4 Signs You’re Ready for a Digital Banking Upgrade Balancing AI‑Driven AML With Human Control Leadership in Times of Crisis OFFICIAL PUBLICATION OF THE VIRGINIA ASSOCIATION OF COMMUNITY BANKS 2025 PUB. 14 ISSUE 3
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©2025 Virginia Association of Community Banks (VACB) | The newsLINK Group LLC. All rights reserved. The Community Banker is published four times per year by The newsLINK Group LLC for VACB and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and 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 VACB, its board of directors or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. The Community Banker is a collective work, and as such, some articles are submitted by authors who are independent of VACB. While a first-print policy is encouraged, 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. 12 18 VACB Board of Directors CHAIR Tara Y. Harrison Virginia National Bank Charlottesville CHAIR-ELECT Lisa E. Kilgour MainStreet Bank Fairfax VICE CHAIR Dabney T.P. Gilliam Jr. The Bank of Charlotte County Phoenix PAST CHAIRMAN Joseph R. Witt, CPA, Retired The Old Point National Bank Hampton ICBA VIRGINIA DELEGATE Blake M. Edwards Jr. Skyline National Bank Independence PRESIDENT & CEO Corey J. Connors VACB Richmond VACB Directors LeAnne R. Emert Benchmark Community Bank Kenbridge Cetric A. Gayles Citizens Bank & Trust Blackstone Aaron Green Pendleton Community Bank Harrisonburg James E. Hendricks Village Bank Midlothian Robert J. Hobbs CornerStone Bank Lexington Paul M. Mylum National Bank Blacksburg Thomas L. Rasey Jr. The Farmers Bank of Appomattox Appomattox Mark N. Reed Pioneer Bank Stanley Matthew H. Steilberg C&F Bank Toano VACB Staff Katharine C. Garner, CMP Vice President Education & Communications Kelli C. Mallinger Member Services Administrator CONTENTS 4 CHAIR’S MESSAGE Continue the Momentum! By Tara Y. Harrison, Chair, VACB, Executive Vice President, Chief Financial Officer, Virginia National Bank, Charlottesville 5 PRESIDENT’S COLUMN Reflections After Year One By Corey Connors, President & CEO, VACB 6 Balancing AI‑Driven AML With Human Control By Jessica Tirado, CSI 9 Getting Back to I&T Basics Crafting Effective IT Governance and Policies By Brad Brosig, Assurance Manager, Risk Advisory Services, YHB 12 4 Signs You’re Ready for a Digital Banking Upgrade By Terry Gore, Director of Sales (Digital Banking), SHAZAM 14 Plan For Unplanned CEO Transitions By Alan J. Kaplan, Founder & CEO, Kaplan Partners 15 Bank Webinars Smarter Training. Stronger Teams. 16 The Evolving Deposit Landscape What You Need to Know By Dennis Falk, SVP and Regional Manager, PCBB 18 Leadership in Times of Crisis Provided by the Virginia Association of Community Banks 3 The Community Banker
Chair’s Message CONTINUE THE MOMENTUM! As I write my last column for The Community Banker as Chair of the VACB, it’s hard to believe that a year has passed since I wrote my first column. Looking back on the year, I am proud of all that our community banking association has accomplished, yet we still have so much more to do! The staff and the board of directors have been working diligently on aligning priorities for the association’s future. We have received and evaluated feedback from our member roundtables (thanks to the many of you who participated in these!), conducted internal assessments, and discussed new organizational opportunities during our alignment planning. Know for certain that our priorities include, to name only a few: • Strategies to limit credit union expansion; • Education of policymakers and regulators on our issues and distinctions; • Comprehensive evaluation of current educational offerings to align with member needs and identify any gaps; • Establishment and promotion of need-based peer collaboration; • Reciprocal member feedback and member value proposition discussions; and • Continued internal operational improvements. I’d like to give a huge shout-out to Corey for his hard work on this alignment planning process. Corey has worked tirelessly during his first year in the areas of advocacy for community banks, streamlining internal processes and procedures and increasing new sources of revenue for the association. He has effectively transitioned into the executive role with much success! I would like to thank all who participated in the convention by actively listening to our motivating speakers, attending the exhibitor events, or networking while discussing the scores of the latest games and playing heads or tails! I would also like to thank Katharine and Kelli for all of the work that they put into the convention once again this year. It was indeed another successful event! As we conclude another hectic year for our association, our community banks, and our nation, please take time to reflect on our many blessings and show kindness to your neighbors. Let’s carry the positive momentum and energy from the convention into our communities! TARA Y. HARRISON Chair, VACB Executive Vice President, Chief Financial Officer, Virginia National Bank, Charlottesville 4 The Community Banker
President’s Column REFLECTIONS AFTER YEAR ONE COREY CONNORS President & CEO, VACB This September marked the conclusion of my first year as President & CEO of VACB. When I look back on these past 12 months, I find myself reflecting on what I have learned. The clear throughline: I very much see VACB in the same ways that you see your banks. Yes, we may be small, and we all wear multiple hats during any given workday. But we are driven by a mission that outweighs our scale. Our success depends on the clarity of that mission, the value of what we offer, and our ability to remain relevant to those we serve. That parallel came into focus during my conversations with you. You spoke openly about what it means to compete as community banks in a system dominated by size and scale. I came to understand that your strength does not come from trying to be larger, but from staying true to your mission: serving customers, building trust, and investing in your communities. VACB operates with the same mindset. Our role is not to be everything to everyone, but to be indispensable to you. One theme that consistently surfaced was how mission translates into action. For community banks that means being present in your towns and neighborhoods, supporting small businesses and building relationships that last across generations. For VACB, it means carrying your voice into the General Assembly and in Washington, D.C., designing educational opportunities that solve real challenges, and creating connections that foster collaboration among peers. More simply put, it is mission made practical. Another clear message was that value is not about quantity, but about impact. Your success stems from focusing on products and services that truly matter to your customers rather than offering everything under the sun. That resonated with me because VACB must hold itself to the same standard. The measure of our value cannot be the number of programs we offer. Rather, our value proposition is predicated upon whether those programs make your work easier, your teams stronger, and your institutions more competitive. Finally, there was a sobering reminder that relevance is never a given. You described the reality of competing daily with too-big-to-fail banks, tax-dodging credit unions, fintech lenders, and an unstable federal regulatory environment. Staying relevant requires constant effort and renewal. VACB faces that same reality. We cannot assume our place in your professional lives. We must earn it by being vigilant in our advocacy, precise in our offerings, and responsive to your needs. As I close out year one, I am struck by how much VACB and its member banks have in common. We are both proof that small does not mean less. It means personal. It means focused. It means resilient. And it means that our relevance will always be rooted in mission and value, carried out with persistence and purpose. Thank you for the great honor of serving this wonderful community. My commitment in the year ahead is to take those lessons forward to strengthen VACB as your advocate, your partner, and your ally in keeping Virginia’s community banks strong and vibrant. 5 The Community Banker
Artificial intelligence isn’t just for big banks anymore. One compelling use case for community financial institutions: reducing the cost, effort and headache of AML compliance. An AI-powered AML solution can automatically review millions of transactions overnight, surface unusual activity and even draft a suspicious activity report (SAR) while your analysts sleep. However, greater speed and scale come with a tradeoff: As system complexity increases, transparency can decrease. To manage that risk, AI-powered AML systems still need human oversight. Some aspects of your program should never be entrusted to AI. WHAT KIND OF AI SUPPORTS AML? Although generative AI has dominated headlines over the past couple of years, AI is more than just chatbots. In AML compliance, key AI technologies include: • Machine Learning (ML): Learns and adapts from transaction history to detect anomalies and adjust risk scores. • Natural Language Processing (NLP): Extracts data from unstructured analyst notes or reports. • Graph Analysis: Maps relationships among accounts, people, devices and transactions to spot hidden connections. OPPORTUNITIES FOR AI IN AML When these techniques are paired with quality data and strong governance, community banks can see powerful benefits: • False Positive Reduction: The system learns normal patterns and suppresses benign alerts, so analysts spend more time on genuine risks. • Faster Investigations: The system auto-collects KYC data, negative news and transaction history, so SARs are completed and filed faster. • Pattern Recognition: The system spots indirect or layered transactions that rules miss, increasing the detection of complex laundering typologies. • Continual Learning: The model evolves alongside criminals’ tactics. Compliance keeps pace without constantly rewriting rules. RISKS AND DOWNSIDES OF AI OPACITY Rules-based systems are easy to explain: “If X, then Y.” AI models rely on thousands of parameters, making it hard to trace decisions. Without strong explainability tools, this can become a governance risk. Hybrid models, which include AI layered on rules, help balance scalability with transparency. BALANCING AI‑DRIVEN AML WITH HUMAN CONTROL BY JESSICA TIRADO CSI 6 The Community Banker
Automation is a force multiplier for your compliance team, not a replacement plan. BIAS AND BLIND SPOTS AI reflects the biases in its training data: • Under-represented groups may be missed or unfairly targeted. • Media sources or sanctions lists can encode geopolitical bias. • Analyst behavior, like clearing alerts faster for familiar customer types, can reinforce skewed patterns. These issues are harder to spot in opaque models, making governance reviews essential. MISSED RED FLAGS AI models only know what they’ve seen before. Emerging typologies like crypto off-ramps can evade detection. Human oversight is essential for recognizing novelty and interpreting real-world context. AMPLIFIED ERRORS Faulty inputs or logic scale quickly in AI systems. A single mis-weighted variable could freeze hundreds of accounts or overlook major fraud before anyone notices. REGULATORY RESPONSIBILITY The OCC and FinCEN have made it clear: You own your AI’s outcomes. Institutions must validate, document and explain model behavior. “The algorithm did it” won’t satisfy an examiner. AML TASKS TO KEEP IN HUMAN HANDS Automation is a force multiplier for your compliance team, not a replacement plan. These critical functions should remain human-led: 1. Setting Risk Appetite: Only the board and senior leadership can define acceptable levels of residual AML risk. AI can enforce thresholds, but deciding what those thresholds should be belongs in boardroom minutes, not model settings. 2. Designing Customer Risk Scores: AI can crunch data but can’t make value judgments. For example, should cash volume or political exposure carry more weight? That’s a question of ethics, strategy and regulatory expectations. 3. Clearing Alerts: Models can cluster alerts or assign “likely benign” scores, but a human must make the final call. Auto-closing alerts removes your ability to defend decisions in hindsight. 4. Finalizing SARs: AI can draft SARs by linking accounts and summarizing activity. But only a trained analyst can verify accuracy, add context and craft a clear, defensible narrative. 5. Model Governance and Tuning: Vendors may build the models, but you’re on the hook. That means validating data inputs, sanity-checking the math and signing off on all changes. 7 The Community Banker
6. High-Impact Customer Actions: Freezing accounts or filing 314(b) requests affects real lives. AI can recommend, but humans must confirm and justify each step. 7. Explaining to Regulators and the Board: No algorithm can sit across from an examiner and defend itself. Your team must translate model logic into plain English, from feature weights to tuning rationales. BEST PRACTICES FOR COMMUNITY FIs To use AI safely and effectively in AML, community institutions should: • Use Explainable Models: Choose vendors that provide reason codes or variable weights so analysts can explain every decision. • Customize for Your Risk Profile: Tune models to reflect your institution’s size, market and product mix. • Keep Humans in the Loop: Let AI prioritize alerts, but reserve final decisions for trained analysts. • Validate Regularly: Conduct independent validation pre-launch, test after any material change and audit frequently. • Invest in Analyst Training: Run workshops on model interpretation and encourage staff to challenge or override model outputs when their gut says, “Dig deeper.” BRINGING IT ALL TOGETHER AI is fast becoming a standard part of AML programs, even for smaller institutions. When deployed thoughtfully, it can cut through noise, surface risk patterns and save staff hours of clerical work. But it must remain a co-pilot, not the one flying the plane. Community banks that strike the right balance will: • Adopt explainable, customizable hybrid systems. • Embed human review at all high-risk decision points. • Validate and document continuously. • Cultivate staff who understand both compliance and AI. Follow these steps, and you can get the best of both worlds: the speed of automation and the assurance of human oversight. Community. Learning. Innovation. Discover What Makes ICBA LIVE Unforgettable San Diego sets the stage for the largest gathering of community bankers in the world. This is the event where connections are made, ideas are sparked, and strategies are shaped. From powerful keynote speakers and immersive learning labs to high-energy networking events and cutting-edge fintech showcases, ICBA LIVE offers something for every attendee. Register Today At icba.org/live MARCH 6-9, 2026 San Diego Convention Center 8 The Community Banker
Crafting Effective IT Governance and Policies BY BRAD BROSIG Assurance Manager, Risk Advisory Services, YHB GETTING BACK TO I&T BASICS Organizations must actively manage their Information and Technology (I&T) resources to remain competitive and secure. Yet many small and medium-sized enterprises lack structured approaches for effective I&T governance. Establishing solid IT governance with a robust policy framework isn’t just beneficial, it’s crucial for long-term success, security and efficiency. UNDERSTANDING IT GOVERNANCE AND ITS IMPORTANCE IT governance provides the structure to ensure IT investments and activities align with organizational goals and strategies. It encompasses leadership, 9 The Community Banker
structures and processes that help IT support and enable broader strategic objectives. Organizations often struggle with unclear roles, ineffective decision-making processes and misaligned IT initiatives. Without clear governance, IT projects may drift, become costly or fail entirely. A robust IT governance system delivers: • Strategic Planning and Alignment: Ensures IT initiatives support organizational objectives. • Reporting Lines: Establishes clear reporting, including a voice for I&T at the top. • Risk Management: Defines processes for identifying and managing IT and vendor-related risks. • Resource Optimization: Maximizes the value of IT resources, both human and technological. • Performance Measurement: Assesses and improves IT processes and services. • Compliance and Accountability: Supports adherence to regulations, standards and policies. This sounds like a lot — because it is. So where do we start? STRATEGIC PLANNING AND ALIGNMENT Assuming your organization’s overall strategic goals are defined, the first step is creating an IT strategic plan. Executive leadership should work with I&T leaders to position IT resources to achieve those goals. Effective alignment provides clarity and direction. A strong IT strategic plan includes: • Vision and Mission Statement: Describe how IT supports organizational ambitions. • Strategic Initiatives: Identify specific projects or efforts needed to meet goals. • Resource Allocation: Outline the financial and human capital needs. • Timeline and Milestones: Define deadlines and measurable outcomes. • Governance Structure: Document clear roles, responsibilities and accountability. Strategic alignment isn’t a one-time exercise; it’s continuous. Regular communication between IT and executive leadership — through routine meetings and transparent reporting — builds trust, supports consistent alignment and enables rapid response to change. Poor alignment can have significant consequences, perhaps even failure to achieve key objectives. The need for ongoing, active alignment is paramount. THE IMPORTANCE OF A ROBUST IT POLICY FRAMEWORK The second pillar of solid IT governance is a strong IT policy framework. Policies set expectations, define behaviors and establish operational standards. An IT policy framework comprises clear, comprehensive and enforceable policies that cover various aspects of information and technology management. Organizations may use a set of policies or a single overarching policy with sub-policies. Regardless of approach, key topics should include: • Acceptable Use: Defines appropriate and inappropriate use of IT resources to protect organizational assets. • Information Security: Details practices for safeguarding data confidentiality, integrity and availability. • Access Management: Establishes clear criteria and processes for granting and revoking access. • Incident Management and Response: Clearly outlines roles, responsibilities and actions during IT incidents. • Backup and Recovery: Specifies the frequency, methods and procedures for safeguarding and restoring data. • Vendor Management: Defines criteria and procedures for selecting, managing and evaluating IT vendors. • Project Management: Provides structure for undergoing and managing projects within the organization; and most importantly, provides a robust definition of what constitutes a project. • Change Management: Describes procedures to effectively authorize and control modifications to IT systems and infrastructure. WHY A POLICY FRAMEWORK IS ESSENTIAL A robust policy framework brings clarity and reduces ambiguity. Policies help prevent risky behavior, security breaches and compliance issues, while supporting adherence to regulations and internal controls. Consistent standards empower IT leadership to protect organizational assets. Whether you start from scratch or with a template, the key is customization and detail. I&T POLICY DEVELOPMENT AND IMPLEMENTATION Sitting down with a blank piece of paper, or more likely an empty Microsoft Word document, can be daunting; 10 The Community Banker
however, there are plenty of paid and free online resources available that provide template-based policies. Alternatively, our good friend ChatGPT can provide a great starting point as well. Building the basic structure of your policy framework is only the first step. No matter how amazing the template or first draft from AI is, detailed customization is critical. Policies offer guidelines and set explicit expectations. These guidelines and expectations will be unique from company to company, so take the time to do it right the first time. The following are several components that should be taken into consideration when adding detail and depth to your policies: • Involve Stakeholders Early: Involve key stakeholders from across the organization. Collaborative development ensures buy-in and enhances practicality, acceptance and enforceability. • Write Clearly and Concisely: Policies must be straightforward, understandable and free from technical jargon. Clear language helps ensure everyone, regardless of technical literacy, understands their responsibilities and the consequences of non-compliance. • Effective Communication: Distributing the policies through multiple channels is critical. Active communication ensures broad awareness and reinforces organizational commitment to adherence. • Training and Education: Training employees on the importance and application of IT policies significantly boosts compliance. Regular training sessions, refreshers and practical examples foster a strong understanding of expectations, and the risks associated with non-adherence. • Reviewing and Updating the IT Governance and Policy Framework: Effective IT governance and policy frameworks are not static. They must evolve alongside the organization. This can be accomplished through employee/departmental feedback, periodic reviews and approval of the policy by executive management or a governing body. • Monitoring, Measuring and Reporting Success: Performance metrics provide tangible evidence of governance effectiveness. Organizations should identify and measure specific Key Performance Indicators (KPIs) aligned with strategic objectives. KPIs may consider alignment of IT and overall strategic objective outcomes, compliance, efficiency, or even risk. Furthermore, regular reporting to leadership helps maintain strategic alignment, transparency and ongoing support. WHERE TO NEXT? Implementing robust IT governance and a comprehensive policy framework strengthens your organization’s ability to leverage IT effectively. By closely aligning IT strategy with organizational goals and providing actionable policy guidance, you lay the groundwork for better performance, stronger security and long-term success. Brad Brosig joined YHB in 2014 after graduating from Indiana University of Pennsylvania with degrees in accounting and management information systems. He is currently a manager on YHB’s Risk Advisory Services team, bringing extensive experience in IT audits, vulnerability and penetration testing, and SOC audits. Brad approaches every engagement as a partnership — aiming not only to deliver effective solutions, but also to equip clients with the knowledge and strategies needed to manage risk in today’s increasingly complex information and technology environments. Implementing robust IT governance and a comprehensive policy framework strengthens your organization’s ability to leverage IT effectively. 11 The Community Banker
4 SIGNS YOU’RE READY FOR A DIGITAL BANKING UPGRADE Digital banking isn’t merely a channel. It’s an extension of your brand, a virtual branch available to accountholders whenever they need to access their accounts. A strong digital presence is a must for community financial institutions to stay relevant in today’s digital age. BY TERRY GORE Director of Sales (Digital Banking), SHAZAM 12 The Community Banker
Community banks are uniquely positioned to deliver the convenience and flexibility digital banking brings, but it can also negatively impact accountholder loyalty if your product doesn’t meet expectations. Here are four signs that your digital presence is holding you back. 1. POOR USER EXPERIENCE Accountholders expect a seamless digital banking experience across all their devices. They want the flexibility to view their accounts, pay bills and deposit checks all at their fingertips. All these features must be an intuitive user experience to give your accountholders the flexibility to stay active in their busy lives while conveniently managing their finances. Additionally, system limitations such as no way to send messages to accountholders or users who have separate logins for personal and business accounts, prevent seamless secured communications with your accountholders and create additional headaches. If your current digital banking offering doesn’t provide these features or is difficult to use, it detracts from the overall user experience and negatively impacts your accountholder relationship. 2. SECURITY VULNERABILITIES While digital banking apps are generally secure, some may have vulnerabilities that could expose user data. Advanced security measures offer effortless and secure access for your users. Features such as single sign-on and biometric authentication add extra layers of security, making it harder for cybercriminals to gain access to someone’s account. Real-time fraud detection and card controls give your cardholders additional security for their debit cards. Providing the ability to lock and unlock cards, replace a lost or stolen card and receive account notifications helps build trust and grow accountholder relationships. 3. LACKING VENDOR SUPPORT Accountholders still want to talk to a human when there’s an issue with their account or app. And when that time comes you need to have answers fast. Any vendor who doesn’t deliver fast, personalized service isn’t supporting you when you need them most. Without proper support, resolving customer issues related to mobile app errors can be challenging, leading to frustration and damage to your reputation. 4. LACK OF INTEGRATION WITH YOUR TECHNOLOGY STACK Your digital banking product needs to work well with your core and debit card provider. Integrating existing systems with new offerings through APIs enables seamless data exchange and efficient communication between systems, enhancing customer experience and operational efficiency. Make sure your vendor is open and willing to work with vendors to ensure your product solutions are working as intended without frivolously charging you to provide what’s best for your accountholders. DIGITAL WITH A PERSONAL TOUCH For community banks a digital transformation is not just about keeping up, it’s about unlocking new revenue streams, expanding reach and future-proofing the business. By integrating digital banking, financial institutions can extend their reach beyond their physical branch locations by offering around-the-clock convenience without sacrificing personal service. SHAZAM® DigiHive™ digital banking offers a hybrid approach that blends innovation and identity. Our product offers the features and functions consumers expect from digital banking while allowing financial institutions to service accounts, create and adjust settings, send messages, and view reports and dashboards through an intuitive interface. And because DigiHive digital banking can integrate into any core, community banks have the flexibility to build the tech stack that fits their business best. By embracing a tech-driven, people-centered model, community banks can grow, compete and continue to serve their communities with purpose and impact, all while staying true to their mission. You can learn more about DigiHive digital banking by scanning the QR code. https://www.shazam.net/services/ digital/digital-banking/ Terry Gore is the director of sales (digital banking) at SHAZAM. He’s an experienced sales professional in banking and financial services, specializing in building strong client relationships, exceeding sales targets and delivering tailored financial solutions. Terry is known for strategic thinking, team leadership and a customer-focused approach that drives growth and value. He’s passionate about staying ahead of industry trends and leveraging innovative strategies to create meaningful impact. Contact him today at tgore@shazam.net. 13 The Community Banker
PLAN FOR While the frequency of unplanned changes at the top of the house truly surprised me, the causes of these unexpected changes varied widely, including: • Surprise/early retirement. • Resignation for personal/ family reasons. • Termination for poor performance. • Termination for inappropriate behavior. • “Nudged out” by the board after staying too long without a plan. • Death or serious illness. One only needs to read the news in any major business publication to see that literally almost every day, the CEO of a major public company, private-equity-backed enterprise or financial institution exits for one reason or another. Unplanned transitions simply occur much more often than we like to think about. The vast majority of bank boards, whether public, private or mutual, are well aware of the need to have an “Emergency Succession Plan.” Our regulators require this, of course, and it is a best practice to regularly refresh this plan as time UNPLANNED CEO TRANSITIONS BY ALAN J. KAPLAN Founder & CEO, Kaplan Partners Since the founding of our firm over 30 years ago, we’ve been fortunate to assist clients with over 100 President or CEO succession projects across the financial services landscape. When reviewing these successful assignments with an eye towards common themes, I was struck by the number of leadership transitions that occurred unexpectedly. 14 The Community Banker
passes and conditions/options evolve. Even banks with new leaders — whether selected internally or externally — should review and revise the emergency plan shortly after a new leader arrives and annually thereafter. For example, a new leader selected internally after a comparative evaluation process may have been the emergency choice, requiring the identification of a new backup plan. Or the “name in the envelope,” as it is often called, may retire or simply depart concurrent with a new leader’s arrival, forcing a fresh assessment of the talent pool of internal emergency successors. Sometimes, we observe that when a new leader is promoted from within the organization, the prior CEO remains on the board or acts as an “advisor” to the bank. In these situations, the recently retired CEO may be an excellent choice to step in during a time of unexpected upheaval. However, this plan really only works if the need for the emergency fill-in occurs (unfortunately) not long after the transition itself takes place — perhaps a few years at most. This also assumes that the interim replacement had a high level of continuing engagement at the board level. Otherwise, this plan could backfire due to a lack of currency with the bank, regulatory climate and broader industry dynamics. The goal of an emergency succession plan is not necessarily to solve a longer-term CEO succession issue. Rather, it is to keep the train on the tracks, and to reassure employees, customers and communities that the bank’s continuity is not tied to any one individual. This allows the board of directors time to evaluate options, potentially recruit or elevate a new leader and breathe after this unexpected event. Some Directors and even CEOs think this cannot happen to their institution, whether because of the youth of their leader or the faith they have in the depth of the team. However, in my home state of Pennsylvania, there have already been three unexpected leadership transitions in the industry this year. As the saying goes, “stuff happens,” and the more prepared the board is to “expect the unexpected,” the more likely the bank can maintain its momentum and continued independence. Alan J. Kaplan is the Founder & CEO of Kaplan Partners, a retained executive search and board advisory firm headquartered in Philadelphia. Kaplan Partners is a longstanding partner with Bank Director. You can reach Alan at (610) 642-5644 or alan@kaplanpartners.com. 15 The Community Banker
What You Need to Know BY DENNIS FALK SVP and Regional Manager, PCBB The rise of digital banking and fintech platforms has transformed depositor behavior, making it increasingly important for community banks to adapt their strategies to manage the cost of funds and remain competitive. This challenge has been a top concern for community banks in recent years, as rising rate sensitivity, digital banking adoption and evolving depositor expectations continue to reshape the industry. To stay ahead, community banks must understand these structural shifts and develop sustainable funding strategies. THE GROWING COST OF FUNDS AND DEPOSIT COMPETITION Nearly 90% of community banks identified the cost of funds as a very or extremely important issue, according to the Conference of State Bank Supervisors’ (CSBS) 2024 community bank survey. This proportion has nearly doubled since the 2022 survey, reflecting both rising funding costs and heightened deposit competition. The cost of funds has more than tripled since 2020, increasing from 0.74% in December 2020 to 2.85% by March 2024. As rates increased, depositors became more rate-sensitive, leading to greater money movement between banks and non-bank financial institutions. SHIFTING DEPOSITOR BEHAVIOR: A STRUCTURAL CHANGE Historically, deposit rates followed a slow, predictable cycle, with customer movements largely driven by bank-led pricing decisions. However, since 2022, digital tools and fintech’s have accelerated deposit flows, making customer behavior more dynamic and unpredictable. • A growing proportion of deposit outflow events involved instant transfer apps like Zelle or Venmo, enabling same-day transfers. • Deposit beta surged from 0.25 before the 2022 federal funds rate hikes to 0.5-0.6 in 2023, meaning rate hikes are passed to depositors much faster. This represents a fundamental shift in how depositors behave — community banks must adapt by offering competitive products and leveraging customer relationships for retention. THE EVOLVING DEPOSIT LANDSCAPE 16 The Community Banker
THREE CRITICAL QUESTIONS BEFORE RAISING DEPOSIT RATES While higher rates may seem like the easiest way to compete for deposits, community banks should consider three strategic questions before making pricing decisions: 1. DOES YOUR BANK NEED ADDITIONAL DEPOSITS? There’s only one fundamental reason to spend money on attracting deposits: because your bank has profitable ways to deploy them. Assess your overall funding strategy, including: • How much funding is needed for loans and other profitable uses? • How much of your current deposit base is at risk of outflow? • What alternative funding sources exist, such as correspondent banking services, liquidity lines, or structured funding solutions that may provide flexibility while maintaining deposit pricing discipline? 2. ARE YOU REACTING TO MARKET DATA OR INDIVIDUAL COMPLAINTS? Some institutions feel pressured to raise rates when a competitor does or when a single high-value customer demands higher returns. However, with today’s digital landscape, high-rate depositors are the most likely to move their money elsewhere at the next opportunity. Instead of chasing rates: • Use data to determine competitive but sustainable pricing. • Explore diversified funding options that align with long-term profitability and risk management strategies. 3. HOW CAN YOU OPTIMIZE YOUR DEPOSIT STRATEGY? Attracting large-balance customers with premium rates is tempting, but these customers are more likely to move their funds quickly when rates shift. A more sustainable strategy is to: • Reward customers who use multiple products, such as treasury management services, commercial loans or wealth planning. • Incentivize relationship-based deposits over rate-driven accounts. • Consider requiring a depository account with every lending relationship. Breaking down silos between different departments can help identify your best customers and create a strategy that looks at the entire customer relationship. • Ensure deposit gatherers are being appropriately incentivized through product pricing and funds transfer pricing. STRATEGIC TAKEAWAYS FOR COMMUNITY BANKS 1. Cost of funds has risen significantly, and depositors are more rate-sensitive than ever. Community banks need a clear funding strategy before aggressively pursuing new deposits. 2. Digital banking and fintech platforms have made deposit flows highly dynamic. Offering niche digital banking solutions and real-time payments may help retain customers. 3. Rather than chasing rate-sensitive funds, community banks should focus on relationship-based deposits. Encouraging client engagement and establishing primacy with them as their main financial institution can increase the client’s net value. By adapting to this new deposit environment, community banks can optimize their balance sheets while maintaining a competitive edge in an increasingly volatile financial landscape. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management services such as settlement and liquidity for the FedNow Service, international services, lending solutions and risk management advisory services. PCBB was recognized by American Banker as one of the “Best Banks to Work For” in 2024. 17 The Community Banker
LEADERSHIP IN TIMES OF CRISIS PROVIDED BY THE VIRGINIA ASSOCIATION OF COMMUNITY BANKS A crisis within an organization can happen at any time, whether it be a new piece of legislation that turns the industry on its head, a pandemic that brings society to its knees, or something in between. Effective leadership during a crisis can significantly influence the eventual outcomes for your team and organization. It goes without saying that when faced with a crisis, normal routines are disrupted. If a company is not prepared, policy and procedures often go out the window, leading to confusion and a breakdown of communication lines. Even the best employees can become reactionary, making decisions based on what they think is best to solve the problem that is happening in front of them. Additionally, a crisis can cause a far-reaching domino effect of challenges. For example, if a supplier within a supply chain is disrupted, retailers in turn may not be able to meet customer demands, leading to poor customer satisfaction. And with today’s tech-savvy consumers, bad news can spread fast. We all know how a few poor online reviews can affect the financial bottom line. As a leader, the way you handle a crisis sets the tone for the entire team, good or bad. If you are prepared for the unexpected, it can significantly reduce any fear and anxiety that your employees might be feeling. There are real benefits to being proactive and having a “just-in-case” backup plan ready to roll out at a moment’s notice. Proactive leadership involves meticulous planning and preparation. It allows an organization, in the event of a crisis, to move from plan A to plan B and implement the necessary changes smoothly. And the good news is that you don’t have to make these plans alone. Involving the management team — and employees when appropriate — helps to foster a sense of commitment and plan ownership within your organization. 18 The Community Banker
Taking a proactive and strategic approach to crisis management involves a number of core elements: • Identification: Conduct risk assessments to help identify potential crises before they occur. • Planning: Develop plans and procedures that specifically address various scenarios, including resource allocation and communication protocols. • Communication: Establish strong lines of communication. Without clear, transparent communication, no plan, no matter how good, will work. It’s been said that communication makes the world go round, and to that point, in a crisis, effective communication is vital to making it through difficult times successfully. Communication can make the difference between your business weathering the storm or suffering operational and/or reputational damage. • Response: Assign roles and responsibilities to implement your plan in the case of a crisis. This may involve taking immediate action to protect your people and property, as well as informing stakeholders. Leaders should be open to new approaches and willing to adjust strategies as the situation evolves. • Recovery: Assess your plan once normal operations are restored. What parts worked? What can be done better? Take this opportunity to learn and improve preparedness plans. However, it’s important to remember that even the best plan can fail if people are not prioritized, both employees and leaders alike. Strong leadership in action can help employees understand that a crisis does not have to lead to the destruction of the organization or the loss of their jobs. In fact, the ability of those in charge to be agile and make decisions may give employees hope as they realize that their leaders were prepared for the event and competent enough to get them through it safely. Equally as important is self-care, especially during times of crisis. Leaders should take time to eat healthy and make sleep a priority. When possible, try to find a moment to step back from the situation, refocus and find perspective. And, don’t try to do it all yourself. After all, you’ve spent time planning and preparing your team — give your plan and your employees the chance to make things work. Crises are bound to happen, but with a little planning and a lot of teamwork, you can successfully navigate the storm instead of bracing for impact. By not having a crisis management plan in place, employees can and most likely will lose trust in leadership. Believe it or not, leading by influence on a day-to-day basis can help a company’s upper management prepare for a crisis. This type of leadership guides and inspires others through actions, words and ideas as opposed to solely relying on title, authority or position. It involves skills like active listening, setting a good example and building strong working relationships with the team. Attention to and development of these skills is absolutely vital. The idea that a leader will be forged in a crisis — that they will rise to the occasion with skills previously unseen — is simply unrealistic. But if you have the skills that keep you involved and show a true interest in employee well-being, and you are consistent in your behavior, you’re more likely to conduct yourself in the same way during a crisis. 19 The Community Banker
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