BANKER WEST VIRGINIA WINTER 2023 PLEASANTS COUNTY BANK A Legacy of Strong Leadership Succession EXPLORING BANKERS’ PRIORITIES AND PERSPECTIVES FOR 2023
6 CONTENTS ©2023 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. 4 President’s Message I Marvel at My Good Fortune By Mark Mangano, WVBankers President & CEO 6 Pleasants County Bank A Legacy of Strong Leadership Succession 10 Rising Interest Rates May Shut Some Community Banks out of FHLB Funding By Dennis Falk and Jo Ellen McKinley, PCBB 12 Why Should I Hire a Managed Security Services Provider (MSSP)? By Jay Mallory, ImageQuest 14 Corporate Transparency Act: New Beneficial Ownership Reporting Creates Efficiencies for Banks By Drew A. Proudfoot and Amy J. Tawney, Bowles Rice 16 Ludwig on CRA Revamp, Bank-Fintech Scrutiny, and Crypto’s Future By Rob Blackwell, IntraFi 18 Exploring Bankers’ Priorities and Perspectives for 2023 By Shane Ferrell, CSI 20 ALM in 2023: Revisiting Economic Value of Equity (EVE) By Jeffrey F. Caughron, The Baker Group, LP 22 CECL Model Validation By Kelly Shafer, CPA, Suttle and Stalnaker, PLLC 24 ICBB Launches Digital Content Source for Community Bankers — The Correspondent By Independent Correspondent Bankers’ Bank (ICBB) 26 Plaintiffs Pursuing Increased Class Action Claims for Overdraft Fees and Charges Against Customers By Bryce J. Hunter and Joshua L. Jarrell, Spilman Thomas & Battle, PLLC 29 2023 Calendar of Events 24 2 West Virginia Banker
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
I marvel at my good fortune. When I was a child, I do not remember dreaming about growing up to be a banker or drawing pictures of vaults. Even in high school when my entrepreneurial father started a tiny bank in my hometown, I had no thoughts of ever working there. Through a significant amount of serendipity, I had the opportunity to lead my hometown bank and enter the community banking world. In doing so, I was admitted to a very select society composed of the most kind, thoughtful, generous, friendly, principled, and selfless professionals to be found anywhere. The West Virginia Bankers Association was my gateway to that society. My admission to the banker society provided me with friendship, mentorship, counsel, and resources that proved invaluable to me both personally and professionally. The list of bankers from banks large and small to whom I owe a debt of gratitude is a long one. The West Virginia Bankers Association is a critical resource for all banks serving West Virginia businesses, citizens, and communities. Through thoughtful, consultive and vigorous advocacy, the Association has protected and improved the banking environment in West Virginia. It has helped meet bankers’ changing professional development needs with innovative programs. Perhaps most importantly, the Association strives to increase collegiality among competing banks and bankers to improve the industry’s quality and bankers’ ability to work together for the benefit of all West Virginians. To say that I am thrilled to begin my role as the Association President & CEO and participate in the Association’s evolution as a premier banking association is an understatement. I am humbled to join the leadership traditions defined by Sally Cline and Joe Ellison. Through their professionalism and passionate commitment, they transformed the Association and enhanced the banking environment in this state. I am grateful to join the Association’s professional team who is so committed to efficiently, effectively, and vigorously working every day to create value for our members and the State of West Virginia. I am proud to work for an industry that I love and that creates so much good in the state. I am honored that the Association board has entrusted me with a leadership role in the Association. I am committed to earning that trust each day and hope you will join me in helping to write the next chapter in the Association’s proud history of service to bankers, communities, and all West Virginians. Sincerely, Mark Mangano I am grateful to join the Association’s professional team who is so committed to efficiently, effectively, and vigorously working every day to create value for our members and the State of West Virginia. PRESIDENT’S MESSAGE I Marvel at My Good Fortune By Mark Mangano, WVBankers President & CEO 4 West Virginia Banker
PLEASANTS COUNTY BANK A Legacy of Strong Leadership Succession On Dec. 21, 1896, W. E. Chilton, Secretary of State, issued a charter to the Pleasants County Bank with an authorized capital of $25,000. Incorporators were Newton Ogdin, Dr. A. S. Grimm, Dr. George T. Gale, I. O. Reynolds, C. C. Schauwecker, John Schauwecker and D. W. Reynolds. At the time, St. Mary’s was a small town of 800 inhabitants, and the town had few public improvements: no city water, sewers or electricity. The bank opened for business on March 15, 1897, after selling stock, securing equipment, banking rooms and setting up necessary books. They opened for business at 217 Second Street just below the old Post Office building. Over the years, the town continued to grow with paved streets, a water and sewerage system, good schools and churches, and a bright future. And Pleasants County Bank grew along with it, providing deposit and loan services to the community. From a humble beginning, the Pleasants County Bank has grown into a strong financial institution. The bank and its board take pride in the part they have played in the development of their community, and they look forward with confidence. One of the things that makes PCB unique is that its charter remains true to the first bank that opened in 1897 – its ownership has been continuous, and a family member of the original founder has always served on the board. In a world where true community banks are decreasing in numbers and charters are sold, the legacy of PCB is really in its succession planning willingness of its leadership to put the bank and the needs of their community first. As Pleasants County Bank completes over 125 years of service to the St. Mary’s, Belmont and surrounding area, Mike Nelson, President of the bank for the past 20-plus years, retires and Mark Bias takes the reigns. WVBA had the opportunity to meet with both gentlemen and talk about their perspectives on community banking, PCB’s future, and their role in it. 6 West Virginia Banker
MIKE NELSON Mike Nelson served as President of PCB from Jan. 1, 2001, to this past fall, completing just over 20 years. Mike’s professional career spans 50 years, starting from when he applied for his first banking job at Union Trust Bank in Parkersburg during winter break while in college. He loved the business from day one and transferred to evening college classes so he could work during the day. In 1997, he joined PCB, when their then President, Leo Tullis, was looking towards retirement and wanted to hire and mentor his replacement. Q: What inspired you to become a banker? Banking wasn’t a conscious career choice. I loved math. When I enrolled in college, the goal was to eventually find a job in the accounting field. However, banking found me through a job during my winter break. I loved the industry immediately and knew I had found my career path. Q: What has been the most enjoyable part of your time at PCB? Running a community bank is just like running a small business – you get to be involved in so many things, which has been wonderful. By far, however, have been the relationships that I have with the customers of the bank. I have been fortunate; my career in banking has been in the same community, so my relationships with my customers span decades. As community bankers, we have boots on the ground, so to speak. I have personally helped businesses start and watched them grow and thrive and be passed on to the next generation. In many cases, we have multi-generational banking relationships and it’s not something that I have ever taken lightly. It’s been a privilege to be part of our customers’ lives. Q: What has changed in the industry since you started? I think you can sum it up in two words: the computer. Technology has changed the landscape. Back when I started in banking, we had people that filed checks in filing cabinets. It was labor-intensive and took time. The technology changes have all happened in the last twenty years. It’s been an incredible thing to have been a part of. ATMs are critical. Websites. Online banking. Bill Pay. Remote deposit. All these things opened up opportunities for community banks. As people leave small towns for college or job offers, they don’t need to leave their banking relationship behind – our customers can bank with us regardless of where they go. That’s been a game-changer. Sally Cline (WVBankers President & CEO), Mike Nelson, Mark Mangano (WVBankers Incoming President & CEO) Mike Nelson accepting his 2019 – 2020 WVBankers Chairman Plaque 7 wvbankers.org
Mike Nelson (WVBankers 2019 – 2020 Chairman) presenting Geoff Sheils (WVBankers Chairman 2018 – 2019) with the Chairman Plaque 8 West Virginia Banker Q: What would you say the draw is for careers in banking for younger people? Well, as an industry, we – like so many other industries – need to look towards attracting talent into the field. When I started out in banking, the path was pretty much an upward trajectory: you started in a lower position and grew within the ranks. Today, young people are coming out of college well-educated and banking offers many career paths, such as jobs in finance, IT, lending, and investments. The list is long, the opportunities are there, but many times overlooked, as banking may not be top of mind. I think we need to do a better job of educating young people about the field. Q: As you look back at your career, what’s the mark you made? Back in 2017, we built a new main office and spent a lot of money. After 115 years at the 323 Second Street home, the new main office facility opened at 215 Washington Street. PCB wants to be a part of our community for a long time to come, and I think this investment helps us to do that. Overseeing this project, was an especially enjoyable part of my career. I also, after 20 years, retired as President of the Pleasants County Development Authority, focusing on local economic development. We were able to pull off some very nice projects. I would also say the relationships I was able to form and retain. For those of us that have been mentored – and I was by some of the best – I think it becomes a personal mission to give back and mentor someone else. I would like to think that I made a difference in those I mentored. Q: Plans for retirement? My wife, Laura, and I got side-tracked, as did a lot of people through COVID. The “bucket list” is being revived and we are traveling. MARK BIAS Mark Bias became the new President and CEO of Pleasants County Bank this past fall (November 2022), becoming the eleventh President and CEO in the 125-plus years of the bank. Mark attended West Virginia University, where he received a liberal arts degree, before completing his Master’s degree in international business at the University of South Carolina. He began his career in banking when he took an internship at Pittsburgh National Bank in the early 1980s and has been a commercial banker most of his career. Q: Describe Mike’s leadership and dedication to PCB and the banking industry? My first comment would be that his wealth of knowledge as a banker is very broad, running the full gamut from retail and consumer banking to large corporate banking. His “analytics vs. horse-sense” approach has produced exemplary results over the years. Mike is detail oriented; he gets into the weeds and is not the least bit afraid to jump into the fray. Mike is so knowledgeable about the inner workings of PCB – his knowledge is basically off the charts. He brings something to the table that can’t be duplicated in less than decades. Q: What are some of the things that stand out about Mike’s career? His relationships. He’s a relationship guy and it shows. He drives a tight ship, yet he’s pleasant and fun to be around. He has consistently developed excellent, long-term relationships with his customer base, employees, and community leaders. At the same time, he’s a family man, completely dedicated to his wife and kids. He’s been a great resource to me, personally, which I appreciate. I think that in addition to his relationship development, one of the things he’s most proud of is overseeing the construction of our new building. It was a big project and one that was difficult to navigate. Q: What do you see as your contribution as you take over the reigns at PCB? This bank is unusual. We have over 125 years of continuous independent history, which I don’t feel is an accident. It’s the result of careful planning and putting the right people into leadership – those that can act in the now while preparing for the next leadership succession. I see myself as a bridge, if you will, to the future. My job is to be a good steward of the history of this bank, an active participant in the current success while mentoring the talent we have into future leadership. Sadly, the talent pool in our industry is thin, so being generous and willing to mentor talent is paramount. My leadership style is very different from Mike’s, as I’m sure Mike’s was different from his predecessor. I think the trick is to add to what is, make your mark and have a hand in the future by nurturing in-house talent. I am looking forward to the next few years and adding to the legacy of PCB.
Measuring capital value can sometimes be challenged by the type of scale that is used — take the tangible capital rule that determines if a bank qualifies for Federal Home Loan Bank (FHLB) advances. Created in 1932, the FHLB system promotes its role as a source of liquidity to banks, particularly during times of economic stress. In order for a bank to qualify for those FHLB funds and liquidity resources that might otherwise be unavailable to community banks, that institution must meet FHLB’s criteria for tangible capital levels. This includes stock assets that may not yield the minimum required amounts under current market rates. That rule is under stress right now as a result of the recent economic conditions, rising interest rates, and low yields that are partly responsible for causing those negative tangible assets. The situation has started to push some community banks below tangible capital requirements, which would then exclude them from FHLB advances. That could have serious consequences for those institutions. Financial Institutions Ask for Rule Modifications While the problem is thought to have an immediate impact on only about 100 community banks, it is serious enough to draw the attention of the entire financial community. In a letter to federal regulators, 77 financial organizations asked for the rule to be modified, substituting Tier 1 Capital (also referred to as regulatory capital) for tangible assets. That should be enough to ease the situation. Among those who signed are the American Bankers Association and the Independent Community Bankers of America. The primary culprit behind the problem is the rapid rise in interest rates, which has hit some community banks hard, undercutting their asset values enough to turn their tangible capital levels negative. When that happens, community banks are cut off from low-cost FHLB advances, which can lead to an immediate liquidity crisis unless they get a waiver from regulators. The continuing rise in interest rates could push more banks over the line. Some in the financial world are warning that the issue could lead to a fast-spreading liquidity crisis. Blame It on the Pandemic and the Rise in Deposits As bankers explained in their letter, banks took in a flood of deposits during the pandemic, and much of that was invested in short-term securities such as treasuries. As interest rates rose, however, the value of those treasuries and other securities dropped. Bigger banks were more diversified, but many community banks have been caught in the squeeze, leading some to have to place a negative value on their tangible assets. The banks may be perfectly sound, but the tangible asset calculation makes them look like they are in trouble. Viewed one way, the tangible capital rule is doing what it is supposed to do: ensure that banks with dodgy financials don’t get access to FHLB financing. But as the current situation makes clear, tangible assets may not be the best way to evaluate banks in the current economic climate. About a decade ago, regulators such as the Fed and the FDIC adopted new rules that used Tier 1 Capital as the primary measure of soundness, but the FHLB continued to use tangible capital. Both methods offer a snapshot of a bank’s condition. But Tier 1 capital casts a wider net and, according to the financial organizations, provides a better reflection of actual conditions. In addition, using Tier 1 would likely alleviate the liquidity crisis for affected banks. How the Federal Housing Finance Agency (FHFA), the FHLB's regulatory agency, will respond remains to be seen. The FHFA could temporarily waive the rule, change it, or leave things the way they are. Meanwhile, a growing cross-section of community banks wait anxiously to see if they will continue to have access to FHLB financing. To continue this discussion or for more information, please contact Dennis Falk or Jo Ellen McKinley. 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. RISING INTEREST RATES MAY SHUT SOME COMMUNITY BANKS OUT OF FHLB FUNDING By Dennis Falk and Jo Ellen McKinley, PCBB Dennis Falk SVP & Regional Manager for PCBB pcbb.com | dfalk@pcbb.com Jo Ellen McKinley SVP & National Business Development Manager for PCBB pcbb.com | jmckinley@pcbb.com 10 West Virginia Banker
What do you really know about your bank’s data? Specifically, do you know how well it’s protected? Where it’s housed? And who has access to it? When your bank collects data from customers – whether it’s as simple as name and address or more complex financial information – you need proper security measures to protect that data. With an increase in the number of cybersecurity regulations and the growing number of customers in your enterprise, it can be hard for small community banks to keep their data secure. That’s where an MSSP can help. As an outsourced managed security services provider, an MSSP can handle all your complex cybersecurity needs and help with compliance requirements. Whether implementing a pen test (penetration testing), needing documentation to show an examiner, or enhancing your cybersecurity measures, an MSSP can help. What Is an MSSP, Anyway? A managed security services provider (MSSP) is a third-party company that your bank hires to provide digital security. Typically, an MSSP has a deeper bench of system administrators and security engineers than its clients. An MSSP likely also has partnerships with security vendors that are more costeffective than what a single client hiring those vendors would face. And an MSSP has systems that provide better alerting and faster response than what many clients could achieve on their own. Services provided by MSSPs include: • Managed firewall protection • Threat detection and response • Cloud-based security measures to improve the cyber protection – and productivity – of off-site or remote workers. • Management of security risks • Data and information security • Compliance with industry standards and regulations What’s the Difference Between an MSP and an MSSP? Managed services providers (MSP) are also outsourced IT solutions for companies. However, MSPs offer generalized IT and network support, such as VoIP, cybersecurity training, cloud setup and management, and some security solutions. An MSSP provides specialized security solutions, focuses on compliance requirements, and handles incident response. Another significant difference between the two is the operation center of the companies. MSPs operate from a network operations center (NOC), where they can monitor and manage your network. MSSPs add a security operations center (SOC) to provide cloud, network, and email security. Why Do I Need an MSSP? Your bank is a prime target for hackers. Outsourcing some of the security WHY SHOULD I HIRE A MANAGED SECURITY SERVICES PROVIDER (MSSP)? By Jay Mallory, ImageQuest 12 West Virginia Banker
monitoring to an MSSP provides a host of benefits, including: • Increase network security bandwidth: With real-time monitoring and management of your network, you and your employees can focus on serving customers, not on whether your data is secure. • Prevent cyberattacks: A managed security provider helps prevent cyberattacks by implementing current best practices. An MSSP offers services such as intrusion detection, Zero Trust architecture, Vulnerability Management, and threat monitoring. These additional layers of security in your network make it harder for cybercriminals to get in. • Take the pressure off your already overwhelmed team: When your bank is growing or inundated with routine IT tasks, it can be hard to find enough time to focus on security logs, respond appropriately to alerts, or even implement improvement projects. MSSPs alleviate some of that pressure by taking over some security tasks. • Enhanced technical expertise: Whether you have an entire IT department or one tech person running the show, having a backup team can be an asset to your organization. Perhaps there’s a problem too advanced for your internal staff. An MSSP can help resolve the issue. What If I Already Have an IT Department? No problem! MSSPs are designed to work in conjunction with your IT department. While your IT department handles your bank’s day-to-day responsibilities and future business initiatives, a managed security services provider can keep a close watch on your network. In addition, if someone on your IT staff is sick, goes on vacation, or leaves your company, an MSSP can fill that cybersecurity gap to prevent vulnerabilities. In addition, MSSPs may have additional knowledge or capacity that your IT department or MSP doesn’t have. This could apply, for example, to the vast Log4j vulnerability seen in December 2021. An MSSP also could assist with the asset management documentation examiners are seeking, or help you keep your Vendor Management Plan current. An MSSP also can assist with routine tasks, such as keeping backups current and protected, managing security alerts, and providing other documentation examiners seek. Banking is a Highly Regulated Industry. Can an MSSP Still Help? An MSSP security company shines brightest in industries with strict regulations. For example, during an examination, you may need to show Jay Mallory has been a business leader in the Louisville area since graduating from Western Kentucky University. To contact Mr. Mallory, he can be reached at jmallory@imagequest.com. your business continuity, disaster recovery, and incident response plans. In addition, the examiner will want to see that you have tested the plans and have proof of implementation. Many small community banks don’t have the bandwidth to adequately prepare these plans and run regular tests on them. But with an outsourced managed security provider, you would have the documentation for the examiner to prove you have the plans to meet business continuity requirements and that penetration testing, vulnerability testing, and tabletop exercises are completed. The financial industry isn’t the only regulated industry where an MSSP can help. If you have customers in healthcare, insurance and benefits, legal services, or non-profit organizations, an MSSP can guide them through the appropriate tests and plans and ensure they remain compliant with industry regulations – and remain good risks for your bank. Finally, having an MSSP on board can help you with cyber insurance renewals and even examiner questions on your bank’s security posture. The better MSSPs include professionals who can sit with you during examinations and answer questions to examiners’ satisfaction. Not sure if your bank needs more security measures? A penetration test, in which you prearrange with an MSSP to see if its “hackers” can penetrate your defenses, might be a first step. This one-time expense can give you a report on areas where you might need to make security improvements. To learn more, call (888) 665-4362 or fill out a form at www.imagequest.com/contact. 13 wvbankers.org
Money laundering has posed a substantial threat to the U.S. economy for decades and financial institutions have served as a front line of defense under anti-money laundering regulations such as the Customer Due Diligence Requirements for Financial Institutions rule (the “CDD”) issued by U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Banks are all too familiar with chasing down information on owners with 25% or more of the equity interests in legal entity customers and natural persons with “significant responsibility to control, manager, or direct” a legal entity customer. However, beginning Jan. 1, 2024, the previously enacted Corporate Transparency Act (the “CTA”) requires certain business entities, each defined as a “reporting company,” to self-report similar information to FinCEN, creating an opportunity to ease the information gathering requirements of banks. Who Must Report? A “reporting company” includes any corporation, limited liability company, or other similar entity that is (i) created by filing a document with a secretary of state or similar office under the law of a State or Indian Tribe, or (ii) formed under the law of a foreign country and registered to do business in the U.S. by filing a document with a secretary of state or similar office under the law of a State or Indian Tribe [31 U.S.C.A. § 5336(a)(11)]. The CTA also provides a list of 23 categories of entities that are exempt from reporting requirements under the CTA. These exemptions exist because the entities are already highly regulated or subject to similar ownership reporting requirements. Banks, federal and state credit unions, bank holding companies, savings and loan holding companies, entities registered with the CORPORATE TRANSPARENCY ACT: New Beneficial Ownership Reporting Creates Efficiencies for Banks By Drew A. Proudfoot and Amy J. Tawney, Bowles Rice
Securities and Exchange Commission, and other categories of financial services companies are notably included in the list of entities exempt from the reporting requirements. What is in the Report? A reporting company must identify each (i) beneficial owner of the reporting company, and (ii) applicant of the reporting company. Beneficial owners are individuals that exercise “substantial control” over a reporting company or own or control 25% or more of the ownership interests of the reporting company. Company applicants are individuals that directly file the document that creates the reporting company or are primarily responsible for directing or controlling the filing of the relevant document by another, if one or more individual is involved in the filing. The following information is required for each beneficial owner and applicant: (a) full legal name, (b) date of birth, (c) current residential or business street address, (d) unique identifying number from an acceptable identification document (passport, driver’s license, etc.), and (e) an image of the identification document. Individuals may obtain a unique FinCEN identifier by reporting the information required above directly to FinCEN and thereafter may submit the FinCEN identification number in lieu of the requirements above. The reporting company must also report the following information about itself: (A) full legal name, (B) any trade names, (C) complete current address (excluding PO boxes or corporate formation agents), (D) state, tribal, or foreign jurisdiction of formation, (E) the U.S. jurisdiction where a foreign reporting company first registered, and (F) Taxpayer Identification Number. When is the Report Due? The formation/filing date of the reporting company determines when the CTA report is due. If the reporting company was formed/registered before Jan. 1, 2024, the reporting company has until Jan. 1, 2025 (one year after the effective date) to complete the report; provided, however, information regarding company applicants is not required. If the reporting company is formed/registered after Jan. 1, 2024, the report must be filed within 30 days of the earlier of the date it received actual notice of its creation/registration, or the creation/registration of the reporting company becomes public. Why Does the CTA Benefit Financial Institutions? FinCEN is required to store the CTA report information in a secure nonpublic database known as the Beneficial Ownership Secure System (“BOSS”). A financial institution subject to customer due diligence requirements like the CDD or other anti-money laundering regulations may request information from BOSS to facilitate the bank’s reporting compliance; provided, however, the bank must obtain the reporting company’s consent to request the information. BOSS stands to not only help reduce fraud and criminal activity in the U.S. economy through information availability, but also simplify and significantly reduce the information reporting burden on the financial services industry. For avoidance of doubt, the CTA does not eliminate reporting requirements of financial institutions regarding their customers, but simply requires those customers to already report that information in a format more readily accessible to financial institutions. The effective date of the CTA is less than a year away, but banks still have plenty of time to prepare to utilize the CTA to their advantage. Financial institutions should review and revise existing privacy policies and customer agreements to provide for bank access to CTA information, revise loan document forms to include representations, warranties, and covenants related to the CTA, and provide internal training regarding the requirements and opportunities presented by the CTA. A financial institution subject to customer due diligence requirements like the CDD or other anti-money laundering regulations may request information from BOSS to facilitate the bank’s reporting compliance… Drew A. Proudfoot is a partner in the Morgantown office of the regional law firm Bowles Rice. He specializes in corporate and financial services transactions, including commercial lending, mergers and acquisitions, and business succession planning. Contact Drew at (304) 285-2566 or dproudfoot@bowlesrice.com. Amy J. Tawney is a partner in the Charleston office of Bowles Rice. She focuses her practice on banking law, mergers and acquisitions, securities law, and regulatory matters. Contact Amy at (304) 347-1123 or atawney@bowlesrice.com. 15 wvbankers.org
LUDWIG ON CRA REVAMP, BANK-FINTECH SCRUTINY, AND CRYPTO'S FUTURE By Rob Blackwell, IntraFi Bankers aren’t exactly thrilled with the current proposal to reform the Community Reinvestment Act. They’ve publicly criticized much of it, from the examinations that would likely become more stringent; to online lending changes that could harm low- and moderate-income communities; to the timeline for finalizing and implementing the rule. Trade groups have even warned about filing a lawsuit if the proposal is passed in its current form. To better understand the proposal and how it could be modified to better suit the industry, I sat down with Eugene Ludwig for an episode of Banking with Interest. Gene led the last successful effort to reform the CRA as comptroller of the currency under President Clinton. He explains why the current proposal should be reproposed – and dramatically simplified. He also talks crypto, how to prepare for a possible recession, and more. What follows is our conversation, edited for length and clarity. What’s your view of the current CRA reform proposal? It’s well-intentioned, but long, complex, and hard to understand. It should be simplified materially and kept broad. This is a complex country, and different geographic areas need different forms of assistance. A one-size-fits-all approach won’t work. Another issue is that CRA is oriented toward good economic times. But institutions face difficult circumstances all the time that aren’t their fault. Additionally, low- and moderate-income communities typically have more problems in bad times than other communities, and they emerge from those bad times more slowly. Bankers should get credit for assisting during these periods (and for anticipating them). Under the current law, they don’t. 16 West Virginia Banker
Some industry players are so angry about the proposal, they’ve threatened to file a lawsuit. It’s tragic. Regulators take pride in what they do – these are good people – but when you bring the OCC, Fed, and FDIC together, each agency has its own proposal. Then they start to negotiate, and before long, each agency needs to accept the other agencies’ proposals if it wants the others to accept theirs. So they end up mashing three proposals together. When I was comptroller, I simply called Larry Lindsey at the Federal Reserve and invited him to my office to write the rule. When we were done, we had a rule that was relatively brief and easy to comprehend. The current proposal seems like an attempt to give everybody what they want, but it’s too long and complex. Do you think they need to repropose it? I do. What are some nonobvious things banks should be doing to prepare for a recession? First, determine which borrowers to work with. Community bankers have a lot of authority. People listen to them. If they tell a borrower to dial things back and ensure they have enough cash to pay their loans on time, the borrower will listen in most cases. Bankers know better than anyone how to manage through these periods. Second, avoid any undue conflict with regulators. When regulators ask questions, banks should think hard about their answers. They should be honest, of course, but thoughtful. Regulators too often aren’t clear in written communications, and that lack of clarity can lead bankers to interpret things in an overly rosy manner. But when regulators write things, they don’t intend to be rosy. Any time there’s ambiguity, banks should clarify what the regulator wants. Third, clean up any outstanding MRAs and MRIAs. Letting them drag on won’t make them go away, and as the pile gets bigger, it becomes harder to deal with – especially during down cycles, when bankers have more to do. It could also make the regulators come out with public orders and ceaseand-desist and all the things that make life more difficult. Crypto markets are in turmoil. Democrats say the instability supports why U.S. regulators have been skeptical of the relationship between banking and crypto. Republicans say that if regulators were less skeptical and offered guidance on relationships between banks and crypto firms, the crypto markets would have more oversight and be safer. What’s your take? Crypto isn’t going away. The two big questions are: 1) how big is it going to be? and 2) what are the functionalities that will genuinely be beneficial to end-use consumers and financial institutions? Crypto may be faster for certain types of transfers, but maybe traditional money-transfer mechanisms used by the Fed and others can adapt to compete. Regulators should begin crafting rules for crypto firms, but keeping banks out of crypto altogether is a bad idea. Banks should be able to experiment with it. Otherwise, nonbank players will end up dominating the market. We ought to watch the space closely and be flexible, and we need sensible standards that apply to banks and nonbanks alike. What should banks be doing as calls for a CDBC get louder? Is it possible to have a CBDC that doesn’t lead to disintermediation? A CBDC would be very bad. What banks should do – and I think the trade associations are already moving in this direction – is to come up with standards that have no give. They should be clear that they don’t want the Federal Reserve or another federal entity to become a bank. It’ll never work, it’ll be inefficient, it’ll create unfair competition, and it’ll be terrible for the country. It’s also unnecessary because banks are already performing the intermediation function just fine. Over the years, you’ve talked a lot about right-sizing regulations. But many small banks contend that rules created for bigger players are drifting down to them. It’s true, and if you look at the bank rulebook, it’s enormous! Many of the rules are out of date and so complex a normal person can’t understand them. Yet they’re still applied. Federal regulatory agencies should be spending as much time trying to simplify the rules as they do adding new ones. They should draft rules that anybody can read and understand and eliminate redundant rules that make life unnecessarily difficult, particularly for community and regional banks. Rob Blackwell is Chief Content Officer and Head of External Affairs for IntraFi. He previously served as the Editor-in-Chief of American Banker and has covered financial services as a journalist for nearly two decades. He can be contacted at rblackwell@intrafi.com. 17 wvbankers.org
To find out how bankers will confront challenges associated with a changing technology landscape, digital acceleration, cybersecurity, regulatory changes and more, CSI surveyed banking executives from across the nation about their strategies and priorities for 2023. The results of this annual survey are outlined in an interactive executive report and reflect both familiar challenges and emerging opportunities while also revealing the strategies that community institutions will deploy to stay competitive. In this article, we explore the top industry issues selected by bankers. What Did Bankers Identify as Top Issues? The CSI survey explored the challenges facing bankers this year, asking respondents to identify which one issue will have the greatest influence on the industry in 2023. Bankers generally agreed on the industry’s biggest concerns in the coming year: • Retaining and Recruiting Employees: More than one-third (34%) of bankers described this as their biggest issue this year, rising from 21% going into 2022. Organizations across industries are feeling the ongoing effects of the Great Resignation, and banking appears to be no exception. However, the outflow of workers from the service and tech industries, paired with growing interest from young applicants, creates an opening to attract customer-oriented and tech-savvy talent. To attract this influx of fintech talent on the market, many financial institutions are focusing on improving the employee experience, upping their compensation package game and even offering remote or hybrid work. • Regulatory Change: With 27% of bankers selecting this as their top issue, regulatory change remains of constant significance to financial institutions. While there is a host of regulatory issues to consider, several of which are outlined in the executive report, bankers are most concerned about overdraft fees and potential UDAAP violations (74%), followed by cybersecurity compliance (68%). In addition to existing rules and regulations, the Current Expected Credit Losses (CECL) methodology goes into effect for the final group of financial institutions this year. Also, everyone is anxiously awaiting the final rule on Section 1071 of the Dodd-Frank Act and the Financial Crimes Enforcement Network’s (FinCEN) beneficial owner database. • APIs/Open Banking: Open banking APIs are on the minds of financial institutions everywhere, evidenced by this issue rounding out the top three at 17%. APIs allow separate systems to communicate with one another and determine what information is shared between them. Using open APIs enables third-party developers to build applications and services around an institution. Open banking APIs offer a host of benefits, including optimization of existing systems and integration with new technologies. Bankers selected platform banking (39%) as the most popular open API strategy for 2023. This selection is unsurprising, given that most banks rely on third parties to provide digital technologies like digital account opening, digital loan origination and payments technologies. Banks are also embracing Banking as a Service, a component of the open banking strategy, which allows them to partner with other institutions, fintechs or nonfinancial institutions to quickly launch digital banking products and payment solutions, including mobile payment services and purpose-driven cards. Bankers’ Top Technology Priorities for 2023 Financial institutions must strategically choose where to use their limited technology resources to ensure they meet the demands of a tech-savvy population. This year’s results reveal where surveyed bankers plan to deploy their valuable dollars: • Digital account opening: Like the results from 2021 and 2022, digital account opening topped the list of bankers’ technology priorities at 55%. The continued push for improved digital account opening and digital lending reflects an environment in which many non-traditional institutions have created a seamless digital EXPLORING BANKERS’ PRIORITIES AND PERSPECTIVES FOR 2023 By Shane Ferrell, CSI 18 West Virginia Banker
experience for customers. In today’s digital-first world, customers expect a world-class experience when opening a new account – making a customercentric approach to digital account opening a priority for all institutions. • Data analytics and reporting: Bankers are also aware of the capability of data and analytics to inform their strategic investments, with 47% prioritizing this technology. Only 29% of bankers selected reporting as a priority in 2022, suggesting that data will be increasingly leveraged for decision-making in the coming year. • Digital lending: 41% of bankers favor digital lending, and this technology has secured the third ranking for the past three years. In addition to improving the overall user experience and enabling quick loan origination, digital lending services improve efficiency, ease compliance and support efforts to use business intelligence and analytics. • Customer relationship management (CRM): While only 34% of respondents chose CRM as a technology priority, banks shouldn’t overlook how an effective CRM empowers them to meet customer needs. As institutions expand their digital presence, it’s imperative for them to maintain their sense of community and customer familiarity. An integrated CRM provides the means to build and maintain a strong connection with individual customers who previously relied on face-to-face interaction. Further, a truly integrated CRM does the same thing for the increasing universe of digital-first customers. Revealing the Greatest Cybersecurity Concerns As a prime component of our country’s critical infrastructure, financial institutions are targets of cyberattacks perpetrated by criminal and state-sponsored hacking organizations. Because of this, cybersecurity concerns continue to loom large for bankers. Bankers selected P2P or other digital fraud (29%) and data breaches (23%) as the top threats for 2023. As the risk of P2P or other digital fraud grows, fraud detection systems built with artificial intelligence (AI) represent a significant opportunity for banks. Using fraud systems with AI allows banks to identify incidents of fraud in real time and expedite investigations. While the financial services industry has made great strides in shoring up security measures to combat cybercriminals, security-minded consumers who follow best practices help mitigate risk and strengthen protection. Cybersecurity training is another strategy to prioritize, as banks benefit significantly from an informed customer base. Want the Full Results of the 2023 Banking Priorities Survey? As your bank navigates the changing technology landscape, explore the results of the 2023 Banking Priorities Survey by scanning the QR code for insight on the latest strategies and trends relating to modern banking, cybersecurity, compliance and more. Shane Ferrell is Vice President of Product Strategy at CSI. https://csi.foleon.com/bp-2023-doc/bp23/?utm_ source=association&utm_medium=article&utm_ campaign=wp_fy23_01_bankingpriorities2023 19 wvbankers.org
Bank balance sheets were adversely affected in multiple ways by the speed and magnitude of the rising rate environment in 2022. Most noticeable was the effect on investment portfolios which experienced significant depreciation in market value, some to the point where capital became severely stressed and liquidity access was restricted. The problems had nothing to do with asset quality, poor lending practices or anything credit-related. It was entirely a function of the mathematics of rising interest rates. Even banks that owned nothing except U.S. Treasuries experienced heavy unrealized losses. This fact and the lessons learned point out the critical importance of reliable tools and sound processes for managing liquidity and interest rate risk. Asset/liability management (ALM) is the coordinated process of defining, measuring, and managing the financial risks faced by bank balance sheets, including price risk, liquidity risk, and interest rate risk. Interest rate risk specifically is the risk to earnings or capital arising from movements in interest rates. Bank managers most often focus on the risk to earnings and income rather than capital. Capital at risk, however, is an important point of focus for sound macromanagement, and it’s something that warrants a deeper understanding. Managing capital at risk involves the measurement of the economic value of equity or EVE. This concept gauges ALM IN 2023: Revisiting Economic Value of Equity (EVE) By Jeffrey F. Caughron, The Baker Group, LP 20 West Virginia Banker
Asset/liability management (ALM) is the coordinated process of defining, measuring, and managing the financial risks faced by bank balance sheets, including price risk, liquidity risk, and interest rate risk. the impact of interest rate changes on fair market values of assets, liabilities, and equity. Using discounted cash flows and standard valuation methodology, EVE captures the change in economic value of the bank even though that change may not be reflected in the bank’s accounting books and records. Consider the underlying market value of bonds in the investment portfolio. We all know that if interest rates rise, bond prices fall. This is the manifestation of price risk. If we’re focused only on bonds in isolation, though, we can’t know how the rate changes affect the overall economic value of the balance sheet. After all, loans and deposits also have an economic value just like bonds. If market interest rates rise sharply, then existing fixed-rate loans will be worth less from an economic standpoint. Indeed, any financial asset or liability – anything with a cash flow – will have an underlying value that fluctuates as interest rates move up and down. Whereas the value of assets will move inversely to interest rates, the value of liabilities will move directly with rates. This is because existing fixed-rate deposits become more valuable to the institution if market interest rates rise. So how do we calculate economic value of equity? Remember from the standard accounting relationship that “assets equal liabilities plus owner’s equity.” If we can calculate the fair market value of assets and liabilities, then we can simply back into the value of equity capital. Moreover, if we can project the changed value of assets and liabilities under different rate environments, we can measure projected changes in EVE as well. This is precisely what we do when we measure interest rate risk from the economic perspective. Monitoring changes in the economic value of equity is valuable in that it provides a comprehensive measurement of interest rate risk. It captures the effects of optionality and other important influences on value not contained in static accounting-type reports. The economic valuation method also reflects those sensitivities across the full maturity spectrum of the bank’s assets and liabilities. EVE relies on methodological and calculation assumptions, most notably the discount rate assumptions used to calculate the present value of assets and liabilities. It is relatively easy to calculate the market value of a bond with a fixed rate of interest and a fixed maturity. It is considerably more difficult and far less objective to calculate the economic value of a savings account with no fixed maturity and an administered rate subject to change by bank management. That’s why institution-specific assumptions must be based on the unique characteristics of each bank. A robust, bank-specific “open/ close” study is preferable for most banks. A cookie-cutter approach can give misleading results. Measuring interest rate risk involves tracking dynamic and complex relationships within a bank’s balance sheet. To do it properly, we must have good input, reasonable assumptions, and sound methodology. The calculation and monitoring of changes in the economic value of equity is an important part of the process. And in the final analysis, we cannot properly manage the financial risk of our bank without a clear understanding of the big picture. Jeffrey F. Caughron is a Senior Partner with The Baker Group, LP. Caughron has worked in financial markets and the securities industry since 1985, always with an emphasis on banking, investments, and interest rate risk management. Contact Jeffrey at 800-937-2257 or jcaughron@GoBaker.com. 21 wvbankers.org
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