Archive for category: Products

,

The Rise of Instant Payments

The Federal Reserve Launches FedNow® Service

By Hannah Flanders

In 2022, research by the Pew Research Center found that over 75% of U.S. adults have utilized PayPal, Venmo, Zelle, or Cash App at least once to send and receive payments. Of these users, ease is cited as the main reason for their adoption.

As banks look to further engage their customers, remain competitive in a quickly advancing society, and provide a safe and trusted alternative to popular payment apps, the Federal Reserve has launched its long-awaited FedNow instant payment service.

What is FedNow?

Launched in July 2023, FedNow allows financial institutions of all sizes to provide safe and efficient instant payment services to customers nationwide. Already, over 100 financial institutions across the U.S. have begun offering FedNow to customers. Of these institutions, First Citizens State Bank in Whitewater is currently one of the few in Wisconsin.

“As early adopters of the service, our team believes that FedNow, and other real-time payment systems, are the future of payments,” states Nate Parrish, First Citizens State Bank president. “We want to ensure our bank is on the cutting edge and not left behind when this technology really takes off.”

The release of the FedNow Service includes baseline functionality including core clearing and settlement capabilities. Currently, FedNow not only facilitates the peerto- peer (P2P) functionalities many customers are familiar with, but also has the capabilities to facilitate payments between businesses or between businesses and consumers. Further developments are expected to launch in phases as industry demand evolves.

FedNow, however, is not the first service to provide real-time payments to banks. In 2017, The Clearing House launched its Real Time Payments® (RTP) service to all federally insured U.S. depository institutions. As of mid-2023, over 350 banks and credit unions were listed as participants in RTP.

With several banks in Wisconsin signed on as RTP participants, the most significant difference bankers will notice with FedNow is the development of a new rail. The rail, which runs concurrent to already existing credit card and Automated Clearing House (ACH) payment rails, is overseen by the Federal Reserve Bank. Additionally, beginning in 2024, certified institutions will pay a monthly participation fee of $25. On the customer end, varying transaction limits (only $500,000 for Fed- Now) and clearing times occurring in just a matter of seconds may be the most obvious difference.

“‘Instant’ is the next modernization of ‘faster’ in the payments landscape,” says Julie Redfern, chief banking officer at Lake Ridge Bank in Monona. “Services such as Fedwire and FedACH, which are only available during certain windows, will always have a place. Fed- Now is the next step in remaining competitive and providing our customers the services they expect.”

For banks in deposit-gathering mode, the implementation of Fed- Now will help increase cash flow by allowing customers to move funds directly from one bank account to another, rather than storing funds within third-party apps. These capabilities to move money instantly can be found on the certified bank’s website or mobile app.

Getting Started

Unlike previous real-time systems, FedNow is generally seen as more accessible to mid-size and smaller banks. In this, smaller banks utilizing FedNow will now have the ability to access real-time payments without having to pay their larger competitors for the service.

Both First Citizens State Bank and Lake Ridge Bank, which is currently in the implementation process, are connecting to FedNow’s receiving rail (i.e., the bank cannot initiate customer payments) via integration of their core system. However, participation in the FedNow service is flexible, meaning that banks may opt to both send and receive payments, support liquidity management transfers, or access settlement services between correspondents and respondents. Additionally, banks may also choose to connect to the rail network through partnership with a FinTech company.

“FedNow has been slow out of the gate mainly due to bottlenecking on the core’s end,” says Redfern. “If an institution is considering going through a Fin- Tech, it’s important to make sure that they are already Fed approved rather than having to face additional delays.”

Parrish also emphasized the importance of getting ahead of the instant payment movement. “Especially with core providers being slow to adopt the idea of instantaneous movement, it may take several years for interested institutions to get on the rail. Even if 900 institutions are able to join in the next year, it could still take another nine or 10 years before FedNow is fully implemented across the country.”

To begin the process of implementation, banks are encouraged to consider their overarching payments plan and examine their operating processes to determine if the institution has the capabilities to support real-time payments. This process may require meeting with third party service providers or enhancing in-house technology.

From there, banks must undergo onboarding and testing. Certification, according to the Fed, is the final stage which entails the completion of an operational readiness test and network experience checklist. The Independent Community Bankers of America (ICBA) has emphasized that this process is not meant to be difficult, but rather to ensure that institutions are prepared to support instant payments.

The Future of FedNow

With just over 100 providers across the U.S. connected to FedNow’s rail as of October 2023, the main issue currently certified institutions are facing is the lack of transactions.

“Aside from conducting P2P payments, many customers are not entirely aware of the possibilities of FedNow,” says Parrish. “As bankers, it is our role to help inform our customers and small business clients of the possibilities of instant payments. From payroll to recurring bill payments or emergency disbursements, the ability to immediately move money will impact the way many operate.”

Though the Fed expects usage to increase as more institutions go live, banks that have incorporated FedNow into their payment offerings play an important role in emphasizing the key use cases and sharing with customers the possibilities of real-time payments.

Parrish also adds that the prospect of conducting Government-to- Consumer (G2C), Customer-to-Government (C2G), and Business-to-Government (B2G) payments on FedNow to be a significant factor as to why banks should become participants. Already, the U.S. Department of the Treasury’s Bureau of the Fiscal Service is ready with instant payment capabilities via FedNow.

Of course, as fraud continues to evolve, especially as increasingly more services become digitalized, risk mitigation and security is a significant consideration for many banks. While many theorize that the use of FedNow’s instant payment service will significantly cut down the number of uninsured, fraudulent payments that occur on third party apps as well as reduce check fraud scams across the country, it is vital that participating institutions have up-to-date strategies and procedures to mitigate risk.

Through FedNow, key risk management and information security solutions, such as accepting payments without posting, the ability to request more information from the sending or receiving institution, data encryption and tokenization, as well as several authentication and authorization measures, are available to participants. These tools, too, are expected to evolve and expand as the service grows. However, as the first line of defense against fraud, the Fed emphasizes that all participating institutions ensure that their overall fraud management strategy is consistent with the evolving payments landscape, communicated with vendors and customers, and regularly reviewed.

As ‘instant’ becomes the status quo for payments, FedNow can help drive commerce in new sectors, increase cash flow throughout communities, and offer financial institutions of all sizes innovative solutions to meeting the ever-evolving expectations of customers. To learn more about FedNow, and what its services may offer your bank and its customers, please visit frbservices.org/financial-services/fednow.

/by
, , , , , , ,

November/December 2023 Wisconsin Banker

Learn more about what ag bankers are expecting in the new year, upcoming WBA events, and how your bank can make an impact with WBA’s advocacy initiatives.

Featured inside are the chair’s column by Donna Hoppenjan, current WBA chair and president and CEO of Mound City Bank, Platteville; Loni Meiborg, senior vice president – organizational development at Fortifi Bank in Berlin; and the Community Advocate, Steve Ploetz, president of Bank of Prairie du Sac.

/by
, ,

Executive Letter: Protecting Your Bank from a Cyberattack

By Rose Oswald Poels

Cyberattacks are becoming an increasingly alarming trend and it is vital that bankers in Wisconsin remain vigilant in safeguarding their institutions and the personal financial information of their customers. In 2022, global cyberattacks increased by 38% when compared to the year prior, notes a study conducted by Check Point Research. These attacks, which target both individuals and businesses worldwide, include phishing, ransomware, breaches, and vulnerability exploitation. Each year, cybercrime costs the U.S. economy billions of dollars.

Despite this, there are many ways in which banks are able to mitigate these risks if an attack occurs.

Continually monitoring, updating, and testing your systems are all key to ensuring that your people and environments are not vulnerable. In an ever-changing digital and banking world, it may be difficult to know what areas need to be addressed, but it does not have to be. As always, WBA and its subsidiaries — FIPCO and Midwest Bankers Insurance Services (MBIS) — offer many different resources for banks to help educate your employees, protect your systems, and partner with you during a cyber event.

To proactively identify vulnerabilities of critical aspects of business operation, FIPCO offers an IT Audit & Security service. This service, which includes various tests, audits, and resources, keeps your institution one step ahead to mitigate high-risk areas before it is too late.

Right behind robust firewalls, up-to-date antivirus software, and other initiatives to mitigate cyberthreats, are your employees. Ensuring all team members feel empowered to assist in cyber risk reduction efforts should be a significant aspect of an institution’s risk mitigation strategy. Annually, WBA offers a number of security and IT-focused educational opportunities, a best practices library featuring an extensive list of security and financial crimes resources, as well as a technology and operations peer group to help in facilitating discussion and idea sharing.

Ensuring that all team members are set up with strong, unique passwords may also be the difference between a secure organization and a vulnerable one. These passwords, according to the National Institute of Standards and Technology (NIST), should be more than 12 characters long and include mixed casing and numbers. Multifactor Authentication (MFA) is also strongly recommended for bank leaders and administrators, if not every member of the team.

Having comprehensive insurance coverage is also crucial in the event of an attack. MBIS offers an extensive list of insurance coverages, including cyber liability. This policy is designed to protect directors, officers, employees, and entities from losses arising out of electronic theft of customer information, including cyber extortion, forensic expense, security breach notification, e-commerce activity, and electronic publishing. The insurance carriers for cyber liability policies also provide extensive resources that MBIS recommends be immediately engaged in the event of any cyberattack, including phishing incidents and ransomware attacks. Additionally, FIPCO’s Loan Processing Central service provides a resource you can retain ahead of time to immediately step in if a bank experiences a disaster, including a cyberattack, or an unplanned employee absence, to help continue the processing of your loan documentation.

Whether your bank is recovering from a cyber incident or mitigating the chances of one, our team is here to ensure your bank is well-prepared and equipped to navigate the complex and stressful landscape of cybersecurity challenges. If you are interested in learning more about the protections WBA can help you implement at your bank, please contact Rob Foxx (FIPCO) at rfoxx@fipco.com or Jeff Otteson (MBIS) at jeffo@mbisllc.com.

/by
, ,

Seven Strategies for Mitigating Cybersecurity Risk

By Tyler Leet

When it comes to cybersecurity, a good offense is a key component of a good defense. Much like organizations, hackers continuously learn and hone their skills. So, it’s critical to keep up with the latest threats they deploy, identify potential vulnerabilities, and understand how your bank would respond to an attack. By examining vulnerabilities before a real hacker has the opportunity, your institution can take an offensive approach and mitigate cybersecurity risk.

How to Mitigate Your Bank’s Risk

How can financial institutions take steps to strengthen cybersecurity in the face of evolving threats? Here are several tips to mitigate cybersecurity risk for your institution:

1. Conduct Penetration Tests: During a penetration test, a tester identifies vulnerabilities or security weaknesses and then attempts to leverage them to gain deeper access into your network. Penetration tests often reveal eye-opening results by showing how many points of entry exist across your network.

While still valuable, a vulnerability scan or assessment offers a broader view than a penetration test; however, the results are much more generic. Since a penetration test is more manual and object-oriented, it provides directly actionable information to help you evaluate and resolve weaknesses likely to be leveraged by a malicious individual. Combining these with a layered security approach offers the most protection.

2. Remediate results. Don’t be afraid of the results from a penetration test or vulnerability assessment. Assessments aim to strengthen your approach, not to serve as a pass/fail benchmark. Your institution should analyze the results and remediate any issues for optimal effectiveness. Remediating any issues or critical vulnerabilities after an assessment is a key step in preventing bad actors from exploiting your weaknesses.

3. Prioritize cybersecurity education. Since cybersecurity is a business issue, employees outside the IT department play an important role in cybersecurity. From loan officers to tellers, employees have access to a myriad of systems and are potential targets as a result. While employees don’t have to be cybersecurity experts, it is still beneficial to practice good security hygiene. This is also a cost-effective measure, as the cost of educating users will almost always be less than the cost of dealing with a breach.

Hackers often rely on weak passwords or phishing attacks to gain system access, but educating your users on the latest tactics and common social engineering schemes — and how to report them when spotted — helps mitigate your risk of a successful attack. Ensure your employees and customers remain vigilant when they receive an unexpected email with an urgent message that includes a strange link or attachment, as this is a common hacker tactic.

4. Implement multi-factor authentication. One way to encourage hackers to move on to a different target is making it as difficult as possible to carry out their objective, which is often account access. Multi-factor authentication (MFA) is an excellent way to discourage hackers, as it requires more than a username and password to obtain account access. This additional information can include a token, text message, email, or biometric data such as a face scan or fingerprint. Not only should employees use MFA when accessing your systems and network, but your institution should encourage customers to enable this control on their financial accounts, email accounts, and even social media.

5. Implement patch management. Most bad actors use tools that take advantage of your system vulnerabilities, so it’s important to invest in routine vulnerability and patch management to shore up your defenses. If you remediate a vulnerability, bad actors don’t have an easy way to exploit it and will likely move on to low-hanging fruit elsewhere. Further, good patch management minimizes surface area and attack exposure. While updating your patches can be resource-intensive, it is worth it in the long run. This approach includes encouraging employees to update software, operating systems, applications, etc. to mitigate the risk of hackers taking advantage of any vulnerabilities.

6. Assess your risk. If done properly, risk assessments are a key component of a cybersecurity plan. A risk assessment helps an organization identify and manage financial, operational, and other risks associated with internal and external incidents. And proper risk assessments should be more than filling out a spreadsheet; they’re about the lessons learned along the way as you produce it. During this assessment, you should identify assets you need to protect and understand how controls in place work together. The resulting document should help you prioritize your limited resources.

7. Involve your leaders. Cybersecurity involvement should not be limited to your IT department. Since this issue touches nearly every part of your bank, it’s important to have board and senior management involvement. Senior management should be invested in understanding cybersecurity threats and have enough familiarity with the topic to ask credible questions to IT leaders. Further, they should serve as advocates for your cybersecurity plan and reinforce the importance of education and training at all levels.

When determining the appropriate cybersecurity investment, leaders should consider your institution’s individual objectives, risk assessment and risk appetite — or a representation of how much risk an institution is willing to accept. As an integral component of a holistic approach to IT, security and compliance, IT governance ensures that an institution’s technology and business objectives support its larger strategies.

Finding the Vulnerabilities Before Cyber Criminals

With evolving threats and opportunistic hackers, investing in cybersecurity for your institution should be a priority. Tools like penetration tests and vulnerability assessments should be components of your larger cybersecurity strategy and help you stay ahead of cyber criminals.

Leet is director of Risk and Compliance Services for CSI’s Regulatory Compliance Group. CSI is a WBA Associate Member.

/by
Triangle Background
,

Association Update: New Benefit Available to WBA-Member Banks

Delta Dental adds CheckUp Plus™

By Daryll Lund

Annually, the Wisconsin Bankers Association Employee Benefits Corporation, Inc. (WBA EBC) provides thousands of bankers across Wisconsin with access to high-quality health benefits. Ranging from dental insurance, medical insurance, prescription drug plans, and vision to life and disability insurance, WBA EBC is committed to ensuring that WBA-member banks are able to provide their teams with the best options for them. Through WBA EBC, bankers throughout Wisconsin are provided with flexible plans, purchasing power usually only offered to larger groups, and access to an online insurance portal.

Starting on January 1, 2024, WBA EBC is excited to share that all dental insurance participants will gain access to Delta Dental’s new CheckUp Plus™ program at no extra cost.

CheckUp Plus™ allows enrollees to get diagnostic and preventive dental services without applying the cost to the individual’s annual maximum. By emphasizing preventative care, individuals will keep their annual maximum for the things they need. In the long-term, CheckUp Plus™ will help reduce the need for more expensive services and save benefit participants more money.

Although there will be no rate adjustments in 2024, dental insurance holders will retain access to enhanced benefits such as an annual maximum and orthodontist maximum of $2,000 each and preferred pricing options that could save up to 30% off standard pricing. These plans are exclusive to WBA-member banks participating in WBA EBC’s dental insurance program.

Interested in learning more about CheckUp Plus™, or what benefits WBA EBC’s assortment of health options could offer your team? Contact Brian Siegenthaler at 608-441-1211 or bsiegenthaler@wisbank.com to ensure your employees are receiving the best plans for the best price.

/by
, ,

Executive Letter: The Federal Reserve’s FedNow® Service Offers New Payment Options

By Rose Oswald Poels

As you have likely seen, the Federal Reserve’s FedNow® Service is now live, having initially launched in late July with baseline functionality to support account-to-account transfers and bill pay. Through the service, financial institutions are able to instantly transfer money for customers any time of the day and any day of the year, adding greater flexibility for customers.

For those who are not yet familiar with the new service, FedNow Service is the Federal Reserve’s new instant payment infrastructure that allows financial institutions of any size to provide safe and efficient payment services. Customers can send and receive instant payments; recipients have full access to funds immediately. The following is a standard payment flow example from the FedNow Service:

  1. A sender (i.e., an individual or business) initiates a payment by sending a payment message to its Financial Institution (FI) through an end-user interface outside the FedNow Service. The sender’s FI is responsible for screening the payment according to its internal processes and requirements.
  2. The sender’s FI, or its service provider, submits a payment message to the FedNow Service.
  3. The FedNow Service validates the payment message, for example, by verifying that it meets message format specifications.
  4. The FedNow Service sends the contents of the payment message to the receiver’s FI to seek confirmation that it intends to accept the payment message. At this point, the receiver’s FI has the opportunity to confirm, among other things, that it maintains the specified account.
  5. The receiver’s FI sends a positive response to the FedNow Service, confirming that it intends to accept the payment message. Steps 4 and 5 are intended to reduce the number of misdirected payments and resulting exception cases that can occur in high-volume systems.
  6. The FedNow Service debits and credits the designated master accounts of the sender’s and receiver’s FI (or those of their correspondents), respectively.
  7. The FedNow Service sends a payment message forward to the receiver’s FI with an advice of credit and sends an acknowledgement to the sender’s FI that settlement is complete.
  8. Outside of the FedNow Service, the receiver’s FI credits the receiver’s account.* The receiver’s FI makes funds available to the receiver immediately after step 7. This crediting to the receiver’s account as well as the debiting of the sender’s account by their respective financial institutions happens outside the FedNow Service.*

*The FedNow Service processes payments around the clock, every day of the year. However, for accounting and reporting purposes, the FedNow cycle date differs from the calendar date for a period of time (from close until midnight) because it aligns with the Fedwire® Funds Service business day, which generally has a closing time of 7:00:59 p.m. ET. If the Fedwire Funds Service business day is extended, the FedNow cycle date extends along with it. For consistency, the FedNow Service aligns to the same timeframe for weekends and holidays.

For financial institutions that elect to be a receive-only participant, the institution is able to receive customer payments, but may not initiate customer payments, except to return payments using the service. Alternatively, a financial institution may elect to be able to send and receive customer transfers. A financial institution could also elect to participate in the FedNow Service to receive requests for payment via the FedNow Service.

The FedNow Service will also support transfers between participating financial institutions, either on behalf of their respondents or for their own internal purposes. This type of transfer includes settlement services.

In trying to identify future educational offerings and other resources for the WBA membership, I ask that bankers please complete the following short survey regarding use or non-use of the new service. Results will be kept confidential.

Take the Survey

Additional FedNow® Service Resources

/by
Triangle Background
, , , , , , ,

September/October 2023 Wisconsin Banker

Learn more about how Wisconsin’s 2023–2025 Budget will impact banks across the state, upcoming WBA events, and serving Amish/Mennonite communities.

Featured inside are the chair’s column by Donna Hoppenjan, current WBA chair and president and CEO of Mound City Bank, Platteville; Lauren Moran, marketing director at Wolf River Community Bank in Greenville; and the Community Advocate, Craig Stuedemann, president and CEO of AbbyBank in Abbotsford.

/by
, , ,

Executive Letter: New Resources Available to All WBA-Member Bankers

By Rose Oswald Poels

As part of the Wisconsin Bankers Association’s (WBA) mission to support bankers across the state, our team — often in collaboration with the membership — regularly creates resources to assist WBA-member bankers in expanding their knowledge and expertise. Recently, WBA launched several valuable compliance resources that your staff will find useful in maneuvering the ever-changing banking compliance landscape. Our objective with these services is to continue to make training accessible and more flexible for all WBA members at a reasonable cost.

I am excited to announce our new WBA Legal In-House Compliance Training resource. Member banks are encouraged to take advantage of this opportunity to bring compliance training by the WBA Legal team directly to your bank. The training may be conducted in-person or as a virtual meeting and will be customized to your bank’s needs. All training will be conducted by WBA Legal; the presenter selected is dependent on the topic and timing of the training.

Additionally, I am excited to share that the new WBA Account Titling Video Series is now available. This series is designed for your bank to use as a new employee onboarding tool or a refresher for frontline retail staff. The series is built upon WBA’s longstanding and popular, comprehensive account titling workshop and is meant to help frontline staff develop an awareness of the laws related to account titling, analyze a variety of deposit account ownerships and fiduciary roles of deposit account relationships, recognize the legal and practical importance of an account title, and identify various documents which make up a deposit contract and understand their significances.

The new series provides information about account titling in short, topic-specific videos. Each video is supported by written materials. When utilizing the videos as training, there are also exercises to illustrate concepts shared within the videos. Managers are encouraged to supplement the information in the series with bank-specific policies, procedures, and operational requirements, so frontline staff know of any additional actions bank management expects frontline staff to execute.

The new resource consists of 11 modules, covering 60 topics with over five hours of video material! Each video ranges between two and 10 minutes in length — making training very flexible. Also included are manager/trainer resources such as a viewing sequence listing, tracking resource, examples, and test questions with an answer key.

As our legal team has provided for decades, new materials and resources are routinely added to the WBA Compliance page on the WBA website, so I encourage your compliance team to monitor this site and our e-publications for updates. The newest release is a Lender’s Guide to the Marital Property Act. The guide answers frequently asked questions lenders have regarding the Act and is just one of several other available guides for members. Other such resources include a Banker’s Guide to LLCs and a Transfer by Affidavit Guide.

Finally, many other resources created by bankers serving on various WBA Sections and Committees may be found in the WBA Best Practices Library on our website. The Best Practices Library is password protected. If you do not have the password, please reach out to WBA Legal.

WBA strives to provide comprehensive compliance resources for its members. If you have requests for new content or other materials, please let me know and we will incorporate all feedback into our new product development process.

/by
,

Acquiring and Maintaining Liquidity, the Lifeblood of Financial Institutions

By Kent Musbach and Marc Gall

Recent banking industry situations have refocused attention on liquidity’s importance. Rising interest rates, volatile markets, and depositor diversification are but a few of the causes for concern.

Accordingly, banks must act more strategically than ever in how they evaluate, access, and deploy liquidity when facing economic uncertainty. An overarching concern is how these strategies may change if interest rates pivot and decline, as analysts and the Treasury yield curve are forecasting for later this year.

Maximizing Available Liquidity

The first step in liquidity planning is assessing current and potential availability. With input from both the deposit and lending side, a simple sources and uses document can chart out the bank’s current position.

From there, identify current contingent sources of funding. These may include the Fed discount window, Fed Bank Term Funding Program (BFTP), Fed funds lines and the Federal Home Loan Bank. Within these sources, some may require collateralization. Consider rearranging the collateral pledged to each entity to maximize coverage.

Collateral-free options, such as brokered CDs, may merit consideration even at a slightly higher current cost to preserve other borrowing lines. Taking losses in the investment portfolio or repositioning these assets for higher income in 2023 and beyond can also be considered.

Short-Term Gain, Long-Term Pain?

The inverted yield curve presents unique challenges to managing net interest margin. In the face of falling margins, bank managers may be enticed to find ways to maximize earnings in the short term that could be detrimental to longer-term performance. This may mean adding more optionality or credit risk to the balance sheet.

Attempting to maximize earnings in this environment may lead to earnings issues if the market is correct and rates fall, resulting in a positive sloping yield curve. For example, purchasing callable agencies that would likely be called if rates fall, or making a substantial amount of floating rate loans without floors, would negatively impact margin if the market and analysts are correct about the downward direction of rates.

Within the investment portfolio, callable agencies have very high yields. While attractive for this year, should rates fall, the bond is likely called and returns cash to reinvest in a lower-rate environment. Stretching credit standards in the loan portfolio to book higher yields could also spell trouble. The inverted yield curve has traditionally forecasted a downturn in the economy. With that in mind, compromising on standards late in a credit cycle could result in unwanted troubled assets if the economy turns.

Loan Pricing Considerations

Given the stress on the banking system and the drive to have liquidity on the balance sheet, banks may be reluctant to extend credit. Banks can be pickier—and may have more pricing power than they think. In national Federal Reserve survey, large banks are tightening their lending standards and increasing credit spreads, which should reflect three types of risk—credit, optionality and liquidity — and each has value. Bank earnings are at risk when rates fall and prepayment penalties aren’t included in loans. Their choices then will be to refinance and lose income or lose the customer to a competitor.

Be sure to consider prepayment penalties, which some bankers disavow, but are actually quite common. When rates are high, the option for a customer to refinance a loan has tremendous value. Without prepayment penalties, institutions may be forgoing higher income should rates fall and the loan refinances.

Today, community bank management teams should be asking, “Are we pricing our loans and deposits properly?”

Liquidity is the lifeblood of any financial institution, but with lower interest rates an eventuality, banks must be strategic and intentional to maintain your income streams, liquidity and customer relationships.

Musbach is senior vice president and Gall is vice president and asset/liability strategist for BOK Financial Capital Markets. Content Sponsored by BOK Financial Capital Markets, a WBA Gold Associate Member.

/by
,

Three Energy Credit Opportunities for Financial Institutions

By Meghan Gardner, CPA, Wipfli tax manager and Philip Yasenak, CPA, Wipfli senior manager

Conversations surrounding tax strategies for energy credits have been happening for decades, but the passage of the Inflation Reduction Act (IRA) in August 2022 has reinvigorated the intent and incentive behind the credits. The IRA increased the available clean energy federal funding to $400 billion, creating a strong incentive for banks to reassess their clean energy investment strategies.

Investing in renewable energy projects creates eligibility for energy credits. The credits are applied directly against tax liabilities, effectively providing a dollar-for-dollar reduction in income taxes. By structuring investments this way, banks can both support green initiatives and make a return on investments through tax savings.

The IRA has enhanced and introduced three credits that may apply to your bank’s tax strategy: the investment tax credit (ITC), the new clean vehicle credit and the alternative fuel vehicle refueling property credit.

Investment Tax Credit

The ITC is available for energy properties placed into service. Some examples include solar energy (such as solar panels or fiber-optic solar), wind energy and energy storage. Requirements for the property include original use of the energy property by the taxpayer and the specification that the property must be depreciable.

For property placed into service after December 31, 2022, the ITC base credit is 6% of the cost of the property and installation, with multipliers that can increase the credit up to 30%.

Energy properties funded with tax-exempt bonds will reduce the credit proportionally and, once the credit has been claimed, the depreciable basis of the property is reduced by 50% of the credit amount.

New Clean Vehicle Credit

New vehicles placed into service after April 18, 2023, will qualify for the new clean vehicle credit of up to $7,500. To maximize this credit, the vehicle must meet both the critical minerals requirement and the battery components requirements, each worth $3,750 respectively.

Other requirements to take into consideration for this credit include:

  • MSRP
  • Gross vehicle weight rating
  • Domestic production
  • Seller requirements

If your bank is already considering the purchase of new vehicles, this credit may create an incentive to invest in clean vehicles.

Alternative Fuel Vehicle Refueling Property Credit

This credit has stricter qualifications but may be applicable to rural and nonurban-based banks.

It applies to the cost of equipment and installation of alternative refueling sources, such as electric vehicle charging stations. The base credit is 5% but can increase to 30% with multipliers for a maximum dollar value of $100,000. The property must be installed in nonurban or low-income census tracts as defined by the Department of Housing and Urban Development.

Once earned, C corporations can claim credits directly against their tax liability, and S corporations pass the credits through to their shareholders on schedule K–1. The use of credits by shareholders may be limited by passive activity rules.

How Wipfli Can Help

While there are immense potential benefits to taking advantage of clean energy credits, navigating the specific requirements of energy credits and ITCs can be complex. Wipfli’s team of tax professionals brings our specialized knowledge of financial institutions to help you tap into these opportunities. Contact us to learn how we can help you identify the strategies you need to enhance profitability and contribute to a sustainable future.

Contact us to learn how we can help you identify the strategies you need to enhance profitability and contribute to a sustainable future.

Content Sponsored by Wipfli, a WBA Silver Associate Member.

/by
WBA logo

questions@wisbank.com

608-441-1200

4721 S Biltmore Ln.
Madison, WI 53718

Get our Newsletter!
Subscribe