FALL 2023 VALUE IS IN THE EYE OF THE BEHOLDER MEET YOUR CHAIRMAN — TOM WHALING West Union Bank BANKER WEST VIRGINIA
CHARLESTON, WV • MARTINSBURG, WV • MORGANTOWN, WV • PARKERSBURG, WV • SOUTHPOINTE, PA • WINCHESTER, VA The world of banking and financial services is evolving at lightning speed. Innovations in new technologies, virtual currencies, digital payment systems, lending services and the overall regulatory landscape are fueling the FinTech revolution, creating a financial services market that is more accessible, responsive and competitive than ever before. At Bowles Rice, our FinTech team is built on the firm’s strong foundational practices in banking and financial services, tax, business and corporate law, cybersecurity and information privacy, and government relations. Whether you are building the next universally adopted application or looking to acquire and implement one into your existing financial services business, our team is ready to assist. For experienced FinTech solutions, contact team leader Sandy Murphy at (304) 347-1131. FinTech Solutions bowlesrice.com Responsible Attorney: Marc Monteleone 600 Quarrier Street • Charleston, WV 25301 Follow us on Twitter @BowlesRice @bowlesbanklaw @creditors_law
18 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. 5 President’s Message: Value Is in the Eye of the Beholder By Mark Mangano, WVBankers President & CEO 6 Meet Your Chairman — Tom Whaling, West Union Bank 10 Community Corner: Peoples Bank Honoring Bankers Who Make Our Communities a Better Place 12 West Virginia Security for Public Deposits Program By Josh Sharp, Suttle & Stalnaker 14 Thank You to Our Sponsors 15 S.R. Snodgrass Announces Two New Hires 18 Artificial Intelligence — The Benefits and Challenges for Financial Institutions By Julia A. Gutierrez, Bankers Alliance 21 Virtual CISO: An Easier Way to Get the InfoSec Services You Need By ImageQuest 24 Under Pressure: Cost of Funds Strategies in a Rising Rate Environment By Achim Griesel and Dr. Sean Payant, Haberfeld 28 Is Your Balance Sheet Recession Ready? By Dale Sheller, The Baker Group 28 Cover Photo: Fall 2023 Chairman Cover Photo and Convention Photography provided by Erin Hurst, Erin Hurst Photography | Lewisburg, WV (www.erinhurstphotography.com) 4 West Virginia Banker
President’s Message Value Is in the Eye of the Beholder By Mark Mangano, WVBankers President & CEO The West Virginia Bankers Association board and management team are committed to continually enhancing the association’s value to its members and their employees. But what constitutes value? The association provides diverse services. Each member and each banker values particular association-provided services. At the same time, they may not highly value other services. Our challenge is to recognize and ensure that we meet all the value elements desired across our membership. We believe that we deliver value by combining: • Advocacy • Education • Political Engagement • Products and Services • Connection • Leadership These elements are individually important and, in sum, drive the association’s value to our members. To successfully deliver each element, we must clearly define our goals, develop effective strategies and create systems to consistently execute our strategies. Below I will briefly define our goals for each value element: Advocacy The association is an advocate that can amplify and aggregate individual bank voices. Advocacy is often equated to lobbying. Lobbying is critical, but advocacy involves much more. Effective advocacy requires communication and conversation both inside and outside the association. Inside conversations must foster insight and perspective and build consensus on association policy. External conversations must educate decision-makers, allies and opponents on the merits of our industry’s priorities. Education Education focuses on providing core services that include seminars, courses, certification programs, leadership development and schools. In addition, we will continually evaluate and deliver resources to address emerging banker needs. Political Engagement Successfully defending and advancing the banking industry requires more than advocacy. Political engagement among the association’s members and their employees is an essential complement to advocacy efforts. Political engagement includes participation in the association’s political action committee but also includes providing the opportunity, guidance and resources for interested bankers to directly participate in influencing government policies that impact their banks, careers and communities. Products and Services Through Proserv, the association’s for-profit subsidiary, we curate vendors that provide best-of-breed solutions, offer significant pricing advantages to members and support other association services. Connection The association is uniquely positioned to foster personal connections among bankers, vendors, lawmakers, public officials and other stakeholders. These connections provide financial opportunities and build relationships that strengthen the industry’s resilience and success. We pursue connection through facilitating in-person and virtual meetings, maintaining diverse communication channels and exploring opportunities for mutual benefit related to cooperation. Leadership The association is driven by volunteer leaders. Over 150 bankers per year provide their time and talent to serve on the association board and committees. While they do not receive monetary payment for their service, we recognize that their service must provide them with value in return. We are committed to making volunteer service meaningful, educational, collegial and satisfying. We are living in an exciting and challenging time in the banking industry. The association is committed to providing resources to support our members’ success. We welcome your input on how we define, balance and deliver the six value elements. We will continually seek to create optimal value for our members and their employees. 5 West Virginia Banker
Tom Whaling has over 30 years of financial expertise and is a very active member of WVBA and numerous charitable organizations. He is the President and CEO of West Union Bank and is the 2023-2024 WVBA Chairman. We recently had a chance to sit down with Tom and get to know more about him. We would like to thank him for his time. The following are excerpts from our conversation. How did you start your banking career? In 1988, I was working as an internal auditor for the West Virginia Department of Highways and was going to school parttime at West Virginia University to get my MBA. After 13 months, I graduated and started looking for a job in the financial industry. I received and accepted a job offer from National Bank of Commerce Bank in Charleston, WV, and have been in banking ever since. I started out as an accounting officer and then became CFO of two banks. Then, in 2006, I became President of West Union Bank, overseeing all banking operations. I still have that job today. Are there any individuals who had a major impact on your career? When I worked at Commerce Bank, the CFO, Rick Wolford, took me under his wing. He gave me some good advice that has served me my entire career: Don’t let your job get in the way of your personal life. He believed in giving a hard day’s work, but when you leave work, you need to take care of your personal life. There has to be a balance between the two. At work, I try to be conscious and supportive of my employees’ needs. There are days when it is hard to leave home at home — children get sick or emergencies come up — we make due. We cannot hold our employees back from taking care of their families. I am proud of the caring and supportive atmosphere we have created in our bank. Do you have a favorite memory or experience of your career? Being elevated to the CEO position meant a lot to me. I have been able to build off of the work that my predecessors had done and grow our bank. We currently have five branches and have grown from $93,495,000 in Total Assets to over $253,000,000 since 2006. What advice would you give emerging leaders in the banking industry? Stay open to evolving career paths and wearing multiple hats, as they say. One day, you could be making a decision on a major expansion, and the next, you could be approving an overdraft. Banking is a great field with a lot of opportunities. There are so many things you learn and career paths that you can take that are rewarding both financially and professionally. Meet Your Chairman — Tom Whaling, West Union Bank 6 West Virginia Banker
What is something about you that might surprise fellow bankers? My wife and I spend a lot of time working in our yard and grilling in our outdoor kitchen. It’s a never-ending battle between new flower beds, mowing lawns and keeping the weeds out. This past May, I completed my first seven-mile race, and I am happy to say that I didn’t finish last. Tell us more about you, your family, interests, hobbies and charitable organizations. I have been married to my wife, Martha, for 34 years. My stepdaughter and son-in-law have two children. They live in Austin, TX. We love spending time with our grandchildren. They are a special blessing in our lives. We also like to travel. My wife and I have been on a couple of the Viking River Tours in Europe and will be traveling to Ireland this fall. Several times over the past six years, we have rented a sailboat with my siblings and have gone on week-long expeditions around the U.S. Virgin Islands and the Bahamas. I am thankful that my family is so close-knit. I enjoy spending time with them. I also enjoy skiing. I have been involved with the Parkersburg Area Community Foundation and the Doddridge County Community Foundation, since 1999. I am the Vice Chairman this year. Through grants, we help support the arts, education, the environment, human services or health and community development in our region. What advice would you give someone considering entering the banking industry? Banking offers so many career paths, especially in commercial and residential lending. Working in the banking industry offers a great work/life balance. There is so much opportunity if you’re willing to consider the options and work hard. Landscaping 2023 Phoebe’s Diner, Austin, Texas, September 2023 7 West Virginia Banker
What do you think will be some of the dominant trends within the banking industry in the next 5-10 years? The expansion of fintech and technology within banking will become more prevalent, not necessarily from the customer-facing side of things but from the backroom standpoint. Unfortunately, I see consolidation coming due to needing to find new talent to move up and take over. It’s hard to get young talent to move to small, rural areas unless they are from there. What has been the most rewarding part of your career? Overall, helping people. From helping customers meet their goals and dreams to assisting employees and helping them get on the right career path, it has all been very rewarding. How long have you been active in the West Virginia Bankers Association? I’ve been a member through the banks I’ve worked at since 1988. I have been an active board member since 2006. Why is being a member of WVBA important? As a collective group, WVBA does an amazing job advocating for our industry. It’s important that our voice is heard on legislative issues, and that couldn’t happen without strong members. There is power in numbers. What are you looking forward to most as the WVBA Chairman? I am looking forward to the whole experience, not just one thing. I hope this will be a quiet year, but I am prepared for whatever comes. I am humbled and thankful that I have this opportunity to serve. Vespio, Austin, Texas, September 2023 Grandkids with Cuckoo Clocks from Black Forest, Germany, December 2019 8 West Virginia Banker
Park City, Utah 2022 Passau, Germany, April 2022 Passau, Germany, April 2022 Strasbourg, France, October 2019 9 West Virginia Banker
communityCORNER Peoples Bank Honoring Bankers Who Make Our Communities a Better Place PositivelyPEBO Lewisburg Several Peoples Bank associates in the Lewisburg, West Virginia, area volunteered to assist the local Almost Heaven Habitat for Humanity during a home build. Participating associates were Brittney Hinkle, Lisa Vallandingham, Kirsten Brooks, Michael Moore, Stacey Coles, Alexis Walker, Aaron Toothman and Crisey Holliday. PositivelyPEBO Huntington The Peoples Bank offices in Huntington, West Virginia, recently partnered with the Ebenezer Community Outreach Center to collect and donate school supplies for local children! Facing Hunger — Jeans for Hunger Every Friday, Peoples Bank associates wear jeans and donate a portion of each paycheck to support local nonprofits that strive to end hunger in our communities. Since the “Jeans for Hunger” program began in April 2020, Peoples Bank associates have donated $421,001 to local food banks and pantries. Pictured are Peoples Bank associates and members of Facing Hunger Foodbank in Huntington, West Virginia. Scott Skyhawks Athletic Tribute Corporation The Peoples Bank Foundation presented a donation to the Scott Skyhawks Athletic Tribute Corporation in Madison, West Virginia, a nonprofit that honors past and present Scott High School athletes, coaches and teams. Pictured are Peoples Bank Foundation President Staci Matheney, Scott Skyhawks Athletic Tribute Corporation Director Jessica Thompson and Peoples Bank Foundation Vice President Kevin Eagan. 10 West Virginia Banker
For better or worse, State and Federal laws are constantly changing regarding the banking environment. Occasionally, some changes will go under the radar. In this article, we recap the WV Senate Bill 438 changes and what you can expect. Senate Bill 438 is an act to amend and reenact §12-1-5 of the Code of West Virginia and to amend the Code by adding Article 12-1B, otherwise known as the West Virginia Security for Public Deposits Act (the Act). The Act will ultimately impact all designated state depositories that hold public fund deposits. A published list of designated state depositories is listed on the West Virginia State Treasurer’s website at the bottom of the Banking Services tab. Legislative Intent The purpose of the Act is to allow designated state depositories to pledge collateral for all public deposits through a pooled method and Public Deposits Program. The West Virginia Legislature intends that designated state depositories participating in the Public Deposits Program will be authorized to secure public deposits through the pooled method as an alternative to forms of securing public deposits charged under other sections of the Code of West Virginia. The West Virginia Legislature anticipates that authorizing designated state depositories to secure public deposits via the pooled method will lower the overall cost of public deposits and make public banking contracts in West Virginia more desirable to financial institutions. Collateralization of Public Funds Going forward, the following methods will be allowed for collateralizing public deposits: the Dedicated Single Bank Method and the Multibank Pooled Method. The Dedicated Single Bank Method is securing public deposits without accepting the contingent liability for the losses of public deposits of other designated state depositories as provided in §12-1-5. This method includes: • A 102% collateral pledge for all public deposits over the FDIC, IntraFi/CDARS/ICS coverage amounts • A weekly reporting of public deposits through the State Treasurer’s Office Online Collateral System • No liability for losses of public deposits held by other public depositories The Multibank Pooled Method is the securing of public deposits by accepting the contingent liability for the losses of public deposits of other designated state depositories that choose this method. This method includes: • Collateral pledging levels of 50%, 75% or 100% will be determined by nationally recognized financial rating West Virginia Security for Public Deposits Program By Josh Sharp, Suttle & Stalnaker 12 West Virginia Banker
services and will be required for all public deposits over the FDIC, IntraFi/CDARS/ICS coverage amounts. Bank Rating Collateral Pledging Level 1-2 50% 3 75% 4-5 100% • A weekly reporting of public deposits through the State Treasurer’s Office Online Collateral System • Liability for proportionate share of losses of uninsured and uncollateralized public deposits held by a designated state depository in default. Requirements and Responsibilities Once designated state depositories select one of the two aforementioned collateralization methods, the designated state depository will be responsible for pledging collateral at the required amount with a designated Qualified Escrow Agent for holding and safekeeping in benefit to the State Treasurer’s Office. Both designated state depositories and qualified escrow agents must report weekly to the State Treasurer’s Office via the State Treasurer’s Office Online Collateral System. If desired, designated state depositories may change from one collateralization method to another each quarter. There are no exemptions or exceptions to the Act, and all public funds must be collateralized through the State Treasurer’s Office. Additionally, all parties must sign appropriate forms provided by the State Treasurer’s Office. Compliance with the Act is required while a designated state depository holds any public funds. Failure to comply with the Act may result in penalties or the rescission of authority to receive public funds. State Treasurer’s Office Online Collateral System The online collateral system will allow designated state depositories to have access to and see their public depositor’s accounts, will let qualified escrow agents see securities held by their depositories, will enable depositors to have access to see their account balances and will allow for balances to be uploaded weekly. The Public Deposits Program is expected to be operable on or before March 1, 2024, and will be administered by the State Treasurer’s Office. Suttle & Stalnaker is ready to help you. If you would like more information on how this applies to you, contact Kelly Shafer, CPA, at kshafer@suttlecpas.com or (304) 343-4126. You may also contact Josh Sharp, CPA, at jsharp@suttlecpas.com or (304) 343-4126. The purpose of the Act is to allow designated state depositories to pledge collateral for all public deposits through a pooled method and Public Deposits Program. 13 West Virginia Banker
DIAMOND SPONSORS GOLD SPONSORS TITANIUM SPONSORS BRONZE SPONSORS FRIENDS OF CONVENTION SILVER SPONSORS 183F5F Thank you to our sponsors AMERICAN BANKERS ASSOCIATION BANC CARD OF AMERICA BROWN EDWARDS ICI CONSULTING JACKSON KELLY PLLC SOUTHSTATE CORRESPONDENT DIVISON SUTTLE & STALNAKER PLLC TRAVELERS 129 ANNUAL th WVBANKERS CONVENTION July 23 - 26, 2023 14 West Virginia Banker
S.R. SNODGRASS ANNOUNCES TWO NEW HIRES Cranberry Township, PA: S.R. Snodgrass, P.C., a full-service accounting and consulting firm known for its forward-thinking work with financial institutions, nonprofits, and other businesses, has hired William Hall as Manager, Tax Group at the firm’s Wheeling, WV office, and Mike Winters as Manager, Nonprofit Group at its Cranberry Township, PA office. Mr. Hall has over 15 years of public accounting experience with various types of income tax returns. He primarily focuses on individual, trust/estate, and pass-through entities. As an Enrolled Agent (EA), he frequently represents taxpayers before the IRS for an assortment of issues, including notices to audits, and continues to remain up to date with the ever-changing landscape of tax law and regulation. CPA Mike Winters brings more than ten years of experience in audits of nonprofit organizations. He is responsible for all aspects of audit engagements, from planning and performing fieldwork to analyzing high risk areas. In addition to serving nonprofit organizations, he also has experience working with local government entities, including school districts. Mike is a highly regarded expert on the latest accounting developments affecting today’s nonprofit landscape. Snodgrass President Chuck Marston said, “We are very excited to add both Bill and Mike to the Snodgrass Team. Both bring significant experience in key practice areas, with outstanding track records of performance in every position they’ve held over many years, and I’m sure that will continue. I look forward to seeing them both bring their considerable talents to help fuel the future growth of our firm.” CONTACT US TODAY! 801.676.9722 sales@thenewslinkgroup.com Your Customers Are Too. Advertising Space Available. QR Code 15 West Virginia Banker
Artificial Intelligence — The Benefits and Challenges for Financial Institutions By Julia A. Gutierrez, Bankers Alliance The technologies of artificial intelligence (AI) are becoming an integral piece of the world we live in. These technologies are being deployed across a plethora of fields ranging from simple devices, such as cell phones, to more complex technologies, such as autonomous vehicles or the diagnosing of diseases. AI is even rearing its advancing technological head into the playing field of banking. It is a constantly evolving technology that many industries are jumping into while others are slowly pushed into in their efforts to thrive. For banks, it’s critical to embrace the advancements of the future but also to consider the security and regulatory requirements and overall risk to the organization and its customers. What is Artificial Intelligence? Artificial intelligence is a term that commonly references the various technological capabilities that allow for the analysis of data and the identification of patterns to make decisions and impact an outcome. Some examples of these AI-type activities or branches include machine learning, natural language processing, robotics process automation and speech and object recognition. Machine learning is a branch of AI and computer science that focuses on the use of algorithms and data to imitate human learning patterns, while gradually improving accuracy. With machine learning, the system learns and improves as new data is made available. Another branch of computer science and AI is natural language processing. This branch of AI enables computers to process human language, received through text and spoken words, and to understand the meaning and intent. It basically allows a computer system to understand the semantics of conversational language. The AI branch of robotics process automation, also known as software robotics, is the use of applications and systems to perform human-like tasks. It uses intelligent automation technologies and rule-based software to perform business process activities at a more efficient volume, reducing the need for human resources or involvement in the task. Finally, the AI branch of speech recognition enables a system to identify and process human speech into a written format. Speech recognition may also be referred to as automatic speech recognition, computer speech recognition or speech-to-text. This AI technology is often confused with voice recognition which focuses on identifying an individual user’s voice. However, speech recognition focuses on translating 18 West Virginia Banker
speech from verbal to text. Each of these artificial intelligence branches are utilized throughout financial institutions and countless other industries around the world. The Benefits of Artificial Intelligence Artificial intelligence is used in various fields and applications ranging from online shopping, advertising and machine translation enabling cross-language communication, to improving the overall operations and cost efficiency of financial institutions. The use of AI technologies in financial institutions can drastically reduce operational costs while significantly increasing productivity. With its broad range of uses, AI can potentially aid financial institutions in reducing costs associated with products and services, and it can enhance the overall customer experience as it bridges the gap between customer convenience and relationships. AI can benefit a financial institution’s lending process as it can expand credit access, assist in financing decisions, decrease underwriting times and costs and enhance both the borrower and lender experience. AI can be beneficial throughout other areas within financial institutions, such as identity validation and real-time anti-fraud monitoring. The opportunities and benefits when it comes to AI and financial institutions seem to be endless. But there have to be challenges, right? Artificial Intelligence Challenges Artificial intelligence isn’t perfect. Like any other enhancing technology, AI comes with its own set of risks and challenges. Some of those risks and challenges include system integration and a gap in skills. With system integration, the data behind AI is equally as critical as the technology itself. In order for the utilization of AI to be beneficial and effective, the data quality and quantity need to be accurate. This involves organizing data and preparing for integration. This means that financial institutions with a core processor will have to coordinate between their core system and their AI technologies. This can often be a complex and costly undertaking and financially burdensome, especially for small financial institutions and community banks. Financial institutions may also run into a more complicated integration process if their core processors and AI solutions vendors are competitors of the same or similar products and services. This challenge often leads to increased fees and costs for integration. Even if financial institutions are able to work out all the kinks related to system integration, there is always the challenge of obtaining expertly trained staff who are knowledgeable in building and deploying AI solutions. With the rapid advancement and use of AI technologies, it has led to a shortage of skilled AI experts in the broader labor force. While this is a challenge that is expected to improve in the future, at present, it leaves financial institutions competing with large tech companies such as Apple or IBM when recruiting for AI talent. An even more challenging area associated with artificial intelligence and financial institutions is meeting compliance expectations on technologies that are surrounded by so much regulatory uncertainty. Financial institutions are expected to identify and manage all risks related to AI and how it is used within the organization. It’s not enough for financial institutions to simply employ the technologies of AI, but rather they are expected to understand the data or inputs that drive the outcomes. Financial institutions are expected to ensure that all data used within the various branches of AI align with regulatory compliance requirements. For example, if the machine learning branch of AI is used in the decision-making for credit, the bank should understand and be prepared to explain what the contributing factors were that the AI system used to make that decision (i.e., what data was inputted to receive the outcome/decision). It 19 West Virginia Banker
is critical that financial institutions are not only able to understand and explain this process, but also that all the data used within the AI system meet regulatory requirements. This means ensuring that the AI system isn’t using information that may violate consumer or fair lending laws. Financial institutions that are utilizing AI should have processes in place that allow for the identification of risk, both new and emerging, as well as controls for managing that risk. Because of the rapidly evolving technologies of AI, there is always the challenge of changes in risk level or even unidentified risk developing. Financial institutions need to be prepared to rise to the occasion when it comes to meeting those regulatory and risk challenges, whether that be through an increased frequency of monitoring and reviewing established controls or contracting with external vendors to conduct robust third-party risk management. The use of AI technologies within financial institutions has captured the interest of regulators and policymakers alike. A couple of key concerns are always the safety and soundness of financial institutions and consumer protections. While AI is constantly growing and advancing, many of the banking laws and regulations currently on the books are still a little behind the times, leaving some areas of regulatory uncertainty. Nevertheless, regulators acknowledge the benefits of AI and support responsible innovations by financial institutions. In 2021, the agencies (Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve Board) issued RFIs (requests for information) on the use of artificial intelligence by financial institutions. In 2022, the OCC (Office of the Comptroller of the Currency) issued supervisory expectations for how banks should manage risks associated with AI. And most recently, in April 2023, a joint statement was issued by the agencies on the enforcement efforts against discrimination and bias in automated systems. The 2023 statement outlines some of the challenges of AI and serves as a reminder that financial institutions must embrace responsible innovation. Conclusion For financial institutions to thrive in the industry and remain relevant in the market, they must continue to be forward-thinking and responsible in their innovation efforts. Artificial intelligence is an ever-evolving technology and convenience of the world in which we live. Financial institutions must engage in the balancing act of supporting new and innovative technologies for their consumers while also acknowledging the risks and challenges of such growth. It is imperative to fully understand the technologies that our institutions rely on for its operation and that we remain abreast of any arising issues in the regulatory world. Artificial intelligence is the future, and it’s filled with risks and rewards. Scan the QR code to read the joint statement on enforcement efforts against discrimination and bias in automated systems. https://files.consumerfinance.gov/f/documents/cfpb_jointstatement-enforcement-against-discrimination-bias-automatedsystems_2023-04.pdf 20 West Virginia Banker
Virtual CISO: An Easier Way to Get the InfoSec Services You Need By ImageQuest Imagine the peace of mind that comes with knowing your bank is protected from data breaches and cyber risks, all while ensuring compliance with industry regulations. Typically, this requires an executive known as a Chief Information Security Officer or a CISO. However, hiring a full-time CISO is challenging. There’s not yet a huge supply of them; they can pick where they want to live. It’s an expensive position, and even if you do hire one, retaining them when they get a better offer is hard. Now, imagine achieving this situation without recruiting and hiring a full-time CISO. Sound too good to be true? Enter the Virtual Chief Information Security Officer (vCISO). This solution provides banks with C-level security expertise on a fractional basis, fulfilling all cybersecurity needs with a much smaller financial commitment. A vCISO can assess your organization’s security posture, develop tailored security strategies, oversee risk assessments and guide your internal security staff while aligning with your business objectives. 21 West Virginia Banker
What Is a vCISO? A vCISO is an outsourced security practitioner who provides your bank with high-level cybersecurity expertise on a part-time or contract basis. They oversee the planning, development and implementation of your information security program, ensuring that it effectively addresses the cyber threats unique to your organization. Unlike a traditional CISO, a vCISO offers flexibility, allowing you to access top-tier security skills without the financial burden of a full-time executive. For community banks, a vCISO can be a game-changer. Their knowledge and experience can help identify potential vulnerabilities in your security posture, develop effective security policies, and ensure compliance with industry regulations. They work closely with your IT team, augmenting their capabilities and driving your organization’s security strategy. Why Is Having a vCISO Important? In an age where data breaches and cyberattacks are becoming increasingly common, having a dedicated professional to manage your cybersecurity needs is essential. A vCISO brings a wealth of knowledge and experience to your bank, providing guidance on protecting your sensitive information and mitigating cyber risks. Community banks often face the challenge of limited resources. With a vCISO, you get the benefits of a Chief Information Security Officer without the full-time salary expense. They can provide your bank with a tailored cybersecurity program, conduct annual risk assessments and train your staff on best practices for handling sensitive information. This expertise and attention can significantly enhance your bank’s security, giving you peace of mind and a competitive edge. What Are the Benefits of Hiring a vCISO? Having a vCISO can offer numerous benefits to organizations, especially for those who may not have the resources to hire a full‑time in‑house CISO. One significant advantage is cost‑effectiveness. As noted above, hiring a full‑time CISO can be challenging and expensive. In contrast, a vCISO provides the same expertise and strategic oversight on a more flexible and affordable basis, because you’re not paying a salary, benefits and other expenses. It makes this executive position more achievable for community banks. Financial institutions must engage in the balancing act of supporting new and innovative technologies for their consumers while also acknowledging the risks and challenges of such growth. 22 West Virginia Banker
Beyond cost savings, a vCISO brings your organization a wealth of experience and broad industry knowledge. They are well-versed in the latest cybersecurity threats, regulatory requirements and best practices. This knowledge allows them to identify potential vulnerabilities swiftly, implement effective security policies and ensure that your company complies with relevant regulations. Furthermore, a virtual CISO provides an objective, third-party perspective, offering unbiased advice to improve your security posture. Their guidance can be invaluable in prioritizing cybersecurity initiatives, managing risks effectively and building a robust cybersecurity program aligned with your business objectives. How to Find the Right vCISO for Your Bank Finding the right vCISO involves understanding your organization’s specific cybersecurity needs and goals. Look for a vCISO with experience in your industry and who understands its unique risks and regulatory requirements. They should be able to align their security strategies with your business objectives, ensuring that your cybersecurity initiatives support rather than hinder your growth. Consider vCISO service providers that offer a team-based approach. This way, you benefit from the combined expertise of multiple professionals, ensuring a comprehensive and wellrounded security program. It’s also important to choose a vCISO who can effectively communicate with both your IT team and executive leadership, bridging the gap between technical details and strategic decision-making. Remember, choosing a vCISO is an investment in your bank’s future. The right vCISO can help you navigate the complex world of cybersecurity, protect your assets and build a resilient business ready to face the digital threats of tomorrow. Thinking About Hiring a vCISO? Navigating the complex digital landscape and protecting your organization’s information assets require expertise and strategic thinking. A vCISO can make a significant difference in this area. With a vCISO, you can ensure your cybersecurity program is robust, compliant and tailored to your unique business needs, all without the cost of hiring a full-time executive. We understand that balancing security needs with budget constraints can seem overwhelming for small to medium-sized banks. The threat of data breaches, cyberattacks and noncompliance penalties can leave you feeling uneasy. But remember, you’re not alone in this journey. By leveraging vCISO services, you can turn these challenges into opportunities. A vCISO brings cybersecurity expertise, provides guidance on risk management and offers a cost-effective solution to enhance your security posture. At ImageQuest, we’re committed to helping you secure your bank and maintain your competitive advantage. Our team of certified professionals is ready to provide the guidance, strategy, and risk management your bank needs to thrive in today’s cyber-centric world. 23 West Virginia Banker
When rates were at record lows for long periods of time, the true value of low-cost funding may have faded into the background; however, low-cost core deposits continue to be the driver of long-term franchise value. Now, with rates continuing to rise — the one-year treasury exceeded 4.5% in January of 2023 — the importance of low-cost funding is once again at the forefront. The chart below is for a financial institution with strong low- and no-cost funding. In record lowrate environments, its cost-of-funds advantage over its peers was relatively small at 20-30bp. When rates started to rise from 2017-2019, it tripled to 60bp. For a $1 billion institution, that represents a $6 million increase to the bottom line. The current rising rate environment will lead to similar increases in profit. The jump from an 18bp to a 38bp advantage in 2022 shows a trend that will continue to accelerate. Under Pressure: Cost of Funds Strategies in a Rising Rate Environment By Achim Griesel and Dr. Sean Payant, Haberfeld In addition, deposit growth stagnated in Q2 of 2022 and then started to decline in the second half of 2022. On the macro level, FDIC-insured deposits were down for the first time in a long time, and they were down significantly at 2.89% from their peak in Q1 of 2022. A deeper dive into the deposit decline shows that the majority of the decline happened in non-interest-bearing deposits, which declined almost 6%. That decline was partially offset by growth in growth in time and brokered 24 West Virginia Banker
deposits, putting even more pressure on funding costs. On the micro level, our data for consumer and business checking account deposit balances shows balances are down 5% and 4%, respectively, from the beginning of 2022. Even more importantly, the entire balance decline happened since mid2022, and we anticipate this trend will continue. Large institutions are aware of the value created by low-cost deposits, and they have the budgets to target core relationships that drive these benefits. For example, Chase is back to its $600 offer for opening a checking and a savings account. BMO Harris pays up to $500, and Citi has an offer of up to $2,000 for relationships with extremely high balances. In addition to the cost of the offer, these largest banks spend a significant amount of marketing dollars to gain new core relationships and the benefits that come with them. When a financial institution does not commit to an always-on marketing strategy, it must provide above-market offers to “buy” new relationships. Community-based financial institutions (FIs) cannot compete by following a similar strategy. Unlike their large competitors, community-based FIs do not have the budgets for acquisition incentives of $500+ or the expansive budgets associated with marketing to acquire these relationships. 25 West Virginia Banker
Compared to community-based FIs, large banks generally have more products and services as well as marketing teams who dwarf their smaller competitors. Given this reality, what does a community-based FI need to do to thrive? To grow low-cost deposits, it is essential you follow a disciplined approach: Step One: Your Institution Must Have a Sales and Service Culture Good products are the foundation of a sales and service culture. You cannot ask your teams to sell or consumers to buy inferior products. If you want to know if your institution has good products, ask your customer-facing employees; they can tell you how consumers respond. Equally important is ensuring your team members are well-trained, understand and believe in your products, and consistently execute your service expectations. Step Two: Your Institution Must Be Strategic Large institutions have staffing and marketing budgets that allow them to change offers frequently, products marketed and/or desired prospects. For community-based FIs to compete, they must make data-driven, always-on marketing part of their core growth strategy. Your always-on marketing strategy, supported by your sales and service culture, will drive tangible results even when large banks are in periods of very high offers. Step Three: Your Institution Must Be Aligned Your FI’s training and execution at the branch and through online channels must be aligned with your strategic marketing. Aligning marketing and execution is what reduces the acquisition costs for new core relationships. Without this alignment, your FI is left trying to compete on the offer alone, making it expensive to match those large bank offers previously mentioned. Step Four: Measure, Inspect and Reward! Any strategic initiative needs to be measured. Your core relationship growth strategy should have periodic — quarterly at least — goals. In addition, determine benchmarks to evaluate success. Inspect what you expect in order to ensure your sales and service standards are being consistently executed. Reward success! When your team members are fully aware of where they stand compared to their goals, it is possible to evaluate results and reward successes. Growing core relationships in order to grow low-cost deposits should be of primary importance in any rate environment; however, it is paramount in the current rising rate environment. Ultimately, outperforming your peers by 60bp will be welcomed by your board and celebrated by your management team. When you strategically align your culture, products, and people, competing for core relationships becomes easier, and the $500+ offers from large banks become less effective. David will beat Goliath! Achim Griesel is President, and Dr. Sean Payant is Chief Strategy Officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community financial institutions. Achim can be reached at (402) 323-3793 or achim@haberfeld.com. Sean can be reached at (402) 323-3614 or sean@haberfeld.com. 26 West Virginia Banker
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Is Your Balance Sheet Recession Ready? By Dale Sheller, The Baker Group I recently joked that I have read an article every week for the past year that says a recession is starting the next month. But where is that recession? Everyone — or maybe some of us — remembers the common rule of thumb that two consecutive quarters of negative gross domestic product (GDP) growth equals a recession. However, determining a recession is not quite that simple. The official recession determination is made by the National Bureau of Economic Research (NBER), which is a committee made up of eight economists who use many factors in making that determination. The NBER states their traditional definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” As of September 2023, the NBER hasn’t declared an official recession since the COVIDinduced recession of April 2020. A recession typically has plenty of negative consequences, including a rise in the unemployment rate as well as stagnate or declining incomes. As a result, consumer spending declines, which further impacts businesses and their bottom lines. The early phases of an economic downturn often coincide with increases in interest rates as the Federal Reserve uses monetary policy to pump the brakes on an overheating economy to help control inflation. The Federal Reserve’s monetary actions have a major impact on institutions’ balance sheets, specifically with loan and deposit pricing. As the Fed raises rates, the cost of credit increases and deposit rates increase (usually at a slow pace), therefore incentivizing less borrowing and more saving. These macroeconomic and interest rate dynamics play a major factor in overall performance and balance sheet management. 28 West Virginia Banker
No one has the crystal ball on when the next recession will begin, how long it will last, and how severe it will be. However, given the recent decline in inflation levels due to the Fed’s aggressive tightening cycle, it does feel as if we are getting closer to the peak in interest rates and closer to the end of the current economic cycle. Whether this current Fed tightening cycle ends in a recession or a soft landing, the Fed’s latest Dot Plot points to a path for lower interest rates in the future. Balance sheet managers and ALCOs should never try to time the peak of interest rates. Rather, they should best prepare the balance sheet for the next recession and/or falling interest rates. Here are some considerations for preparing the balance sheet for the next recession: • Interest Rate Risk — Whether the current tightening cycle ends in a recession or a soft landing, there is a high likelihood for some level of lower rates in the future. Utilizing your Interest Rate Risk Model to identify any exposures to falling interest rates is critical. Managing your asset sensitivity and asset duration through effective investment selection and strategy is key. Being reactive is not a strategy. • Credit Risk — Asset quality problems of some magnitude accompany recessions. Ensure current loan pricing and structure is appropriate given the deal and current environment. Avoid chasing loan demand late in the cycle by tightening credit underwriting standards. • Liquidity — Historically, during recessions and falling rate scenarios, deposit levels increase, and liquidity levels grow. Ensure your assets are fully deployed to optimize your earning asset mix while keeping a cushion of unencumbered liquid assets. Lastly, every institution should have ample contingent liquidity sources for those unforeseen liquidity events and needs. • Stress Testing — Stress testing should be done on a regular basis. It is important to consider higher impact, lower probability scenarios when creating stress scenarios. Stress testing can be conducted on various aspects of the institution, including on capital, liquidity and interest rate risk. “How can we better prepare for a possible recession?” I encourage you to put this question as an agenda item for your next ALCO meeting. Every institution’s balance sheet and risk profile are unique. There is no one-size-fits-all strategy, but being proactive and having a plan (as well as contingency plans) is essential. Dale Sheller is an Associate Partner in the Financial Strategies Group at The Baker Group. He joined the firm in 2015 after spending six years as a bank examiner with the Federal Deposit Insurance Corporation. Sheller holds a bachelor’s degree in finance and a master’s degree in business administration from Oklahoma State University. He works with clients on investment portfolio strategies, interest rate risk management, liquidity risk management and regulatory issues. Sheller regularly speaks at educational seminars nationwide and serves as a faculty member for multiple banking schools. Contact Dale at (800) 937-2257 or dsheller@gobaker.com. 29 West Virginia Banker
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