specific loan scenario. Sometimes a buydown is money going to the borrower from the seller, while other times, it is money going to the bank from the seller. These would be disclosed differently. So, the first question to ask: Who is giving money to whom, and for what purpose? A more common scenario for temporary buydowns is where the buydown is seller paid and is not being reflected in the note or credit agreement as it is contracted for between the buyer and the seller. How is this properly disclosed? Well, the most common way to disclose this, since it is not reflected in the note or credit agreement, is to disclose this as a Seller Credit. Since this is not considered discount points that either the buyer or the seller are paying to the bank, the bank would not disclose them in Section A. The bank is not involved in the scenario where a buydown agreement is solely between the borrower and the seller. Rather, the regulation and commentary do not specify that this must be disclosed in any particular way, so it is viewed generally as just a concession from the seller, which has multiple ways of compliant disclosure. Disclosing as a Seller Credit, as noted above, is the more common. This would be found in the Calculating Cash to Close Tables (LE & CD) and also in Section L on the CD, as it is not a credit that is paying any specific fee listed on page two of the disclosure. It could also be disclosed in Section N of the CD as a seller credit due at closing. If it is a situation where the buydown funds are from the seller to the bank, it would be disclosed in Section A in the Seller Paid column, and not Section H because the recipient of Section H fees are third parties, and the bank is the one receiving the fee. In this instance, the money from the seller is specifically being used to buy down the rate, which is a Section A fee, since that is paid to the bank. There are other arrangements in which the seller just gives the borrower some money to make up the difference in what the borrower is paying between Rate A and Rate B with no actual buydown of the rate taking place. This is a Section N disclosure. But in the instance in which the bank will actually be the recipient of the fee, and the fee from the seller is to pay for a specific loan cost, it should be disclosed in Section A. The remix is happening — the early 2000s are repeating themselves. But even more so now with the increased examiner focus and scrutiny on consumer harm, it is important to make sure the bank is aggressively reviewing its buydown loan programs for the risks they can bring: reputational, compliance, legal, credit and fair lending, and diligently documenting justifiable business decisions, reviewing investor requirements and examining for proper disclosure and fair lending implications. w Whether a buydown agreement is actually modifying the terms of a note or contract is going to depend on how it is structured and whether that note or contract ultimately reflects that lowered interest rate. 14 THE ARIZONA BANKER
To browse the winning issue, please scan QR code. To see the list of winners on The Communicator Awards website, please scan QR code. Congratulations! 2023 COMMUNICATOR AWARD WINNER! AZBA We are very pleased to announce that The Arizona Banker magazine earned the Award of Distinction for an association magazine. The Award of Distinction is presented for projects that exceed industry standards in quality and achievement and represents the best in marketing and communication. https://www.communicatorawards.com/winners/ https://the-arizona-banker.thenewslinkgroup.org/ pub-12-2022-issue-4/ This past year marked the 29th year of The Communicator Awards. This distinguished award is dedicated to recognizing excellence, effectiveness, and innovation across all areas of communication; they are the leading international awards program honoring talent in this highly acclaimed field. The Communicator Awards receives almost 5,000 entries from companies, agencies, studios, and boutique shops of all sizes, making it, globally, one of the largest award shows of its kind. They honor work that transcends craft; work that makes a lasting impact and provides an equal chance of winning to all entrants regardless of company or agency size and project budget. The goal is to reward excellence. The Awards provide winners and their clients the recognition they deserve and give communications and creative professionals proof and validation that their work is highly regarded by their peers within the industry.
he LastPass breach reminded us there is no way to stay 100% safe online and highlights some of the risks associated with using a central vault to store passwords and other secrets. However, password managers (PMs) remain the most secure way to protect passwords, even though they are not perfect. PMs allow you to store strong, unique passwords for all the dozens or hundreds of websites, web applications and services a user utilizes regularly. Additionally, PMs: • Enable the user to log in without typing the password every time, protecting them from keyloggers • Allow users to utilize stronger passwords that don’t need to be written down • Encourage users to use different passwords for every account • Provide some protection against credential harvesting phishing emails, as they will not populate credentials into spoofed sites While keeping all your passwords in one location is an inherent risk with PMs, the trade-off is worth the risk. Most PMs utilize 256-bit Advanced Encryption Standards, zero trust (your master password is encrypted before leaving your device) and twofactor authentication (2FA) to protect password vaults. Types of Password Managers There are three types of PMs: device-based, cloud-based and onpremise. Each class is an exercise in balancing the equation of security and convenience. For example: • Device-based solutions run locally on a device that limits sharing the password vault on multiple devices, do not detect weak or reused passwords and do not have the security controls a commercial PM does. • Cloud solutions work with multiple devices and detect weak or reused passwords; however, your data is on someone else’s server. • On-premise solutions may appear to be the safest option, but they provide complications in maintaining in-house IT infrastructure and data backups which may increase the cost. Note: Using your browser’s “Save Password” feature to save passwords is not considered a safe or recommended way to store passwords. While some inherent risk stems from the mere use of any PM solution, understanding the risk of each solution should be obtained during the due diligence and vendor management process. Any risk remaining after the solution selection should be addressed in the IT risk assessment to ensure the solution’s risk score is acceptable to your organization’s risk appetite. Things to Consider When Changing Password Managers If your organization currently utilizes LastPass as a password management solution, it is absolutely appropriate to evaluate alternate PM products and solutions, as there are many viable password management vendors in the market. However, it is recommended that your organization only switches PM providers after doing your homework. Keep in mind your current investment with the incumbent provider. For example, even if you believe it’s in your organization’s best interest to switch PM providers, what does that transition look like? Does your current PM provider make it easy for you to transition all your sites and passwords to another platform, or will that transition be timeconsuming and complicated? Alternatively, your organization may wish to shift from a cloud-based password manager to a device-based or on-premise version. Still, it is recommended that you evaluate the pros and cons of making such a switch. For example, if you currently have users utilizing a cloud-based PM and want to shift to an on-premise PM, what functionality will your users lose in that switch? If you are evaluating your password management solution, it is recommended that you do the proper homework (vendor due diligence and IT risk assessment) on alternative PM solutions to ensure appropriate security controls and risk mitigation measures are in place. Only once you’ve done the appropriate homework can you determine the best path forward for your organization based on an informed business decision. w SBS CyberSecurity does not partner with nor endorse any password management vendors or solutions. For more information, contact Robb Nielsen at 605-251-7375 or robb.nielsen@sbscyber.com. SBS helps business leaders identify and understand cybersecurity risks to make more informed and proactive business decisions. Learn more at www.sbscyber.com. Are Password Managers Secure? By Shane Daniel, SVP Information Security Consultant/Regional Director and Terry Kuxhaus, Senior Information Security Consultant, SBS CyberSecurity 16 THE ARIZONA BANKER
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They Opened Your Email. Now What? By Neal Reynolds, President, BankMarketingCenter.com ou’re sending out emails. But, are you getting the response and the return that you want and deserve? Even if you’ve been in the bank marketing business for a relatively short time, you probably understand the power of marketing automation. And when it comes to automating marketing processes, there’s nothing like using automation to supercharge your email marketing. Are you still taking a manual, handson approach to your email marketing? If so, it’s time to stop. With ongoing developments in AI (Artificial Intelligence) and ML (Machine Learning), marketing automation has taken quantum leaps forward in its ability to dramatically enhance certain marketing processes, and email marketing, in particular. Today’s AI-powered emailing is far more effective and efficient than it was just a year or so ago! Automation has taken email from a cost-effective means of getting your message out there into a cost-effective means of carrying on a very personal, timely conversation with both customers and prospects. Unfortunately, here’s what many community banks are still doing … and need to stop doing. 1. A staffer manually creates customer and potential customer records/lists from a variety of data sources, often in different formats. 2. The bank uses an email program that enables the building and sending of emails, each email is created and manually sent. 3. KPIs (Key Performance Indicators) — such as bounce and open rate — are available, but with no real, actionable insights. The assumption is that an “open” signals interest, so follow-up emails are then sent to those individuals … again, manually. 4. The follow-up emails are not specific to the recipient’s wants or needs because that data is not available to the email program. In all likelihood, the response is low as it isn’t possible to align an offer, product or service to a recipient’s need. Here is a great example, courtesy of 360view.com, of the difference that automation can make to email marketing: “Southside Bank in Tyler Texas remembers their days before marketing automation. Gone are the days where a marketing campaign looked like this: we decide to promote auto loans, we get a list of all our customers, we send them an email, we celebrate that we sent them an email, and that’s it. Now we strategically build each campaign specific to a customer group and track what happens after the campaign — night and day difference.” When you add the power of the marketing automation tool to your email messaging, you now have the ability to talk to your recipients about products and services that matter to them most at a particular time in their “purchase path” or “customer journey.” AI-powered emailing solutions can tell you when it’s a customer’s anniversary, when they purchased their last vehicle or their current home, the credit cards they use and their payment history … with all of it stored where you can access it quickly and easily. And that’s just the tip of the iceberg. Just think about how much more personal, and effective, your conversations with customers can be when you not only know their interests and behaviors, but also have that information right at your fingertips in your email marketing service’s CRM (Customer Relationship Management) database. Direct access to this kind of recipient data and preferences enables you to create a true “nurture” marketing campaign, one that truly nurtures your relationship by meeting your customer with the right message, in the right place, at the right time, every time. How? With the help of “triggers.” HubSpot does a pretty good job of going into detail on trigger marketing, but here’s the short of it: “Trigger marketing refers to the use of marketing automation software to perform a task as a result of an event, often an action taken by a prospect or customer. Couple multiple data points through analytics and it increases the precision of your campaign.” For example, lifecycle campaigns might include triggering a communication when a customer reaches a certain age, since different types of accounts are more beneficial at different ages. Couple the age profile with wealth and demographic data and you can more successfully offer retirement planning or life insurance products. Another example is a balance trigger. It might involve a customer reaching an account balance over $100K, which could indicate that the customer might be interested in a different type of account, such as an investment 18 THE ARIZONA BANKER
product that they don’t currently participate in. Email marketing automation allows you to automatically generate more leads, increase revenue, and retain customers without manually managing your email marketing program. Enhanced analytics will provide you with greater insights into your audience and their needs. Automated tasks will free up your marketing resources. You’ll now be reaching your customers and potential customers with the right message in the right place at the right time, and more. In short, you’ll finally be getting the response and the return from your email marketing that you want and deserve. When you’re ready to begin looking for an email marketing tool, there are many, many to choose from — each offering a unique set of features and benefits — at a wide range of price points. Happy hunting! w About BankMarketingCenter.com Here at BankMarketingCenter.com, our goal is to help you with that topical, compelling communication with customers; the messaging — developed by banking industry marketing professionals, well trained in the thinking behind effective marketing communication — will help you build trust, relationships, and revenue. In short, build your brand. To view our marketing creative, both print and digital – ranging from product and brand ads to social media and in branch signage — visit bankmarketingcenter.com. You can also contact me directly by phone at 678-528-6688 or via email at nreynolds@bankmarketingcenter.com. As always, I welcome your thoughts on the subject. 19 THE ARIZONA BANKER
S&P Webinar U.S. Banks To Stockpile ‘Precious’ Deposits With Recession Forecast By Tim Weatherhead, S&P Global ithdrawals from depositors have subsided or stabilized since March, but the episode supercharged trends that could result in a pullback in lending and a mild recession, experts said during an S&P Global Market Intelligence webinar on April 27. “Even before the failures of Silicon Valley Bank and Signature Bank in early March, deposits had become ‘more precious’ as deposit levels fell over the course of 2022,” said Nathan Stovall, head of FIG research at Market Intelligence. Following the bank collapses, that trend was pushed forward. Any bank facing elevated liquidity pressures likely would be more reticent to lend, “which could lead to higher funding costs and modestly higher credit costs,” Stovall said. “First Republic Bank was one of a handful of banks punished by investors and customers for sharing some similarities with Silicon Valley Bank and Signature Bank,” Stovall said, “such as high levels of uninsured deposits and an underwater loan portfolio.” First Republic reached the end of the road on May 1 after JPMorgan Chase & Co. unit JPMorgan Chase Bank NA agreed to assume substantially all of its assets and all of its deposits from the Federal Deposit Insurance Corp. after regulators took control of the embattled bank. “What started as a liquidity squeeze at banks in early March has largely been contained, but the turmoil should lead to further tightening of financial conditions, which should help the Federal Reserve in its quest to tame inflation,” according to Chris Varvares, Co-Head of U.S. economics at Market Intelligence. “The most recent Senior Loan Officer Survey published by the Fed showed ‘material tightening of credit conditions’ and a decrease in willingness to lend, with those trends expected to continue,” he said. The effects of the banking sector tumult led Varvares and his team to no longer predict a Fed rate hike in June. Scan the QR code to access a replay of the webinar and the presentation slides. https://gateway.on24.com/wcc/eh/863544/ lp/4188154/04272023-q2-outlook-forcommercial-banks-whats-next-for-bankperformance-and-the-economy 20 THE ARIZONA BANKER
Data compiled April 5, 2023. A = actual, P = predicted. Figures for the federal funds rate through 2026 are based on a four-quarter average of estimates provided by IHS Markit, now part of S&P Global. Actual reported figures used when available. Sources: S&P Global Market Intelligence; IHS Markit, proprietary estimates. ©2023 S&P Global Market Intelligence. All rights reserved. Earnings Effects The upshot of the March tumult is that it appears to be an earnings issue for banks rather than a “safety and soundness issue,” Stovall said. Liquidity is largely stable at most banks, though funding costs have gone up as money has moved into higher-cost certificates of deposit (CDs). Earnings will feel the squeeze, as they are expected to fall by 18% in 2023 as higher funding costs pressure net interest margins, according to Stovall. See Figure 1. Commercial Real Estate The depth and breadth of the forecast recession will be impacted by what happens in the commercial real estate sector. The office sector is trading at a 53.1% discount to net asset value, which implies that the market is predicting “big haircuts,” Stovall said. He noted that the current situation is due in part to preferential shifts by workers in the post-pandemic world and higher rates, rather than bad practices like highly leveraged banks and lax regulation. Varvares’ team modeled a scenario in which CRE prices fall 15%, which led to the economy falling into a mild recession of “less than a 1% decline peak-to-trough in the second half” of the year, he said, adding that the CRE declines would have big balance sheet effects on banks and insurance companies. M&A Slowdown With respect to bank M&A, Stovall said the first quarter was about as slow as “we’ve ever seen,” trailing only the second quarter of 2020 at the start of the pandemic. Legislators and regulators are expected to respond to the March turmoil with increased regulation, which could “ultimately encourage activity,” he said. “Specifically, some of the old measures for large regional banks that were wiped away during the Trump administration could be reimplemented, including the liquidity coverage ratio, macroprudential standards and living wills, as well as new rules pertaining to uninsured deposit levels and deposits highly concentrated in one industry,” Stovall said. w FIGURE 1. 21 THE ARIZONA BANKER
Helping Small Businesses Go International By Jay Kenney, SVP and Southwest Regional Manager, PCBB oing business across borders — whether physically or digitally — is becoming increasingly important for small businesses. The majority (91%) of U.S. and European small business owners feel cross-border commerce is a moderate to high priority, with 48% saying it’s critical to keep up with the competition. Essential International Payment Solutions Of course, businesses expanding overseas require international banking support. This means community banks need to be able to offer their small business customers guidance, technological capabilities, and certain key cross-border services. • International wire transfers or payments, also known as foreign wire transfers, form the backbone of cross-border transactions. Being able to help your customers electronically transfer funds to different countries around the world quickly and securely is essential to supporting them in any international business efforts, particularly for those dealing in e-commerce. • Foreign exchange forward contracts can provide your small business customers with protection against the risk of fluctuating exchange rates while providing your institution with additional fee income. By offering this service, customers can lock in exchange rates at a future date when buying or selling currency. Aside from helping them to manage risk, these contracts can help small businesses plan for future transactions with foreign suppliers and customers. • Letters of credit, through which your institution guarantees that a supplier will receive payment from your business customer for the correct amount and on time, are particularly important for international trading. They can provide greater security and trust for both buyers and sellers. • By offering foreign check clearing, you can help businesses easily clear U.S. dollar and foreign currency checks on a cash letter or clean collection basis, making it easier for them to clear incoming international payments. • Currency exchange services are useful for those customers that need to travel abroad for business, as they may want to have some local cash in hand. Staying Ahead of the Competition With many fintechs, neobanks and other financial institutions offering increasingly seamless cross-border payments solutions, banks need to ensure they’re exceeding their customers’ expectations in this area. If not, there’s a chance they’ll move to a competitor who offers the services you’re lacking. According to a 2022 Mastercard report based on a survey of over 3,074 small businesses, there are several ways in which institutions can ensure their cross-border payment solutions support their customers’ needs: • Enhanced transparency about your fees and process, how much transfers will cost and the exact amount that will be received. A shocking 39% of small businesses surveyed reported having no transparency about fees for foreign payments.
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