Westernbanker ISSUE 2 2020 a PUBLICATION of WESTERN BANKERS ASSOCIATION

WesternBanker ISSUE 2 2020 A PUBLICATION OF WESTERN BANKERS ASSOCIATION

WHAT’S INSIDE: 8 10 14 BANKERS WORKING OVERTIME IMPACT OF COVID-19 CRISIS ON TAX IMPACTS OF COVID-19 TO PROVIDE IMPORTANT FINANCIAL CRIME MANAGEMENT LEGISLATION ON BANKS PROGRAMS RELIEF TO THOSE AFFECTED BY CORONAVIRUS MORE FUNDING OPTIONS PICTURE FOR A YOUR BRIGHTER BANK ASSETS FUTURE. WORKING HARDER.

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Over 150 Live and On Demand Webinars Learn more about webinars at: westernbankers.com/webinars Online webinars on payments, retail banking, compliance, ﬁnance, lending, hot topics, and more provide banks the ongoing training Questions? Contact Montana needed to ensure staﬀ keep current on regulatory requirements and Townsend at (916) 438-4427 or industry trends. Every registration includes a recorded playback. [email protected]

MAY FREE WEBINARS • Powering Smarter Construction Finance • Lease Capitalization—How It Affects Borrowers and Lenders • Turning up the Heat: Board Fiduciary Duty Update NEW COVID-19 RELATED • Modern Digital Statement Integrations to Drive Customer WEBINARS AVAILABLE Satisfaction and Adoption • Key Strategies to Attract and Retain Business Customers WBA has made a series of COVID-19 • 2020 Regulatory IT and Cybersecurity Hot Spots related webinars available to help banks address challenges brought • Writing SARs for Law Enforcement with Purpose & Clarity about as a result of the pandemic. JUNE Our on-demand complimentary webinars, include: • Pulling Strings to Optimize Your Payments Networks in the New Normal • Recovering Smartly & Strategically • Developing Call Centers into a Personal One-On-One from Pandemic 2020 Touchpoint to Support Digital Technology • Managing and Operating an Effective • Growing Fee Income without Raising Fees in Any Economic BSA Team in COVID-19 Times Environment • CARES Act Paycheck Protection • COVID-19: Keep Calm & Prepare for the Legal Program (PPP): Update and Review of Challenges Ahead Recent Guidance • Why EBITDA Doesn’t Spell Cash Flow and What Does • The Challenges of Banking High Risk • Key Reporting After the Crisis Customers in a Work From Home World • Community Bank Mergers and Acquisitions Simplified • Musings on the US Economy: COVID-19 • Staying Connected While Staying at Home • Navigating Uncertainty: Creating a 2020 Web Pass Path Forward 12 Months of Unlimited Membership • Paycheck Protection Program — How to Take Applications & Submit Them to A Web Pass membership grants single-registration access to the SBA all regular online education (both live and playback) for 2020! • The CARES Act PPP Loans: Feedback Employees and bank representatives gain unlimited access to all From the Field scheduled webinars and our extensive playback library. Simply log • Leading Others Through Change in online and sign up for any webinar within your area of interest. • Crisis Management: Responding to Learn more at: westernbankers.com/web-pass COVID-19 Questions? Contact [email protected] Contents ISSUE 2 2020

P.10

It P.8 DEPARTMENTS FEATURES 6 Message from WBA President 7 Western Bankers Association Workshops and CEO Stephen G. Andrews

8 Bankers Working Overtime to Provide Important Relief to Those Affected by Coronavirus 26 2020 WBA Advertiser Index

10 Impact of COVID-19 Crisis on Financial Crime Management Programs P.24 14 Tax Impacts of COVID-19 Legislation on Banks

18 Federal Reserve Board Amends Regulation D

21 ESG – What Is It and How Does It Pertain to Me?

23 Community Awareness Campaign

24 Annual Conference and Directors Forum

View this issue and past issues of WesternBanker online any time at www.westernbankers.com

WesternBanker is the official publication of Western Bankers Association. Western Bankers Association, 1303 J Street, Suite 600, Sacramento, CA 95814, P: 916-438-4400/F: 916-441-5756, Email online at www.westernbankers.com. ©2020 Western Bankers Association | The newsLINK Group, LLC. All rights reserved. WesternBanker is published four times each year by The newsLINK Group, LLC for Western Bankers Association and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and member education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of Western Bankers Association, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. WesternBanker is a collective work, and as such, some articles are submitted by authors who are independent of Western Bankers Association. While Western Bankers Association encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at: 855.747.4003.

WesternBanker | Issue 2 2020 5 Message from WBA President and CEO Stephen G. Andrews

t’s been nearly four months since our world myriad media inquiries, the majority of which changed as we knew it. With record unem- have focused on our members’ participation in I ployment applications and business closures, PPP and other efforts to assist their customers. this new economic reality is downright bleak. We have been actively communicating across Stephen G. Andrews But amid the uncertainty, we have seen that all our social media platforms, and we also just President and CEO the American spirit is alive and well. Commu- launched our new podcast series, called Bank- Western Bankers Association nities are coming together to help one another ing Insights. The first podcast featured WBA’s [email protected] and you need not look far to find individuals government relations team providing an update making a difference by sewing masks, delivering on everything COVID-19 related, and the sec- food to first responders and health care workers ond one was a terrific interview with Assembly and making sure that the elderly and disabled in Member Monique Limon, chair of the Assembly their neighborhoods have what they need. Banking and Finance Committee.

America’s banks have also provided tremendous On the professional development front, the team We have made all assistance to those in need across the nation. has been actively sourcing new webinar content Whether it is a short-term or long-term loan, that focuses specifically on COVID-19 related webinars that relate mortgage modification, elimination of fees or issues that bankers need to be aware of. We have to the pandemic free their support of the CARES Act and Paycheck made all webinars that relate to the pandemic to our members to Protection Program, banks are working close- free to our members to assist and educate our ly with customers every day to address their bankers as they work to adapt to banking in this assist and educate individual needs. Through America’s banks, current environment. We are carefully considering, our bankers as they the first round of the Paycheck Protection Plan and will shortly unveil, what the remainder of our work to adapt to (PPP) delivered $349 billion in loans to busi- conference schedule will evolve into, as it appears nesses in 56 states and territories. unlikely that large-scale gatherings will be per- banking in this current mitted in the near future. In the interim, we have environment. We are Our association is committed to supporting you developed a series of virtual workshops that I en- carefully considering, during these times and when it’s time for us to courage you to explore at westernbankers.com. Our return to what will undoubtedly be a new nor- workshops will focus on issues of importance to and will shortly unveil, mal. Our advocacy teams have been incredibly banking at this moment and will be priced at what the remainder busy working at both the state and federal levels. one rate, where an unlimited number of bank of our conference In California, the team is very busy tracking all employees can participate. schedule will evolve the local ordinances being enacted in response to the pandemic, as well as monitoring legislative Our nation’s bankers have stood on the front into, as it appears proposals and executive orders that have been lines every day since this pandemic hit, and the unlikely that large- implemented that directly impact the indus- team at WBA is grateful for your unwavering scale gatherings will try. At the federal level, we were updating our commitment and service to our communities. membership in near real-time as new guidelines We couldn’t be prouder to represent and support be permitted in the were being released with enormous frequency you each and every day. near future. by regulatory agencies with respect to mortgage forbearance and forgiveness, CECL implementation delay, CARES Act passage and of course, PPP rules and implementation guidelines.

Our communications team has also been ac- Stephen G. Andrews tively issuing press releases and responding to President and CEO

6 www.westernbankers.com | WesternBanker

Bankers Working Overtime to Provide Important Relief to Those Affected by Coronavirus

By Kevin Gould, Senior Vice President, Director of Government Affairs

espite stay-at-home orders, California banks are deemed significant steps to stabilize our economy and protect jobs, critical infrastructure and are essential businesses. Serv- and delivers more support for health care professionals and the D ing in this role, we are extremely proud of the incredible patients fighting the coronavirus. work that banks and their frontline employees have accom- plished, putting in extra hours and working through weekends Included in the CARES Act is $349 billion for small business to support their customers and communities. Bankers have support administered through federally guaranteed Small been working to maintain an operating financial ecosystem Business Administration (SBA) loans made available through where customers can engage in the myriad of credit and deposit the Paycheck Protection Program (PPP) to provide eight weeks transactions that occur daily to ensure the continuation of of cash-flow assistance to small businesses who maintain their commerce, which is fundamental for a functioning economy. payroll. Employers that maintain their payroll in accordance with the program’s requirements will have their loans forgiven, Whether it is on the retail or commercial side of the bank, we essentially converting the loan to a grant. deeply appreciate the early and proactive efforts by the industry to provide important relief to customers who are trying to min- By way of background and to contextualize the amount of imize the adverse financial effects of this health crisis, which volume moving through the SBA, according to its 2019 annual will have enormous economic consequences. As has historically performance report, SBA approved loans totaling $28 billion. been the case, banks are a reflection of their community and The $349 billion initially authorized under the CARES Act for they are in the business of serving their customers, especially the PPP was exhausted in less than two weeks from the date when hardship strikes. As evidenced by previous economic cy- the program opened. Said another way, more than 14 years’ cles, banks succeed when communities succeed, and they suffer worth of loans were made in less than 14 days. With the first when communities suffer. We are in this together. round of funds depleted, CBA successfully advocated for additional funding and was pleased when Congress passed, and the As a complement to proactive efforts by the industry, banks president signed, the Paycheck Protection Program and Health have played a critical role in deploying important stimulus Care Enhancement Act, authorizing an additional $321 billion relief efforts. Banks have been instrumental in implementing in PPP funding. the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides $2 trillion in economic stimulus. This Banks have also been instrumental in outreaching and inform- relief measure provides financial help for the American people, ing consumers about economic impact payments issued by the provides relief for small businesses and their employees, takes Internal Revenue Service. Banks have helped educate consumers

8 www.westernbankers.com | WesternBanker about the importance of making sure that shortfall. Notwithstanding difficult fiscal The association will continue to work the federal government has their banking times ahead, it appears that a previous collaboratively with policymakers at information on file, opening checking proposal to restructure the Department all levels of government to achieve accounts online as a means to avoid indi- of Business Oversight into a mini-CFPB solutions-oriented outcomes that ad- viduals receiving paper checks and taking with UDAAP authority will advance. The dress demonstrated problems and that proactive steps to make sure the full UDAAP authority becomes even more minimize unintended consequences. amount of the economic impact payment concerning given the flexibility banks As we work to shape public policy, is available even when the customer has a have been given, and asked to apply, when we will continue to highlight the im- negative balance or garnishment order. trying to help customers during this pan- portant efforts delivered and underway demic. A look backward, gotcha liability by banks. The CARES Act also builds upon early exposure for trying to stretch to meet the relief efforts for residential mortgage moment would be unfortunate and disap- As the pandemic evolves, California loan borrowers. For loans backed by pointing but probably not surprising given banks will continue to explore every federal government agencies or govern- the litigious nature of this state. option to assist customers with finan- ment-sponsored entities, mortgage ser- cial hardships during this challenging vicers have been working to deploy the Notwithstanding the important proactive period. When we get to the future 180 days of forbearance granted by the work by the industry to assist customers, moment when the state of emergency Act to borrowers who request and make along with federal stimulus efforts, we is lifted, the collaborative efforts that an affirmation of financial hardship due have seen a few measures that impose will be necessary to rebuild and recov- to COVID-19. The Act allows the initial foreclosure moratoriums and restrictions er economically will linger. period to be extended up to another on evictions. While these efforts are 180 days at the borrower’s request. In well-intentioned, they lack precision and Banks realize that the economic addition, mortgage servicers are restrict- have unintended consequences that fail to challenge facing the country from this ed from assessing penalties, fees or extra understand the impacts on landlords and public health emergency is significant. interest during the forbearance period. lenders. Local governments are also taking The current economic slowdown will action, imposing a patchwork of proposals be painful for individuals and busi- Stateside, it’s expected that the state for homeowner and tenant protections nesses alike, including some banks and budget, which started the year with a along with mandates on how businesses their staff. But we will meet, and get surplus, will now experience a significant can reopen and under what circumstances. through, this challenge together.

WesternBanker | Issue 2 2020 9 Impact of COVID-19 Crisis on Financial Crime Management Programs Pandemic leads to increased challenges and change for financial institutions

s COVID-19 continues to impact financial systems of their level of preparedness, they don’t have the luxury of around the globe, early reports are emerging on how shifting, say, 10 people from their AML team to augment A the pandemic is affecting financial crime management their 20 person fraud team. For the vast majority of banks in programs. Financial institutions should have processes in place the U.S., it’s about how their 2- to 5-person compliance and to minimize the impact of a pandemic and ensure the continuity risk team can work smarter and more efficiently to protect of financial services. Industry agencies are urging institutions to the most vulnerable people.” remain vigilant in monitoring for rising fraud schemes and re- – Jim Richards, founder and principle of RegTech Consulting porting of potentially suspicious activity capitalizing on consumer fear surrounding COVID-19. On April 3, the Financial Crimes Enforcement Network (FinCEN) released an updated COVID-19 Notice providing While the pandemic has compelled financial institutions to additional information to assist financial institutions in com- adopt new business-as-usual processes, these changes have plying with their Bank Secrecy Act (BSA) obligations during caused challenges for fraud, anti-money laundering (AML) the COVID-19 pandemic. The Notice explains that financial and compliance programs at institutions of all asset sizes. As institutions should continue following “a risk-based approach” industry expert Jim Richards explains, the ability of institu- and “diligently adhere to their BSA obligations.” tions to adapt to this evolving situation depends on their size, complexity and preparedness. But there are a number of challenges that all institutions share, despite their differences in scale, including staff working “The reality is that three-quarters of banks in the United from home, changing customer behavior, and a rise in States have fewer than 100 employees in total, so regardless pandemic-related fraud schemes.

10 www.westernbankers.com | WesternBanker • Working with Less: With more employees working from home with varying levels of availability, some financial institutions are struggling to manage and maintain processes with limited resources for transaction monitoring, due diligence reviews, and fraud management. • Managing Manual Processes: Depending on an institution’s size and systems, many AML and compliance programs rely on manual processes or lack the technological resources to adapt business practices to remote working environments. These limitations can hinder investigative workflows, risk assessments, and reporting potentially fraudulent or suspicious behavior. • Accessing Secure Systems: When working from home, financial crime management teams may have difficulties securely connecting to investigative systems or navigating multiple programs. Employees may need to travel to the office if they are limited by manual investigation tools, or lack adequate means to perform required compliance func- tions or file regulatory reports.

Changing Customer Behavior In response to the need for physical distancing and with many financial institutions closing locations, customer activity has shifted away from in-person transactions to digital channels and online banking. This shift in customer behavior has introduced several challenges for financial crime management programs: • Going Digital: With more people sheltering at home, now more than ever customers are moving their banking to online channels. With less in-branch and cash transactions and a shift to online, mobile banking and digital transfers, expected activity has changed for individuals and businesses. These changes in customer behavior can have an impact on transaction monitoring processes and alerting systems. Financial institutions need to be diligent in their monitoring Staff Shift to Work From Home efforts and distinguishing legitimate activity from potential “Financial institutions are being forced to reevaluate their risk- fraud. based approaches to AML — the ways their people and systems • Raising Limits: Many institutions are increasing daily are deployed — as they work to address the greatest financial transaction limits to meet the increased consumer demand for crime threats in the face of the pandemic.” additional cash, card purchases and transfers during the pan- –Sarah Beth Felix, Palmera Consulting LLC demic. Financial institutions must weigh the needs of customers against the added risk that these allowances may pose. As Many institutions are encouraging employees to work from home institutions strive to support customers during this time, it is to reduce the spread of COVID-19. Remote working is having an necessary for financial crime management programs to ensure impact on operational efficiency and productivity, and is creat- that illicit activity is not slipping through the cracks. ing a host of challenges for financial institution staff who are • Hoarding Cash: In stark contrast to the decline in cash “straining networking capabilities and business-continuity plans transactions, fear is driving a surge in “mattress banking”; and [even challenging] cybersecurity defenses.” New challenges institutions are reporting dramatic increases in large cash for institutions include: withdrawals by concerned consumers. As a result, strained • Adapting to a New Normal: The emotional toll on employ- compliance programs must also keep pace with a rise in ees during this time of crisis cannot be understated. Health and Currency Transaction Report (CTR) filings. safety concerns, family responsibilities, and adapting to a new remote working environment can place added stress on employees. CONTINUED ON PAGE 12

WesternBanker | Issue 2 2020 11 CONTINUED FROM PAGE 11 times of crisis, including benefits fraud, charities fraud and • Increasing False Positives: Changing customer behavior can cyber-related fraud. increase false positives for fraud and AML compliance profes- • Preventing Losses from Scams: The pandemic has emboldened sionals to review. Programs with limited resources using conven- fraudsters to commit opportunistic crimes while processes and tional rules-based systems may find it challenging to manage the resources at financial institutions are strained. Many of the iden- added workload that false positives can create, while ensuring tified fraudulent schemes are based on known fraud tactics, but effective monitoring for suspicious activity. prey on consumer fear surrounding COVID-19 to facilitate the crimes, such as Business Email Compromise (BEC) fraud, infor- Fighting Fraud, Protecting the Vulnerable mation technology fraud, phishing scams, provider scams, testing “As older Americans appear to be at a greater risk for and scams, supply scams, charity scams and investment scams. disproportionately impacted by coronavirus (COVID-19), we • Protecting Elderly Customers: Institutions are being urged by are concerned that there will be a corresponding increase in the industry agencies to be vigilant in transaction monitoring to pro- number of COVID-19 scams on U.S. consumers and specifically tect vulnerable consumers during this crisis. One industry agency our senior population.” said, “In light of the evolving nature of the coronavirus, there is – Letter from Patrick McHenry et al., United States House of Rep- an increased level of fear and subsequent vulnerability to fraudu- resentatives Committee on Financial Services lent schemes. We are particularly concerned that bad actors will use this as an opportunity to take advantage of seniors.” As fraud schemes capitalizing on the COVID-19 pandemic rise, • Reporting on COVID-19 Trends and Losses: As criminals con- it is critical for institutions to identify fraudulent and potential- tinue to capitalize on the COVID-19 pandemic, fraud manage- ly suspicious activity. Institutions should actively monitor for ment teams must track and report this activity to senior manage- emerging trends that may target them and their customers: ment. Detailed reporting of trends, losses, system performance • Detecting Disaster-Related Fraud: As noted in the 2017 and workforce efforts is critical to understanding the full impact FinCEN Advisory to Financial Institutions Regarding of the crisis on a financial institution. Detailed case management Disaster-Related Fraud, institutions need to be prepared for and reporting will help institutions plan ahead to improve fraud an increase in potentially fraudulent transactions during risk management and mitigation efforts.

Banks and Credit Unions Rise to the Challenge The impact of the COVID-19 crisis is far-reaching and will continue to affect financial institutions into the foreseeable future. Institutions must continue to ensure the health and safety of their employees and customers, while maintaining the stability of the financial system, protecting vulnerable consumers, and managing and mitigating the risks of money laundering and fraud losses.

FinCEN’s April 3 Notice has again encouraged “financial institutions to consider, evaluate, and, where appropriate, respon- sibly implement innovative approaches to meet their BSA/anti-money laundering compliance obligations, in order to further strengthen the financial system against illicit financial activity and other related fraud.”

While financial crime management programs are rising to the challenges of the COVID-19 crisis, the true health of fraud and AML programs will be measured once financial institutions’ operations return to normal.

Verafin is the industry leader in enterprise financial crime management solutions, Contact us today to learn more. providing a cloud-based, secure software platform for fraud detection and management, BSA/AML compliance and management, high-risk customer management and Gayle Appelbaum I Partner [email protected] information sharing. Nearly 3000 banks and credit unions use Verafin to effectively 952.886.8242 fight financial crime and comply with regulations. Leveraging its unique big data in- www.mclagan.com/crb telligence, visual storytelling and collaborative investigation capabilities, Verafin sig- nificantly reduces false positive alerts, delivers context-rich insights and streamlines the daunting BSA/AML compliance processes that financial institutions face today.

12 www.westernbankers.com | WesternBanker The Banking Industry Is Here To Help During The Coronavirus Pandemic Banks are ready to help their customers and communities during this time of need.

Since the beginning of this emergency, banks have been outreaching with customers to minimize the adverse ﬁnancial eﬀects on our communities as we navigate through this situation.

It’s important to know that banks have well developed business continuity plans designed to address these kinds of emergencies, including pandemics, to make certain that they can keep doing business.

Banks are actively monitoring the latest reports from the Center for Disease Control and taking numerous precautions to help ensure the safety of their customers and employees. Banks are implementing remote work policies for non-customer facing staff, increasing social distancing measures for all customer-facing staff, and restricting staff travel.

As this emergency has evolved, banks have been communicating with their customers describing the ways in which they are responding to the crisis and providing options and relief to impacted customers.

USE MOBILE BANKING OPTIONS INFORMATION FOR CONCERNED HOMEOWNERS When possible, customers are being encouraged to access their accounts from home to monitor Homeowners concerned about upcoming their accounts to check balances, make mortgage payments, should know that state and payments, transfer funds and deposit checks. federal law contain extensive borrower protections, which require mortgage servicers to engage in conversations with distressed SUPPORT FOR SMALL BUSINESSES, borrowers to explore alternatives to foreclosure. INDIVIDUAL HARDSHIPS If you are concerned about your ability to make a mortgage payment, please contact your Many banks are also taking steps to mortgage servicer immediately. accommodate affected customers through hardship programs, small business support, extended banker availability hours and other BE AWARE OF SCAMS measures to address individual circumstances. It’s important to be aware of scams and remain vigilant to imposters and fraudsters that may CONTACT YOUR BANK use this emergency to obtain personal information by sending phishing emails with Given the unique nature of everyone’s personal links or attachments. financial situation, customers experiencing hardships should reachout immediately to their As needs arise, our members will continue to financial institution to discuss their specific closely monitor the situation and evaluate circumstances and understand what assistance additional measures to support their customers may be available. and communities.

WesternBanker | Issue 2 2020 13 Tax Impacts of COVID-19 Legislation on Banks

By Michael J. Rowe, CPA

s a result of the COVID-19 pandemic, President Trump Employee Retention Credit for Employers Subject to signed two pieces of legislation into law: the Families First Closure Due to COVID-19 A Coronavirus Response Act (FFCRA) March 18 and the Eligible employers can qualify for a refundable quarterly payroll Coronavirus Aid, Relief and Economic Security Act (CARES Act) tax credit equal to 50% of qualified wages (including costs to pro- March 27. These were enacted to provide relief to individuals and vide and maintain group health insurance) paid to an employee. businesses during the crisis, and have tax implications for banks. For purposes of the credit, up to $10,000 of qualified wages per employee is taken into account. Excess credits are refundable. Tax Credits to Recover Costs of Providing COVID-19 Leave The Families First Coronavirus Response Act provides two paid Eligible employers include: leaves that employers with less than 500 employees must provide: • Employers whose trade or business is fully or partially Emergency Paid Sick Leave and Emergency Family and Medical suspended during the calendar quarter due to orders from Leave. These provisions take effect within 15 days of the signing an appropriate governmental authority limiting commerce, of the Act and expire Dec. 31, 2020. travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19. As part of the legislation, employers are allowed two new refund- • Employers who have a 50% decrease in gross receipts for the able payroll tax credits, designed to reimburse them for the cost of same calendar quarter in the prior year. providing COVID-19 leave to their employees. CONTINUED ON PAGE 16

14 www.westernbankers.com | WesternBanker LEAD. LEARN. INNOVATE.

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VISIT GSB.ORG CONTINUED FROM PAGE 14 Employers claiming a credit due to a significant decline in gross receipts are Usually, a corporation’s charitable contribution no longer eligible once gross receipts are 80% of gross receipts for the same calen- deduction cannot exceed 10% of its taxable income dar quarter in the prior year. (with certain modifications). Any nondeductible

For employers with less than 100 em- contribution can be carried over for five years. ployees, the credit is based on wages paid to all employees, even if employees have not been prevented from providing services. For employers with more than Modifications for Net Operating unused minimum tax credit could be 100 employees, the credit is allowed only used, subject to limitations, for tax years for wages of employees who are not pro- Losses (NOLs) before 2021, when any remaining credit viding services because of the business The Tax Cuts and Jobs Act (TCJA) would be fully refundable. suspension or reduction in gross receipts eliminated the two-year carryback of described above. net operating losses and allowed for an indefinite carryforward (increased from The CARES Act allows corporations to claim any remaining credit in tax years The credit applies to wages paid after 20 years). It also provided a limitation beginning in 2019, with an election to March 12, 2020 and before Jan. 1, 2021. that NOLs would only be able to offset amend the return for the tax year be- Wages funded through the paid leaves in 80% of taxable income. These rules ginning in 2018 to claim the remaining the Families First Coronavirus Response were for NOLs generated in taxable credit in that year. Act are not eligible for the credit. years ending after Dec. 31, 2017.

The CARES Act amends provisions Modifications of Limitation of Increased Charitable Contribution of TCJA to allow for the carryback of Business Interest Limitation for 2020 losses arising in taxable years begin- The TCJA imposed limitations on the Usually, a corporation’s charitable ning after Dec. 31, 2017 and before deductibility of business interest if inter- contribution deduction cannot exceed Jan. 1, 2021, to each of the five taxable est expense exceeds interest income. The 10% of its taxable income (with certain years preceding the taxable year of CARES Act reduces the amount of the modifications). Any nondeductible such loss. However, real estate invest- limitation for taxable years beginning in contribution can be carried over for ment trusts (REITs) are not permitted 2019 and 2020. five years. The CARES Act increases such carrybacks. The CARES Act does the limitation for certain cash contri- not alter the indefinite carryforward This provision most likely will not have butions made during the calendar year of NOLs arising in those years. The a direct impact on financial institutions 2020 to 25% of taxable income (with CARES Act also amends the Code to but may have an indirect impact through modifications) over the amount of remove the limitation that NOLs could partnership interests and to the banks other charitable contributions. Non- be used to offset no more than 80% customers. deductible contributions are carried of taxable income (disregarding the over pursuant to the same rules as other NOL deduction itself). The amendment Technical Amendments Regarding contributions. applies to tax years beginning before Qualified Improvement Property (QIP) Jan. 1, 2021. TCJA added QIP, a new category of Delay of Payment of Employer assets. However, a drafting error placed Payroll Taxes The CARES Act also fixes a technical QIP in the 39-year category and there- Employers can delay payment of the em- error in the TCJA that prevented NOLs fore was not eligible for bonus deprecia- ployer portion of Social Security payroll arising in a tax year beginning in 2017 tion, which increased to 100% in 2018. taxes through the end of 2020. Fifty and ending in 2018 from being carried percent of any payroll taxes deferred back two years. QIP means “any improvement made by under this provision must be paid by the taxpayer to an interior portion of a Dec. 31, 2021, with the remaining Modification of Credit for Prior Year nonresidential building if the improve- 50% paid by Dec. 31, 2022. Deferral Minimum Tax Liability ment is placed in service after the date the of payment is not allowed if an em- The TCJA repealed the Alternative building was first placed in service, but ployer has amounts forgiven under the Minimum Tax for corporations for qualified improvement property does not Paycheck Protection Program (PPP). years beginning after Dec. 31, 2017. Any include any improvement for which the

16 www.westernbankers.com | WesternBanker expense is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.”

Under the CARES Act, QIP is now treated as 15-year property, eligible for bonus depreciation. The amendments are effective for property placed in service after Dec. 31, 2017.

Federal Tax Filing and Payment Dead- line Deferral Forms 4868 or 7004) are required to be questions, we encourage you to reach out In response to the COVID-19 pandemic, filed. Please note, the state taxing authori- to your Wolf & Company tax team. the IRS announced in Notice 2020-18 ties are responding and enacting their own that it is extending the April 15 tax filing version of deferrals and may differ from the Michael J. Rowe, CPA, is a Tax Principal in Wolf’s deadline for both income tax filings and federal deferral rules noted above. Financial Institution’s group, where he leads a variety of payments to July 15, 2020, to provide engagements in connection with income tax planning relief for taxpayers. and compliance for financial institutions and nonprofit Please visit our COVID-19 Resource organizations. He consults on various tax matters, such Center for more details on these issues, as examination support, mergers and acquisitions, stock There is no limitation on the amount of as well as the acts’ impacts on businesses offerings and other significant transactions. Mike is payment that may be postponed. This post- and individuals. responsible for managing a team of professionals to en- ponement applies to individuals, trusts, es- sure successful delivery of tax compliance and planning services to our financial institution and non-profit clients. tates, partnerships, associations, companies This article is based on the tax laws as Mike joined the firm in 1988 and has over 25 years of and corporations (collectively, “Affected currently written and is intended for infor- experience providing tax compliance, tax provision Taxpayers”), and no extension forms (e.g., mational purposes only. If you have any and planning services.

Your Partner in Education

Due to the COVID-19 pandemic, the 2020 resident session has been postponed to 2021.

Pacific Coast Banking School, in partnership with the Foster Session Dates: August 22 – September 3, 2021 School of Business at the University of Washington, offers a Location: University of Washington, Seattle, WA premier three-year graduate-level educational program focused To learn more about PCBS or to apply to the program, call on the financial services industry. Our full-length courses, taught (425) 278-0250 by outstanding industry experts, provide responsive, practical answers to today’s most critical banking challenges. or visit www.thePCBS.org

WesternBanker | Issue 2 2020 17 Federal Reserve Board Amends Regulation D Longstanding Difference Between Savings and Checking Accounts Eliminated

By Karl Leslie, Principal Attorney, Wolters Kluwer

he Federal Reserve Board (FRB) has issued an interim final account) and a savings deposit (a savings account). The other rule to amend Regulation D. Regulation D categorizes feature that has traditionally distinguished savings accounts T accounts into “transaction accounts,” “savings deposits,” from checking accounts is the requirement that financial and “time deposits.” The interim final rule amends the definition institutions reserve the right to require seven days’ notice pri- of “savings deposit” by eliminating the six-per-month limit on or to withdrawal from a savings account. The seven-day notice so-called “convenient” transfers. The rule also allows deposito- requirement is not being eliminated as a result of this rulemaking. ry institutions to suspend enforcement of the six-transfer limit However, the definition of “transaction account” is being expand- immediately and to allow account holders to make an unlimited ed to include accounts with the seven-day notice limitation. To put number of convenient transfers and withdrawals from their savings it simply, instead of three unique types of accounts (transaction, deposits. This interim final rule became effective April 24, 2020. savings and time accounts) there are now only two unique types There is a comment period that runs until June 29, 2020. After the of accounts (transaction and time accounts) as savings deposits comment period, a “final” rule will be published. are now a subset of transaction accounts. The interim final rule does not include a sunset date — a date where the old definitions The six-transfer limit has been one of two distinguishing return. As a result, these definitional changes are permanent and features between a transaction account (typically, a checking can only be changed by subsequent rulemaking.

18 www.westernbankers.com | WesternBanker Background transfer limits. Financial institutions that waive, suspend or By way of background, Regulation D has traditionally otherwise modify their savings account products to eliminate imposed reserve requirements on financial institutions for the transaction limits will need to update those systems to transaction accounts, but not on savings accounts. However, match their revised policy. the Federal Open Market Committee (FOMC), a branch of the FRB, had previously announced its intention to imple- New Accounts ment monetary policy in an “ample reserves regime.” Reserve Financial institutions that make changes to their account requirements do not play a role in such a framework. As a products to remove or modify any transfer limitations will result, effective March 26, 2020, the FRB reduced the reserve need to update their new account disclosures. Both Regula- requirement ratios to zero percent. tion D (Part 707 for credit unions) and Regulation E require transaction limitations to be disclosed. Financial institutions Additionally, the COVID-19 crisis has caused many consum- will want to review their account opening software solutions ers to have a more urgent need for access to their savings to determine whether there is flexibility with the system to funds. Further, because many financial institutions have ei- make such modifications or whether program updates are ther closed branches or severely limited in-branch activities, needed. Printed disclosures — or electronic disclosures based there is an increased need for consumers to be able to access on the same — will need to be updated accordingly as well. these accounts remotely or in some other convenient manner. Because of the elimination of reserve requirements, and Existing Accounts and Change Notices because of financial disruptions related to the COVID-19 The bigger issue for financial institutions may be how to crisis, the FRB decided to make these amendments to Regula- inform existing customers or members of any product amend- tion D immediately. ments — or a waiver (or temporary suspension) of the transaction limits. The FAQs do not appear to address whether fi- Impact to Financial Institutions nancial institutions that amend their savings account products Frequently Asked Questions (FAQs) are required to send change notices. The relevant FAQ only Along with these amendments, the FRB has published a set says that the “rule does not specify how depository institu- of FAQs, which is also being maintained on the FRB’s web- tions that choose to amend their account agreements may” site. According to those FAQs, financial institutions are not notify their account holders. While the language stops short required to waive the six-per-month transaction limit, nor are of a requirement, the answer does seem to imply that sending they required to enforce the limit — even though the limit may a change notice is, at a minimum, a good idea. be written into their deposit account contracts. In fact, financial institutions can choose to waive the transfer limits tempo- Regulation DD requires a change notice for changes to required rarily. One FAQ suggests financial institutions can continue to disclosure information if the change “adversely affects” the charge fees for transactions that exceed the six-per-month limit consumer. The changes coming out of the interim final rule as long as the current agreement discloses such fees, even if actually benefit the consumer. Still, required or not, there are enforcement of the six-per-month limitation is suspended. Such plenty of good reasons to send a change notice. There is also at a practice, suspending enforcement of the transaction limits but least one circumstance where a change notice is required. still charging a fee for exceeding the limits, seems questionable and is likely to come under scrutiny for UDAAP. Financial in- Good reasons to send a change notice include providing stitutions that take such an approach should not do so without information to consumers that give them another financial notifying their account holders of this policy and should only management tool to help navigate the current pandemic. do so after obtaining the advice of counsel. Additionally, sending a notice will help explain your institution’s policy and any remaining limitations, such as In another interesting FAQ, there is no requirement to if the waiver is temporary or if any fees for exceeding the change the name of an account to eliminate the word “sav- limits will be retained, or if such fees are also being waived. ings” from the account name. However, financial institu- Providing a notice also offers another opportunity to touch tions can reclassify the savings deposit to be a transaction your accountholders and let them know you’re here to help account if they so choose, and the account can be reported during these trying times. to the FRB under either category (as they all roll up under transaction accounts anyway). One circumstance where a change notice may be required, however, is if a financial institution intends to provide a System Updates temporary waiver. Specifically, because of the current climate Many financial institutions have systems in place to prevent transfers from savings accounts above the six-per-month CONTINUED ON PAGE 20

WesternBanker | Issue 2 2020 19 CONTINUED FROM PAGE 19 to, suspend enforcement of the six-per-month transaction limit. Financial institutions making changes to their account of uncertainty, some financial institutions may decide to products will need to update their new account disclosures as temporarily waive the transfer limitations and not provide a well as make any corresponding system updates. The bigger date when the limitations will be re-imposed. For example, issue for many financial institutions will be how to inform they may just say the transfer limitations are waived or existing account holders of any product amendments or the suspended “until further notice.” In such a circumstance, at suspension of the transaction limitations. Lastly, financial the time when the transfer limitations are suspended, a change institutions will want to review the application of their funds notice is recommended. However, when the limitations are put availability policy to savings accounts and determine what, if back in place, that change now becomes adverse and, under any, actions are needed. Regulation DD, advance notice of the change is required. The advance notice period for when a change notice is required is Check the Regulation D and Regulation CC Resource Cen- 30 days under Regulation DD (or 21 days under Regulation E). ter for more information, including FAQs, videos, webinars and more. Review of Account Opening Procedures; Funds Availability Because savings deposits are not considered transaction Karl Leslie is a principal consultant with the Regulatory Analysis team of accounts, and because the Regulation CC funds availability Wolters Kluwer’s Compliance Center of Excellence, where he works as the rules apply to transaction accounts as defined in Regulation D, lead attorney in the areas of deposit law, tax-advantaged accounts, financial financial institutions will need to review their funds’ availabil- intelligence and anti-money laundering. With over 30 years of experience as an attorney within the financial services industry, Leslie calls upon his knowl- ity policy and account opening procedures. edge of banking law to help financial organizations develop strategies and solutions that address some of their most complex compliance challenges. He Many financial institutions already apply their funds’ avail- can be reached at [email protected]. ability policy to their savings accounts, so there is not an action item here for those financial institutions. However, for financial institutions that have not previously extended their funds’ availability policy to savings accounts, it appears that the policy now applies by the action of law. These institutions should review their account opening processes to determine whether savings account customers/members were given the financial institution’s funds availability policy at account opening and, if none was provided, deliver one to those customers/members. Also, given the July 1, 2020 Regulation CC amendments, financial institutions may want to review, and expand as needed, the list of who gets sent the Regulation CC change notices. Financial institutions should look for the FRB to provide additional guidance on this potentially complicated issue.

Additional Information • Here is a link to the Federal Register notice: Help your https://www.federalregister.gov/documents/2020/04/28/2020-09044/ customers open regulation-d-reserve-requirements-of-depository-institutions new accounts • Here is a link to the FAQs: from the safety https://www.federalreserve.gov/supervisionreg/savings-deposits-frequently-asked-questions.htm of their homes.

Conclusion The Federal Reserve Board has issued an interim final rule to amend Regulation D to eliminate the six-per-month limit on so-called “convenient” transfers from the definition of savings deposit. The rule also permits depository institutions to im- For more information, go mediately suspend enforcement of the six-transfer limit. There to Q2ebanking.com/WBA is a 60-day comment period but the rule became effective or call (833) 444-3469. immediately. Financial institutions may, but are not required

20 www.westernbankers.com | WesternBanker ESG – What Is It and How Does It Pertain To Me?

By D. James Lutter; Co-author: Todd A. Terrazas

SG — Environmental, Social and Governance: These are seem to have the momentum to become law under the current the three central pillars utilized by investors on mea- administration but is being addressed at the state level. While E suring the social and sustainability (non-financial) the federal government is remaining on the sidelines, states are factors of entities in which they invest. Investors who focus embracing and passing ESG laws. on ESG incorporate these social and sustainability factors, along with financial factors, to assess risk and perfor- Rather than a single federal approach like in Europe and mance. Until recently, ESG has been implemented mainly Japan, the U.S. approach is being determined at the state and by investors, but now it has moved more into the main- local level. The approach is expanding beyond Congress’ bill, stream, with attention both at the state and federal level. which pertains to issuers to include all institutions in which pensions or political subdivisions are investing. The individu- On Sept. 20, 2019, the U.S. House Financial Services Commit- al approach leads to each state and locality having individual tee passed H.R. 4329, the ESG Disclosure Simplification Act of requirements, creating an endless set of rules and regulations. 2019. The bill addresses environmental, social and governance This approach is going to be more expensive and less efficient (ESG) disclosures and would require issuers to describe the to manage, but that is the direction at this point. link between ESG metrics and long-term strategy where ESG metrics would be included in disclosures. The bill does not CONTINUED ON PAGE 22

WesternBanker | Issue 2 2020 21 CONTINUED FROM PAGE 21 Disclaimer PMA Funding is a service of PMA Financial Network and PMA Securities. Securities, California, amongst other states, has embraced ESG into public finance services and institutional brokerage services are offered through PMA regulations and the investment of pension funds. Other states Securities. PMA Securities is a broker-dealer and municipal advisor registered with include Connecticut, Illinois, New Jersey, New York, Oregon the SEC and MSRB and is a member of FINRA and SIPC. Prudent Man Advisors, an and Washington, not to mention localities such as Boston, SEC-registered investment adviser, provides investment advisory services to local government investment pools and separate accounts. All other products and services Chicago, New York City and Seattle. are provided by PMA Financial Network. PMA Financial Network, PMA Securities and Prudent Man Advisors (collectively “PMA”) are under common ownership. Illinois is among the leaders to sign into law the Sustainable Investing Act, also known as HB 2460, which became ef- Securities and public finance services offered through PMA Securities, LLC, fective Jan. 2020. The biggest difference from the others is are available in California, Colorado, Florida, Illinois, Indiana, Iowa, Michigan, that the new law requires all public or government agencies Minnesota, Missouri, Nebraska, Ohio, Oklahoma, Pennsylvania, South Dakota, Texas and Wisconsin. This document is not an offer of services available in any involved in managing public funds to “develop, publish, and state other than those listed above, has been prepared for informational and implement sustainable investment policies applicable to the educational purposes, and does not constitute a solicitation to purchase or management of all public funds under its control.” sell securities, which may be done only after client suitability is reviewed and determined. All investments mentioned herein may have varying levels of risk, and This is the point at which to question, how does it pertain may not be suitable for every investor. PMA and its employees do not offer tax or legal advice. Individuals and organizations should consult with their own tax and/ to my financial institution? Governmental entities are now or legal advisors before making any tax or legal-related investment decisions. IRS required to implement sustainable investment policies in which CIRCULAR 230 NOTICE: To the extent that this communication or any attachment anyone participating in the investment of public funds (which concerns tax matters, it is not intended to be used, and cannot be used by a includes financial institutions) will need to address. Financial taxpayer, for the purpose of avoiding any penalties that may be imposed by law. institutions, in addition to issuers, will need to consider ESG criteria and be able to defend themselves when soliciting funds Additional information is available upon request. For more information, visit http://www.pmanetwork.com and www.pmafunding.com. that fall under the ESG requirements. ©2020 PMA Financial Network, LLC

Sources INSIGHT: States Take Lead on ESG Investment Regulations While Feds Stand Still Bloomberg Law, Ali Zaidi

Pending Federal ESG Legislation Could Yield Significant and Step-wise Change Bloomberg Law, Ali Zaidi

Environmental, Social, and Governance (ESG) Criteria By James Chen Reviewed By Gordon Scott Updated Feb 25, 2020

ESG Disclosure Simplification Act of 2019 Congress.gov

About D. James Lutter D. James (Jim) Lutter is the senior vice president of Trading and Operations at PMA Financial Network and PMA Securities, where he oversees PMA Funding, a service of both companies that provides over 1,000 financial institutions with a broad array of cost-effective funding alternatives. Mr. Lutter is a registered representative with PMA Securities and investment advisor representative with Prudent Man Advisors. Mr. Lutter has the following FINRA licenses with PMA Securities, LLC: Series 7, 24, 50, 53, 63, 65 and 99.

About Todd A. Terrazas Todd joined PMA Financial Network in 2014 as a financial analyst for the firm’s Credit Risk Management team. He now serves as business development and product manager for PMA Funding, where he is responsible for developing financial institution partner relationships and managing funding product solutions and association affili- ations. Mr. Terrazas also engages in strategic planning and identifying market trends through extensive market research. Prior to joining the firm, he was a market research analyst at Common Goal Systems, Inc. Mr. Terrazas earned his Bachelor of Arts in Finance from Calvin College.

22 www.westernbankers.com | WesternBanker Community Awareness Campaign

he COVID-19 pandemic has changed our landscape and created a greater need to be proactive and vigilant in communicating T with our stakeholders. As part of the Western Bankers Association’s mission to support and advocate on behalf of its members, the association launched a media and digital campaign to elevate and reinforce the banking industry’s commitment to customers and communities.

The campaign was launched on Monday, April 13th and included 140 sponsorship announcements on National Public Radio stations in the Los Angeles (KPCC), San Francisco (KQED) and Sacramento (KXJZ) markets over two weeks. In Sacramento, the radio campaign was extended for an additional week. The sponsorship spots highlighted that banks were working hard to provide assistance and flexibility to those experiencing financial hardship during these difficult times.

The digital campaign strategically placed ads on political blogs and trusted news websites visited by our identified audiences in targeted geographical areas. Political blog sites included Around the Capitol, The Nooner, Capitol Morning Report and CalMatters. In addition, the display ads appeared on websites for news organizations including NPR, the Sacramento Bee, KCRA, KXTV, CNN, MSNBC, Fox News, USA Today and BBC, and garnered more than 2 million impressions and nearly 6,000 click throughs.

WesternBanker | Issue 2 2020 23 Annual Conference and Directors Forum Scottsdale, Arizona — February 29-March 4, 2020

24 www.westernbankers.com | WesternBanker WesternBanker | Issue 2 2020 25 ...... 2020 WBA Advertiser Index Issue 2 2020

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For over 35 years, PMA Funding™ (PMA) has been a leading provider of stable deposit and cost-effective funding solutions. The result: financial institutions have been able to diversify and manage their liquidity needs with greater flexibility. The PMA companies provide financial services to more than 3,200 public entities and administer client assets over $27.5 billion, which offers our banking partners a dependable source of funding. Through unique funding capabilities, we develop custom deposit programs to meet your funding needs using a variety of deposit vehicles. PMA’s client deposits provide the size and savings of the secondary CD market with the flexibility and stability of core deposits, without disrupting your local markets. Put the days of worry—and cannibalizing your funding sources—behind you, and relax. We do the work. Call us at 800.783.4273 or visit us at www.pmafunding.com

*Total assets under administration as of 12.31.19 include money market pool assets for which the PMA companies serve as fund administrator/ PMA accountant,Funding is a service marketer/distributer, of PMA Financial Network, fixed LLCincome and PMA program Securities, provider LLC (member (brokerage FINRA, SIPC)services), (collectively and/or “PMA”). investment PMA Securities, advisory, LLC is ora broker-dealerseparate institutional and municipal advisor registeredp with800.783.4273 the SEC and MSRB. Visit our websites at www.pmanetwork.comaccounts. PMA Funding and www.pmafunding.com is a service of PMA for Financial more information. Network, LLC and PMA Securities, LLC (member FINRA, SIPC) (collectively “PMA”). PMA pmafunding.com ©2019Securities, PMA Financial LLC Network, is a broker-dealer LLC. All rights and reserved. municipal advisor registered with the SEC and MSRB. ©2020 PMA Financial Network, LLC. All rights reserved. w