Florida Banking November 2022

Banesco USA Stewarding an Investment in the Local Community THE MAGAZINE OF THE FLORIDA BANKERS ASSOCIATION WWW.FLORIDABANKERS.COM SEPTEMBER 2020 T I I ERS A SOCIATION W.FLORIDABANKERS.COM NOVEMBER 22

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THE MAGAZINE OF THE FLORIDA BANKERS ASSOCIATION

VOLUME 37

NUMBER 10

NOVEMBER 2022

ON THE COVER 8 �� �� �� �� Banesco USA: Stewarding an Investment in the Local Community CONTENTS 4 �� �� �� �� �� �� �� �� � Chair’s Message 6 �� �� �� �� �� �� Straight Talk from the President’s Desk 12 �� �� �� �� Government Relations: What to Expect From the 2023 Session 14 �� � BancServ Endorsed Partner: Price Pullback Prospects: Availability of Discount Bonds Causes a Rethink of Strategies 16 �� �� �� �� �� ��Trust Banking: "Pick Your Partner" - New Florida Amendments to UCC Article 9 18 �� � Florida Bankers Educational Foundation: Giving Thanks While Giving Back 20 �� �� ��ESG and the Introduction of the Index Act 22 �� �� �� �� �� �� FBA's Pete Brokaw Retiring at Year’s End 24 �� �� �� Florida BankPac Update 27 �� �� �� �� �� Personal Transactions 28 �� �� �� �� �� �� �� �� �� �� �� �� ��Kudos 30 �� �� �� �� �� �� �� Upcoming Events 31 �� �� �� �� �� �� �� �� Did You Know? 31 �� �� �� �� �� Advertising Directory

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Florida Bankers Association asanchez@floridabankers.com Pamela Ricco Executive Vice President and Chief Operating Officer Florida Bankers Association pricco@floridabankers.com Brooke Harrison Publications Director Florida Bankers Association bharrison@floridabankers.com

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Bill Penney Chair Jose Cueto Chair-Elect

Fab Brumley Immediate Past Chair

Greg Nelson Second Immediate Past Chair

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On the Cover: Banesco USA President and CEO Cali Garcia-Velez

Florida Bankers Association: The voice of Florida banking since 1888.

Photos by Mark Gall, Images for Business, Orlando, Fla.

Images ©istock.com: Nuthawut Somsuk; Berezko; nirat

CHAIR’S MESSAGE

WHAT I TOLD THE WHITE HOUSE ABOUT YOU, OUR BANKERS

BY BILL PENNEY, FBA CHAIR

Y ou all have entrusted me with this incredible honor of representing you and our banking industry at important meetings and events. Please understand that I take this responsibility very seriously. In September, I attended the FBA’s 18th annual joint Washington, D.C., fly-in with the California Bankers Association. We met with representatives and key policymakers to discuss banking issues like the Section

hyper-competitive environment, as consumers have a substantial number of financial choices, both inside and outside of the banking industry. As bankers, we work hard every day to help Americans make their dreams come true by: • Financing that first car. • Financing the first home. (I still remember how excited my wife, Karen, and I were to learn we were approved for our first home loan!)

1071 rulemaking, cannabis banking, digital assets, CRA modernization, and credit unions (among other topics). We were invited to meet with Deputy EconomicAdvisor Bharat Ramamurti for aWhite House briefing.While we know that the current Administration has not been overly friendly to banking and business interests, we believe it is still necessary to be at the table.

• Financing a bus iness e x p a n s i o n t o h e l p entrepreneurs create new jobs and grow our economy. I then ventured into forbidden territory by describing how we work with our customers to pay an overdraft in a difficult week when they run short of cash. However, we then offer to help them establish a savings account and a savings plan and go on to teach financial literacy. My colleagues have the heart of a servant, and our best reward is helping our customers achieve financial success.

I had the privilege of introducing Mr. Ramamurti to the group, which was easy: He is a Harvard undergraduate, received a law degree from Yale, did a stint in the legal department at the Boston Red Sox (he has a World Series ring!) and then moved into roles with Sen. Elizabeth Warren and now President Biden’s White House. Very impressive! I would argue that our group of Florida and California bankers, however,was equally as impressive. I felt obligated to introduce our talented bankers to Mr. Ramamurti. So what did I tell the White House about you, our bankers? I said that sometimes our bankers are painted with an ugly brush as monopolists, “robber barons,” even greedy. I assured him that we operate in a

I introduced our group, and Mr. Ramamurti smiled. I’d like to believe that my message may have helped improve our reputation in theWhite House. Even if it doesn’t, it was a message that needed to be shared. Why did I make these statements? Because they are true! You all make our industry proud every day. Keep your head up, be proud of your efforts, and continue to do what you’re doing. I’m proud to say I’m a banker. I hope you are too! Now, even theWhite House knows all about the good work you do for your colleagues, your customers, and your communities.

FBA Chair Bill Penney with Deputy Economic Advisor Bharat Ramamurti at the White House.

4 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

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STRAIGHT TALK FROM THE PRESIDENT’S DESK

SOUTHWEST FLORIDA WILL REBUILD TO BE BETTER AND STRONGER

BY ALEJANDRO “ALEX” SANCHEZ, FBA PRESIDENT AND CHIEF EXECUTIVE OFFICER

I have had many conversations with our bankers in Southwest Florida who were impacted by Hurricane Ian. Our bankers are, of course, bruised by Hurricane Ian’s brutal aftermath, but they are also strong and ready to rebuild their communities. I shared with them that while it is hard to imagine now, they will come back stronger and with a more sustainable community than ever before. To envision the future, one must look to the past: recovery from devastating storms did occur after Hurricane Andrew in Miami and Hurricane Michael in the Panama City area, for example.

overpass and stood looking at the neighborhood before me. I saw many destroyed homes, and what was really impactful — in addition to the loss of property — was the lack of trees. Today, Homestead is once again full of trees, including my favorite — the Royal Palm tree. Years later, Hurricane Michael (another Category 5 storm) hit Florida in the Panama City area. As I drove to tour the city, the devastationwas unimaginable.Hurricane Michael had ripped through the area leaving nothing in its wake. As with Hurricane Andrew and now Hurricane Ian, it was hard to imagine that a newer and stronger

The world was a different one in 1992 when Hurricane Andrew hit Miami’s Homestead area. The federal and state governments did not mobilize in the way we see today with supplies, the delivery of water, or electric trucks to restore power. Now, our Florida Governor is constantly on the airwaves to warn us about upcoming storms. I believe Governor Jeb Bush was our first Governor to take the communicationwithFloridians to a whole new level during a hurricane. And he did so in both English and Spanish. Today, we also have network channels like theWeather Channel tracking the storms and providing 24/7 updates.

Panama City would emerge from the rubble. That is the case today. To Southwest Florida — you will rebuild.Adjustments may need to be made. Southwest Florida will have to decide what building code will be used to rebuild homes on or near the coast, andwhether mobile home parks should be located at or near the coast. Southwest Florida, you will rebuild. Your community will be more beautiful than ever, and your homes will be stronger and more resistant. I encourage all of our bankers and industry partners to donate to help rebuild Southwest Florida. The Florida Bankers Association Executive Committee approved a $25,000

“THIS IS THE BIGGER ISSUE: BANKS SHOULD HAVE THE RIGHT TO DECIDE, BASED ON THE RISK OR BUSINESS PROFILE OF THE BANK, THE TYPE OF BUSINESS THEY WANT TO BANK.”

During Hurricane Andrew, people were hot, frustrated, and without shelter, food, or water for extended periods. Much of the aid that was given came from private sources. Today, we have seen Florida Governor DeSantis travel to Southwest Florida for an extended period to work alongside his team assisting in the recovery efforts, and eventually in the rebuilding. When Hurricane Andrew hit, I remember visiting the area after the storm. I stopped on a turnpike elevated

direct contribution to the Florida Disaster Fund within Volunteer Florida, which goes directly to helping impacted areas. Our industry has donated millions to organizations to help Florida recover from Hurricane Ian. I am so proud of our bankers for caring, and more importantly, giving. The American Bankers Association donated $100,000 to Florida Hurricane Ian relief and I want to thank Rob Nichols, President and CEO, for his

6 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

leadership in making this a priority for the ABA. In addition, the ABA is also raising monies from our industry nationwide and will donate all funds raised to the Florida Disaster Fund at Volunteer Florida. Similarly, Independent Community Bankers of America President and CEO Rebecca Rainey has activated a new ICBA Foundation Disaster Relief Program to assist community banks and employees

affected by Hurricane Ian. ICBA will match the first $50,000 raised for Florida community bankers to help donations go further. If you or your bank want to help — and every little bit helps — please donate to the American Bankers Association Foundation at aba.com/Florida. This is my priority now. Join me in this effort, please. Thank you.

MARCH 22 , 2023

during the 2023 Legislative Session and spend a day at the Capitol discussing important banking and economic issues with Florida legislators. The day ends with Capitol Night—a dinner held at FBA headquarters.

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WWW.FLORIDABANKERS.COM NOVEMBER 2022 — 7

The Banesco USA executive team.

8 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

Stewarding an Investment in the Local Community Banesco USA

B anesco USA is part of Banesco International, a financial services brand that has provided banking, insurance and global payment solutions for more than three decades. Today, the multibank company has over 5,300 employees and a network of 263 branches serving over 4.8 million client relationships. Banesco International Group is comprised of four independent financial groups, each with their own charter, independent management team and

“We’re achieving our goals with a very aggressive and responsible growth trajectory,” Garcia- Velez said. “We’ve firmly established our objective to be the go-to bank for business owners and professionals with needs for domestic and international banking services.” Banesco USA recently received a $250 million investment from the U.S. Department of Treasury’s Emergency Capital Investment Program (ECIP), the only bank in Florida and Puerto Rico to

board of directors. Bane s co USA wa s founded in January 2006 and operates as a domestic bank with four business centers in South Florida and one i n San J uan , Puerto Rico. Later this year, the Bank will open a fifth business center near the Doral area and move into a new headquarters facility that’s close to Miami International Airport, the heavily concentrated business districts of Doral and Medley and just a short drive to downtown Miami. “ We f o l l o w a community banking

receive the funds. Under the program, the U.S. Treasury will invest up to $8.7 billion in community f inanc ial ins t i tut ions to increase lending to minority borrowers and businesses in underserved communities. “We’re proud that the U.S. Treasury placed their trust in Banesco USA to be good stewards of this funding. It is a huge vote of confidence in the Banesco USA team. The Bank received the investment because of the professionalism and dedication to serving our local communities,” Garcia-Velez said. Th e t e am wo r k e d

“WE’RE PROUD THAT THE U.S. TREASURY PLACED THEIR TRUST IN BANESCO USA TO BE GOOD STEWARDS OF THIS FUNDING. IT IS A HUGE VOTE OF CONFIDENCE IN THE BANESCO USA TEAM."

- GARCIA-VELEZ

on the extensive appl ication for months, which included developing and presenting a comprehensive business plan detailing how the Bank will responsibly deploy the capital to minority individuals, minority-owned businesses and underserved communities. As a result, they were awarded the maximum amount of Tier 1 capital available, which Garcia-Velez believes will be “transformational”. That’s because the ECIP funding is for long-term investments that will strengthen local economies and make them more resilient and self- sustaining, rather than short-term or one-time payments like other recent government-funded stimulus programs. Banesco USA, Continued on page 10

model,” said Cali Garcia-Velez, president and CEO of Banesco USA. “Since each bank in the Banesco International Group operates independently, we are a very agile, customer-centric organization that can meet the unique needs of each of the communities we serve.” “We’re very excited to bring the team together under one roof,” Garcia-Velez said. “The move will enhance collaboration among our employees by making it easier to meet and talk to each other in person. That results in faster decisions and service delivery to our customers.” The execution of that strategy led to the Bank’s record growth in the first half of 2022. In July, Banesco USA reached $2 billion in total loans.

WWW.FLORIDABANKERS.COM NOVEMBER 2022 — 9

manager, you can refer people you know in your local community. If you’re the head of commercial banking, you know who is successful in the market and can reach out to them to join our team.” Garcia-Velez is “always recruiting.” He got to chatting one time with his Uber driver, a newcomer to South Florida, and learned that he’d worked in a bank. Though the driver did not yet speak fluent English, he recommended his English-speaking wife.

Banesco USA, Continued from page 9

Banesco USA has 10 years to deploy the ECIP capital and expects to deliver over $9 billion in funding that will support business growth and create local jobs. For instance, executives are focused on collaborative partnerships with community development organizations to reach out and build relationships with individuals and businesses to finance the acquisition or renovation of commercial

real estate and wide variety o f c o n s t r u c t i o n t h a t contribute to local growth. Through the middl e o f 2 0 2 3 , t h e B a n k will focus on strategic p l a n n i n g , l e v e r a g i n g existing human capital, expertise and technologies and strengthening internal capabilities, resources and processes to accommodate the projected increase in lending. A core component of the Bank’s strategic p l a n i n c l u d e s h i r i n g over 140 professionals in 2 years to execute the planned strategy. “Our team is our strength. We seek professionals who are engaged, passionate and dedicated to servicing our

Garcia-Velez introduced her to his human capital team and she was hired for a career position in compliance. “She became our star,” Garcia-Velez said. “My wife and kids laugh because whenever I have a great experience with someone in the service industry, I’ll give them my card and say, ‘You’d be great working at our bank, call me.’” Garcia-Velez did not or i g ina l l y see himse l f becoming a career banker like his father. However, after he earned an MBA from the University of Miami, a friend convinced him to interview with First Union Bank (now Wells

“WHENEVER I HAVE A GREAT EXPERIENCE

WITH SOMEONE IN THE SERVICE

INDUSTRY, I’LL GIVE THEM MY CARD AND SAY, ‘YOU’D BE GREAT

WORKING AT OUR BANK, CALL ME.”

- GARCIA-VELEZ

clients and creating the experience they expect and deserve,” Garcia-Velez said. He’s proud of the Bank’s corporate culture that consistently results in high employee engagement scores. Garcia-Velez believes that successful recruiting starts with referrals from frontline staff. “It’s all hands on deck when it comes to recruiting. At Banesco USA, everybody owns the recruitment process,” Garcia-Velez said. “If you’re a branch

Fargo). Garcia-Velez and two of his friends accepted jobs with the bank, and, as he says, “the rest is history”. Ga r c i a - Ve l e z j o i n e d B a n e s c o USA i n November 2021. “What attracted me to Banesco USA is its global reach and the breadth and depth of the resources behind the Group. Even before the Bank was awarded the ECIP funds, the leadership

Banesco - Puerto Rico

10 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

was committed to continuing to invest capital in the Bank to grow it,” Garcia-Velez said. It was an exciting opportunity for Garcia-Velez to run a bank with a presence in both Florida and Puerto Rico. He calls Miami home and is just as comfortable in Puerto Rico after living and working there for years during his time with Citibank and FirstBank Puerto Rico. Garcia-Velez was also pleased to reconnect with his mentor and friend Carlos Palomares, his former boss at Citibank, who now serves as the acting chair of Banesco USA. Looking forward, Garcia-Velez says Banesco USA will continue to do what has made the Bank successful - maintain its focus on commercial lending, including commercial real estate and C&I small business lending. With clear purpose and company wide passion for its clients’ success, Banesco USA moves forward to deliver on its promises to the local community.

Banesco - Brickell

CALI GARCIA-VELEZ Calixto (Cali) Garcia-Velez is the chief executive officer of Banesco USA, a $2.6 billion full-service community bank with operations in Florida and Puerto Rico. Banesco distinguishes itself in providing superior products and services across segments including commercial , corporate, real estate, and consumer banking for both domestic and international clients. Prior to joining Banesco, Garcia Velez served as executive vice president for FirstBank Puerto Rico. Furthermore, he had a successful career with Citibank, where he served in various roles that included President of Citibank Florida, and Business Manager across several markets in the United States. He also served as President and CEO of Doral Bank in San Juan, Puerto Rico. Garcia-Velez is a graduate of the University of Miami, where he received both his bachelor’s and MBA degrees. Garcia-Velez has been involved in his community for many years. He currently serves on the Board of Directors of the United Way of Miami-Dade, The Beacon Council, the Alliance for South Florida National Parks Trust, and was recently named to the Florida Bankers Association Board of Directors. He also serves as a Guardian ad Litem volunteer.

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GOVERNMENT RELATIONS

WHAT TO EXPECT FROM THE 2023 SESSION

BY ANTHONY DIMARCO, FBA EXECUTIVE VICE PRESIDENT AND DIRECTOR OF GOVERNMENT AFFAIRS

O nce again, Florida will change its Speaker of the House and Senate President after the November election. With the changes in House and Senate leadership come changes in priorities. What was once a priority of the House or Senate may not be the priority of the incoming leadership. Naturally, their priorities must be balanced between the two chambers and with the Governor’s legislative priorities. If the election results are as expected, Governor Ron DeSantis will return as Governor. Also, the new Speaker of the House will be Rep. Paul Renner (R-Palm Coast) and the new Senate President will be Sen. Kathleen Passidomo (R-Naples). It would be presumptive to set forth their priorities for the 2023 Session, plus whatever results from Hurricane Ian’s destruction; however, rest assured that the FBA will be there to represent our industry. We have also heard rumors about the leadership team in each chamber as well. We will not have complete knowledge of who will make up Speaker Renner’s and President Passidomo’s leadership teams until the formal announcements are made. Unlike social media, we will not speculate on this piece. Moreover, we will not know the committee or subcommittee chairmen or members of each until after the November election. The credit unions will once again file their bill to take public deposits. This is the only bill they really care about, and all of their resources are for this issue. How unfair would it be for these tax-exempt “banks” to compete against you more than they already do? Please get ready to answer our Calls to Action on this. Unfortunately, we think this issue will get more traction than normal in the 2023 Session. We also expect legislation dealing with property Some issues that we expect to be heard in the 2023 Session

insurance. There was unfinished business from the 2021 and 2022 Sessions in the insurance arena. We expect a major component of any insurance legislation to address tort reform and roof coverage. Add on any issues that became apparent from Hurricane Ian to the bill. The Governor and Legislature will have to address the increases in property insurance, the lack of coverage, and growing number of Citizen insurance policies. Another issue is likely to deal with the state and local government investment policy dealing with ESG. The Governor and Speaker had a press conference this summer to address the problems and costs associated with adherence to ESG scores and policies. The Governor and Cabinet sitting as the trustees for the State Board of Administration (SBA) passed a resolution prohibiting the SBA from considering the ESG policies of potential investment funds. The SBA is to be guided solely by the potential profits and losses to the state’s funds. We expect legislation to address investments and contracts by the state and local governments. We have not seen language, but it is the most talked about bill in Tallahassee. We also expect the PACE lenders to make another run to expand their program. They could file a bill again that opens the program to commercial properties and covers mold and lead paint remediation, sea walls and other flooding projects, and septic to sewer conversions, among other projects. Naturally, they will not entertain any amendments to change their lien priority position. Finally, we have worked with the Florida title industry on a bill concerning estoppel letters. We had agreed to language last Session, only to watch the bill fail to pass for unrelated reasons. What can you do? As always, we need your help to be successful in the 2023 Session. How can you help? First, get to know your state legislators now before you have to ask them

12 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

for help. This can be done in a variety of ways: Help with a campaign or meet with them after the election over a cup of coffee (or your beverage of choice) and just talk with them. Let them know that you are available to discuss banking issues. Second, be sure to attend any events we have throughout the year. These range in size from giant lunches or dinners with the Governor to small luncheons

with legislators. Also, Capitol Day in Tallahassee is a great way to lobby your elected officials. Finally, answer every Call to Action we send out. We need boots on the ground to call legislators and let them know that you are for or against legislation. Once again, Kenneth, Gina, and I will work hard to support our industry. We get it done in a variety of ways, but we still need your help.

We have what it takes to address your correspondent needs.

Strategic Vision

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Subject Matter Experts

We are ready to meet your needs and to deliver on our promise of Service Beyond Comparison .

Contact your Relationship Manager at 800.275.4222

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WWW.FLORIDABANKERS.COM NOVEMBER 2022 — 13

BANCSERV ENDORSED PARTNER: ICBA SECURITIES

PRICE PULLBACK PROSPECTS: AVAILABILITY OF DISCOUNT BONDS CAUSES A RETHINK OF STRATEGIES

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BY JIM REBER, ICBA SECURITIES

I ’ve learned a few things about human nature as it relates to bond portfolio management over the years. Some of these notions or biases in the minds of investors are more logical than others. For example, it seems community bankers take some pride in owning a collection of bonds whose price has risen since purchase. An unrealized gain is much preferred over an unrealized loss in the minds of a lot of seasoned portfolio managers,

such as 2022, will produce bonds whose prices are below par. Like it or not, discounts are the story of the day, so let’s review how discount priced bonds can be used strategically to improve portfolio performance. Agency options The simplest investment sector to analyze is government agencies. These bonds are issued by

some of your favorites, such a s Fann i e Mae , Freddi e Mac and the Federal Home Loan Bank. These do not have periodic principal repayments, so your original investment r ema i n s i n t a c t u n t i l maturity date. That is, unless it has a call feature, which is present in about 88 percent of outstanding issues. For these bonds, the borrower can decide to “call,” or prepay, the debt early, and on designated dates. I f a g i v en bond i s purchased in the secondary market at a price below

investment committees and boards. This is in spite of the fact that the gain is residue of rates falling since purchase. The natural consequence is that the overall portfolio’s yields are on the way down, and I haven’t met many people who are hoping for lower returns on their bonds. A g r ea t pa r adox i s that many of these same bankers prefer to buy bonds whose prices are less than 100 cents on the dollar, rather than at premiums. In some cases, they’ll opt for discount

“MAYBE THE BIGGEST BENEFIT TO OWNING BONDS AT PRICES LESS THAN 100 IS THAT THEIR RETURNS WILL BE INVERSELY RELATED TO GENERAL MARKET RATES. ”

- JIM REBER

100, and the issuer later calls the bond early, the investor’s yield to call is higher than yield to maturity. This yield improvement can be dramatic if the callable is owned at a deep discount. Of course, the investor doesn’t expect the call to ever be exercised, so it’s a pleasant surprise to see the yield jump. These discount callables are typically priced to the worst case (i.e., maturity) to yield slightly more than non-callable bonds (i.e., bullets).

bonds even if they have lower yields to maturity. I think they get satisfaction out of knowing they’re better off than the poor suckers who originally paid par or more for the same investment. In that community banking is a cyclical industry, and its earnings have some correlation to market interest rates, there are periods in which certain strategies are in play, and others are not. An environment in which rates are high and rising,

14 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

Mortgage maneuvers Mortgage-backed securities (MBS) remain popular as community bank investments.The majority of the dollars in all bank portfolios are in some type of MBS. And it is a deep and liquid (and growing) market, so supplies are plentiful for a given investor to shop around. The cash flows of an MBS are mostly predicated on how much prepayment (not repayment) is received each month. There is a direct link between prepayment activity and the borrowers’ rates (in MBS parlance, “Gross WACs”) of a given pool, so investors can (within limits) create a predictable risk/ reward profile. And have I mentioned that MBS are currently available at discounts? Buying below-market coupons means two things in the near term. First, your monthly cash flows will be limited, and that may be fine for your bank’s needs. Secondly, the market price has room to improve, up to and beyond par, if rates begin to fall. For example, a 15-year MBS with a 2 percent coupon is currently priced around 94 cents on the dollar, and was worth around 102 at the start of 2022. Since the borrowers’ rates on these pools will be well below 3 percent, there is no financial incentive to prepay the loans early, so average lives will be quite long in the near future.

Offset to falling rates Maybe the biggest benefit to owning bonds at prices less than 100 is that their returns will be inversely related to general market rates. When interest rates fall, the “optionality” comes “in-the-money” and some bonds get called away. To the extent they’re owned at discounts, their yield-to-call is enhanced. This is true for all bonds: agencies, MBS and even munis at discounts. Further, since almost all community banks have interest rate risk profiles that are built for rising rates, investments that out-perform as rates fall can help offset the margin compression that’s likely to occur. Perhaps best of all, discount bonds’ yields will automatically (magically?) increase as interest rates decline, without the need to sell the investments. All told, owning bonds at prices less than par can help bring stability to the cash flows while lessening exposure to falling rates. It can also feed the needs, however subliminal, to get a bargain price, while improving future chances for unrealized gains. Paradoxical? I’d call it logical. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.

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Session Dates: August 20 – September 1, 2023 Location: University of Washington, Seattle, WA To learnmore about PCBS or to apply to the program, call (425) 278-0250

PCBS, in partnership with the Foster School of Business at the University of Washington, offers a premier three-year graduate-level educational program focused on the financial services industry. Our full-length courses, taught by outstanding industry experts, provide responsive, practical answers to today’s most critical banking challenges.

or visit www.thePCBS.org We look forward to everyone joining us on campus next year!

WWW.FLORIDABANKERS.COM NOVEMBER 2022 — 15

TRUST BANKING

“PICK YOUR PARTNER” —NEW FLORIDA AMENDMENTS TO UCC ARTICLE 9

BY MATTHEW HALE, SHAREHOLDER, STICHTER RIEDEL BLAIN & POSTLER, P.A.

W henever Article 9 of the Uniform Commercial Code (UCC) is amended, the banking community should always take notice. Not to fear, however—recent, narrow amendments to Florida’s version of UCC Article 9 should have little impact on day-to-day banking activities. But understanding these “pick your partner” amendments to the UCC Article 9 override provisions also provides a useful opportunity for banks to evaluate underwriting practices when taking security interests in limited liability company Senate Bill 336 and House Bill 519 passed Florida’s legislature in the spring 2022 session and were approved by Governor DeSantis on May 18, 2022. The amendments, which take effect on January 1, 2023, ensure that transferability restrictions in LLC operating agreements, partnership agreements, and limited partnership agreements are given effect, recognizing the “pick your partner” principle that is fundamental to these closely-held business organizations. In passing these amendments, Florida incorporates official amendments to the UCC, a national uniform model law governing commercial transactions. In 2018, the UCC’s two national sponsoring organizations, the American Law Institute and the Uniform Law Commission, approved amendments to UCC Sections 9-406 and 9-408, which are colloquially known as the Article 9 “override” provisions. These provisions earn that name because they operate to “override” terms in contracts (and sometimes other laws) that would otherwise restrict the ability of a debtor to pledge property as collateral. Under partnership and limited liability company law, however, the “pick your partner” principle has long recognized that partners and members in closely-held businesses have substantial interest in approving other co-owners’ right to participate in management of the business.This principle is usually embodied in partnership and operating agreements conferring on partners or members the right to approve the admission of new partners or members. Years ago, issues arose in some (LLC) or partnership ownership interests. Background of the amendments

states over whether the UCCArticle 9 override provisions could invalidate these “pick your partner” clauses in operating agreements or partnership agreements. The potential for conflict between the UCC Article 9 override provisions and the“pick your partner”principle caused several states, led by Delaware in the early 2000s, to adopt their own amendments to their versions of UCC 9-406 and 9-408 clarifying that the UCC Article 9 override provisions do not apply to ownership interests in LLCs and partnerships. Some states also amended their LLC, partnership, and/or limited partnership statutes to provide further clarification. The proliferation of non-uniform amendments on this issue resulted in the 2018 amendments to the UCC, which introduced a uniform fix. In adopting the 2018 amendments to the official UCC, Florida amended its version of the override provisions, Sections 679.4061 and 679.4081 of the Florida Statutes, to add a single clause to each of the sections, providing: “This section does not apply to a security interest in an ownership interest in a general partnership, limited partnership, or limited liability company.” How do the Article 9 override provisions work? In order to understand the effect of the amendments, let us first understand how the override provisions operate. To facilitate the free transferability of intangibles rights, Sections 9-406 and 9-408 of the UCC operate to override terms in agreements that would otherwise restrict the transfer of such rights, including the granting or enforcement of security interests. Although the general aim of each override statute is the same, the two statutes operate slightly differently and apply to different types of collateral. These UCC provisions are enacted in Florida as Sections 679.4061 and 679.4081 of the Florida Statutes. An example helps illustrate how the override statutes work in practice. Say a bank makes a loan to a business secured by a blanket lien on substantially all of its personal property, including accounts receivable. If the business has a contract with one of its customers, and the contract provides that that business’s account

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receivable with that customer cannot be assigned, the UCC override provision (9-406) would render that contractual anti-assignment provision unenforceable against the bank. That means the bank could take a security interest in the account receivable and could enforce its rights in the collateral as provided in Article 9, regardless of the contractual restriction. The concern addressed by the recent “pick your partner” amendments arises when these override provisions intersect with ownership interests in LLCs or partnerships. The overrides in Sections 9-406 and 9-408 apply to LLC membership interests and partnership interests because such interests are typically categorized by UCCArticle 9 as general intangibles, which fall under the purview of UCC Section 9-408. Additionally, an LLC member’s or partner’s economic rights — the right to receive distributions — are typically categorized as payment intangibles, which fall under the purview of UCC Section 9-406. Can the UCC Article 9 override provision invalidate a “pick your partner” clause in an LLC operating agreement, which would otherwise require the consent of other co-owners before a debtor can pledge his or her membership interest? The answer is not entirely clear, and the application of the UCC Article 9 overrides to LLC and partnership interests is complex, leaving substantial room for litigation. This debate is beyond the scope of this article, but suffice it to say that substantial disagreement exists on the issue. Given this uncertainty, the amendments may be appropriately viewed as a clarification of the law rather than a substantive shift. What are the amendments’ practical effects on lenders? Practically speaking, do lenders need to take any action in response to these amendments? For loans where a key component of the loan is the pledge of equity interests of the borrower or a subsidiary, such as mezzanine loan transactions, it is critical that a lender review the entity formation documents, such as articles of organization, and any operating agreements or partnership agreements for the entity. If the governance documents contain any restrictions on the owner’s ability to transfer or pledge the equity interests, or any restrictions on admission of new members or partners into the

LLC or partnership, it is incumbent on the lender to request appropriate consents from other members and/or amendments of the governance documents. The lender must also record a UCC-1 financing statement to perfect its security interest. For these types of loan transactions, lenders should already be performing this type of due diligence. Alternatively, a lender could require its borrower to amend its governance documents to “opt in” to Article 8 of the UCC. By opting into Article 8, the ownership interests in an LLC or partnership are treated as securities. The ownership interests in the LLC or partnership are typically reduced to physical certificates, then the lender takes physical possession of the certificates to perfect its lien. The governance documents also are amended to specifically permit the pledge of securities to the lender. Following the recent amendments to UCC Article 9, these same due diligence requirements would apply to blanket loan transactions if the lender intends to take a lien on the borrower’s ownership interest in an LLC or partnership. In the unlikely event that lenders were previously relying on the UCC Article 9 override provisions to obviate the need to obtain necessary consents or operating agreement amendments to deal with “pick your partner” transferability restrictions, lenders should no longer place any reliance on those provisions. Conclusion The recent amendments to Florida’s UCC Article 9 do not dramatically alter law but rather clarify that the Article 9 override provisions do not apply to LLC and partnership ownership interests, upholding the primacy of the “pick your partner” principle fundamental to LLC and partnership law. Lenders intending to take security interests in LLC or partnership ownership interests should, however, be even more careful when performing due diligence and obtaining necessary documentation. Matthew Hale is a shareholder at Stichter Riedel Blain & Postler, P.A., in Tampa, Florida. He represents creditors, debtors, and fiduciaries in bankruptcy and restructuring engagements, in addition to representing parties in commercial litigation matters in state and federal court. You can reach Hale at mhale@srbp.com.

WWW.FLORIDABANKERS.COM NOVEMBER 2022 — 17

FLORIDA BANKERS EDUCATIONAL FOUNDATION

GIVING THANKS WHILE GIVING BACK

BY LETTY NEWTON, DIRECTOR OF FLORIDA BANKERS EDUCATIONAL FOUNDATION (FBEF)

W e must find time to stop and thank the people who make a difference in our lives.” - John F. Kennedy Thanksgiving is one of my favorite holidays because it helps remind me to stop and acknowledge all of the good things in my life and the people who made those things possible. While Thanksgiving is only one day, gratitude is something that I think we should focus on year-round. "In ordinary life, we hardly realize that we receive a great deal more than we give, and that it is only with gratitude that life becomes rich." - Dietrich Bonhoeffer

"

bankers a chance to give back. It has been really inspiring to me to see how many bankers want to help others. Our former recipients, who once needed help so that they could succeed, have gone on to give so much. They provide encouragement and support to their employees and coworkers, making sure they know that there are opportunities available to them like the FBEF. These bankers help interview students and provide references, allowing new applicants to request funding for the continuation of their education and the advancement of their careers. Many have served on the FBEF Board of Trustees,

Recently I was talking with a friend about their career and they mentioned numerous people who had helped them along the way, providing references or leads on job opportunities, and it reminded me that no one gets where they are in life without help. Whether you are just starting out after college or an unexpected change has made a new career path necessary, you have probably

becoming directly involved in the administration of the foundation. Our former recipients give their time, their money, and their support to other bankers because they know that giving back is the best way to give thanks. What a wonderful gift it is to succeed to a level where the gifts you have received can be shared with others. "If you are really thankful,

“FBEF GIVES TO BANKERS BUT IT ALSO GIVES BANKERS A CHANCE TO GIVE BACK.” - LETTY NEWTON

relied on a network of people to help you.Without that support it is likely you wouldn’t get very far because help from others is the foundation of success. "Gratitude is a currency that we can mint for ourselves, and spend without fear of bankruptcy." - Fred De Witt Van Amburgh I am grateful every day for the opportunity to work with the Florida Bankers Educational Foundation (FBEF) because I get to see how helping creates a ripple effect, as the help we give flows far beyond our recipients. FBEF gives to bankers but it also gives

what do you do? You share.” - W. Clement Stone By showing gratitude for the assistance given to them, and giving more than they have received, FBEF recipients have taken one gift and turned it into a multitude of blessings. They have generously shared their success with others, allowing the cycle of giving and gratitude to continue. This is a gift that has immeasurable benefits, to both the giver and the recipient. “We should certainly count our blessings, but we should also make our blessings count." - Neal A. Maxwell For 66 years the FBEF has been helping Florida

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bankers and we are thankful for the opportunity to help so many deserving men and women across the state. The FBEF is proud to have played a part in the lives of these bankers, helping them graduate and go on to work in the financial industry. The success of these individuals creates a positive impact for the Florida banking industry for many years to come.

OBTAINEDFROMTHEDIVISIONOFCONSUMER SERVICES BY CALLING TOLL-FREE (800-435 7352) WITHIN THE STATE. REGISTRATION DOES NOT IMPLY ENDORSEMENT, APPROVAL, OR RECOMMENDATION BY THE STATE. www. FloridaConsumerHelp.com

To o u r d o n o r s a n d volunteers who help make the FBEF’s mi s s ion of advancing careers in banking possible, thank you for helping us help others. We are grateful for the support that we receive, not just one day a year, but every day. Organized in 1956, the FBEF continues to help bankers throughout Florida. The FBEF is a 501(c)(3) non profit corporation registered with the Florida Department of Agriculture & Consumer Services, Registration #CH7621. Contributions to the FBEF are tax-deductible. For more information about the FBEF please contact Letty Newton at lnewton@ floridabankers.com or 850 701-3522. For application information go to www. FloridaBankers.com/FBEF. A COPY OF THE OFFICIAL REGISTRATION AND FINANCIAL INFORMATION MAY BE

WWW.FLORIDABANKERS.COM NOVEMBER 2022 — 19

ESG AND THE INTRODUCTION OF THE INDEX ACT

BY CONGRESSMAN BLAINE LUETKEMEYER

W e continue to see a pattern in our country that I’m sure you as bankers are well aware of. Political agendas, specifically climate change, are seeping into areas that have absolutely nothing to do with them. Through the guise of Environmental, Social and Corporate Governance (ESG), progressives within the government and corporate America are taking outspoken positions on political and social issues that should have no bearing on business. ESG began as a fabricated metric to illustrate a perceived “enlightenment” that has transformed into a control tactic over corporate America. The parameters for who is “environmentally responsible” and who is not are murky at best. For example, ExxonMobil received a higher ESG rating thanTesla.Not surprisingly, that rating change occurred when Elon Musk was threatening to make public the inner workings of Twitter. No neutral observer could honestly argue that the ratings have anything to dowith governance. It’s simply about applying political pressure on businesses to declare themselves aligned with the left, often at the expense of serving their customers, paying their workers, and supporting their local economies. Recently in the House Financial Services Committee, we saw a perfect example of the control some elected officials try to attain through ESG. In a hearing with seven bank CEOs, Congresswoman Rashida Talib demanded that each bank commit to no further financing of fossil fuel production. Fortunately, the witnesses understood the real-world effects of that disastrous idea and did not satisfy the Congresswoman’s demand. Another even

more troubling example is the proposed SEC Climate Rule.The SEC is proposing that companies calculate and report the “climate-related risks” associated with their products and operations. That includes the emissions of every supplier, and a prediction of the future emissions their products may create after sale. Publicly traded banks would be charged with filing a disclosure for all their business customers. While that wouldn’t directly affect FBA members, if any of your customers supply anything to a publicly traded company they will be on the hook

for those disclosures. Again, it’s a glaring example of regulators completely disregarding the real consequences of their absurd demands. Unfortunately, it’s not just politicians or Twitter warriors demanding ESG commitments. Some of the largest corporations in the world are using their influence and boardroom seats to advance progressive priorities at the expense of American jobs. Even worse, they’re doing it with everyday citizens’ retirement savings. As you know, retirement plans and pension plans often invest in mutual funds or exchange

“ THE PARAMETERS FOR WHO IS ‘ENVIRONMENTALLY RESPONSIBLE’ AND

WHO IS NOT ARE MURKY AT BEST. ”

traded funds (ETF). Those funds are made up of hundreds of businesses whose stock is purchased and held at the fund. However, the individual investors almost never get the chance to exercise the voting rights the shares they own provide. That’s because the fund managers, like BlackRock or State Street, are voting on retirees’ behalf. They obviously don’t ask the retirees their opinions before the vote, nor do they want it. They use the votes owned by individual investors to pursue their own agendas. For example, in a letter to America’s

20 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING