Q2.18 | June 2018
Independent and proud of it!
Bottom Line Community Banker Victory President Signs S. 2155 into Law
2018 US Bank Market Report Executive Summary
Dick Behl Hometown Banking with your Neighbors and Friends
2018 annual retreat Details Inside!
ICBSD Annual Retreat
26 â€“28, 2018 register today!
S Y LVA N
E PA RK
r e L tr A
R E T
Mark your calendars
Reserve your lodging by calling 1-888-875-0001 and reference the 2018 ICB Annual Retreat and Sylvan Lake Lodge. Be prepared to charge the first and last nights deposit when making your reservation. If you do have to cancel, this deposit is refundable less a $25 cancellation fee if you do so at least 15 days in advance.
INSIDE This Issue Q2.18 | June 2018
FROM THE DESK OF
2 President’s Message The Lifecycle of a Community Bank by Megan Olson, President & CEO of ICBSD
14 Dick Behl: Hometown
3 Fine Points
Goodbye, Farewell and Thank You by Camden R. Fine, President & CEO of ICBA
From the Chairman Never Give Up by Jaimey Schempp, Chairman of ICBSD
From the Chairman Let’s Sow the Seeds of Change by Timothy Zimmerman, Chairman of ICBA Legislative
Perspective from Pierre by Dean Krogman, Lobbyist Federal Delegates Report by Emily Hofer
Banking with your Neighbors and Friends by Twila Schmitt, ICBSD Correspondent People you Should Know
16 Dean Krogman ICBSD Lobbyist by Twila Schmitt, ICBSD Correspondent
18 Todd Gochenour DIC Regional Ombudsman F by Twila Schmitt, ICBSD Correspondent Member Services
20 2018 US Bank Market Report Executive Summary
24 What is a ‘Legal Entity’ Under the Enhanced CDD? In the news
FROM CAPITOL HILL
8 Making Taxes Less Taxing by Congresswoman Kristi Noem
9 2018 PAC Contributors 9 Welcome New
P.O. Box 615, Watertown, SD 57201 605.878.3040
Announces Management Transitions
10 Rounds Report
30 Banks of the Week 33 2018 ICBA Live and
11 A Race We Can and
34 Portfolio Power
26 It’s Time to Celebrate! 28 United Bankers’ Bank
by Senator Mike Rounds Should Win by Senator John Thune
12 Community Banker
Victory: President Signs S. 2155 into Law
by Jim Reber, President and CEO of ICBA Securities
36 Associate Member Spotlight by VGM Forbin Q2.18 | JUNE 2018 1
President’s Message From the president
“Remember – we’re all in this together. Community banks are only successful if our customers and communities are too. That’s why the community bank and its relationship business model have thrived for more than 150 years.”
Megan Olson, President & CEO of ICBSD
The Lifecycle of a Community Bank If you’ve ever participated in career day at a local elementary school, you’ll probably relate to this story. A banking colleague visits her son’s kindergarten class and amid explaining the role of a banker, one eager child pipes up and says, “It’s like the lifecycle of a plant!” He’s right – community banks take in deposits and distribute loans and feed into a selfsustaining micro-economy by keeping funds right here in South Dakota. The idea of “sustainability” is linked to a lot of our local activities these days – whether it’s reusing or recycling products that otherwise might be tossed out, sampling culinary delights from the local bakery or family-run diner, or choosing to buy American-made products to support our national economy. There are plenty of reasons why eating, dining and banking locally makes good economic sense. It’s all part of a symbiotic relationship that community banks have with their communities. Funds taken in by the community are put to productive use by lending that money back into our communities economic ecosystem – to local small businesses and residents just like you. When you deposit money at your local independent community bank, those funds are used to support local businesses, homebuyers, and everyday consumers. And the proceeds from those businesses employ local residents, fund municipalities, and continue the cycle of locally based economic growth. For ICBSD, Community Banking Month is celebrated every month. I encourage everyone to consider what it means to bank locally and help sustain Main Street today, tomorrow and for generations to come. Remember – we’re all in this together. Community banks are only successful if our customers
and communities are too. That’s why the community bank and its relationship business model have thrived for more than 150 years. We know what it takes to create successful local economies – join us in helping to build a more sustainable, vibrant economy here at home!
2 ICBSD 2018
FINE POINTS Goodbye, Farewell and Thank You From the president
Camden R. Fine, President & CEO of ICBA
Every month for nearly 15 years, I have shared my thoughts with you on the top issues of the day in my monthly column. With this column, I pen my last message to you. It boggles my mind that 15 years have passed since my first monthly message, but here we are. Such
“It has been the greatest honor of my life to represent and advocate for our nation’s community banks. I will never be able to adequately thank all the thousands of community bankers who have helped and encouraged me over the years.”
a different world today than then. But community banking remains, and is, in many ways stronger today than it was when I arrived at ICBA in May 2003. I could write a thesis on the myriad ways the world has changed over the past decade and a half. In my view, one word best captures our changed world: technology! Technology has affected every facet of our lives for both good and ill. And it will continue to impact our lives, our culture and society in ways we cannot even imagine today. Whether those changes will work for the better or worse depends on how we relate and adapt to them. If community banking can adapt and assimilate to the ever-changing technological landscape, community banks and banking will flourish. And I believe community banks can and will adapt, because the greatest strength of community banks is their ability to evolve. Community banks have been adapting to their changing environments for more than two centuries, and they will continue to do so. That is what makes our nation’s community banks unique. And it is what makes representing community banks so much fun and such an honor. No other nation on earth has a community banking system like that of the United States. It is our nation’s secret economic weapon. It is what has separated the U.S. economic system from all other nations and made ours the greatest economic force on earth. Community banks are the engines that create jobs, enable small communities and the rural countryside to thrive, and help entrepreneurs to get their start. Some of the greatest companies in the United States got their start from a community bank. And our community banking system has held to its principles while at the same time adapting to its environment. That is why we continue to survive and thrive. Relationship banking, adaptability and a willingness to take chances are the hallmarks of community banks. These qualities will serve the community banking industry well as our financial world continues to evolve in the years ahead. I leave ICBA in the hands of my very able successor and the most outstanding staff in the association world. It has been the greatest honor of my life to represent and advocate for our nation’s community banks. I will never be able to adequately thank all the thousands of community bankers who have helped and encouraged me over the years. Just know that I will always be grateful to you and hold a special place for you in my heart. You are the greatest men and women in America. And always know that it is you who make all of this work.
Thank you from the bottom of my heart. I wish all of you well and great success. Farewell. Q2.18 | JUNE 2018 3
Never Give Up From the Chairman
Jaimey Schempp, Chairman of ICBSD, Premier Bank, Alcester, SD
“Walking the halls of Congress it may be easy to become overwhelmed or complacent about the legislative process, but I am always encouraged by our Senators’ and Congresswoman’s willingness to listen and understand the issues and the continued message to “Never give up coming to D.C., and we love to hear from South Dakotans”. Flying into Washington D.C. can always be an adventure. I will always remember the first time I came out of the metro at Smithsonian station to see the Washington monument standing over the complex, and shortly thereafter watching helicopters landing on the south lawn of the White House. I probably looked like a kid visiting Toys-R-Us for the first time. Although age and grey hair have probably dulled my reaction, it was still exciting to be in Washington for the annual policy summit. I was a first-time attendee at the policy summit and by the final day, I finally got my North-South directional senses established like most South Dakotans need to get figured out. In addition to many historical reference points in Washington, you quickly are reminded of due process, privilege and frustrations that are involved in the legislative process. Independent Community Bankers came to town riding the wave of the successful passage of Senate Bill 2125, and also asked the legislatures in the house to pass a similar bill. We thanked Senator Thune and Senator Rounds for their support of the Senate bill, and encouraged the senators and Representative Noem to continue to help push the legislation on the house side. Our agenda with legislators included continued support of the crop insurance program and expansion of the USDA FSA guaranteed loan limits. All of our South Dakota legislators know the importance of these programs on our South Dakota
Mark your calendars 4 ICBSD 2018
rural economy. Walking the halls of Congress it may be easy to become overwhelmed or complacent about the legislative process, but I am always encouraged by our Senators’ and Congresswoman’s willingness to listen and understand the issues and the continued message to “Never give up coming to D.C., and we love to hear from South Dakotans”. I would recommend to each of you to have on your desks the contact information for the legislators or staff of their offices, so you can quickly contact them with banking related issues. Going to D.C. is typically a working vacation. In addition to the seminars and visits to the hill there is always a little time to catch a museum. As many of you are making your summer schedule, I would also like to encourage you to attend another working vacation this summer for the ICBSD annual retreat. I would also encourage your bank to invite employees and families of your staff who may not have typically attended. The annual retreat will once again be structured as a family event with a great time of networking, learning by some content and other bankers and plenty of time to see the beautiful Black Hills with your family. This past week I just heard of the Poet’s Table. I think I will make that a treasure hunt this year in Custer State Bank. See you in July at Sylvan Lake.
2018 ICBSD annual Retreat
26 –28, 2018 REGISTER TODAY AT ICBSD.COM
Let’s Sow the Seeds of Change
From the Chairman
Timothy K. Zimmerman, Chairman of ICBA
“Our industry’s future holds so much promise, but it is up to us to plant those seeds now. Our customers, our communities and our nation will thank us.”
Anxious, humbled, excited. Those were the three words I used to describe how I was feeling as I became your new ICBA chairman at ICBA Community Banking LIVE in Las Vegas just a few short weeks ago. I was anxious because of the tremendous sense of responsibility I feel to properly and effectively represent you; humbled because of the opportunity I’ve been given to help make a positive difference for an industry that I love; and excited about the opportunities we have to achieve meaningful regulatory relief and being part of the significant changes that are happening at ICBA. As you know, we’re transitioning from Cam Fine’s leadership to Rebeca Romero Rainey’s leadership this month. Cam has led the transformation of ICBA into the most influential and respected financial services organization in the nation. I can’t thank him enough for his work on behalf of our great industry. It’s a tough act to follow, but in Rebeca, we have found the perfect answer to that challenge. She is the right person with the right talent at the right time to lead us into the future. I am very excited about the prospect of working with Rebeca, the executive committee, the incredible ICBA staff
and, of course, all of you – my fellow community bankers – over the next year. You are all my ICBA family, and everything we do will be a genuine team effort! That’s why, for my speech in Las Vegas, I chose the classic children’s story The Little Red Hen to illustrate how we will continue to accomplish great things for community banking over the next year. Think about it: If ICBA and community bankers around the nation were not fighting to lessen the burden that crushing over-regulation has on our industry sector, would the U.S. Congress be close to passing bipartisan community bank regulatory relief? If we had not been vocal at FASB’s headquarters in Norwalk, Conn., do you think community banks would have gotten any meaningful changes to CECL? If we had not pushed so hard, would ICBA community bankers have been invited to the White House twice last year to discuss regulatory relief? The answer to all these questions is a resounding “No.” Because we all did our fair share and helped throughout the growing season, all of the seeds that we sowed eventually became a delicious loaf of bread that we could all enjoy. Thank you all for saying, “I will” instead of “not I.”
That’s why we have to keep the momentum going, and it’s why I’m asking all community bankers to not only keep up their personal advocacy but also to identify a community banker who is not currently involved and show them how they can help. Show them ICBA’s vast grassroots advocacy and communications resources, and, most importantly, show them why nobody else can do it for them. Our industry’s future holds so much promise, but it is up to us to plant those seeds now. Our customers, our communities and our nation will thank us. I look forward to working with you over the next year to make great things happen for our industry! Q2.18 | JUNE 2018 5
Perspective from Pierre
by Dean Krogman, ICBSD Lobbyist
The 2018 State Legislative Session came to an end in early March. Overall, it was a successful session!
“In total, 535 bills were introduced and 235 were passed (53%). Some may argue 53% is far from “successful”; however, the fact is the highest percentage of passed bills is 57%.”
In total, 535 bills were introduced and 235 were passed (53%). Some may argue 53% is far from “successful”; however, the fact is the highest percentage of passed bills is 57%. Of those that didn’t pass, most were bills that all fell within the same category. Many pertained to: the election process, gun ownership, land ownership, and alcoholic beverages. During the session, we heard a number of complaints regarding legislators raising their salary and the conflict of interest at hand. The fact is we are a citizen legislature in a small state; we will always have conflict. Furthermore, in order to eliminate “conflict of interest” more than half of the legislature would have to recuse themselves from voting on the budget, which isn’t realistic. On that note, the most important bill in the legislature is the budget bill. Less than 15% of the budget goes to run state government. Forty-nine percent goes to education, with the remaining going to social services and transportation. That is to do for the people what they can’t do form themselves. Below is a summary of the bills the ICBSD monitored throughout the legislative session: S.184 – This bill was first read in Senate and referred to Senate Commerce and Energy S.J. 294. In February, the bill was withdrawn at the request of the Prime Sponsor S.J. 432. HB 1032 – Sponsored by the Committee on Commerce and Energy, the purpose of this bill is to exempt credit unions from the requirements to be licensed as real estate brokers. This was signed into law on March 1, 2018. HB 1072 – Simply put, HB 1072 is the product of the Governor’s Trust Task Force and is aimed at cleaning up existing trust laws. This bill was passed. HB 1082 – This is a bill that addresses contracts for deeds in the sale of assets. This bill was signed into law without an opposition. This is a bill that addresses contracts for deeds in the sale of assets. I don’t expect there to be any opposition. The bill clarifies when the sale of assets is done with a contract for deed.
It is a great pleasure to represent our community bankers at the State Capitol. If you have any questions or concerns regarding feel free to contact me.
HB 1094 – HB 1094 is sponsored in part by our own Representative Hugh Bartles. This bill was signed, and revises certain provisions regarding limitations on licensees engaged in the business of making loans.
HB 87 – HB 87 proposed revised provisions regarding the lawful possession of a firearm in certain locations. The bill was amended to require the installation of security in “gun free” zones. The bill did not pass with a vote of 16 to 19.
HB 1248 – The purpose of HB 1248 is to revise certain provisions regarding filing and recording secured transaction records with the Office of the Secretary of State. This has been signed into law.
Thanks for the opportunity to work with you. 6 ICBSD 2018
“The Senate passed the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) on March 14, 2018. The Senate’s passage of this bill is a shining example of the powerful change that can happen when our voices are heard.”
Federal Delegates Report by Emily Hofer, ICBA National Director, Merchants State Bank, Freeman, SD
change that can happen when our voices
ICBA. My hat off to all of the bankers that
are heard. Our contributions to the
saw the importance of taking the time to be
ICBPAC gave us a seat at the table, and
part of sharing our message, which was clear.
our many calls and emails to Congress
We thanked Sen. Rounds for co-sponsoring
did not fall on deaf ears.
S. 2155 and for helping to create a pathway
I would like to take this opportunity to thank Dick and Peg Behl of The Farmers
for bipartisan community bank regulatory relief. Our talking point priorities were to
and Merchants State Bank (Scotland,
get S. 2155 to the President’s desk and signed
SD) for their tireless work co-hosting this
into law, to ensure a level playing field in the
year’s ICBPAC auction and fundraiser
financial services industry, to preserve equal
at the ICBALive18 National Convention
community bank access to the secondary
in Las Vegas. Dick, who is infamous for
mortgage market, and to stop the credit
As I write this letter, we are in that
running our ICBSD PAC “Last Banker
union and Farm Credit System mission-
magical, mystical season of “Sprinter”
Standing,” put his skills and passion
here in SD. The geese are sitting on
to work to for the national association.
Silver Lake outside Freeman as I type this
Congratulations to the Behls for co-
column, wondering why they headed
hosting a record-breaking fundraiser!
For our ag customers Spring holds the promise of a great future. Recent regulatory successes have shown us that
north so soon. The robins are chirping in revolt of Mother Nature’s belated April
The PAC fundraiser is always one of
our industry’s future also holds great
Fool’s joke of six inches of snow on April
my favorite events of the National
promise. Community banks hold the
3. Our farm customers who calve late
Convention. However, the quality of
are cursing the weather, and the row
speakers and educational opportunities
crop farmers are wondering when, if
are second to none. In the last general
ever, they will get in the field. April snow
session, Gretchen Carlson, author and
brings May flowers – said no one ever!
Chairwoman of the Miss America board
seeds to America’s economic prosperity in our hands. It is up to us to plant those seeds and continue to be the Difference Makers in the communities that we serve.
of directors, challenged each of us to Although the current weather leaves little
Thank you for your continued
“Be Fierce,” tell your story, and control
to celebrate, the Community Banking
membership in ICBA and ICBSD, and
your own story. As community bankers,
industry has something to celebrate.
thank you for giving me the opportunity
we need to do just that. We cannot stop
to serve on the Federal Delegate Board.
Many of us were in Las Vegas in March when our industry had a big day and
telling our story.
I will continue to tell the Community
took a positive step forward. The
The ICBA Capital Summit in Washington,
Bank story to anyone who will listen!
Senate passed the bipartisan Economic
D.C., April 8-11, was an opportunity to
Feel free to contact me at any time if you
Growth, Regulatory Relief and Consumer
do just that – tell our story. This year SD
have questions, comments, issues, etc.
Protection Act (S. 2155) on March 14,
sent over twenty community bankers and
I’m always happy to hear from other
2018. The Senate’s passage of this bill
advocates to the Summit to build upon the
bankers. I can be reached at ehofer@
is a shining example of the powerful
strong foundation of advocacy created by
msb-sd.com or 605-660-4790. Q2.18 | JUNE 2018 7
FROM CAPITOL HILL
Making Taxes Less Taxing
United States Representative (R-S.D.)
When you sent in your 2017 taxes, you filed your last return under the old tax code. Because of the historic tax cuts I helped negotiate with President Trump, next year’s bill will be
“At the end of the day, around 90 percent of Americans will see an increase in their takehome pay because of the tax cuts. It was the honor of a lifetime to work with President Trump to negotiate this deal and help deliver on his agenda to make taxes just a little less taxing on South Dakota families.”
significantly lower for many. In fact, the average South Dakota family of four is projected to save more than $2,400. For me, the bottom line has always been that you work hard for your money and the federal government ought to respect that. It’s because of this foundational principle that I pushed, as one of only five House Republicans on the final negotiating team, for lower tax rates and to double the standard deduction. It’s also why I fought beside Ivanka Trump to double the Child Tax Credit and maintain the Child Care Credit. We also eliminated the marriage penalty and won key provisions for farmers, ranchers, and South Dakota job creators. But until a person punches in the numbers, it can be difficult to conceptualize what these changes really mean. Rather than waiting for Tax Day 2019, I wanted to share a few examples of what you can expect. Let’s look at Jim and Kelsie. Both are teachers making $45,600 each, which is about average in South Dakota. The couple has two children. Under previous law, the family would owe $6,288. Because their tax rate fell, their standard deduction was doubled, and their Child Tax Credit went from $1,000 per child to $2,000 per child, Jim and Kelsie will now owe $3,683 – a $2,605 savings. Let’s look at another example. Liz has been working in marketing for seven years. She makes around $54,000 and doesn’t have any children. Because of the historic tax cuts, Liz will get to keep an extra $100 a month from her paycheck, helping her save for a much-needed new car. For many, the benefit on their tax returns is only part of it. Millions across the country have received bonuses, pay raises, or better benefits. Many companies – including major employers like Walmart – have increased their minimum wages. We’re seeing new companies pop up, energy costs are going down, and people are feeling more confident about the direction our country is headed in. At the end of the day, around 90 percent of Americans will see an increase in their take-home pay because of the tax cuts. It was the honor of a lifetime to work with President Trump to negotiate this deal and help deliver on his agenda to make taxes just a little less taxing on South Dakota families.
8 ICBSD 2018
Thank you for supporting the ICBSD Political Action Committee! PAC 100 Contributors: David Ebbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Mark Tetzlaff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Jan Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank David Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Hugh Bartels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Mark Lee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Claire Konold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Robert Smithback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliabank Duane Roseth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First National Bank, Phillip The ICBSD Political Action Committee helps provide South Dakota community banks with a strong voice in state politics through contributions to candidates for state elected offices. These contributions help ensure we have a seat at the table when issues affecting your bank are being discussed in Pierre.
Contribute Our thanks in advance for your support of the PAC 100. Your PAC 100 contribution supports legislative candidates throughout our bankersâ€™ districts. Contact Megan Olson to learn more. Your checks can be mailed to: ICBSD PAC, PO Box 615, Watertown, SD 57201
WELCOME New Associate Members WELCOME
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FROM CAPITOL HILL
Round’s Report U.S. Economy is Improving Thanks to Pro-Growth Policies
United States Senator (R-S.D.)
“In Congress, we’re building on this momentum by advancing legislation that rolls back costly, onerous regulations on small businesses, small-to-medium-sized financial institutions, farms and ranches so they can get back to work for their customers instead of focusing valuable time, energy and money on compliance.” The United States economy is looking up, thanks in part to the pro-growth policies implemented by the current administration and this congress. Since President Trump took office, 3 million new jobs have been created. Nearly 800,000 jobs have been created just since the Tax Cuts and Jobs Act was enacted in January. Our economy is growing at a faster rate than previously expected. Prior to the passage of the Tax Cuts and Jobs Act, the nonpartisan Congressional Budget Office (CBO) projected that the U.S. economy would grow 2.1 percent in 2018. Now that tax reform has been signed into law, CBO changed their outlook and now predicts that it will grow 3.3 percent this year. This is great news for employers wanting to grow their businesses and for employees looking for higher wages or new jobs. In Congress, we’re building on this momentum by advancing legislation that rolls back costly, onerous regulations on small businesses, small-to-medium-sized financial institutions, farms and ranches so they can get back to work for their customers instead of focusing valuable time, energy and money on compliance. The president recently signed into law the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act, of which I am an original sponsor. This new law begins to undo the unnecessary regulations placed on smaller, local banks and credit unions under the 2010 Dodd-Frank Act – financial institutions that had nothing to do with the 2008 crisis. Making sure families and businesses have access to credit when they need it is critical as we work to grow a healthy American economy, and relieving smaller financial institutions from costly, burdensome regulations frees them up to do what they do best: serve their customers and support their communities. The Economic Growth, Regulatory Relief and Consumer Protection Act includes seven provisions that I authored. Some 10 ICBSD 2018
of these include the Home Mortgage Disclosure Adjustment Act, which provides small banks and credit unions with data reporting relief, as well as a measure to provide relief from Dodd-Frank capital rules to banks and local governments that issue debt so banks can count high-quality municipal bonds toward capital requirements. It provides relief from the enhanced supplemental leverage ratio – or eSLR – for custody banks that service mutual funds and state and local pension plans. It also includes my provision to streamline federal rules to help small, local federal savings associations, or thrifts, expand their ability to offer loans to more families and businesses without going through a costly charter conversion process. The law also includes a provision from my Community Bank Access to Capital Act that would make it easier for banks with less than $3 billion in assets to raise capital and grow. Another important provision included in the law is the Protecting Veterans Credit Act, which protects the credit of veterans who are awaiting reimbursements from the VA Choice program. Lastly, the law includes rural appraisal relief for instances when borrowers apply for a loan less than $400,000 and have difficulty finding a qualified appraiser – which is a fairly common occurrence in rural areas in South Dakota. This new law, in addition to tax reform and the other progrowth economic policies we’re advancing, will continue to boost business in America, and result in more jobs and higher wages. When businesses aren’t tied down by heavy-handed federal regulations, they are free to be innovative and reinvest into the economy. And when smaller, local banks and credit unions don’t have to spend the majority of their time and money on compliance, they can focus on providing services to their customers. The economy is improving because the era of government-knows-best policy is finally coming to an end.
FROM CAPITOL HILL
A Race We Can & Should Win
United States Senator (R-S.D.)
“I’m hopeful that lawmakers in Washington can help these new American pioneers cross the finish line faster and more efficiently, because if we don’t win this race, another country will. ” The United States has experienced
When it comes to mobile broadband
We were close, though, which is why I
numerous technological revolutions
technology, in particular, of which
reintroduced the bill on the very first day
throughout its relatively short history that
media consumption is only one small
of the 115th Congress in 2017. Our
have been so monumental that life as
part, I believe American innovators and
hard work and persistence paid off. The
Americans knew it would never be the
entrepreneurs are at the doorstep of
committee passed it again, and, as part
same. Henry Ford made automobiles
another “what’s next?” moment. I’m
of a larger legislative package, so did
and the assembly line a reality. Scientists
hopeful that lawmakers in Washington
the full House and Senate. Our multi-
helped American astronauts take “one
can help these new American pioneers
year effort culminated with the president
giant leap for mankind.” And U.S.
cross the finish line faster and more
recently signing it into law.
innovators and academics played a
efficiently, because if we don’t win this
pivotal role in making the internet as
race, another country will.
integral to our day-to-day lives as it is today.
Now that it’s the law of the land, I hope we can move quickly to cut unnecessary
In early 2016, I introduced the Making
and overly burdensome red tape so
Opportunities for Broadband Investment
U.S. innovators can continue to move
It was Americans’ desire to ask “what’s
and Limiting Excessive and Needless
the ball down the field. By deploying
next?” that led to each of these
Obstacles to Wireless (MOBILE NOW)
newer, modernized infrastructure, like
technological revolutions in the past, and
Act, bipartisan legislation that would
small cell technology, and making
lay critical groundwork for the next
more of it available for broadband,
generation in wireless broadband
including inefficiently used government
technology. At the time, I said the MOBILE
spectrum, the airwaves over which mobile
NOW Act would be our passport to a 5G
communications travel, we can achieve
future of gigabyte wireless connectivity,
it’s already leading to those of the future. An easy example of this is the evolution in how we’ve consumed media over the last century and the technology that has allowed us to do it. We had books and newspapers, then radio and television, then color television, then VHS and VCRs,
and I believe it now more than ever.
My hope is that as this new technological
then DVDs and Blu-ray, and now with a
While the Senate Commerce Committee,
revolution continues to take shape, states
few quick clicks, you can watch a movie
which I chair, easily approved this
like South Dakota can play a leading role
from a wireless tablet on a chair in your
common-sense legislation a few months
in making it a reality. Some might say,
backyard or on an internet-connected
later, it unfortunately didn’t make it to the
“why South Dakota?” And to them, I say,
airplane at 30,000 feet.
Senate floor before the end of the year.
why not? It’s within reach. Q2.18 | JUNE 2018 11
Community Banker Victory: President Signs S. 2155 into Law Pro-growth law will help community banks of all sizes “This landmark law signed by the President today unravels many of the suffocating regulatory burdens our nation’s community banks face and puts community banks in a much better position to unleash their full economic potential to the benefit of their customers and communities,...” “This landmark law signed by the President
messages to lawmakers, congressional
today unravels many of the suffocating
testimony, joint state association letters,
regulatory burdens our nation’s community
petitions, articles and op-eds. Most
banks face and puts community banks in
recently, ICBA delivered to the House
a much better position to unleash their full economic potential to the benefit of their customers and communities,” ICBA President and CEO Rebeca Romero Rainey said. “While this new law will make a Washington, D.C. (May 24, 2018) – The Independent Community Bankers of America® (ICBA) today thanked President Trump for signing into law the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155). The new law will spur greater consumer access to credit and business lending in Main Street communities nationwide. The House passed
positive difference for community banks, there is plenty more work ahead of us to ensure a tiered and proportionate regulatory environment that will allow community banks and local communities to flourish.”
a petition signed by more than 10,000 community bank employees and allies urging immediate passage of the regulatory relief bill. “There are beneficial regulatory relief measures in this law for community banks of all sizes,” said ICBA Chairman Tim Zimmerman, CEO of Standard Bank in Monroeville, Pa. “We thank the
As illustrated in a new digital timeline outlining ICBA’s road to regulatory relief, the new law was signed after years of outreach by ICBA and community bankers. ICBA’s tireless
president for signing this vital community bank regulatory relief legislation into law, along with the members of Congress who stood up for Main Street
the ICBA Plan for Prosperity-inspired
advocacy campaign included hundreds
communities by supporting the bill. It
legislation on Tuesday with a bipartisan 258-
of meetings with policymakers on
will go a long way in helping community
159 vote following the Senate’s 67-31 vote in
Capitol Hill and at the White House,
bankers like me serve the needs of our
tens of thousands of community banker
customers and communities.”
For more details about what’s in the bill, view www.icba.org. 12 ICBSD 2018
Earlier this quarter, the ICBSD signed the following joint letter urging the House of Representatives to oppose any farm bill amendments that would reduce funding for crop
insurance programs and encouraging lawmakers to provide the USDA with greater flexibility for its guaranteed farm loan
A New Farm Bill
programs and resist any expansion of Farm Credit System
Dear Members of the House of Representatives:
expand FCS activities and ensure FCS loans and investments match the lending constraints in current statute.
The undersigned state banking associations, which represent 5,700 community banks in the United States, most of which are in rural areas, thank you for your untiring work in developing a new farm bill to replace the current legislation which expires September 30. Farm income has dropped precipitously by over 50 percent since 2013 making a new farm bill vital to our nation’s farmers and ranchers, our rural communities and the community banks that serve them. While there is much work yet to do on the farm bill, we make the following recommendations as the bill moves to the House floor. A robust commodities title is necessary to help farmers survive the current distress impacting the farm economy. Crop insurance is a vital risk management tool for producers, enabling them to obtain loans and repay loans when widespread weather disasters strike. Crop insurance has been an overwhelmingly successful program representing a true partnership between producers and taxpayers, with farmers contributing nearly $4 billion per year towards premium costs. Rural bankers will tell you emphatically whatever you do in the farm bill, do not make cuts to the crop insurance program. We strongly urge you to oppose any amendments that reduce funding for crop insurance programs, including those that raise premium rates by restricting participation or reducing premium support to certain producers or those that raise costs of private sector delivery. The United States Department of Agriculture (USDA) should be provided greater flexibility for guaranteed farm loan programs. Guaranteed farm loan limits should be raised from the current $1.4 million level to $2.5 million to accommodate the needs of modern day family farmers. The commercial banking sector is the largest provider of production loans to farmers and ranchers and it will be much easier to continue serving producers experiencing financial stress if Congress provides ample funding and raises loan limits for these programs. Banks and their borrowers should also be able to choose to obtain loan approval in either the county where the bank is located or where the producer is located to speed up processing time and better accommodate the thin resources of many county offices and their staffs. We strongly oppose any expansion of the Farm Credit System’s (FCS) lending and investing authorities. The FCS is a government sponsored enterprise (GSE) with significant tax and funding advantages over private sector, tax-paying commercial banks. The FCS’s overall tax burden is 0.7 percent and FCS’s numerous advantages allow their cherry-picking of banks’ best loan customers. We urge members to reject any effort to
lending and investing authorities. We thank you, our valued members, for your support and partnership on this initiative!
Thank you and we look forward to working with you as the Farm Bill moves through Congress. Sincerely, Alabama Bankers Association, Inc. Arkansas Community Bankers Arizona Bankers Association Community Bankers of Washington California Community Banking Network Independent Bankers of Colorado Florida Bankers Association Community Bankers Association of Georgia Community Bankers of Iowa Idaho Bankers Association Community Bankers Association of Illinois Indiana Bankers Association Community Bankers Association of Kansas Bluegrass Community Bankers Association Louisiana Bankers Association Massachusetts Bankers Association, Inc. Maryland Bankers Association Maine Bankers Association Community Bankers of Michigan Independent Community Bankers of Minnesota Missouri Independent Bankers Association Mississippi Bankers Association Montana Independent Bankers North Carolina Bankers Association Independent Community Banks of North Dakota Nebraska Independent Community Bankers New Hampshire Bankers Association New Jersey Bankers Association Independent Community Bankers Association of New Mexico Independent Bankers Association of New York State Community Bankers Association of Ohio Community Bankers Association of Oklahoma Oregon Bankers Association Pennsylvania Association of Community Bankers Independent Banks of South Carolina Independent Community Bankers of South Dakota Tennessee Bankers Association Independent Bankers Association of Texas Virginia Association of Community Banks Vermont Bankers Association, Inc. Wisconsin Bankers Association Community Bankers of West Virginia Wyoming Bankers Association Q2.18 | JUNE 2018 13
Hometown Banking With Your Neighbors And Friends
Whether he’s reading The Wall Street Journal or the Scotland Journal, Dick Behl, President of Farmers and Merchants State Bank of Scotland always finds plenty of information relevant for his day-to-day life.
generations of the Behl family to serve the community through bank ownership. “It was my destiny, really,” said Behl, who explained that his granddad (George D. Behl) was at the helm of the bank starting
On the same day that the national news recently touted President Trump signing into law ICBA’s #S2155, the local paper delivered news of Scotland’s state track qualifiers, vocal and band awards and results of the Scotland Academic Pizza Quiz Bowl. Dick Behl takes his bank’s motto, “Hometown Banking With Your Neighbors and Friends” completely to heart. Located just 28 miles from Yankton, SD, Scotland currently boasts a population of 981. The east edge of town features parks and rodeo grounds. With approximately 60 local businesses, a thriving K-12 school, a local hospital and South Dakota’s first ethanol plant, Behl is proud of his hometown. “The community continues to do surveys and keeps getting better for the people who live here,” he said. Both the city’s history and his own family’s history, are extremely important to this bank president. “We could spend more than a day going over some of the bank history and looking at artifacts from the family,” said Behl. The bank itself stands in its original location, built in 1919 at 550 Main Street. Farmers and Merchants State Bank was chartered and began operations on September 7, 1920. Now, along with his son, Michael Behl, they currently represent the third and fourth 14 ICBSD 2018
in 1938 – and continued through his death in 1969. After serving in the armed forces, George’s son, Darwin Behl joined the bank in August of 1941 and served until his death in 2015. “My mom, Marilyn Behl, joined the bank in 1945 and served as head of operations and public relations until her death in 2012,” said Dick Behl. While he essentially grew up in and around the bank, Dick Behl officially joined the bank in January 1977 and took over the day-to-day management of the bank as president in 1982. Michael Behl joined the bank in October 2009 and is active in compliance and IT. Behl said his three sisters are stockholders in Scotland Holding Co. which is 100
From left to right: Devin Lubinus, Ag Loan Off.; Michael Behl, IT, Compliance, & CFO; Shirley K. Herrboldt, Vice-President & COO; Annabelle Hlavac, Teller; Dick D Behl, Board Chairman & President; Patty Diede, Bookkeeping; Mary DeBoer, Cashier; Ashley Fischer, Teller, Asst Internal Audit; not shown: Jean Pravecek, Internal Auditor; Courtnee Edeleman, Teller.
percent family owned and owns 95% of the bank stock. While all three of his children have worked at the bank for periods of time, Behl’s wife Peg, served as director of nursing at Scotland’s LandmannJungman Memorial Hospital. Although she has recently retired, their two daughters have followed her footsteps into the medical profession. In addition to Behl’s immediate family, he recalled many others who have become “like family” over the decades. In fact, on staff right now three of the 10 employees have celebrated their 33-year, 20-year and 18-year anniversaries. And none of them mentioned any intentions of moving on. More Scotland High School students than Behl can count got their “start in the working world” as employees at Farmers and Merchants State Bank. That tradition continues this summer as his granddaughter, Annabelle, is learning how things work behind the scenes. “While I’m proud of all of them, I’m especially fond of those who went on to college and then came back,” he said. Behl has obviously seen plenty of changes – and challenges – during his time at Farmers and Merchants State Bank. He illustrated his point by showing an index card-sized “loan document” that was used decades ago by the bank. By contrast, loans now require multi-page documents with many, many signatures and initials.
He is quick to say that belonging to ICBA and ICBSD has been extremely beneficial in keeping up with current information. “Sometimes we’re used as a litmus test for how rules and regulations affect the smaller banks,” he said.
he said. “Now I feel we’re basically a big family. I know I can pick up the phone at any time and ask a question.”
Behl has served as ICBA federal delegate board member for SD for six years and is currently on the ICBPAC committee, working on bi-partisan legislation in Washington, D.C.
Community banks in the surrounding communities of Tabor, Freeman, Menno, Tyndall, Avon, Tripp, Parkston and Wagner are also thriving – and Behl couldn’t be happier. Because of local loyalties, Behl said the smaller banks often create lifetime customers.
“ICBA offers a lot of opportunities for a small town banker,” he said. “If I can do it, every single banker should be involved.”
“We have several people who opened their accounts while they were in high school and still keep their business here,” he said.
Behl has also served on the ICBSD board as chairman and past chairman, working with the PAC committee fundraising, encouraging bankers to regularly contact their legislators. As an ICBPAC co-chair couple of a recent ICBPAC fundraiser, Behl and his wife, recently raised $575,000 in one night with a combination of live auction and silent auction items. A South Dakota pheasant hunt package was highly sought after – and raised a record amount.
It seems the more things change, the more things stay the same in Scotland.
Although he feels his time away from Scotland on ICBA business is beneficial, Behl really values the information he can bring back to his hometown. And while Behl says he can be “very vocal” about the issues now, it wasn’t always that way.
With the 100th anniversary of Farmers and Merchants State Bank rapidly approaching, Behl continues several long-standing family banking traditions – including printing the annual calendars that they continue to give away by the hundreds every year. “We would never want to disappoint anyone. Our customers depend on us – and we depend on them year after year,” he said.
“It took me two years to get up the courage to go to a board meeting,” Q2.18 | JUNE 2018 15
“As a lobbyist, Krogman finds that keeping current on the issues is the key to his success. Changes in technology have made access to information increasingly more convenient.”
Dean Krogman ICBSD Lobbyist
If you’ve walked the halls of the State Capitol in Pierre during legislative sessions in the past 27 years, you’ve
likely met Dean Krogman. “I’m there every morning before the committee work starts,” said Krogman, a long-time Brookings resident and
lobbyist for ICBSD. Krogman knows the physical layout of the Capitol building well, as he previously served as a state
by Twila SchMitt ICBSD Correspondent
representative in the South Dakota Legislature representing Brookings County from 1984 to 1989. As a lobbyist, Krogman finds that keeping current on the issues is the key to his success. Changes in technology have made access to information increasingly more convenient. “I can do my research on the computer and be in communication with ICBSD leaders almost immediately,” he said. “You never know what is going to pop up.”
16 ICBSD 2018
firstname.lastname@example.org Office: 605-335-9164 Cell: 605-695-3497 Capitol: 605-224-5030
Most recently, Krogman helped keep an eye on any activity involving change in trust laws and filing system for security agreements.
Krogman’s own relationship with South Dakota Governor’s office
While issues in banking are always evolving, Krogman said his years of experience in the banking industry have been invaluable. Representing community banks comes naturally for Krogman who believes that these professionals are “meeting the critical needs of rural areas and smaller towns.”
changed when a state airplane crash resulted in the death of
Krogman prefers face-to-face contact with legislators whenever possible. “Depending on the issues, I try to catch the legislators at their desks,” he said. “But if I need to, I can also catch them as they are walking around.” When he is not physically at the Capitol, Krogman’s day still typically includes meetings, calls, emails, letters, action alerts and other communications. During months when the Legislature is not in session, the ICBSD lobbyist delivers several Legislative wrap-up meetings and this spring has been focusing on upcoming elections. “We encourage bankers to develop relationships with legislators,” he said.
harkens back to then Gov. George Mickelson’s years. Krogman was in line to become Mickelson’s Chief of Staff, but everything Mickelson and seven others on the flight. “I took him to the airport,” Krogman said of that fateful day 25 years ago when he stayed behind because the plane was already full. He recalls the event as one that deeply affected the entire state. During his professional career, Krogman has worked in real estate, wholesale financing and banking, served on the school board in Brookings, held positions on the S.D. Board of Regents and has been part of a host of community organizations. A native of Adrian, MN, Krogman became a South Dakota State University Jackrabbit right after high school graduation. “I guess you could say I went to Brookings in 1968 and never left,” he said. He and his wife, Linda, have three grown children and nine grandchildren, who all live in Brookings. Q2.18 | JUNE 2018 17
“As the communities have gotten smaller, the banks remain the backbone of the economy,” he said. “The importance of community banks cannot be overstated.”
Todd Gochenour FDIC Regional Ombudsman
KNOW by Twila SchMitt ICBSD Correspondent
For FDIC Regional Ombudsman Todd Gochenour, a fascination with currency arrived early in life. “It all started as a kid digging for treasures in the yard,” said Gochenour, a Missouri native who now oversees the FDIC Kansas City operations. “I found some round pieces of silver, one of which was an 1842 dime…and the rest is history,” he added. Well, there might be a little more to his story, as his career with the Federal Deposit Insurance Corporation began more than 30 years ago. Prior to assuming his current role as regional ombudsman in July 2016, Gochenour worked for FDIC as a case manager and risk management supervisor. While at one point, he had regular contact with consumers, his contacts are now 95% bankers. Gochenour explained that his current job as regional ombudsman is basically a connection between the seven Midwestern states he oversees and the FDIC office in Washington, D.C. Among his job duties are meeting with heads of trade associations (such as ICBSD), state commissioners and field supervisors.
18 ICBSD 2018
“We are here to allow the bankers an open line of communication,” he added. “We are always looking for feedback,” he explained. Gochenour literally covers a lot of ground, as his territory includes North Dakota, South Dakota, Minnesota, Iowa, Nebraska, Kansas and Missouri. When the number or nature of comments received from the industry about a regulatory issue indicates a trend, the Office of the Ombudsman may report the issue to FDIC’s executive management for consideration and possible action. Ombudsman is a Swedish word that essentially means “mediating disputes,” according to Gochenour. An ombudsman is a neutral party, someone who is independent and confidential, he said.
Typical issues that Gochenour works on might include ratings discrepancies or a rare personality conflict. His job is to find out and report both sides of the story. The Kansas City FDIC Region is one of six across the country, including Atlanta, Chicago, Dallas, New York and San Francisco. One of the biggest changes Gochenour has seen over the past three decades with FDIC is the shrinking population in so many Midwestern towns. “As the communities have gotten smaller, the banks remain the backbone of the economy,” he said. “The importance of community banks cannot be overstated. If the bank is sold and would have to close, it could be very bad for the town.” Looking toward the future, Gochenour said issues such as cyber security will take center stage. Efforts will also continue for regulatory relief for community banks. Outside of work, Gochenour has been married to his wife, Kristin, for the past 29 years. They have one daughter, Allison, who just graduated from grad school – and three beagles, just to keep life interesting. An avid baseball fan, Gochenour decided early on to cheer for the Kansas City Royals, while his brother decided to support the St. Louis Cardinals. “We grew up in the middle of Missouri, so it could have gone either way. It gives us a little something to spar about,” said the ombudsman. Gochenour still likes to collect coins, mostly U.S. coins such as wheat pennies and silver dollars. And, in case you’re wondering, he still has that original 1842 dime!
Todd Gochenour Regional Ombudsman, Kansas City Regional Office
Q2.18 | JUNE 2018 19
2018 US Bank
Market Report Executive Summary • Rising interest rates will support stronger net interest margins at U.S. banks, but tax reform will offer a bigger earnings boost in 2018 and push returns on equity well into the double-digits, even against elevated capital levels. • In our baseline scenario, which does not include the impact of an upcoming change in banks’ reserve methodology, returns on average assets and average equity will expand due to a lower corporate tax rate and interest rate increases, pushing the industry’s ROAA and ROAE as high as 1.25% and 11.29%, respectively, in 2019. But credit costs will rise shortly thereafter and serve as a considerable earnings headwind to the industry. • Asset quality should remain strong in the near term, with tax cuts supporting the current credit cycle. However, the rush to lever tax reform’s windfall will spark more intense competition for loans, preventing yields from rising to previously expected levels. • Before credit quality sours, banks will start seeing more significant increases in deposit costs. Deposit betas, or the percentage of rate increases that institutions pass on to their customers, rose modestly in 2017 and should double in 2018 as the market digests higher interest rates and banks’ funding needs grow. • Competition will increase as the Trump administration achieves some level of regulatory relief, which could eventually lead to a slippage in underwriting standards. Less prudent lending practices could coincide with further increases in interest rates, causing more borrowers to default. • The adoption in 2020 of a new accounting standard that changes the way banks reserve for loan losses could come right as credit quality begins to turn. • That accounting standard, dubbed the Current Expected Credit Loss model, or CECL, will result in a sizable, onetime capital hit for the banking industry.
Bank profitability is poised to improve in the near term
Outlook Additional margin expansion lies ahead for the banking industry. That expansion, coupled with a lower corporate tax, should allow profitability to nearly reach pre-crisis levels. We expect that to occur in our baseline scenario, which excludes the impact of a new reserve methodology, known as CECL, that banks will adopt in 2020. When including the impact of CECL, we project that while the banking industry will record slightly higher net interest margins, it should report lower capital ratios and experience greater earnings volatility. S&P Global Market Intelligence created a baseline scenario as well as a separate outlook including the impact of CECL to offer an apples-toapples comparison between results before and after the adoption of the accounting standard. Projections in this report reflect our base case unless otherwise noted. Assuming interest rates increase as expected, the banking industry’s earnings are projected to jump 36.3% in 2018. Earnings should rise 4.2% in 2019 as higher interest rates continue to bolster profitability. S&P Global Market Intelligence sees earnings falling in 2020 as credit quality begins deteriorating. The projections also assume that in 2020, GDP growth will begin to slow and the unemployment rate will move modestly higher. The benefits of higher interest rates should also wane as funding costs catch up with the expansion in earning – asset yields.
• Most banks should have ample capital to withstand the blow, but Tax reform to offer a big boost to bank earnings (%) CECL could slow balance sheet growth as some institutions raise The lower tax rate stemming from tax reform and the benefit of rates on loans, while others look to rebuild their capital bases. being compared to a lower earnings base in 2017 should allow earnings to grow significantly in 2018. 20 ICBSD 2018
U.S. banks plan to share some of the windfall created by tax reform with their employees and customers, but the industry stands to retain more than 75% of the savings. A number of banks, including industry giants Bank of America Corp., Wells Fargo & Co., U.S. Bancorp, Capital One Financial Corp. and PNC Financial Services Group Inc., announced plans to use some of the windfall to increase their hourly minimum wage to $15. Some of those institutions and others are paying one-time bonuses to certain employees and have unveiled plans to make sizable charitable donations. S&P Global Market Intelligence estimates that the total cost of such plans will amount to just 1.75% of the banking industryâ€™s noninterest expenses in 2018. We believe expenses could remain elevated in the years after that as banks reinvest in their franchises.
Tax reform offers a large boost to bank earnings
increases in 2020 when credit begins to deteriorate as banks compete more aggressively to win new business. Banks will likely compete on price but could also ease terms and conditions to entice borrowers. Changes in the competitive environment could come right as regulatory pressures ease. The current presidential administration and Republican-controlled Congress have pushed to soften a number of regulations enacted shortly after the credit crisis. Even if logical, the change likely could open the door to further easing of underwriting standards. And this will occur as interest rates move higher, increasing the cost of debt service for borrowers. The higher costs could be enough to push some borrowers to the brink or, even worse, into default. CECL looming on the horizon Reserves are expected to rise even more beginning in 2020, when institutions must adopt a new methodology for calculating the allowance for loan and leases losses. The new provision is called the current expected credit loss model, or CECL. CECL will mark a considerable shift in how banks reserve for losses. Today, banks record losses when it becomes probable that a loan will be impaired, meaning reserves are dispersed over time. The process will change under CECL when banks significantly build their allowance for loan losses on the date of adoption. S&P Global Market Intelligence has developed a scenario to
* Assumes a 21% corporate tax rate and potential changes to expenses that will come from reinvestment of tax reform windfall, beginning in 2018. Sources: S&P Global Market Intelligence, proprietary estimates ÂŠ2018. S&P Global Market Intelligence. All rights reserved.
The windfall from tax reform will serve as an effective capital raise for banks, many of which already believe they have excess capital. Absent a notable increase in economic growth, banks likely will not be able to fully deploy the additional funds generated by tax reform. Many banks will use the newfound capital to go on the offensive and look to take market share.
estimate CECLâ€™s impact on the industry. In our analysis, we assumed all loan portfolios had terms of three and a half years, based on the current loan composition across the industry. We further assumed that reserves would equal cumulative net charge-offs in the three and a half years after adoption. We assumed uniform adoption by all banking subsidiaries at Jan. 1, 2020, and based the scenario on our longer-term outlook for credit quality. That outlook projects that loan portfolios will begin deteriorating more significantly in 2020,
Credit quality not a near-term problem
with net charge-offs eventually peaking at 1.36% of average
Against this backdrop, while credit quality should remain relatively strong in the near term, credit costs will emerge as a greater headwind to bank earnings. Banks will build reserves modestly over the next few years before incurring larger
loans in 2022. While the expected level of losses marks a considerable increase from current levels, peak losses are projected to be about half the level witnessed during the Great Recession. Q2.18 | JUNE 2018 21
Under that scenario, if CECL reserves match charge-offs over the period beginning in 2020, the required reserve build for the industry could reach $246.4 billion, or about 1.5x the level of reserves projected under our baseline scenario.
2020. That means additional increases in the allowance for loan
That scenario assumes that banks continue operating under the existing incurred loss model. The increase in reserves would result in a considerable capital hit to banks, reducing the industryâ€™s tangible equity-to-tangible assets ratio by 127 basis points in 2020. (see chart below)
Given that change, earnings would jump in 2022 under our
We expect banks to react to the change and raise rates on newly originated loans, particularly longer-dated real estate credits that will require a larger reserve build under CECL. We also assumed that loan growth will be slower than it would have otherwise been as banks with thinner capital ratios hoard cash and work to rebuild their capital bases.
Funding costs at U.S. banks are beginning to diverge
The industry as a whole is expected to do that through the normal course of operations and should earn back a considerable amount of the capital hit from CECL several years after adoption. Since CECL requires banks to reserve for the full life of loans at the date of adoption, much of the required reserves in future years will have already been set aside in
losses would be minimal in 2021 and 2022, resulting in lower provisions for loan losses than would have been recorded under the current reserve methodology.
CECL scenario, causing capital ratios to rebound right as credit losses are peaking. Deposit competition heating up as rates and funding needs rise significantly, setting the stage for more considerable deposit competition next year. Deposit betas, or the percentage of changes in market rates that banks pass on to their customers, climbed to 19.6% in 2017 from 13.5% in the first half of the year and 12.2% in 2016. While the fed funds rate did not increase much in the fourth quarter of 2017, the industryâ€™s deposit beta was 72.5% in the period. In 2017, 13 of the top 100 banks by deposits recorded betas exceeding 41%, the same level recorded by the industry in 2005,
CECL will cause large initial increase in reserves, hit to equity
CECL = Current Expected Credit Loss Model, a new reserve methodology most banks must implement beginning in 2020. Analysis assumes uniform adoption of CECL by all banking subsidiaries at Jan. 1, 2020. Assumes all loan portfolios have average life of 3.5 years based on current portfolio composition across the banking industry. Required reserves under CECL assume reserves equal cumulative net charge-offs in the 3.5 years after adoption. Net charge-off projection based on a longer-term outlook for credit quality, which assumes losses peak in 2022 and then decline. Sources: Federal Reserve, Fannie Mae, Freddie Mac, S&P Global Market Intelligence, proprietary estimates
22 ICBSD 2018
Deposit betas set to break out
Figures for the federal funds rate through 2019 are based on 3-point averages including estimates provided in The Wall Street Journal’s monthly survey of more than 60 economists. Figures for 2020 and 2021 are estimates from the Congressional Budget Office. Actual reported figures used when available. Sources: S&P Global Market Intelligence, proprietary estimates
which was the first full year during the last rate tightening cycle.
further out of the yield curve in both their securities and loan
Economists expect the Fed to raise rates three more times in
portfolios, with hopes of bolstering income.
2018, and we expect the industry’s overall beta to rise to 45% as depositors digest recent increases in short-term rates and banks’
Still, stronger loan growth, modest margin expansion and a
funding needs grow.
lower corporate tax rate should cause earnings to jump in 2018.
Rising deposit betas will limit how much banks’ net interest
Earnings growth should slow in 2019 as deposit costs increase
margins expand in 2018. Some of the benefits of higher interest
at an even quicker pace and credit costs begin to rise. (see chart
rates will be further mitigated because banks have reached
The full 2018 US Bank Market Report contains our full five-year outlook and historical data. It is available to S&P Global Market Intelligence subscribers, along with supplementary data exhibits and an industry projections template that allows for different growth assumptions in each year. Contact us for more information. Q2.18 | JUNE 2018 23
What is a ‘Legal Entity’
Under the Enhanced CDD? Kelly Goulart Sr. Manager, Regulatory Compliance email@example.com 512.275.2231 Janie Daniel Regulatory Compliance Adviser firstname.lastname@example.org 512.275.2221
: Is a homeowners association (HOA) a ‘legal entity’ under the Beneficial Ownership Rules effective May 11, 2018?
: No. But exactly what is and is not a ‘legal entity’ under the enhanced CDD rule is worth exploring.
Translation: “Legal entity customers” include the following entities created by a filing with a state office or with a Secretary of State: • corporations • limited liability companies • limited partnerships • general partnerships • business trusts • any other entity created by a filing with a state office • any similar entities formed under the laws of a non-US jurisdiction
: Who is a legal entity customer?
: The Rule defines a legal entity customer as a corporation, limited liability company, other entity created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. The definition also includes limited partnerships, business trusts that are created by a filing with a state office, and any other entity created in this manner. A legal entity customer does not include sole proprietorships, unincorporated associations, or natural persons opening accounts on their own behalf.
Translation The definition of “legal entity customer” does not include: • natural persons • sole proprietorships
Source: https://www.fincen.gov/sites/default/files/2016-09/ FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf
24 ICBSD 2018
• unincorporated associations, such as a local Girl Scout troop or a neighborhood association • trusts, other than statutory trusts created by a filing with a state office
: Are there any entities that are excluded from the definition of the legal entity customer and for which a covered financial institutions is not required to obtain beneficial ownership information?
LEARN MORE: IBAT.org/complianceadvisor
: Yes. The CDD Rule excludes from the definition of legal entity customer certain entities that are subject to Federal or State regulation and for which information about their beneficial ownership and management is available from the Federal or State agencies, such as: · Financial institutions regulated by a Federal functional regulator or a bank regulated by a State bank regulator; · Certain exempt persons for purposes of the currency transactions reporting obligations:
Translation Certain legal entities, including the following, are excluded from the Final Rule: • federal or state regulated financial institutions (e.g., federally regulated banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities) • bank and savings and loan holding companies • state-regulated insurance companies • publicly held companies listed on the New York, American, or NASDAQ Stock Exchanges • registered investment advisers and investment companies • SEC-registered exchanges or clearing agencies • entities registered with the SEC Compliance Adviser exclusive member benefit of ICBSD.
Callie Schlieman Call me at 701.433.7430
Based in Fargo, N.D., specializing in bank stock and Regulation O lending
Why choose Bell as your bank’s lending partner? We’re providing loans to banks across the country for capitalization, acquisitions, refinancing and restructuring. We’ll tailor terms and conditions to your bank and its owners. Bank stock & ownership loans Bank building financing
The enhanced CDD rule does not require a bank to update beneficial ownership information on a continuous or periodic basis: “the obligation for identification and verification should be considered a snapshot at the time that a new account is opened, not a continuous obligation.” However, if a bank learns of information about the customer that is relevant to re-assessing the customer’s risk, that would be an appropriate time to update beneficial ownership information.
For the Compliance Adviser Legal Ease archive, visit www.complianceadviser.org
Commercial & ag participation loans
Gene Uher 605.201.1864 Based in Sioux Falls, S.D., serving South Dakota, Nebraska, Minnesota and Iowa
Business & personal loans for bankers
Q2.18 | JUNE 2018 25
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IT’S TIME to
CELEBRATE Join us in congratulating our fellow community bankers on their recent accomplishments! featuring.... • First Dakota • BankStar • Citizens State Bank
Marc Mooney, Director of Branch Administration, is pleased to announce Marcy Moser has been promoted to Vice President — Director of Lobby Services. In her new role, she will work closely with Executive Management to provide leadership of sales and service practices throughout all 19 First Dakota locations. Moser has worked at First Dakota for 27 years, serving as Manager of the Yankton North office since 2006. She has been instrumental in sales and service training for many years, often taking her leadership expertise to other locations within the First Dakota banking system. Moser and her husband, Darren, live in Yankton. They have two grown sons, and two grandchildren.
First Dakota Aaron Ness, Executive Vice President and Yankton Market Manager, is pleased to announce Julz Tesch has been promoted to Branch Manager of the Yankton North location. Tesch has worked at First Dakota since 2005. She was promoted to Personal Banking officer in 2012, and Senior Banking Officer in 2016. She has been involved with bankwide training for many years, and currently trains Personal Banking Representatives and takes the lead training role for other bank operations as well. Tesch and her husband, Wiatt, live in rural Yankton. They have one daughter, Tenlie.
• American Bank & Trust • First National Bank of Sioux Falls send your happenings to:
email@example.com Marcy Moser and Julz Tesch 26 ICBSD 2018
First National Bank in Sioux Falls In March, First National Bank in Sioux Falls had their newest employees participated in Culture Camp – an opportunity to learn about each department and the bank’s FIRST Values. Members of our Executive Team joined the new employees for a service project. They worked together to make tie blankets for the Ronald McDonald House.
Jamie Olson Helps People Find the Right Mortgage Jamie Olson, Mortgage Loan Officer at American Bank & Trust in Huron, was highlighted in the Huron Plainsman’s ‘Women in Leadership’ publication in April. Olson was recognized for her expertise and the service she provides to mortgage customers.
BankStar Financial After 38 years of service, David McMahon has retirement on his mind!
Citizens State Bank Garret Reed (left) has been hired as an Agricultural Loan Officer Trainee at Citizens State Bank, Sinai branch. Donna Bittiker (right) has accepted the position of Internal Auditor/Risk Manager with Citizens State Bank in Arlington. Q2.18 | JUNE 2018 27
United Bankers’ Bank Announces Management Transitions Kevin Bostrom, Senior Lending Executive, Retires After 29 Years “Kevin helped build a firm foundation for UBB’s lending department. Conrad will undoubtedly bolster that foundation and continue to provide our customers with the same, high level of customer service and expertise they have come to expect from UBB,” stated Rosacker.” Bloomington, MN – Bill Rosacker, President and CEO of United Bankers’ Bank (UBB), announces the retirement of Kevin Bostrom, Executive Vice President, Chief Credit Officer, along with a series of promotions designed to maintain and enhance UBB’s lending capabilities and corresponding loan administration responsibilities. Bostrom officially retired on April 13, 2018. “UBB has made great strides during Kevin’s tenure,” said Rosacker. “His loyalty to UBB and earnestness for shaping
policy and strategy in the loan department has set us up for continued success, which leads to customer success – our first priority. He has left a solid structure in place with employees that not only have extensive banking expertise, but also many years of correspondent lending experience.”
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UBB Lending Department Transitions: Kevin Bostrom Executive Vice President, retired on April 13, 2018. Bostrom started at UBB in 1986 Conrad Newburgh Promoted to Chief Credit Officer and will assume the role previously held by Bostrom Dawn Tollefsrud Will serve as Vice President, Senior Credit Officer Lisa Brusen Recently hired as Vice President, Credit Administration Manager Ashley Lemke Promoted to Assistant Vice President, Lending Bostrom was a key contributor to the unprecedented growth in UBB’s balance sheet over his nearly three-decade term. This was evident, when you consider that UBB’s total bank assets and capital were $49.6MM and $2.8MM respectively when he started in 1986 and then fast forward to 2017, where total assets and capital ended the year at $877MM and $95.7MM. Equally as impressive was that total loans grew from $17.3MM to $616.4MM during this same time period. A loyal and customer focused trailblazer, Bostrom understood that there was a huge need for out-of-the-box solutions for correspondent lending while still maintaining quality loans. He was someone that knew that the secret to exceeding expectations was to listen to the customer’s story and understand their needs – adapting and delivering even when things didn’t go as planned. During the 2008 financial crisis, Kevin went above and beyond to advocate for his customers and worked tirelessly to assist them with their bank stock loans. His steadfast commitment made all the difference in guiding community banks through an unstable time. “Correspondent banking is all about cooperation and partnership. I’ve always felt strongly that participation lending was the ultimate partnership,” Bostrom shared. “I was driven to find the best way to support the ideal loan combination for the originating bank and those who participate: everyone helps, everyone benefits. I knew that UBB could fill that void in the community banking world.“ The internal changes Bostrom effectuated ultimately lead the UBB Lending Department in becoming the powerhouse for correspondent loan services that it is today. One notable change Bostrom lead was to restructure UBB’s process to include the review of each loan by a credit analyst in addition to the lender. This level of scrutiny and comprehensive review resulted in higher loan quality and stability. Conrad Newburgh came to UBB after working 30 years in commercial lending for First Bank and for 10 years at Excel Bank in Credit Administration and in Lending. He has served as UBB’s Senior Credit Officer since 2008, and has now assumed Bostrom’s responsibilities, as Chief Credit Officer. Having worked closely with Bostrom to expand services and improve credit quality, Newburgh will carry the torch to continue the growth trend at UBB. “Kevin expected all of us to do everything possible (within reason) to help our banks do their deals. This expectation remains, and will continue to be an integral part of our culture,” Newburgh noted. “Kevin helped build a firm foundation for UBB’s lending department. Conrad will undoubtedly bolster that foundation and continue to provide our customers with the same, high level of customer service and expertise they have come to expect from UBB,” stated Rosacker. “We are proud to say Kevin was one of our own, and we wish him the very best.”
About United Bankers’ Bank Headquartered in Bloomington, MN, United Bankers’ Bank is the nation’s first bankers’ bank, and a full service provider of correspondent banking services to community banks in: Minnesota, North Dakota, South Dakota, Montana, Nebraska, Indiana, Iowa, Wyoming, Idaho, Ohio, Oregon, Washington, Michigan and Illinois.
For more information please visit www.ubb.com
Q2.18 | JUNE 2018 29
BANKS of the WEEK • Dakota Prairie Bank was founded on June 25, 1906. • Dakota Prairie Bank is a third-generation, family-owned bank that has survived the obstacles of the past century, including the Great Depression. • They have twenty-two employees.
Dakota Prairie Bank 3 locations: Ft. Pierre, Draper and Presho
• Community involvement is their priority! Every Halloween, they host a community event called “Trunk or Treat” which is attended by 1,000 kids.
Learn more about Dakota Prairie Bank here at:
f • Employees: 36, all of which are locals. • Their roots run deep in their local communities, in some cases, over 100 years deep! • They pride themselves on local, relationship based decision making.
“If you row someone across the river, you will get there yourself.”
• Fun fact about Rivers Edge Bank: the branch in Marion has a salt and pepper shaker collection. The collection includes 840 pairs! The collection began as a gift to bankers. Customers would travel to places all around the world and bring them back as gifts. Over time, the collection has grown to what it is today!
Learn more about Rivers Edge Bank here:
Rivers Edge Bank
branch locations: Bridgewater, Canova, Hawarden (Iowa), Howard, Marion and Parker
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BANKS of the WEEK Located in Scotland, South Dakota, the Farmers and Merchants State Bank was chartered and began operations on September 7, 1920. The bank is located in its original location built in 1919 at 550 Main Street. The structure was extensively remodeled in 1972 with an addition being added in 1991 along with interior updates. Farmers and Merchants State Bank currently has ten staff members with six board members. The board and staff are proud to be an independent community bank for 90 plus years strong!
Farmers & Merchants State Bank
Learn more about Farmers & Merchants State Bank here at:
“Hometown banking with your neighbors & friends.”
f • Merchants State Bank was chartered in 1899. It was purchased by Harris Hofer in 1968. Their CFO (and ICBSD Board Member, and ICBA National Delegate) Emily Hofer is the third generation of the Hofer family to be part of the bank! • They are highly involved in all of the communities they are located in. For example, every year they host a chili cook off. We’re told it’s highly anticipated and competitive! Their namesake, Merchants State Bank Field, is located in Freeman.
Merchants State Bank
“Big bank products with small town service.” headquarters: Freeman branch locations: Hurley, Viborg and Irene employees: 32
• The Make-A-Wish Foundation was an organization near and dear to former president and CEO Ted Hofer’s heart. Since his passing, every year the bank holds the Ted Hofer Memorial Hunt with all proceeds benefiting Make-A-Wish. They have raised $400,000 thus far!
Learn more about Merchants State Bank here:
Showcase your business to hundreds of key decision makers in community banks all across South Dakota! To advertise, contact Hannah at:
firstname.lastname@example.org Q2.18 | JUNE 2018 31
32 ICBSD 2018
ICBA LIVE & Capital Summit
ICBA Community Banking LIVE brought the brightest minds together to showcase the latest on new community bank strategies, products and solutions. Optimal bank performance was at the top-ofthe-list as attendees took on a multitude of strategic, regulatory, legislative, economic, technological and industry issues. ICBA LIVE was packed with more than 60 learning sessions and networking
ICBA Pac auction Pheasant Hunt Sponsors: • ICBSD • American Bank and Trust • First National Bank • The Farmers State Bank
opportunities. During the convention, our very own Dick Behl spearheaded the ICBA PAC auction. The ICBSD was proud to have the opportunity to support the PAC on a national level by donating a world class pheasant hunting trip to Oak Tree Lodge in Clark, SD.
2018 Capital Summit With access to capital, regulatory and tax relief, mortgage reform and agricultural lending at the forefront of our minds, ICBA’s Capital Summit was the place to be. ICBA and fellow community bankers came together during the 2018 Capital Summit held in Washington D.C., and advocated for change in these areas through ICBA’s Plan for Prosperity legislative platform. By coming together and espousing the community bank message, we made change happen for our business, our customers
• Campbell County Bank
and our communities.
• First State Bank of Roscoe
The ICBA Capital Summit is the perfect forum for influencing change in the community bank space.
• First National Bank of Frederick
Summit will be held April 28th – May 1st.
This is our chance to make a difference for the future of our industry. Save the Date! The 2019 Capital
• Farmers State Bank of Turton • River’s Edge Bank
Left: ICBSD Board Member and ICBA PAC Co-Chairman Dick Behl helps raise money during the live PAC auction. Right: ICBSD CEO and President Megan Olson poses with Mike Ellenburg of First Southern State Bank in Stevenson, Alabama. Mike was the winner of the Oak Tree Lodge hunting package, which was an auction item at the PAC auction fundraiser.
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“ICBA Securities’ exclusive broker Vining Sparks can develop a specific portfolio strategy using selected investments for any community bank. This modeling will display the current and projected returns and market prices for all investments in the strategy over a range of interest rate horizons.”
BY JIM REBER President and CEO of ICBA Securities
Barbell structure may be the right regimen.
s yields continue to set cyclical highs during 2018, many community bankers have asked us questions about what to invest their next purchases. Some of them have been surprised to hear an answer that I’ve been giving for the better part of this decade, even though absolute yields and the shape of the curve look nothing like the 2010s. This answer is rooted in history and in forecasts. While the difference in yields between short maturities and longer ones is the smallest in 11 years (i.e. the curve has flattened), most bond analysts, economists and the Federal Reserve itself are predicting that we’ll see more of the same. And when it’s expected that yields will continue to converge into what looks like a straight line, the type of portfolio structure that performs the best is a “barbell.” This month, we review the structure and the advantages of such an exercise for your investment portfolio.
Repetition and resistance By being disciplined and deliberate about your investments’ structure, you can take advantage of today’s yields and simultaneously hedge your risk against what looks to be on the cards for the next couple of years. The barbell is simple to build and easy to evaluate later. It just requires an investor to define what it considers to be suitable short-term and long-term investments. To be sure, community bankers have differing opinions on what counts as a long-term investment, but generally speaking, those with durations of five years and greater are considered as being on the high end of the price-risk scale. Once we’ve identified the target investments, the portfolio manager will simply purchase roughly similar amounts of both and keep the weightings balanced through ongoing monitoring. By having a collection of bonds that are heavy on both ends of the maturity spectrum, you’ve successfully built a barbell.
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Classic structure Among the bonds that meet community banks’ criteria of liquidity and credit quality are those issued by the Small Business Administration (SBA). They are direct obligations of Uncle Sam, and new issue volumes continue to set records, so the SBA market continues to broaden and deepen. Two of the more visible products are 7(a) pools, which are true floating rate instruments, and Development Company Participation Certificates (DCPCs), which are fixed rate pools with long average lives. It makes logistical sense to consider them together for a barbell. For one thing, credit quality is unsurpassed. For another, one would be hard-pressed to find two bonds with more disparate price-risk profiles. For still another, we can address premium risk that attaches to the 7(a)s by pairing them with a DCPC that is available at a price below par. Finally, at this point in the rate cycle, both ends of the barbell yield much more than they would have a year ago, so an investor today has a big head start over 2017.
End of cycle projections We created a hypothetical barbell portfolio by modeling equal amounts of 7(a)s and 20-year DCPCs. (The latter generally are issued with 10- or 20-year maturities.) We made note of their market values and yields as of April 30, 2018, and in a 75-basis point (0.75%) higher environment over the next year. This rate-hike assumption was driven by both the fed funds futures market and by the Fed’s most recent projections. Here are the more important weights and measures: Yield Effective Duration
2.72% 3.05% 3.18 yrs 3.34 yrs 105.27 102.78
These results are probably conservative in that we are assuming a parallel shift upward in the yield curve. What’s more likely to happen is further flattening, by virtue of short rates reacting more in step with continued Fed tightening, and longer rates moving very little in comparison. A flattening would help preserve the market value of the DCPC, resulting in the price declining less than is displayed.
Stretch before you lift As always, a word of advice from your trainer. These securities will probably produce very little cash flow in the early stages, especially if the pools are new. In fact, the fixed rate securities have prepayment penalties for the first 10 years. As they season, it’s more likely the floaters will have faster prepayments, so you’ll need to monitor your positions to keep the fixed/floating balance in place.
So, if your bond portfolio is suffering from a lack of recent energy or isn’t built to run with the tailwinds from the Fed’s monetary policy, take a trip to your favorite broker’s financial fitness center. A session in barbell lifting can help flex your community bank’s economic muscle.
Barbell Demo ICBA Securities’ exclusive broker Vining Sparks can develop a specific portfolio strategy using selected investments for any community bank. This modeling will display the current and projected returns and market prices for all investments in the strategy over a range of interest rate horizons.
Visit us on the web or contact your Vining Sparks sales rep for more details.
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Your Website: MEMBER
A Hub SPOTLIGHT for Sales, Service and Advice The nature of the world – banking especially – is increasingly digital. This makes your institution’s website crucial for three types of interactions with your current and prospective customers. Sales, Customer Service and Advice A bank website should be more than a glorified portal to login to online banking. It should help drive business, solve customer problems and provide insight to help your customers make smart financial decisions. Your website can drive new business through: • Content focused on helping people compare choices and make buying decisions • Digital workflows that allow users to complete business-generating actions quickly and easily like new account opening & funding and online loan applications • Online switch kits, secure portals for loan or mortgage closing documents, and electronic signature technology Your website can also play a huge role in customer service: • Easy-to-find contact and branch information • Lost or stolen debit card phone numbers for during and after business hours • Live chat (if you have the customer service staff to handle it) • FAQs and video guides for various products or services 36 ICBSD 2018
Financial advice can also be provided through your website for those who need it: • Short videos or articles from staff members about the best financial advice they ever received
• Security – no open source solutions here. BankWeb was developed in house and is reviewed by a third party security firm every year • Accessible – we build our websites with WCAG 2.0 AA standards in mind, as
• Turn common questions into short-form text or video content • Create content to recommend products for people in different stages of life or unique financial situations At VGM Forbin, we cover all of these topics and more as they relate to our clients’ specific goals for each website project we undertake. All of our projects also incorporate our BankWeb CMS, our proprietary website platform built just for banking.
well as offer ongoing scanning and remediation services • Mobile-ready – from tablets to smartphones, we develop our websites to look and perform well on nearly any screen size • SEO built in – from our code to our content, we incorporate SEO fundamentals and offer ongoing website maintenance and performance services as well
Benefits of BankWeb from VGM Forbin • It’s all custom – You’re not getting another bank’s recycled design or content. It’s all original stuff developed for you and your specific goals • Full content control – create pages, add text, place photos, embed videos... it’s all in your hands without needing to know HTML coding • User roles – limit access to the CMS and establish internal controls for who can and cannot publish content to the live site • Audit log – get an overview of all activity occurring in your CMS, as well as see a revision history for each individual page
We’re all about helping community banks in South Dakota put their best foot forward online. Visit forbin.com/ICBSD to learn more about BankWeb and schedule a demo today!
P.O. Box 615, Watertown, SD 57201 605.878.3040