BANKERWINTER 2022 WEST VIRGINIA President’s Message: FAREWELL SIX STRATEGIES to Navigate Credit Stress UNDER PRESSURE Deposit Betas in 2023
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Sample Municipal Summary 03/31/2017 Page 1 of 2 635,461 GO+REV 9,896,680 GO 4,752,978 REV GO 64.7% REV 31.1% GO+REV 4.2% Total : 100.0% Municipal Type 689,324 TX PSF 10,199,393 AA 4,180,764 A 215,638 NR TX PSF 4.5% AA 66.7% A 27.4% NR 1.4% Total : 100.0% Moody/S&P Composite Rating AL CA CO IA IL IN KY NM OH OK TX WA WI AL 1.9% CA 2.3% CO 1.4% IA 3.9% IL 10.8% IN 10.2% KY 2.4% NM 1.7% OH 8.0% OK 9.9% TX 33.2% WA 4.7% WI 9.6% Total: 100.0% State of Issue Individual Municipal Ratings are as of 3/19/2017, unless recently purchased. weighting based on Book Value of 15,285,119 Insd-AGM Insd-BAM Insd-PSFG Insd-PSFG, Pre-ReFunded Insd-State Aid Not Insured Not Insured, Pre-ReFunded Insd-AGM 12.0% Insd-BAM 3.4% Insd-PSFG 3.1% Insd-PSFG, Pre-ReFunded 1.4% Insd-State Aid 11.9% Not Insured 58.2% Not Insured, Pre-ReFunded 10.0% Total: 100.0% Insurance 4/13/2017 6:43:55AM - FSG / SAMP The Baker Group Software Solutions, Inc. - APMTM Although the information in this report has been obtained from sources believed to be reliable, its accuracy cannot be guaranteed. ADVANCED PORTFOLIO MONITORTM 18 18 Sample Cusip Par Cpn Book Price Market Price Gn/(Ls) *Acctg Eff Dur Eff Cnvx Underlying Municipal Credit Detail 03/31/2017 Yield Description Page 6 of 7 Muni Insurer Muni Type Moody S&P Call Date Maturity ASC 320 Gn/(Ls)% State Underlying Ratings GO | REV *DA% | DC *Per Cap | Covnt Issue Date Tax Status Overlapping D/A - Debt/Pop Net Asset Ending Beginning Cnty Jobless Security Fiscal Year Report Date *Proj 944431BL8 220,000 5.500 103.90 105.18 2,816 4.34 4.39 (0.98) WAYNE SD #112-B-BABS IL 26 Not Insured N/A N/A GO N/A A+ 12/01/20 12/01/26 AFS 1.23 IL 5.58 | -- 507 | -- 12/08/10 Taxable 8.29 - 754 WAYNE - 8% 2016 Report AD VAL TAXES 2015 4.34 3 Items 4.19 4.19 3.91 (0.30) (458) 103.36 103.40 5.311 1,160,000 Taxable Municipal Totals 39 Items Portfolio Totals 3.25 3.25 3.91 (0.26) 3.392 104.59 101.78 (409,651) 14,615,000 6,385K AA 6,918K A 1,981K NR AA 41.8% A 45.3% NR 13.0% Total: 100.0% Moody/S&P Composite Underlying Rating 1,471K Aa2 213K Aa3 1,533K A1 768K A3 11,299K N/A Aa2 9.6% Aa3 1.4% A1 10.0% A3 5.0% N/A 73.9% Total: 100.0% Moody's Underlying Rating 695K A+ 635K A 232K A13,723K N/A A+ 4.5% A 4.2% A- 1.5% N/A 89.8% Total: 100.0% S&P Underlying Rating 689K AAA 10,415K AA 4,181K A AAA 4.5% AA 68.1% A 27.4% Total: 100.0% Moody/S&P Composite Rating weighting based on Book Value of 15,285,118 * Denotes Tax Equivalent Yield (TEY) where applicable. Individual Municipal Ratings are as of 2/28/2017, unless recently purchased. * D/A% = Debt to Assesed Ratio; DC = Debt Coverage | Per Cap = Per Captia Debt; Covnt = Rate Covenant 4/13/2017 6:43:56AM - FSG / SAMP The Baker Group Software Solutions, Inc. - APMTM Although the information in this report has been obtained from sources believed to be reliable, its accuracy cannot be guaranteed. ADVANCED PORTFOLIO MONITORTM 26 26 Balances ($000's) Page 1 of 1 12/31/2019 Book Value % of Book TA **Rate Sensitive < 1 Year *Book Yield/ Rate *Reinv. Rate *12 Mo. Proj. Yield/Rate Avg. Life Effective Duration Effective Convexity Full Indx. Rate / Total is % of Segment Fixed Var. Non Int. Summary ALCO - Asset/Liability Mix Sample $20,414 4.16 46.55 53.45 46.55 0.97 0.04 0.01 0.00 Cash & Due 0.97 0.97 / 0.97 $172,210 35.10 100.65 (0.65) 14.56 2.81 4.60 3.55 (0.51) Investments j 2.81 2.64 / 0.00 (Includes MTM) $4,500 0.92 100.00 100.00 1.63 0.04 0.04 0.00 Funds Sold 2.13 2.13 / 2.13 $276,700 56.39 56.28 45.26 (1.53) 53.28 5.20 2.59 1.96 (0.22) Loans 5.37 5.47 / 5.76 $6,511 1.33 100.00 2.49 12.63 0.00 0.00 Other Earning 2.49 2.49 / 0.00 $10,358 2.11 100.00 Non-Earning $490,693 3.24 Total 68.38 28.37 100.00 38.01 4.17 3.27 2.36 (0.31) Assets 4.28 4.28 / 5.31 $276,064 56.26 66.70 33.30 12.02 0.53 7.66 4.48 0.54 Non-Maturing Deposits 0.53 0.53 / 0.53 $92,498 18.85 99.44 0.56 0.00 82.54 0.84 0.70 0.65 (0.04) Certificates of Deposit 0.84 0.81 / 0.70 $37,721 7.69 100.00 68.68 1.09 0.97 0.93 (0.02) Jumbo CDs 1.08 1.05 / 0.00 $28,250 5.76 95.58 4.42 46.90 2.06 1.95 1.89 0.03 Borrowed Funds 2.04 1.86 / 1.88 Other Paying $6,724 1.37 100.00 Non-Paying $441,257 22.36 Total 35.51 42.13 89.93 33.70 0.80 5.15 3.14 0.33 Liabilities 0.80 0.77 / 0.54 10.07 $49,436 (0.60) (0.46) Total Equity Capital 100.00 $490,693 Total Liab & Capital Liability Mix Asset Mix Liquidity Ratios Constant Benchmark ALCO Dependency Ratio Liquid Assets / TA Ratio is outside benchmark. P < 750.00% < 100.00% < 50.00% < 20.00% > 10.00% < 35.00% < 300.00% 42.39 68.11 559.71 48.04 6.31 10.19 7.69 Loans / Assets 56.39 Investments / Deposits Loans / Deposits Loans / Capital Net Borrowed Funds / Capital < 75.00% Available Line of Credit $90,500 56.39 Loan 35.10 Inv 4.16 Cash 2.11 Non-Earn 1.33 Other Earn 0.92 Others 56.26 NMD 18.85 CDs 10.07 Equity 7.69 J CDs 5.76 Borrow 1.37 Others Reliance on Wholesale Funding 9.14 < 30.00% The smallest 2% of all categories will be grouped into an 'Others' category. Jumbo CDs / TA Note: Values are rounded before printing, but full precision values are used in all calculations. * Yields/Rates are reported on EA & PL. Investments using Accounting yield. j (Ver 4.0 R7) Copyrighted 1994 - 2020 1/29/2020 3:39:46PM - SAMPLE / SMB1218 The Baker Group Software Solutions, Inc. - IRRMTM Although the information in this report has been obtained from sources believed to be reliable, its accuracy cannot be guaranteed. Interest Rate Risk Monitor ** Percentages based on maturing, repricing, and paydown balances. As American financial institutions—along with the rest of the world—face unprecedented times, The Baker Group is ready with tools and services to help maximize the performance of your institution. That’s why we’re offering new clients our Software Solutions* service package for a six-month free trial. Not only will you have access to our latest market research and insight from our Financial Strategies Group, you’ll be included in all of our webinars. There you’ll hear the latest Information on the economy and how it could impact your institution and its investment portfolio.
Members of our Bowles Rice Banking Team are consistently recognized for their experience and depth by respected peer review organizations, including Chambers USA, Martindale-Hubbell, U.S. News & World Report’s Best Law Firms, Best Lawyers and Super Lawyers. In addition to our core Banking Team, nearly 50 other Bowles Rice lawyers regularly assist banks across our region with human resources and employment issues, litigation and disputes, real estate, government relations, trusts and estates, executive compensation, and employee benefits. For more information about the Bowles Rice Banking Team, contact Sandy Murphy at (304) 347-1131. bowlesrice.com | 1-855-977-8727 Responsible Attorney: Marc Monteleone • 600 Quarrier Street • Charleston, WV 25301 CHARLESTON, WV • MARTINSBURG, WV • MORGANTOWN, WV • PARKERSBURG, WV • SOUTHPOINTE, PA • WINCHESTER, VA The Bowles Rice Banking Team Experienced. Respected. Recognized. Mike Proctor Drew Proudfoot Amy Tawney Ben Thomas Sandy Murphy Floyd Boone Julia Chincheck Elizabeth Frame Follow us on Twitter @BowlesRice | @bowlesbanklaw | @creditors_law
12 CONTENTS ©2022 The West Virginia Bankers Association | The newsLINK Group, LLC. All rights reserved. West Virginia Banker is published four times each year by The newsLINK Group, LLC for the West Virginia Bankers Association and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and 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 the West Virginia Bankers Association, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. West Virginia Banker is a collective work, and as such, some articles are submitted by authors who are independent of the West Virginia Bankers Association. While West Virginia Banker encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at 855.747.4003. 5 President’s Message Farewell By Sally Cline, President and CEO 6 Community Corner 2022 Highlights Honoring Our Bankers that Make Our Communities a Better Place 8 What a Recent Court Decision and Challenges to the CFPB Mean for West Virginia Banks By Nicholas P. Mooney II, Spilman Thomas & Battle, PLLC 12 Why Banks are Embracing Loan Marketplaces as a Solution to Liquidity By Simon Fisher, CSI 14 Financial Abuse of the Elderly By Travelers 16 Why A Holistic Approach to Cybersecurity in the Banking Industry Is Beneficial By Jim Mundy, Segra 18 Six Strategies to Navigate Credit Stress By Dennis Falk, PCBB 20 ABA Conference Focuses on Legislation, Economic Uncertainty and Digital Assets By Tanya Thomas, Baker Tilly 22 S.R. Snodgrass, P.C. Announces the Acquisition of Zeno, Pockl, Lilly, & Copeland, A.C. 24 Under Pressure Deposit Betas in 2023 By Matt Harris, The Baker Group 14 wvbankers.org 4 West Virginia Banker
This will be my last submission to the West Virginia Banker, as I will retire at the end of February 2023. As I told the attendees at our 2022 Annual Meeting and Convention, serving as your CEO for the past six years has been a tremendous honor and privilege. Thank you for entrusting me to lead and manage this remarkable organization. I hope I have made a small difference in promoting the interests of this great industry. As I reflect on my career and how I got here, I cannot help but also think about my father and how proud he would be. Bill McLaughlin was a career banker who rose to the top of his field. He and other bankers across the state began a campaign in the early 1980s to change state banking laws to allow for branch banking and bank holding companies. He was the first President of the Progressive Bankers Association, formed to advocate for modern banking laws. His accomplishments in the industry were often recognized, but his greatest honors were being inducted into WVU’s John Chambers College of Business and Economics West Virginia Business Hall of Fame in 2004 and Roll of Distinguished Alumni in 2011. The respect I had for my father as a banker was immeasurable, and although I could never match his level of accomplishment, he inspired me to pursue the career I am in today. Some of you may also come from a family of bankers, and others may have accidentally found your way into banking. Unfortunately, banking is not necessarily presented to our youth as a prominent career path, so we, as an industry, need to develop a more concerted effort to educate young people about the exciting and rewarding careers banking has to offer. Banking careers are broad and varied. New hires can pursue paths in operations, lending, trust and wealth management, finance and accounting, human resources, technology and data security, marketing and business development, and regulatory compliance. In addition to providing loans and financial services, bankers are deeply committed to volunteerism, community leadership, and philanthropy. Bankers take pride in giving back to their communities, and the rewards are great. It is up to each of us to create awareness around the financially and personally rewarding opportunities this industry has to offer so that my legacy, and yours, can continue for years to come. I want to take this opportunity to wish all my best to my successor, Mark Mangano. Like many of you, I have known Mark for many years. He is knowledgeable and experienced and has the right skill sets to take this organization to the next level. I do not doubt that with your support, he will be successful. I also offer my gratitude to the amazing staff – each of whom is passionate about our mission – and to the board of directors and committee members who volunteer their time, talent, and treasure to promote our standing as one of the state’s leading trade associations. Again, thank you for the opportunities you provided to me. I admire and appreciate your leadership, partnership, and support, and I will for years to come. Working with each of you has been the highlight of my career. My deepest gratitude and best wishes for a bright future. -Sally President’s Message Farewell By Sally Cline, President and CEO Pub. 13 2022 I Issue 4 Winter 5 West Virginia Banker
communityCORNER 1 2 5 4 2022 Highlights Honoring Our Bankers that make Our Communities a Better Place 3 wvbankers.org 6 West Virginia Banker
1 Grantsville Retail Manager, Brad Stevens presented Emily Anderson a check to help sponsor her on her road to competing in the Miss WV Teen USA. 2 CEO Martha Haymaker (right) with granddaughter Abby volunteering their time at the annual Ox Roast. 3 (L-R) Kelcie Walker, Royce Steele, Ammanda Frame, and Brenda Wolfe assisted the Mountaineer Food Bank to distribute meals on a cold January morning. 4 Calhoun Banks provided each member of the Gilmer County Lady Titans’ basketball team with some snacks to accompany them on their journey to the 2022 State Tournament. 5 Arnoldsburg Assistant Retail Management, Dawn Helmick (left) presented the ladies from the West Fork Community Action group a donation check to sponsor the chicken dinners at the annual Molasses Festival. 6 7 8 9 10 6 Emma Wyer (center) is pictured with members of the Wirt County Middle School cheerleading squad. A donation was made to help purchase new uniforms. 7 CFO Chris Arden (center) was proud to present the Calhoun-Gilmer Career Center’s technology team with a donation check to sponsor their trip to Grapevine, TX. The team competed against other high school students from across the US, Germany, and Turkey. 8 (L-R) Andrew Wilson, Ammanda Frame, and Kyerstan Perkins on one of their many trips to local elementary schools teaching students about Rainy Day Savings. 9 Members of our Grantsville team are photographed with the CalhounGilmer Career Center’s Culinary team before they traveled to participate in the Hospitality Cup. 10 (L-R) Kelcie Walker, Stephanie Brooks, Amber Hamric, and Sandy McCumbers helped judge the regional social studies fair in Gilmer County. Pub. 13 2022 I Issue 4 Winter 7 West Virginia Banker
In October 2022, the United States Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s (CFPB) independent funding structure violates the U.S. Constitution’s Appropriations clause and the principle of separation of powers. The Dodd-Frank Act, passed in the wake of the 2008 financial crisis, provided that the CFPB would not be funded through Congressional appropriations. Instead, the CFPB receives its funding directly from the Federal Reserve, which is also funded outside the congressional appropriations process. In Community Financial Services Association of America Ltd v. CFPB, two trade associations brought a lawsuit against the CFPB to challenge its 2017 Payday Lending Rule. Broadly speaking, the Rule governs certain personal loans with short-term or balloon payment structures. It (1) requires lenders to choose between two ability-to-repay underwriting methodologies; (2) requires lenders to report and obtain information about a consumer’s financial obligations and borrowing history from certain consumer reporting agencies; What a Recent Court Decision and Challenges to the CFPB Mean for West Virginia Banks By Nicholas P. Mooney II Spilman Thomas & Battle, PLLC wvbankers.org 8 West Virginia Banker
(3) limits repeated payment withdrawal attempts from a consumer’s account; and (4) requires lenders give disclosures related to those withdrawal attempts. The trade associations asserted myriad claims against the CFPB, most of which did not persuade the court. However, a three-judge panel of the Fifth Circuit agreed with the associations on one critical argument. It held that the CFPB’s “double-insulated” funding structure violated the U.S. Constitution’s Appropriations clause and the principle of separation of powers. As a result, the court invalidated the Payday Lending Rule. What does this mean for banks in West Virginia? Strictly speaking, the Fifth Circuit’s decision isn’t a law in West Virginia. It is a law (considered “mandatory authority”) within the Fifth Circuit, which includes only Mississippi, Louisiana, Texas, and the Canal Zone. It will remain a law unless it is reversed by the entire Fifth Circuit or the United States Supreme Court. Based on the current composition of the Fifth Circuit, some commentators have speculated that, even if the entire Fifth Circuit were to consider the issue, it is unlikely to reverse the decision. That leaves the Supreme Court as the only court that might possibly reverse the decision and essentially approve the CFPB’s funding structure. Unless and until that happens, the CFPB’s funding structure is unconstitutional, at least in the Fifth Circuit. If the CFPB doesn’t appeal to the Supreme Court, the door is opened for challenges regarding whether the CFPB’s past, ongoing and future actions are enforceable. Even though the Fifth Circuit’s decision is not the law in West Virginia, it is considered a persuasive authority, meaning that West Virginia courts may consider it persuasive and follow its ruling if they are ruling on a lawsuit pending in West Virginia that challenges the CFPB. However, they are not required to follow the Fifth Circuit’s decision and could decide the issue in a way that conflicts with the Fifth Circuit. From a broader standpoint, however, the Fifth Circuit’s decision may open the door in West Virginia and elsewhere for other challenges to the CFPB, the rules it has issued, and the enforcement actions it has prosecuted. Some members of Congress have been challenging the CFPB virtually since its creation. The Fifth Circuit’s decision may embolden them to renew their efforts. However, that challenge may have to wait until the next presidential administration, as it is unlikely President Biden would sign into law a bill that limits the CFPB or changes its funding structure. For now, despite the potentially serious outcomes of the Fifth Circuit’s decision, banks should wait before changing any aspect of their compliance programs. Instead, banks should consult and work with counsel to carefully consider any potential impacts of the decision and the risks to their operations if they change their operations now. At the very least, banks should wait to see if the CFPB asks the entire Fifth Circuit or the Supreme Court to review the decision. Another lawsuit pending in the Fifth Circuit is trying to further reign in the CFPB. In that lawsuit, the U.S. Chamber of Commerce and several industry groups are challenging a recent change to the CFPB’s Examination Manual. The Manual is a guide for the oversight of entities the CFPB regulates regarding their compliance with consumer financial protection laws. The Chamber of Commerce and industry groups challenge a change to the Manual’s provisions regarding Unfair, Deceptive, Abusive Acts or Practices (UDAAP). The CFPB has revised that section of the Manual to provide that conduct it considers unfair discrimination is now considered UDAAP and thus within the CFPB’s jurisdiction to regulate. The Chamber of Commerce and industry groups assert three primary claims against the CFPB’s revision to the Manual: First, they claim that the new provisions need to adequately discuss the classes of individuals that tended to be protected by its provisions, thus leaving regulated entities with unclear guidance on what actions are or are not permissible and, thus, rendering the revisions impermissibly vague. Second, they claim that the CFPB exceeded its authority with the revisions as unfair discrimination already is policed by other agencies through other statutes that Congress authorized. They argue that the CFPB is not permitted to essentially make itself into a second Congress that assumes whatever power it wants. Third, they claim that the CFPB failed to follow the required administrative procedures for revising the Manual. This lawsuit is still in its beginning stages. Banks should not assume that the revisions to the Manual will be invalidated simply because this lawsuit is pending in the Fifth Circuit, the same court that ruled against the CFPB on its funding structure. While the outcome of this lawsuit is uncertain, it does highlight important aspects of the CFPB’s jurisdiction and enforcement philosophy. Banks should consider the revisions to the Manual and audit their products and services to ensure they align with the CFPB’s current posture. At the bottom, the recent decision and lawsuit discussed above show that the scope of the CFPB’s jurisdiction may be uncertain. Banks in West Virginia should consult with counsel on the safest ways to proceed, given the current uncertainty. Nicholas P. Mooney II is a Member attorney in Spilman Thomas & Battle’s Charleston, West Virginia office. His primary practice areas are financial services litigation, cyber security, data privacy, and data breaches. He has represented clients for over two decades in litigation and government investigations related to financial services issues. He can be reached at 304.340.3860 or nmooney@spilmanlaw.com. Pub. 13 2022 I Issue 4 Winter 9 West Virginia Banker
Why Banks are Embracing Loan Marketplaces as a Solution to Liquidity By Simon Fisher, CSI The pandemic created a unique confluence of events that affected the lending market. As recently explored by the Federal Reserve, bank deposit growth soared during the pandemic, with total deposits increasing more than double the pre-pandemic growth rate. In addition, many banks took a more conservative approach to lending, concerned about the potentially negative impact of the pandemic on employment and businesses. And consumers’ declining credit quality, paired with the still-approaching CECL transition, forced institutions to provide for greater losses. Many trends have continued into 2022, leaving banks flush with liquidity. As lending remains a primary revenue driver, many institutions are revising their lending strategy to generate yield for investors. Such strategies include embracing digital lending systems, streamlining small business lending processes or navigating loan marketplaces for participation across the country. How Does a Loan Marketplace Work? A trusted loan marketplace connects bankers with access to loan participations and options to buy or sell whole loans or loan portfolios, creating a curated network of regional community financial institutions, thirdparty originators and investors across the U.S. This technology can streamline existing procedures, help you optimally align with target relationship profiles and drive return from excess liquidity. Since there’s no cost to look at potential loan wvbankers.org 12 West Virginia Banker
Perhaps you’ve merged with another institution and need to minimize risk from existing credits you inherited. Maybe you have a strong borrower and want to keep doing business with them despite reaching your lending limit. In either case, you can post the loan and decide whether to retain the servicing rights. opportunities available and anonymity remains until you finalize a transaction, it’s perfect for any institution hoping to become: • Participants: Buyers can access each deal's key loan metrics and attributes upfront, including the seller’s underwriting process, to help you determine what’s right for your portfolio. Once a whole loan, participation or another opportunity of interest is identified, the buyer submits preliminary interest through the platform. The originator or selling party reviews the request, and once NDAs have been executed, the buyer or participant works to finalize the transaction outside the marketplace. Private personal information has not been exchanged until this time, and this transaction costs 25bps, or 0.25% of the interest rate, to buy or sell. • Lead Lenders: Sellers can efficiently and anonymously post participation opportunities. Once the loan or loan portfolio is approved and posted live on the marketplace, prospective participants/buyers can search, view, favorite and/or submit offers on the opportunity or any other active deal(s) on the platform. Buyers can also set specific parameters, enabling the matching algorithm to automatically find and recommend new opportunities or capital partners that meet their unique transaction criteria, including asset type, size or geography. Balance Your Portfolio and Credit Risk with a Loan Marketplace These marketplaces enable you to become partners of a sort with other banks, establish preferred loan types and optimize quality and price by selecting from a diverse set of deal flows. This gives a big boost to financial institutions, especially smaller community banks, that would like to grow their lending network within – or beyond – their geographic market and enable opportunities across one or more banks. Perhaps you’ve merged with another institution and need to minimize risk from existing credits you inherited. Maybe you have a strong borrower and want to keep doing business with them despite reaching your lending limit. In either case, you can post the loan and decide whether to retain the servicing rights. Banks commonly struggle with a high concentration of certain asset categories that need to be offloaded. But you don’t have to rely on your immediate network. For example, Simon Fisher joined CSI in August 2020 to expand CSI’s digital lending strategy. Before joining CSI, Simon worked as a consultant helping banks around the U.S. conduct core evaluations. He has a fundamental understanding of industry trends by evaluating multiple platforms. During his career, Simon has worked in many different lending roles for a community bank during his 10-year term, including retail, commercial and mortgage loans. He understands the complexity of different loan types and is working to deliver the best digital experience for loan officers as well as borrowers. Learn more about how the right enterprise core powers advancements like digital lending services in our Definitive Guide to a Modern Core Banking Partnership. a rural community bank with mostly Ag loans can easily connect with a metropolitan bank with a portfolio consisting of commercial real estate loans. In so doing, you can also make your institution less vulnerable to local economic slowdowns or sudden declines of loans of certain types. Using Marketplace Lending to Streamline Procedures This new technology simplifies the process of growing assets or disposing of them when lending limits or risk concentration becomes too high. Much like digital loan origination software, a modern loan marketplace decreases internal resource demands and enables you to manage the transaction process through a single point rather than across multiple parties. You can also monitor your bank’s performance against peers using interactive visualizations of current call report information for all FDIC-regulated institutions. These analytics offer performance metrics, allocation, competitive analyses and actionable insight. Between more efficient procedures and market intelligence concerning how peers are transacting, this environment reduces the complexity of lending and deal origination. Looking Ahead for the Lending Market Consider a loan marketplace as you keep an eye on the developing landscape. It’s a new take on a traditional process, but with no fee to participate, there are virtually no downsides. Meanwhile, your institution stands to achieve higher returns, expand your loan access and easily diversify your loan portfolio. Pub. 13 2022 I Issue 4 Winter 13 West Virginia Banker
According to the Federal Bureau of Investigation (FBI), millions of elderly citizens are targeted annually with some form of financial fraud, and many of these attempts are successful. It has been estimated that seniors lose approximately $3 billion per year as a result of these scams, which are becoming more widespread and sophisticated. Surprisingly, much of the criminal activity is initiated by a friend or family member. A recent study by the University of Southern California revealed that 55% of respondents reporting any type of elder abuse categorized those acts as financial, and that family members were the most alleged perpetrators of elder financial abuse. With these facts in mind, banks should maintain heightened sensitivity around transactions that involve elderly clients, particularly if these clients have historically managed their own finances and may be exhibiting signs of cognitive decline. Increased vigilance, in general, can assist in uncovering fraud. Knowing the customer, coupled with a comprehensive employee training program, can act as a strong front-line tactic to help banks prevent and expose elder financial abuse. Financial Abuse of the Elderly By Travelers . . . banks should maintain heightened sensitivity around transactions that involve elderly clients, particularly if these clients have historically managed their own finances and may be exhibiting signs of cognitive decline. Increased vigilance, in general, can assist in uncovering fraud. wvbankers.org 14 West Virginia Banker
Here are some best practices for recognizing “at-risk” clients: • Be on the lookout for non-family members being added to banking or investment accounts. • Monitor large money transfers and changes in spending patterns, as these could be signs that some form of abuse is occurring. A senior’s spending habits are often predictable in frequency, volume and payees. • Be alert for large amounts of funds exiting accounts to payees who had not been previously paid in any manner. • Keep detailed notes in the form of dated, journal-type entries, recording any spending or personal behavior that seems unusual. These notes would be in addition to those kept on risk tolerance, goals, objectives, etc. • Follow up with clients via phone or email to discuss any sudden financial decisions that seem out of character. • In addition to making personal contact, encourage the client to engage an independent attorney to assist in their financial matters. • Understand the laws that apply to the financial abuse of an elder client. Follow prescribed protocols if any illegal activity is suspected. • Implement internal procedures to elevate circumstances that may present the need for further inquiry and analysis to the appropriate decision-makers. “It’s important not just to have a system in place to detect elder financial abuse, but to also act on situations where potential fraud or malicious intent has been identified,” said Kristin Roger, Vice President and Head of Financial Institutions at Travelers. “We know banks want to serve as trusted advisors to their customers, and by taking simple steps, they can better protect their customers from potential financial harm.” Elder financial fraud is on the rise and counts as one of the more heinous abuses of trust that senior citizens might endure. Along with the financial damage inflicted on customers, incidents of elder financial fraud can cause serious reputational harm. Therefore, implementing a sound method of prevention, detection, identification and reporting of this criminal behavior is paramount. Travelers is committed to managing and mitigating risks and exposures and does so backed by financial stability and a dedicated team – from underwriters to claim professionals – whose mission is to insure and protect a company’s assets. For more information, visit www.travelers.com. Pub. 13 2022 I Issue 4 Winter 15 West Virginia Banker
Why A Holistic Approach to Cybersecurity in the Banking Industry Is Beneficial In the growing digital landscape, cyberattacks have become more prevalent, sophisticated, and damaging. For businesses relying on a strong working network, the cost of a cyberattack has never been higher. In 2021, IBM estimated that organizations spend more than $4 million on average for each ransomware attack or security breach. One of the sectors most affected is the banking sector. Due to financial institutions owning private, proprietary information and data linked to consumer finances, they are a prime target for cybersecurity attacks. The top threats currently impacting the financial sector are ransomware, phishing, and Distributed Denial of Service (DDoS) attacks. According to a study from Kenneth Research: • There were more than 105 data breaches in the banking/credit/ financial sector in the U.S. in 2019. • From 2020-2021, the finance sector witnessed over 225 incidents of web application attacks. • Phishing attacks in the finance sector during the first quarter of 2022 were more than 23%. Faced with multiple threats, organizations – especially those in the banking industry – need to rethink their cybersecurity to ensure they can collect, correlate, and analyze security information from all IT systems and networks, enabling rapid detection and remediation. By Jim Mundy, Segra wvbankers.org 16 West Virginia Banker
Jim Mundy is the Director of Security Operations at Segra. Before joining Segra, he worked as a Sales Engineer, Sales Engineering Manager and Product Manager for companies in the telecommunications and managed service provider space. Jim is a Certified Information Systems Security Professional (CISSP) and has recently held Cisco professional-level network and voice certifications. He has also worked as an entrepreneur – starting an ISP, PaxNet, in Greenville, South Carolina, which he later sold to NewSouth Communications. Jim began his telecommunications career in a family-owned cable television company. Cybersecurity Solutions Solutions that could mitigate these cybersecurity issues are: • DDoS Protection: Distributed Denial of Service (DDoS) attacks can strike at any time with potentially devastating effects to your network. At a minimum, these assaults compromise your user/customers’ experience and can often shut down networks completely, resulting in lost productivity, revenue and costly bandwidth charges. With these attacks becoming a regular threat to the online business community, it pays to be prepared. DDoS protection prevents these crippling attacks before they hit your network in real time to prevent disruptions and the possibility of cybercriminals demanding a ransom to restore service. • Private Networks and Fiber Infrastructure: Public networks require encryption, a necessary overhead that reduces speed but a private network internet provides the resiliency necessary to ensure data integrity and is completely isolated from the public. Data that moves across a dedicated private network is not accessible to anyone outside the private network while in transit. Enterprise banks can also benefit from the added security of private fiber infrastructure depending on their chosen regional carrier. • Outsourcing a Security Operations Center: One of the biggest decisions companies face is whether or not to build, deploy and maintain an in-house security operations center. Companies will quickly understand that outsourcing this service will benefit them in cost savings and simplify the need for expertise, ongoing resources and future exposure possibilities. Security Operations Center as a Service (SOCaaS) provides a Security Incident and Event Management (SIEM) platform and an expert-staffed team of advanced analysts, security engineers, threat hunters, and threat intelligence managers. Both can actively monitor devices on the network edge increasingly exposed by cybercriminals getting through traditional obstacles like firewalls and antivirus software. Consider a Hybrid IT Architecture: Utilizing colocation by partnering with a reputable regional data center provider with a private infrastructure, complies with regulatory security requirements and more will help protect your data. Cyberattacks are more advanced than ever, and yesterday’s preventative tactics of simply using firewalls and antivirus software are no longer adequate. Malware can be attached to emails, banner ads, or websites and can provide access to a company’s network through an internal device. Intrusion detection and prevention systems (IDS/IPS) alone are not enough. What Should Banking Leaders Do? The number of unfilled cyber positions is kind of staggering, and finance – particularly banking – is one of the more competitive verticals, so banking executives are likely looking for people. They are also facing increasingly more stringent requirements to obtain cyber insurance or to comply with the Gramm-Leach-Bliley Act (GLBA) and Payment Card Industry (PCI) requirements. In addition, partner financial institutions may add additional cybersecurity requirements to participate in these partnerships (smaller regional banks will feel this in particular). What Should be Done Internally as a Company Create An Effective Incident Response Policy: A cyberincident response plan is critical. Not having a formal plan that includes in-house security experts and tools will cause confusion and difficulty in navigating a security incident. Plans may depend entirely on internal resources for large financial institutions. For small institutions having a reputable cyber incident response organization on retainer would be best. Regardless of organization size, regular review of the response plan and annual full tests, including tabletop exercises, should be required. Finally, a comprehensive risk review and assessment should be completed and shared with the leadership team and, where appropriate, the board of directors. Employee Training: Providing educational training to teach employees the variety of attack vectors can offer a robust defense against cybersecurity attacks. Implement Monitoring and Analytics Tools: Security leaders can implement monitoring and analytics tools that provide detective and corrective controls, including security information and event management (SIEM) and user and entity behavior analytics (UEBA) tools. These tools can provide specific indicators of compromised passwords, including concurrent logins from different locations or unknown endpoint devices that can assist detection. Overall, downtime due to data breaches or non-compliance can cripple a business, causing financial issues and impacting one’s business operations. Relying on firewalls and antivirus software is no longer enough to protect an organization against threats – a holistic approach to cybersecurity is needed. The solutions and steps mentioned above will help provide a well-rounded approach to getting effective cybersecurity within the banking industry. Pub. 13 2022 I Issue 4 Winter 17 West Virginia Banker
Six Strategies to Navigate Credit Stress By Dennis Falk, PCBB Between the pandemic and rising inflation and interest rates, the last two years have taken community banks on a wild ride. Rising inflation and the higher interest rates designed to bring inflation back to earth have influenced cash flow and the cost of goods, which can create financial stress for borrowers. Financial stress can lead to credit stress, a problem for community banks and their customers. Multiple Challenges in Credit Risk The problem isn’t just that economic circumstances may push some borrowers towards payment tardiness or default. Community banks are seeing: • Varying credit quality by market sectors and subsectors. The pandemic, rising inflation, and/or higher interest rates have hit some business areas hard. Other sectors, like those deemed essential businesses, have remained remarkably unscathed. • Difficulty discerning the creditworthiness of different potential borrowers in those sectors and subsectors. For instance, businesses in travel and tourism found pandemic-related lockdowns in 2020 and 2021 very challenging. Some of those businesses have rebounded since then, such as cruise ship traveling, which saw share prices jump after pandemic safety protocols were removed earlier this summer. Other travel-related industries haven’t been as lucky, such as the hotel sector, with lingering staff shortages that caused some hotels to close or leave a portion of rooms unsold. wvbankers.org 18 West Virginia Banker
The challenge is determining which individual businesses are good credit risks. A firm’s business sector matters, but it isn’t necessarily the last word on whether a bank should lend to it. How can your bank assess risk in ways that encourage safe growth during a volatile economic time? Here are six strategies to help: 1.Notice the industry concentrations already in your loan portfolio. Use real-world observation and whatif analysis to determine the effects of rising interest rates on the sectors and subsectors where your bank is invested. Don’t forget the importance of factors such as region and business size. Commercial real estate companies in New York, for instance, might be experiencing different conditions than commercial real estate companies in Chicago while still having long-term tenant contracts in common. 2.Collect current financial information from borrowers more frequently – at least every six months. Annual updates are no longer sufficient. Consider all your possible information sources, which might include credit scores, payment history, debt-to-income ratio, net cash flow variables derived from customer-level income, utilities, rental payments, and other debt servicing. Some financial institutions are even moving toward using real-time data to get the clearest, most up-to-date picture of a customer’s financial standing. 3.Analyze sectors and subsectors of industries to anticipate economic patterns. For instance, the pandemic affected agricultural borrowers differently. Even though both groups are in the same agriculture sector, farmers who sold to grocery stores did well, while farmers who sold to restaurants often had significant financial problems. By the same token, some businesses might find it easier than others to pass along some of their costs – a key ability to thriving when inflation trends higher. You might find that an entire sector has this ability, or you might see that within a single sector, some businesses can pass along costs, and others can’t. Advising the customers who aren’t seeing as much profit of some strategies they can leverage to increase margins will help both them and your community bank. 4.Proactively monitor your higher-risk portfolio concentrations and downgrade at-risk loans when appropriate. The earlier you see credit risk, the more you can limit nonperformance and help commercial customers restore their credit quality. 5.Stress test your portfolio. Community banks are anticipating potential deterioration in borrowers’ debt-servicing capacity, collateral values, and credit quality of their loan portfolios due to exposure to interest-rate risk and inflation risk. There will be more scrutiny from regulators around credit stress, especially those institutions exceeding regulatory guidance on commercial real estate and construction concentration. 6.Think about Current Expected Credit Losses (CECL). Consider what your loan portfolio’s credit risk profile will mean to CECL compliance, which will become mandatory for most banks next year. Taking a holistic approach toward your borrowers’ circumstances and patterns of financial behavior allows you to see potential problems, such as credit stress before they occur. Assessing these potential risks will help you make more informed decisions for the health of your portfolio and weather the current economic times. To continue this discussion or for more information, please contact Dennis Falk at pcbb.com or dfalk@pcbb.com. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management, international services, lending solutions, and risk management advisory services. Proactively monitor your higher-risk portfolio concentrations and downgrade at-risk loans when appropriate. The earlier you see credit risk, the more you can limit nonperformance and help commercial customers restore their credit quality. Pub. 13 2022 I Issue 4 Winter 19 West Virginia Banker
wvbankers.org 20 West Virginia Banker ABA Conference Focuses on Legislation, Economic Uncertainty and Digital Assets By Tanya Thomas, Baker Tilly Baker Tilly was proud to sponsor and attend this year’s American Bankers Association (ABA) conference. This year’s conference was well-represented by banks across the nation that ranged in size from small family-owned community banks to large public institutions. The conference focused mainly on the following: 1. The November elections and the ABA’s efforts to influence candidates and current congressional members on pending legislation; 2. The unpredictability of the economy; and 3. Education for banks on the emerging digital asset market and related tools to provide customers the opportunity to integrate their external digital asset relationship with their current institution. Politics and Pending Legislation The mid-term election cycle allowed ABA political strategists to discuss pending and proposed legislation affecting banks. Several pieces of legislation threaten banks, including the “Durbin 2.0 Act” – a retailer-favored effort to remove the transactional fees associated with credit card transactions and thus remove credit card rewards for consumers. The original Durbin Amendment, passed in 2010 as part of the Dodd-Frank Act, began limiting the transaction fees charged to consumers using a debit card to an amount “reasonable and proportional” to the cost of the purchase. Environmental, social and governmental (ESG) reporting requirements and limitations are also the subjects of pending legislation. Current bills circulating go as far as limiting the Securities and Exchange Commission (SEC) from any ESG oversight or enforcement on one extreme to attempts to make ESG government policy decisions through industry lending relationship restrictions on the other. The ABA is working on influencing legislators to ensure banks maintain autonomy in their lending decisions and keep compliance costs related to ESG reporting manageable. They fear that even applying fair or forced lending access restrictions to the largest banks in the U.S. will eventually trickle to the smallest institutions through “best practice” regulator creep. The Uncertain Economy Economic indicators and multiple Federal Reserve interest rate hikes, unheard of since the 1980s, are causing uncertainty in the lending and investment markets. Economists attending – including Comerica Bank’s Chief Economist Bill Adams – predict a slowing or halt to the interest rate increases in early to mid-2023. They discussed the Fed’s ability to “turn on a dime” if certain economic indicators turn negative, like if the unemployment rate increases. However, economic indicators are normally lagging, and the economy does not respond at the same pace as a Fed decision – creating an unpredictable future for banks. While institutions remain well- capitalized and credit appears strong, the industry saw a decline in deposits in the second quarter of 2022. Half of community banks reported average asset terms of three years or more. Eventually, the interest rate increases will broadly affect the commercial and consumer markets, although the increases are not expected to immediately impact the residential lending market since rates have been at historic lows for an unprecedented period. Other downside risks discussed included nonfinancial corporate borrowing and housing affordability, which could limit consumer spending.
Tanya is a partner of the commercial services practice of Baker Tilly. She is a widely experienced tax professional in corporate, individual and flow-through taxation. She is also experienced in acquisition and merger diligence, accounting and tax planning. Tanya is an industry expert in financial services. Pub. 13 2022 I Issue 4 Winter 21 West Virginia Banker The Digital Asset Era Numerous conference sessions were designed to educate bank leaders on blockchain, encryption, digital assets – including cryptocurrency – and custodial market opportunities. Attendees were informed about the potential for a federal government digital asset – a Central Bank Digital Currency (CBDC). Vendors with platforms that tie to a bank’s main customer reporting systems and dashboards to allow customers to view and get funds back and forth to an existing trading platform were prevalent at the conference. Banks discussed the risks of adopting or avoiding these new platforms, including customer satisfaction, deposit run-off and regulatory risk. On September 30, the ABA submitted public comments to the Basel Committee on Banking Supervision concerning prudent treatment of banks’ digital asset exposure. They listed three key principles that should guide supervisory and regulatory approaches to digital assets: 1. the need to develop a broad understanding of key features in many digital assets; 2. a willingness by regulatory and supervisory authorities to permit prudent innovation; and 3. the benefits of conducting a significant share of the digital asset market through supervised financial institutions. Other Insights During the conference, FDIC Acting Chairman Martin Gruenberg spoke on the effects that more and more expansive storm damage will have on the credit market, banks, and lenders. The risks include a smaller insurance reimbursement market and potentially more loan default. He asked banks to consider climate-related financial risk policies – especially those banks with concentrated geographical risk. He did not expect the Fed’s direction to affect bank capital. Several financial institutions have joined the ABA’s effort to stop bank scams and phishing. The main focus of the ABA platform – banksneveraskthat.com – is to educate people on how to avoid losing money to scammers imitating banks. The website covers important information about scam safety and phishing and includes several videos – and even a game – providing helpful tips and information. Daniel D. Robb, President and CEO of Jonesburg State Bank in Jonesburg, Missouri, was introduced as the new Chair of the ABA. The ABA’s choice of a new leader from a small family-owned financial institution (less than $250M in assets ) shows the ABA’s re-focus on the community aspects of local banking. Other officer appointments included Chair-Elect Julieann M. Thurlow of Reading Cooperative Bank (Reading, MA), Vice Chair John C. Asbury, CEO of Atlantic Union Bancshares Corp. (Richmond, VA), and Treasurer Carissa Rodeheaver, Chairman President and CEO of First United Bank & Trust (Oakland, MD).
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