Kentucky Banker Magazine - March/April 2019

KENTUCKY BANKER

Kentucky Legislature Addresses Major Inequity in Bank Taxation MARCH / APRIL 2019

STRONGER TOGETHER • Loan Participations • Investment Services • BBKYMortgage • Asset Liability Management • Credit Card Services • BBCONNECT Kentucky's Banking landscape has changed dramatically over the years. However, one thing remains consistent; a solid Kentuckybased correspondent serving the needs of community banks.

Your Kentucky-Based Correspondent Bank.

Stronger Together.

Your Local Calling Officers

Todd Beers

CENTRAL KENTUCKY REGION

tbeers@bbky.com

Shawn O'Keefe

WESTERN KENTUCKY REGION

sokeefe@bbky.com

David Fletcher

EASTERN KENTUCKY REGION

dfletcher@bbky.com

NEW LOCATION!

*COPY THIS FORM AND FILL OUT*

UK University Club Big Blue Course Lexington, KY

2019 GOLF OUTING FUNDRAISER Benefitting the Kentucky Banker Political Action Committee

Monday June 17, 2019 / University Club of Kentucky / Lexington, KY Registration Opens 11 AM / Lunch 11:30-12:30 / Shotgun Start 1 PM / Drinks & Awards After Golf PLAYER NAME

SHIRT SIZE

1)

M L XL XXL

2)

M L XL XXL

3)

M L XL XXL

4)

M L XL XXL

$1,000 Four-Person Team / $250 Individual MULLIGANS GET A SECOND CHANCE!

3 FOR $50! Maximum 3 per golfer.

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PAYMENT METHOD PERSONAL CREDIT CARD NAME ON THE CARD______________________________________________________________________________ BILLING ADDRESS________________________________________________________________________________ CARD NUMBER___________________________________________EXPIRES___________________CSC___________ PAYMENT METHOD PERSONAL CHECK

*COPY THIS FORM AND FILL OUT*

Complete this form and MAIL WITH PAYMENT to: Josh Fischer, c/o KBPAC Golf Outing, 600 West Main Street, Suite 400, Louisville, KY, 40202

Contributions to Kentucky Bankers PAC and Kentucky Bankers Committee for State Government (each referred to as KBPAC in this disclosure) will be used in connection with state and federal elections, respectively. Contributions to KBPAC are voluntary and may not be deducted as charitable contributions. KBPAC may not accept corporate contributions. Contributions will be reported to the Kentucky Registry of Election Finance and the Federal Election Commission, as required. You may decline to contribute without fear of reprisal. You may contribute more or less than the amounts suggested and you will not benefit or be disadvantaged because of the amount contributed or the decision to not participate at all. The information being provided herein with respect to the KBA Political Action Committee is for informational purposes only and is not a solicitation by, or an invitation to contribute funds to, the political Action Committee.

Any contribution received from non-eligible donors will be returned.

2019 KBA STAFF DIRECTORY Ballard W. Cassady Jr. President & CEO bcassady@kybanks.com

Timothy A. Schenk Assistant General Counsel tschenk@kybanks.com

Debra K. Stamper EVP & General Counsel dstamper@kybanks.com

Jamie Hampton Education Services Coordinator jhampton@kybanks.com

Matthew E. Vance Chief Financial Officer mvance@kybanks.com

Paula Cross Education Services Coordinator pcross@kybanks.com

Selina O. Parrish Director of Membership sparrish@kybanks.com

Tammy Nichols Events Coordinator Finance Officer, HOPE of KY tnichols@kybanks.com

Natalie Kaelin, Esq. Director of Education nkaelin@kybanks.com Billie Wade Executive Director, HOPE of KY bwade@kybanks.com Josh Fischer, Director of Communications jfischer@kybanks.com Miriam Cole Executive Assistant mcole@kybanks.com John P. Cooper Legislative Solutions jcooper@kybanks.com Michelle Madison IT Manager mmadison@kybanks.com Steve Whitlow Systems Engineer swhitlow@kybanks.com Nina K. Gottes Sponsorship & Business Development ngottes@kybanks.com 4 | KENTUCKY BANKER

Katie Rajchel Staff Accountant krajchel@kybanks.com Casey Guernsey Enrollment and Billing Specialist cguernsey@kybanks.com Chuck Maggard President & CEO, KenBanc cmaggard@kybanks.com Lisa Mattingly Director of Sales & Service KBA Benefits Solutions lmattingly@kybanks.com Brandon Maggard Account Representative KenBanc Insurance Services bmaggard@kybanks.com Donna McCartin Benefit Support Specialist dmccartin@kybanks.com Audrey Whitaker Insurance Services Coordinator awhitaker@kybanks.com

2018-2019 OFFICERS & BOARD OFFICERS Chairman Mr. David M. Bowling, CEO Citizens Union Bank of Shelbyville Vice Chairman Mr. Lloyd Hillard, Jr. Chairman of the Central & Southern KY Region, WesBanco Treasurer Mr. J. Wade Berry President & CEO Farmers Bank & Trust Co. Past Chairman Mr. Timothy E. Barnes President & CEO Hometown Bank KBA President & CEO Mr. Ballard W. Cassady, Jr. Kentucky Bankers Association

Representing Group 5 Mr. Gregory D. Goff President & CEO First National Bank of Kentucky Representing Group 6 Mr. Darin L. Young President & CEO Century Bank of Kentucky Representing Group 7 Mr. Steve Tolliver Market President The Monticello Banking Company Representing Group 8 Mr. Anthony Kinder President & CEO Peoples Bank of Kentucky

BOARD OF DIRECTORS

Representing Group 9 Mr. Andrew Jones Regional President Community Trust Bank

Representing Group 1 Mr. J. Brent Bugg President & CEO Fredonia Valley Bank

Representing Thrifts Ms. Shanda L. Smith President & CEO Blue Grass Federal Savings & Loan

Representing Group 2 Mr. J. Jason Hawkins President & CEO First United Bank & Trust Co.

Representing Thrifts Kari R. Gough President & CEO WinFirst Bank

Representing Group 3 Mr. John W. Key President Commonwealth Bank & Trust Co.

Representing Bank Size; $1B or more Mr. Ja Hillebrand, CEO Stock Yards Bank & Trust Company

Representing Group 4 Mr. Dan M. Harbison President & CEO The Farmers National Bank of Scottsville

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KENTUCKY BANKER MARCH/APRIL 2019

IN THIS ISSUE 3 NEW! KBPAC Golf Outing 7 Chairman’s Corner 9 Straight Talk 11 The Penny’s Fate...

12 Lobby Checklist 14 Farmers National Bank 17 De Novo or Not De Novo 18 Strategies to Win 19 CUB’s Big Day 20 Kessinger Retires 21 NContracts 22 CFO Forum 23 MCM 24 2019: What to Expect 25 Community Trust Bank 25 Billy C. Weddle SUBMISSIONS

Please send submissions and questions to Josh Fischer, Managing Editor. Email: jfischer@kybanks.com

SUBSCRIPTIONS

$30/year for KBA members $60/year for KBA non-members Additional single copies $5 each Email: jfischer@kybanks.com

ADVERTISE

Representing Bank Size Assets at least $200M; less than $1B Mr. David W. Hobbs President, River City Bank

Kentucky Bankers Association 600 West Main Street, Suite 400 Louisville, Kentucky 40202 www.kybanks.com

If you would like to learn more about advertising in KENTUCKY BANKER, please contact Nina Gottes.

Email: ngottes@kybanks.com

RESOLUTIONS

Resolutions published in KENTUCKY BANKER carry a charge of $250. Technical requirement: Resolution submission MUST be a PDF or jpeg with a high resolution (300 dpi). Email jfischer@kybanks.com if you have any questions and/or to submit your resolution.

KENTUCKY BANKER is the official bi-monthly magazine of the Kentucky Bankers Association. No part of this magazine may be reproduced without written permission from the KBA. The KBA is not responsible for opinions expressed by outside contributors published in KENTUCKY BANKER. The KBA reserves the right to publish submissions at the discretion of the KBM editorial team.

CHAIRMAN’S CORNER Mr. David M. Bowling, CEO Citizens Union Bank of Shelbyville 2018-2019 KBA Chairman

Big Win For Kentucky Banks!

Well, if you ever had any doubts about the value of your Kentucky Bankers Association membership or your contributions to the KBPAC those doubts should now be eliminated.

As a KBA Board member and now Chairman I have had the pleasure of watching firsthand the remarkable work done by the KBA staff on the Bank Franchise Tax repeal. It was a long process that had many ups and downs but in the end was well worth it.

It is a HUGE victory for Kentucky and for Kentucky bankers, and as we like to say at our bank it’s “real money.”

It all started a couple of years ago when it became apparent to all of us that while we had been focused on the fallout from the Great Recession, Dodd Frank and trying to navigate a tricky regulatory landscape the Bank Franchise Tax burden on Kentucky banks had gotten way out of line. We had anecdotal stories from all over the state where banks were paying exorbitant tax effective BFT rates compared to regular state income tax rates. It was clear something needed to be done to bring some fairness back to Kentucky banks.

The first step was to gather some good data. We knew the Kentucky Department of Revenue would not do anything without a strong business case built on sound financial data, especially when we knew the state was facing a budget/pension crisis. That’s when Matt Vance, KBA CFO, went to work. With the help of Crowe, BKD and MCM we were able to gather a very large sample of Kentucky bank data to show exactly what the tax burden from the BFT was compared to what it would be under the regular state income tax rates. When the data was all put together, I think it even surprised some of us how significant the difference was.

Armed with the data, Ballard and John Cooper began the long political process to build support from the Governor’s office and state legislators. There were numerous meetings, phone calls and presentations to educate the many interested parties about a relatively complex issue.

Many of these meetings involved Kentucky bankers who had strong relationships with their local legislators. Also, along the way we had to update and enhance the data to include comparable bank tax rates in other states, especially those surrounding Kentucky. Again, the data was compelling and for the most part we received pledges of almost universal support from legislators. The problem however was that while most folks supported our cause there were big concerns over the revenue impact and there was lots of competition from other more pressing political issues. The 2018 General Session was certainly a tense one and at several points it looked like we were going to be included in the 2018 tax reform package. Unfortunately, that fell apart at the last minute and Kentucky banks were left out in the cold.

Unfazed by the 2018 General Session setback, Ballard and John continued to push forward and strategize the best way to keep the BFT reform moving. Throughout 2018 there were many more meetings, more data and this time an unparalleled effort by bankers all across the state. I think it’s safe to say there was probably not one legislator in the state that did not receive numerous personal contacts from one or more Kentucky Bankers.

When the 2019 Short Session started, we were cautiously optimistic but in an uncertain political world we were taking nothing for granted. Throughout the entire session John and Ballard were in Frankfort almost every day talking to legislators, counting votes and continuing the education process about this important issue. And throughout the process bankers kept the pressure on their legislators to not waiver in their support. It was an anxious few weeks to say the least but, in the end, the good guys prevailed and the old BFT was repealed and starting in 2021 Kentucky banks will pay regular state corporate income tax just like everyone else.

It is a HUGE victory for Kentucky and for Kentucky bankers, and as we like to say at our bank it’s “real money.” For my bank it’s at least $500,000 in annual tax savings. That’s huge for us and what a tremendous return on investment for the relatively small amount we pay in KBA dues and PAC contributions.

So, CONGRATULATIONS to Ballard, John, Matt and the entire KBA Team and to the Kentucky bankers all over the state that helped make this happen. And a big thanks to the Kentucky legislators who had the wisdom to think long term and understand how important it is to support a strong banking system in the state. I guarantee you it would not have happened without everyone pulling together to get the job done!

Chairman’s Corner Overtime: De Novo or Not De Novo see page 19 >> 7 | KENTUCKY BANKER

ABA CFO Exchange September 16 –18, 2019 The Seelbach Hilton | Louisville, KY ABA’s CFO Exchange is the ideal peer exchange opportunity for bank CFOs and senior financial officers from across the country.

Exchange ideas, share best practices and hear from experts in the field on the key issues affecting your bank’s bottom line. $300 Hometown Host discount for Kentucky bankers ends July 19.

aba.com/CFO

FO-19 KentuckyBnkr-HalfPg-rev.indd 1

3/8/19 11:22 AM

KBA MEMBERS @ 2019 BANKERS DAY IN FRANKFORT

STRAIGHT TALK Ballard Cassady KBA President & CEO bcassady@kybanks.com

Bank Franchise Tax

Thank You Legislators!!!

With the Governor’s signature on House Bill 354 last week, Kentucky replaced the bank franchise tax with the taxation model applied to all other corporations in our state.

In all my decades at the KBA, I’ve not seen a banking bill of greater scope and impact for our banks and for the Commonwealth. Its passage will directly impact bank profits and local economies, while slowing the acquisition of our banks by out-of-state financial institutions.

Even so, its passage took an unprecedented level of advocacy from our members and our staff.

It started with you, the bankers who called (and repeatedly called) their legislators to tell the story of the inequity of the bank franchise tax. It was a complicated story with a lot of moving parts, but we had a compelling case and we apparently told it well. We hammered the fact that banks in Kentucky paid 92% more in taxes than any other corporations in the state. Our passionate conviction about that fundamental unfairness ultimately overcame the pragmatic arguments against this change.

Specifically, starting January 1, 2021, Kentucky banks will be using the income method of state taxation instead of the strangling bank franchise tax method. This takes us from about an average 9.6% effective tax rate to a 5% rate (assuming the state income tax rate doesn’t increase between now and 2021). We can all do the math on how much that will help our community banks and those they serve.

In addition to all the bankers who took the field in this monumental battle, I salute the leadership of John Cooper, our legislative consultant, who essentially worked around the clock throughout this Session.

The compelling evidence that he placed on every desk was supplied by the equally exhausting work of our CFO Matt Vance, who probably knows more about this subject than anyone. Debra Stamper, our General Counsel, kept us on the straight and narrow and oversaw the critical work of revising the bill language along its tortured path through the entire legislative process. Some of the most critical work to maximize the benefits of HB354 for our banks occurred in the final hours of the 2019 Session.

This monumental advocacy effort will not be finished, however, until we’ve thanked our legislators who voted in favor of this important change. Given the current revenue climate, this was a fair and farsighted vote but not an easy one.

Even if you sometimes felt a legislator was slow to engage with the complexity of our issue, those who came through with yes votes deserve a call from their Kentucky banker, expressing gratitude and affirming how their support will directly benefit all their constituents.

We look forward to sharing details of the transition from the bank franchise tax to the corporate income tax during our Group Meetings in May. They will include specific implications for C Corps, S Corps and S&L’s. Please be sure you register today to attend.* These Group Meetings will be critical to your bank’s ability to transition as quickly as possible into the new tax methods.

It started with you, the bankers who called (and repeatedly called) their legislators to tell the story of the inequity of the bank franchise tax.

Ballard W. Cassady, Jr.

*INFORMATION ON GROUP MEETING SCHEDULE AND REGISTRATION ON THE BACK COVER or email Natalie Kaelin: nkaelin@kybanks.com 9 | KENTUCKY BANKER

Joye Hunt Set to Lead Friends of Traditional Banking “Joye will provide strong leadership to continue our positive momentum.”

Ty Abston, Outgoing FOTB Chair Friends of Traditional Banking (FOTB) is pleased to announce Joye Hunt as the newly elected chair of the Executive Committee.

Hunt, who has served on the FOTB Executive Committee and previously represented Kentucky on FOTB’s Nationwide Banker Board, is also the SVP-CFO for PBK Bank in Stanford, Kentucky.

With more than 30 years of community banking experience, she has been long involved with the Kentucky Bankers Association and has a passion for traditional community banks and the people they serve.

“I want to thank Ty (Abston, outgoing FOTB chair) for his amazing leadership, commitment, and guidance of our organization. FOTB has been elevated to new levels of success,” Hunt said.

“Joye will provide strong leadership to continue our positive momentum. FOTB is becoming a very powerful weapon in the fight to preserve traditional community banking.” said Abston.

Friends of Traditional Banking is governed by an Executive Committee, an Advisory Council of bank association execs, and a Nationwide Banker Board of bankers from each state.

BANK SHOTS FEATURED ON FACEBOOK We want to celebrate every bank promotion and new hire with all our members. This is what Bank Shots is for. We only have a short space to include these in our magazine - much of the story gets missed. Where did they go to school? What branch will they be working? Where do they volunteer in their community?

For this reason, and to help build our Facebook community, we are moving your Bank Shots to the KBA Facebook page. Continue to send your promotions and new hires to jfischer@kybanks.com and within 48 hours your Bank Shot will appear on our page and in your feed. (Subject to KBA approval.)

10 | KENTUCKY BANKER

LIKE & FOLLOW US TO KEEP TABS ON THE KBA COMMUNITY To make sure you see all your bank and employee related posts, and to keep up with your Association’s community news, be sure to like our Facebook page, follow our posts and be sure to invite co-workers, associates, friends and family to like and follow our page.

www.facebook.com/kybankers

MY TWO PENNIES

Debra Stamper KBA EVP & General Counsel dstamper@kybanks.com

Do we REALLY need this?

Do we still need pennies?

Search DIY (do-it-yourself) projects using pennies on Pinterest. You might be surprised to see people using pennies as flooring, table tops, back-splashes, buttons and even Abe Lincoln portraits.

So, the question is begged why do we have pennies? The term “penny” or “pence” is historically considered an informal term for a 1 cent piece. In 1909, the US penny first used the likeness of Abraham Lincoln—it was the first coin to use the likeness of an actual person—and, even though it was designed as a celebration of the 100th anniversary of President Lincoln’s birth, it stuck. In the 1980’s overseas stopped accepting pennies and round transactions to the nearest 5 cents. That makes sense (pun intended).

Legislation has been introduced, several times since the 1980’s, to abolish the US penny, but it has never passed. A few years ago legislation was passed prohibiting the melting of US pennies for their copper content, although we can still use pennies for crafts and we can melt 1 cent coins from other countries.

You might read all of this and come to the conclusion that I am firmly standing on the anti-penny side of this debate. But that is not true. I am a bleeding-heart, sentimental, pro-penny advocate. I vividly remember collecting pennies, counting them out and rolling them until I collected enough to purchase what I currently desired. I hate to admit it, but I would sometimes cash out larger coins for pennies because I did not have enough of those coins to fill a wrapper and because the weight of the additional pennies was really satisfying. I also loved to hunt for and squirrel away wheat pennies—I still do. I often wonder who stole my glass piggy bank of wheat pennies from my bedroom. (It was the kind of piggy bank that was actually shaped like a pig and did not have a stopper, so it had to be broken to retrieve the bounty.)

And, after all of this, I still wonder why the US doesn’t have numbers on coins and why the size of our coins bears no relation to the value… another day.

I encourage you to share your opinions on these topics with me at dstamper@kybanks.com .

Anti-penny arguments include: • It costs more than 2 cents to make a penny.

• People use pennies as a craft item.

• Pennies have limited purpose. Vending machines and automated payment systems do not accept pennies.

• Because of the perceived low value, people often throw pennies away.

• Economists report that rounding transactions would have a neutral impact on consumers.

• Because of the zinc content of pennies, a single penny can harm a child or kill a small pet.

• Approximately 60% of ALL COINS minted are pennies, despite their low value.

• Many other countries have already stopped using their 1-cent pieces.

• A “penny for your thoughts” is no longer an incentive to think.

• Most pennies go quickly out of circulation.

Pro-penny arguments include: • Zinc industry needs pennies.

• People have a sentimental attachment to pennies.

• Government needs the income produced by producing pennies, according to the zinc industry(?).

• What would we give trick-or-treaters when we run out of candy?

• Kids need pennies to learn math and for a sense of accomplishment for saving!

• Charities need pennies.

*All actual facts came from the internet. All opinions came from me.

11 | KENTUCKY BANKER

REQUIRED KENTUCKY BANK LOBBY CHECKLIST* FUNDS AVAILABILITY NOTICE (REG CC): • Post in each branch area where customer makes deposits • Must also be posted where customer is reasonably expected to see it before making deposits • Abbreviated version must be on ATM, on screen while using ATM, or on deposit envelopes at ATM • No size requirement but must be conspicuous • Must state funds may not be available for immediate withdraw • Must state timeframe for available deposits HMDA STATEMENT NOTICE: • Post in lobby of main office and lobby of each branch located in Metropolitan Statistical Area • No size requirement but must be conspicuous • Must state availability of HMDA-LAR • Bank has option of: (1) providing the HMDA-LAR information at the branch itself; or (2) having the customer send a request to the main office • If Bank chooses option 2, the notice must contain an address where to send requests for HMDA-LAR information • Must state data available at www.consumerfinance.gov/hmda EQUAL HOUSING LENDER NOTICE: • Post in lobby of main office, lobby of each branch and in any office where applications are taken • Poster must be at least 11 x 14 inches • Applies to Banks making any loan secured by a dwelling • Text must refer to “Equal Housing Lender” or “Equal Opportunity Lender” COMMUNITY REINVESTMENT ACT (CRA) NOTICE: • Post in lobby of main office and lobby of each branch • No size requirement but must be conspicuous • Text available in Appendix B, 12 CFR § 345 • Two Versions: Version A for lobby of main office and Version B for lobby of each branch *Required as of November 8, 2018, excluding regulatory closings

BANK HOLIDAY NOTICE (KENTUCKY LAW): • Post five days in advance for any branch being closed • No size requirement but must be conspicuous • Excludes emergencies ANNUAL DISCLOSURE STATEMENT NOTICE: • Post in lobby of main office and lobby of each branch • No size requirement but must be conspicuous • Must state that person may attain copy of the annual disclosure statement from the Bank • Must contain name, address and phone number to contact to attain annual disclosure statement ADVERTISEMENT OF FDIC MEMBERSHIP: • Post at each window or station where deposits are received for FDIC-insured accounts • Must contain FDIC logo and be exactly 7 x 3 inches with black lettering and gold background • Design available at 12 CFR § 328.1 • Not required on ATMs FAIR CREDIT REPORTING ACT NOTICE: • Not required but recommended • Informs consumers of right to notify Bank of error on consumer report CUSTOMER IDENTIFICATION PROGRAM: • Posting in lobby of main office and lobby of each branch recommended • No size requirement but must be conspicuous • Notice must generally describe the Bank’s identification requirements and must be visible to customer before account is opened BRANCH CLOSING NOTICE: • Post in lobby of branch being closed • No size requirement but must be conspicuous • Notice must be posted 30 days in advance of closing date • Notice must state closing date and identify other service locations • Alternatively, may provide phone number for customers to call to locate other service centers

4.25 Billion in private corporate

$

Attention CRA Investors

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EQUITY

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800

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0 foreclosures

I welcome your inquiries and the opportunity to discuss the benefits and features this CRA investment provides.

Jonathan Welty, Vice President 614.224.8446

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Central Bank & Trust City National Bank

Community Trust Bank Farmers National Bank Heritage Bank

Kentucky Bank

Peoples Exchange Bank Republic Bank

Springfield State Bank HELPING KBA MEMBERS MAKE CRA PROFITABLE SINCE 1991

Stock Yards Bank & Trust WesBanco Bank 88 East Broad Street, Suite 1800 Columbus, Ohio 43215 www.occh.org

Farmers National Bank Celebrates 140 Years As the 9th oldest bank in Kentucky, and the oldest operating business on Main Street, in Danville, Kentucky, the history of Farmers National Bank is deep-rooted and significant. Started by businessmen and local farmers in 1879, the community-focused bank has become one of the most respected institutions in the state.

1900

The name, Farmers National Bank, was chosen by the stockholders during a meeting on January 8, 1879. On February 10, 1879, the bank received official word from the Office of the Comptroller of the Currency, that the bank was authorized to begin business. It started out with no home of its own. It used rented quarters in a house on Main Street. Eight years later, the bank acquired and occupied for a period of 50 years the older brick Whitley building, on the south side of Main Street. In 1937, a new larger bank was built on the same property.

As Danville has been hailed “The City of Firsts,” Farmers National Bank has been a banking innovator in Central Kentucky. In 1959, Farmers National Bank provided the first drive-in facility on Walnut Street - the property located behind the Whitley Building. An automated, 24-hour teller machine was installed in 1978, the first of its kind in the area. During the 1990’s, the bank acquired additional space on Main Street. The front of the building was restored to current day Victorian architectural style. The Masonic Lodge building on the South Third Street side of the building was also purchased for future use by the bank. Farmers National Bank acquired Citizens Bank & Trust Company of Burgin, Kentucky, its first venture outside of Boyle County.

1930

The bank added locations in Perryville, Junction City, Harrodsburg, Stanford and Lancaster along with four drive-thru locations within Boyle County. In 2017, Farmers National Bank opened its newest branch – Garland Drive, at the intersection of Hustonville Road and the Danville By-Pass. This futuristic style of banking boasts a high-tech delivery system, including three ITM’s (Interactive Teller Machines) called Teller on Demand.

With over 180 dedicated employees, Farmers National Bank is a leader in community service. During the past year, Farmers National Bank and its employees contributed time, talents and financial support to over 200 organizations, with education and economic development being a key focus. Farmers National Bank’s trust division was formed in 1909 and rebranded in 2013 as WealthSouth. This division provides financial advice, trust, investment and retirement planning benefits to customers. WealthSouth has offices in Danville, Bowling Green and Lexington, Kentucky.

1959

14 | KENTUCKY BANKER

1968

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De Novo or Not De Novo?

CHAIRMAN’S CORNER OVERTIME

by David Bowling CEO, Citizens Union Bank of Shelbyville 2018-2019 KBA Chairman

We’ve all heard the numbers, but they are worth repeating. At December 31, 1998 there were 10,464 banks in the US with 6,110 of those banks having less than $100 million in assets. By December 31, 2008, just ten years later, there were 8,305 banks with 3,132 less than $100 million. By December 31, 2018 there were 5,406 banks with only 1,278 less than $100 million. A 48% decrease in the number of banks in just 20 years. In Kentucky we experienced similar results. The total number of banks declined from 301 in 1998 to 148 at the end of 2018 (a 51% decrease) and for banks less than $100 million the number declined from 187 to only 30.

Consolidation has always been part of the banking industry and that trend will undoubtedly continue. It’s a natural part of the free market system and as long as we have well-run Kentucky banks in good markets someone will want to buy them. The big difference over the last ten years however has been that as natural consolidation has continued the startup of new banks (de novos) to partially offset the decline in bank numbers has not occurred. From 1998 to 2008 there were over 1600 de novo applications and over 1,000 new banks started. Since 2008 there have been only 11 new banks started and none in Kentucky.

That is a frightening trend.

There are many reasons for the decline in de novos – weak economic conditions following the Great Recession; historically low interest rates and margins; excessive regulatory burden and costs; and the high cost of getting a new application approved, just to name a few. The real culprit, I believe, is the continued sluggish earnings performance of the banking industry, especially for small banks. In 2018, banks with assets less than $100 million in assets earned a 1.02% ROAA and 7.59% ROE, while banks over $100 million earned a substantially higher 1.35% ROAA and 12.00% ROE. Kentucky banks with less than $100 million in assets earned only a 6.34% ROE. Without consistent strong earnings performance the banking industry, and especially de novos, will have a hard time attracting new capital.

Consider, in today’s environment that it may take $25 million or more of new capital to get a de novo application approved (the old number was more like $10-15 million, or sometimes less). Ask yourself, if you had $25 million to invest, would you invest it in a highly regulated industry where if things go really well after four to five years you may get an 8-10% return on your investment? Probably not.

Without a vibrant de novo pipeline to help stem the tide of consolidation, the number of banks in the US and KY will surely continue to decline at a rapid pace. That would be a sad result for the banking industry, and many local communities, as small banks continue to disappear and be replaced by larger banks or branches headquartered elsewhere.

Today in the US, 627 counties are only served by community banking offices, 122 counties have only one banking office, and 33 counties have no banking offices at all. It’s a serious problem that the banking industry and the regulators need to address.

Fortunately, the FDIC, who as the deposit insurer must approve de novo applications, is well aware of the issue. In a recent ABA article, Jelena McWilliams, the new Chairman of the FDIC, said, “I do not profess to know what the right number of banks in the U.S. is, but I recognize that, like many competitive industries, a dynamic banking sector needs new startups entering the marketplace. De novo banks are a key source of new capital, talent, ideas, and ways to serve customers.

Most de novos are traditional banks that offer services and products to underserved communities and fill gaps in overlooked markets.” In response, the FDIC is taking steps to help make the application process easier and provide more insight into the approval process. They are also offering outreach programs to encourage de novo activity.

Without a vibrant de novo pipeline to help stem the tide of consolidation, the number of banks in the US and KY will surely continue to decline at a rapid pace.

That is a good start but, in my opinion, the focus should instead be on how do we help all banks, and especially small startup banks, be more successful? Capital will always go where there is opportunity and the sad truth is right now investors don’t see enough opportunity in the banking industry. If they did, lack of de novos would not be a problem.

What we need is for industry leaders, bank regulators and lawmakers to focus on finding ways to be more supportive of small banks through reduced regulatory costs, less restrictive revenue streams and lower tax burdens (i.e. KY Bank Franchise Tax) which will result in higher and more consistent profitability.

De novo activity and bank earnings do seem to be improving recently so maybe the tide is turning and we will see more new banks on the horizon. If we truly want a vibrant, diverse and growing banking system in Kentucky and the US and not just a group of very large banks that dominate the landscape we have to find a way to make banking a more attractive investment for investors.

17 | KENTUCKY BANKER

Strategies to Win

by Sean Payant, Chief Consulting Officer, Haberfeld In our ever changing industry, many community bankers fall into the trap of trying to grow market share by following the lead of the “big banks.” And many of them are finding it just doesn’t work. Customers continue to flee from banks that focus on regular service charges and complicated products. Ask yourself, “As a consumer, would you think your pricing structure was fair?” As bankers we need to look through the lens of the customer.

Bank of America announced in January 2018 they were once again complicating their checking offerings for a segment of customers.

While some accounts were grandfathered, others were moved to a basic account for a $12 monthly fee unless the customer maintains a $1,500 balance or has at least one $250 direct deposit.

The number one reason consumers switch banks is because of service failures which often mask themselves as unexplained nuisance charges or fees. Numerous studies published by The Financial Brand consistently show consumers hate monthly service charges, minimum balance requirements and confusing products and services with too many variables and too many “requirements” to follow.

In an increasingly competitive market place, community bankers need to focus on customer perceptions in order to leverage their competitive advantages. In any given market most community financial institutions believe their biggest competitors are the big banks. So let’s compare your institution to one of the top four. Since customer perception is reality, we will have to draw some conclusions on what customers are likely to believe.

• Location: The number one reason customers choose a bank is based on location. The average community bank in the United States has six branches. Bank of America currently has more than 5,000 locations and announced in February 2018 they are opening 500 more. This is a huge advantage given that location or convenience remains a primary reason for selecting a financial institution.

• Marketing Dollars Available: In 2017 Wells Fargo budgeted $593 million for marketing. The average community bank spends less than $600,000 per year. Spent wisely community banks can grow their customer base and double account openings.

• Product Offering: Perception is reality. If you took a random survey of people on the street and asked them: “Which bank offers the most products and services – Bank of America or your bank?” Most people would answer Bank of America based on perception. The reality is most community financial institutions offer nearly everything the majority of consumers and businesses need. With that said, community banks cannot and should not try and copy the big banks to match their products. Since you don’t have the most locations, it is imperative you have a more compelling offer.

• Pricing on Deposits: Based on perception most people assume one of the big banks pays the best. The reality is almost every one of our clients across the U.S. pays higher rates on deposits than the big banks.

18 | KENTUCKY BANKER

Capitalizing on Your Competitive Advantages

• Too Big to Fail: During the financial crisis the government stepped in to prevent big banks from failing. Yet from 2009-2014 numerous community banks were closed on a regular basis. This causes consumers to pause. Who do you think they perceive as more stable?

• Customer Service Culture: All things considered, who has the ability to most fully know their customers and serve them and their business needs –Bank of America or your bank? This is an area in which community banks can win hands down; however, community banks rarely make this a priority. Frankly, it has been my experience that most community banks give “lip service” to customer service.

• Capitalizing on Your Competitive Advantages: Clearly big banks have a few distinct competitive advantages and a number of perceived ones. Unlike community banks they also have a much higher cost structure and are less nimble. Because community banks operate on a very different business model, they can offer more personalized services, lower fees and compelling products. Pricing and service still matter.

Up to 15% of consumers change financial institutions in any given market in any given year. It is difficult to get people to switch banks. People switch banks for a variety of reasons but it is generally event driven.

The goal is to get people to choose your institution when they are ready to change.

Being top of mind when people are ready to switch is key. Since convenience is the primary selection criteria for customers, you should be focusing your marketing on the proximity of your branches for new retail and business customers in your specific market area. Once you’ve attracted those customers, you can use service as a differentiator to maximize your share of wallet through added relationships and a strategic approach to cross-selling additional products and services.

Should you follow the big banks lead and start charging fees? If you start charging for checking accounts, you will ultimately drive good customers to banks with more locations and all of the other perceived advantages discussed above. The best way for a community bank to make up the lost fee income is to grow their customer base. Nearly every community bank branch in the United States has excess capacity.

They could double their customer base and still not need to add staff.

The key to growing customers is to lead with products that are good for customers, simple and logical, easy to sell and easier to buy, and yes, that makes money for your bank.

Community banks that follow the lead of the big banks will lose! The big institutions have too many advantages – some real and some perceived. Community bankers need to differentiate by leading instead of following.

Sean C. Payant, Ph.D., is Chief Consulting Officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community-based financial institutions. Sean can be reached at 402.323-3614 or Sean@haberfeld.com

CUB Has a “Big Day” Walk into your local branch of Citizens Union Bank (CUB) and you may see red and gold dragons and lanterns, Rapunzel’s Tower, a Smart Car, a motorcycle, or even a full- size bed. If you are there on a “Big Day,” employees may greet you wearing pajamas, Hawaiian shirts, or a chef’s hat and offer you fortune cookies.

“Big Day” is part of Citizens Union Bank’s People Helping People (PHP) program. “We created PHP to generate fun and excitement in our branch locations for both potential and existing customers,” says Jeanne Willard, Vice President-Retail Training and Support Administrator. “Every six to seven weeks CUB has a new gift offering and kicks off the cycle with a “Big Day” to showcase the creativity of our employees in developing a theme centered around the gift offering.”

For 128 years, Citizens Union Bank has been committed to its Kentucky communities and employees. They know that creating a fun workplace is important to their business. It helps improve communication and collaboration among employees, and it encourages others to engage with your organization. “Our local businesses have joined in on the fun and allowed us to showcase their products as part of the decorating themes,” says Willard.

Movies help spark themes “We went a little out of the box for our decorating theme for this cycle’s frying pans,” says Stefanie Hardin, assistant branch manager of the Elizabethtown branch. “I’m a Disney fanatic and thought of the movie “Tangled” where Rapunzel uses a frying pan to knock out Flynn the thief.” The branch decorated its lobby with Rapunzel in a tower and a window with the phrase “Hit in the face with fees, we offer free checking and a free gift.”

You may see red & gold dragons & lanterns...

Employees and customers get involved “Here in E-town, we go big or go home on our decorations,” says Hardin. “Employees like the program because it makes us different than other banks around here. It’s not an old stuffy bank, it’s lively, it’s fun.

Customers come in and ask us about the decorations. They want to know what we’re doing next.”

Most Big Day celebrations occur on Fridays. “Since the Walmart branch is open on Saturdays, we usually get a rush on new accounts after the Big Day,” says Wilcox.

“I always have so much fun with each Big Day cycle,” says Walker.

“The program sparks a lot of conversation with customers.”

Sharing customer and employee favorites “Our customer favorite was the rolling luggage gift offering,” says Hardin. “We decorated the branch like an airport – complete with arrivals, departures and baggage claim. On the Big Day employees dressed as pilots, flight attendants, and tourists.”

Wilcox’s favorite was a Pyrex bowl gift offering, a “Keeping it Fresh” theme and ‘90s movies and music decorations. His favorite customer reaction came recently from an older gentleman who said his granddaughter asked him to take her to the bank to see how they had decorated the horse in a prominent branch photo. When asked which cycle was her favorite, Walker had a hard time picking one – she’s loved them all because it allows her and the other employees to show their creative sides. “If I had to pick one though, it would be an early ‘Alice in Wonderland,’” says Walker.

Each branch has a decoration budget, but many said they also bring in things from home, recycle previous decorations or borrow from another branch. “My daughter will be glad to have her Rapunzel doll returned,” says Hardin.

Crystal Walker, branch manager at the Weissinger branch also likes to think outside the box for decorating themes and ideas. “The Imperial Home name on the frying pans and my kids’ love of Disney got me thinking about ‘Kung Fu Panda’ and ‘Mulan.’” With a mostly red and gold color scheme, Walker used paper lanterns seen in traditional Chinese celebrations along with dragon faces and bodies. “On the Big Day we set out fortune cookies and Chinese good luck coins with a note wishing customers ‘good fortune and luck in the new year,’” says Walker.

The team at CUB’s Walmart branch went with a breakfast theme using the movie, “Breakfast at Tiffany’s” to spark decorating ideas. A smaller branch, the team placed pictures of breakfast foods, Audrey Hepburn, and the iconic blue pearls around the branch. “We like to dress up and have fun for our Big Days,” says Tate Wilcox, customer service leader.

He and another team member wore chef’s hats and others dressed up like Hepburn.

CITIZENS UNION BANK (CUB) has been around since 1888, so we’ve been through a lot. We’ve seen wars, depressions, terrorist attacks, and recessions. Yet here we are; always making it through and coming out the other side with continued Strength, Longevity and Trustworthiness.

19 | KENTUCKY BANKER

Kessinger to Retire from First State Bank of the Southeast After sixteen years working devotedly as the Regional President of the Lexington area for First State Bank of the Southeast, Greg Kessinger, a resident of Lexington, Kentucky is set to retire in April.

Kessinger, joined First State Bank of the Southeast after thirty-one years’ experience in the banking field. During his time at First State Bank of the Southeast, he was responsible for the direction and growth of our Lexington region. He attended the University of Kentucky and the LSU School of Banking. He was also instrumental in the merger of First State Bank of Pineville and the Lexington Bank in July 2004.

Kessinger started his banking career in 1972 with the First Security National Bank and Trust Company of Lexington, Kentucky. In March 1997, prior to his career with First State Bank of the Southeast, he joined with two other individuals to form a new community owned and operated bank in Lexington, Kentucky.

“Greg is an exceptional leader who will leave behind a distinguished legacy of professional achievement and personal integrity.”

Katherine J. Reese Chairman of the Board/CEO First State Bank of the Southeast

After raising $10 million in capital, the new Bank opened in November 1997 and was named First Security Bank of Lexington. Kessinger’s primary responsibilities at the new bank included primary oversight of the Bank’s loan portfolio. Additional responsibilities include co-managing business development efforts, loan operations, market development and branch administration.

In August 1992, First Security National Bank was acquired by Bank One, NA. Mr. Kessinger resigned from Bank One in 1994 to become President and Chief Executive Officer of Whitaker Bank, N.A. in Lexington, Kentucky. He also served on the bank’s Executive Committee and Board of Directors. He resigned the position in March 1997 to join First Security Bank’s managing organizers in order to charter a new bank in Lexington.

After the merger, he became Executive Vice President and the Regional President of the Lexington Market. Kessinger also served as a member of the Director’s Loan Committee. He has also served on the Board of Directors of First State Bank of the Southeast, the Board of First State Bank of Pineville and First State Bancshares.

“Greg is an exceptional leader who will leave behind a distinguished legacy of professional achievement and personal integrity,” said Katherine J. Reese, Chairman of the Board and CEO of First State Bank of the Southeast. “Over the years, Greg has touched the lives of thousands of customers and employees and the First State Bank “Family” will greatly miss his wisdom and dedication,” further stated Reese.

Kessinger’s civic activities include directorships on the following boards: Bluegrass Tomorrow, Lexington Kiwanis Club, Cardinal Hill Hospital, American Red Cross, & Chairman of Resources Education Assistance for Community Housing.

20 | KENTUCKY BANKER

Greg Kessinger, Retiring Regional President (Lexington) First State Bank of the Southeast

Is the Absence of Risk Stunting the Next Generation?

by Michael Berman, Founder & CEO, Ncontracts There’s no shortage of news stories and studies telling us that this generation of children is the most parented and protected in America’s history. When it comes to childhood, experts believe we have “a cultural emphasis on eliminating or minimizing physical risk.”

Children of the 1970s and 1980s recount stories of the joys of laissez-fare parenting. They rode their bikes all over town until dinner time and knocked on friends’ doors instead of having their parents plan playdates. Not to sound like the curmudgeon who walked to school uphill both ways in the snow, but I remember making the half-a-mile walk to elementary school by myself each day. Today parents feel obligated to walk their second graders the quarter mile to school. I know, because I did the same.

As children grow older, parents can track their whereabouts and screen time, creating a dynamic with more oversight and less freedom. There’s also less opportunity to engage in risk judgement and decision-making.

It’s a problem. As Jess Row described it in The New Yorker, “This concern for children’s whereabouts—physical and psychological— isn’t just warding off some kind of catastrophic danger; it’s about an aversion to any kind of risk, to even the smallest mistake or setback.”

The problem with living a risk-free life is that it doesn’t last forever. Eventually, children become adults and enter the workforce. There, they’ll have to navigate the perils of the business world (not to mention the personal challenges of adulthood). If we don’t give children the opportunity to encounter reasonable, relatively low-stakes risk, how will they be prepared to identify, understand, and deal with risk at the enterprise level? Our experience with risk teaches us a few things: Makes us better decision makers.

When a child is faced with a reasonable risk, he has to make a decision and then review the outcome. For instance, a child might have to decide whether or not to try and jump over a stream when walking on a trail.

The child may clear the stream or he may end up soaked with muddy water. Either way, he learns a valuable lesson. He absorbs information about why his decision worked or failed and what could have been done differently. He’ll be more informed the next time he faces a decision.

Gives us confidence that we can overcome obstacles.

Every time a child makes a decision for herself, she becomes more comfortable with decision making and consequences. She’ll learn how to cope when something goes wrong and that it’s possible to take corrective action and/or try again. It develops persistence and grit. It will also make her more likely to anticipate potential complications and have a plan to mitigate them.

Helps us assess risk as a group.

Decisions aren’t always made at the individual level. Sometimes children will have to decide what to do as a group. These situations help

kids learn to speak up when they perceive risk and offer solutions. They also learn to listen to input from others.

Teaches us to work independently.

Dealing with risk requires a degree of cerebral effort. Those left to face a risk on their own learn how to work out problems without immediately running to others for help. They grow up to make much better employees.

Banking inherently involves risk. There’s the basic risk that customers will default on loans or that a poor economy will reduce loan growth.

There are runs on the bank and robberies. From a more strategic standpoint, there’s the risk that new competitors will have an advantage that could take away market share. And those are just a few. The list goes on and on and on. As new risks continue to emerge—everything from cyber risk to compliance burden— our industry will continue to need board members, executives, and risk managers who are comfortable evaluating, measuring, and mitigating risk.

While reducing the risk our children face may seem like a gift, exposing them to reasonable risks is just as valuable. As more organizations discover this, the pendulum for childhood risk may be shifting. For example, last year The New York Times reported on a school in England that swapped out plastic play equipment for piles of wood, crates, loose bricks, log stumps, hammers, saws, and a mud pit to “bring in risk” and build resilience.

I admit I have some serious reservations about giving kids saws to play with, but perhaps I’m being overly cautious. If we never let our children use sharp objects, they’ll never get a feel for how they work.

Instead we’ll develop kids who are afraid of them or kids who don’t respect them.

I’d know which person I’d prefer to hire.

ABOUT NCONTRACTS Ncontracts’ risk and vendor management software and services enable your organization to achieve your risk management goals with user-friendly, cost-saving solutions. We provide seamless integration for total risk management, backed by dedicated support, unlimited training, and guaranteed accuracy. Visit ncontracts.com and contact Selina Parrish at the KBA to get started with Ncontracts.

21 | KENTUCKY BANKER

MAY 9, 2019 / 9:00 AM - 4:00 PM (LOCAL TIME) / KBA OFFICES The constant change in the community bank CFO’s environment - regulatory, legislative, and accounting - is creating very real challenges and burdens. In the shifting landscape of our industry, CFOs are confronted daily by situations that call on every bit of their expertise.

This forum will help you stay current on the issues affecting you by covering asset/liability management, regulatory changes, investment portfolios, and other relevant topics. In addition to the impressive line-up of industry experts, the program allows for extensive peer interaction and resource sharing.

Balance Sheet Strategy: Best and Worst ALCO Practices Todd Taylor, President, Taylor Advisors Investment Strategy in a Rising Rate Environment Todd Patrick, SVP-Bank Correspondent Division Centerstate Bank Non-Maturity Deposits & Interest Rate Risk Management P.J. Cole, Director of Client Services, Empyrean Solutions Measuring and Managing Liquidity Paul Allen, Shareholder, Saltmarsh Cleaveland & Gund Maturing your Capital Management Program Henry Hawkins, Partner and Financial Institutions Practice Leader, MCM CPAs & Advisors CECL - Where are We Now? Sam LaFollette, Assurance Principal, MCM CPAs and Advisors

Ncontracts & TRUPOINT Unite!

KBA Endorsed Vendor Ncontracts, the leading provider of active risk management solutions for financial institutions, has acquired TRUPOINT Partners, adding lending compliance solutions to the company’s integrated risk management platform.

cludes 1,250 financial institutions located in all 50 states. The transaction demonstrates Ncontracts’ ongoing investment in growth and innovation, and a commitment to comprehensive risk management for financial institutions in the United States.

“We are thrilled to add these great TRUPOINT customers and employees to the Ncontracts family. The team at TRUPOINT has built a strong reputation as an innovative leader in lending compliance solutions, which includes fair lending, CRA, and HMDA,” said Michael Berman, chief executive officer of Ncontracts. “This acquisition is the natural progression of Ncontracts’ strategic growth plan. TRUPOINT enables us to provide a unified risk management solution and best-in-class service to help financial institutions reduce risk, improve compliance, and control costs. We are very excited about the opportunities moving forward together.”

Terms of the acquisition were not disclosed. Michael Berman will continue his role as chief executive. Trey Sullivan, the current chief executive officer of TRUPOINT Partners, will continue to lead the TRUPOINT division and Lending Compliance solutions for the newly-combined company.

The combination delivers a suite of comprehensive risk management software and services to a rapidly expanding customer base that in-

“The combination of both companies is very exciting. Together Ncontracts and TRUPOINT create an opportunity for all financial institutions to benefit from an integrated risk management platform that connects lending compliance and business intelligence with overall risk management,” said Sullivan. “The strength and experience of the combined teams will further our shared vision for growth while helping our customers reduce risk and lower the cost of regulatory compliance.”

IT STRATEGIC PLANNING MORE A MOVING TARGET THAN A 3-5 YEAR ROAD MAP In the rapidly evolving technology environment, the IT strategic plans of today have become far more than the hardware and software replacement schedules to which we have become accustomed. Financial institutions are competing against new market players that hail from all across the country, not just around the corner. These new players and the new technologies they specialize in are increasing customer expectations for the latest and greatest products and services. With this increase in technological options, comes increased external and internal threats that in turn result in ever-changing regulatory requirements and an increased focus on cybersecurity. With this complicated mix of factors to consider, an IT strategic plan must become a living document so that it can more fully ensure the optimization of technology expenditures alongside the mitigation of risk.

A solid IT strategy, based on the current state of the security practices, will outline the objectives to be addressed in the next 12 months, the mid-terms goals over the next 18-24 months and the long-term objective over the next 36 months. However, as the financial institution environment is constantly changing, the overall planning strategy must take an enterprise-wide IT security governance and cybersecurity approach.

In an ideal world, a strategic plan could be managed a piece at a time until it is completed. Unfortunately, the real world will inevitably disrupt plans and force a reprioritization of projects and thus analysis of strategy. Based on customer expectations, regulatory focus and desired growth, various operational departments will change their strategic plans to consider new projects, updated services, new applications, or new delivery channels on a regular basis. Due to a greater focus on digital transformation across industries but especially for financial institutions, the IT strategy is more important than ever and as such must now respond quicker to the organization’s circumstances, objectives and priorities.

Besides the changing internal factors, technology itself can change faster than

a business’s operations can, and the delayed response can introduce security risks.

Cybercriminals are constantly trying to penetrate business networks by exploiting vulnerabilities in applications, web browsers and operating systems. As many advanced attacks utilize common applications like Adobe Acrobat, Adobe Flash, Microsoft Office and various web browsers, software vendors are issuing continuous streams of security patches. These patches come at a cost to the organization. Besides interrupting employees’ workflow or business processes, sometimes the patches cause conflict with other applications. If unpatched vulnerabilities remain, it can result in damage, regulatory fines, penalties and reduced customer confidence.

With the internal and external environment changes, it is important to understand the knowledge, experience, and capabilities of the financial institution staff. If the IT staff does not have both the latest knowledge and necessary experience, then an IT strategy must be developed in partnership with adequate vendors. As security awareness does not stop with the IT staff, a strategy to provide basic education and training across the organization is necessary to increase awareness of the security threats and risks in the environment. A robust security training and awareness plan can prevent, detect or address risk exposures and thus reduce loss or damage due to accidents, errors and omissions of users.

These constant changes result in the need for an on-going IT risk management process to evaluate the impact of internal and external threats on the organization and which risks to accept, mitigate or transfer. A constant evaluation of how information is handled, stored, shared or exchanged internally and externally is necessary to determine which information assets must be protected and to what extent. As several applications may be partially or completely integrated and delivery systems may change, the cyber risk and control structure must be monitored and reassessed to ensure resiliency. Security personnel must have real-time information about attacks to prioritize activities and detect vulnerabilities and irregularities so

that incidents can be addressed quickly.

These detective and corrective controls may result in updates to the IT strategy and a reprioritization of projects to deter and prevent cyber-attacks.

As the financial institution landscape of risk and threat continues to shift, it is essential that any approach to IT strategic planning be nimble and aware. The once three to five-year plan needs to now be a constant evaluation of hardware, software, network configurations, delivery channels, security controls, knowledge and audit results.

For more information on IT strategic planning for financial institutions, please contact one of the authors below.

By Richard Taylor, CISA Assurance Principal Richard.Taylor@mcmcpa.com

By Michele Welscher, CPA/CITP, CIA, CISA Assurance Manager Michele.Welscher@mcmcpa.com

MCM CPAs & Advisors

www.mcmcpa.com | 888.587.1719

Expert guidance, beyond the bottom line.

2019 >> What to Expect? >> Sarah Sauceda, Associate General Counsel Compliance Alliance Twenty-eighteen was a rather exciting year for banking compliance. The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) provided immense relief to community banks and also proved that acronyms don’t really have to be that short. Updates to the TILA/RESPA Integrated Disclosures (TRID) and the Home Mortgage Disclosure Act (HMDA) have kept everyone on their toes trying to guess what those pesky grey areas mean. Bank officers learned the true meaning of who a “beneficial owner” really is. And not unlike like a Peach from Super Mario, those ever present flood regulations have been saved once again from lapse.

With those show-stoppers, I think I can speak for all of us when I say that twenty-nineteen has a lot to live up to. Though, it does look as though the new year will not disappoint! Major twenty-nineteen provisions set to take effect in the 2019 include: expansion of the Same-Day National Automated Clearing House Association (NACHA) rules; adjustments to the Truth In Lending (TIL) annual thresholds; the Prepaid Account Rule Amendments; and Amendments to Regulations CC (Reg. CC).

First up on this star-studded agenda are the NACHA expansions.

In a nut-shell, this expansion to the Same-Day rules was implemented to enable faster funds availability for ACH transactions, elongate Same-Day ACH processing hours, and increase per-transaction dollar limitations. After the initial adoption of the Same-Day rules, the NACHA voting membership approved the aforementioned new set of rules which take effect in three separate phases. Each separate phase has a separate effective date.

The first phase of the expanded rules provides enhanced access to same-day ACH transactions. It allows Same-Day ACH transactions to be submitted for an additional two hours each and every business day. This phase becomes effective on September 20, 2019. The second phase of the expanded rules ups the per-transaction dollar limit from $25,000 to $100,000. This means that a single Same-Day ACH transaction will be limited to not being over $100,000. Any ACH transactions over that $100,000 limit won’t be rejected, though. They will just be processed for next-day settlement rather than Same-Day processing.

This phase becomes effective on March 20, 2020. The third and final phase increases the speed of funds availability for certain, specific Same-Day ACH transactions and certain next-day ACH credits. This phase becomes effective on September 18, 2020.

24 | KENTUCKY BANKER

Next on the agenda is the set of TIL threshold adjustments. Now, for seasoned compliance professionals, you know a TIL adjustment is not all that novel. However, they are important and worth mentioning. These adjustments affect open-end consumer credit plans under the CARD Act in that the adjusted dollar amount for the safe harbor in respect to a first violation penalty fee will increase to $28 – up $1 from $27. Under that same CARD Act umbrella, the safe harbor for a subsequent violation penalty fee will also increase $1 to $39. For HOEPA loans, the adjusted total loan threshold will be $21,459, and the adjusted points-and-fees dollar trigger will be $1,077. Finally, the threshold adjustments for qualified mortgages are as follows: “the maximum thresholds for total points and fees in 2019 will be 3 percent of the total loan amount for a loan greater than or equal to $107,747; $3,232 for a loan amount greater than or equal to $64,648 but less than $107,747; 5 percent of the total loan amount for a loan greater than or equal to $21,549 but less than $64,648; $1,077 for a loan amount greater than or equal to $13,468 but less than $21,549; and 8 percent of the total loan amount for a loan amount less than $13,468.”

Notably, however, the threshold that triggers the disclosure requirement for minimum interest charges remains unchanged. It will keep steady at $1.00 in 2019. These threshold adjustments became effective on January 1, 2019.

Now onto the Prepaid Accounts Rule Amendments (Amendments) – arguably one of the more major regulations to hit in 2019. The Amendments touch upon four areas: (1) the final effective date of the rule’s provisions; (2) error resolution and limited liability under Reg. E; (3) digital wallets; and (4) minor clarifications and adjustments.

The final date set out by the Amendments place the entirety of the rule effective on April 1, 2019. In regards to error resolution and limited liability, the Amendments provide that banks are not required to follow the liability nor error resolution provisions on unverified prepaid accounts other than on payroll card accounts or governmental benefit accounts. Further, for later-verified prepaid accounts, financial institutions are not required to follow those same provisions on disputed transactions that occurred before verification. The Amendments, for digital wallets, provide an exclusion for business relationships between prepaid account issuers and issuers of traditional credit cards from the definition of “business partner.” This would, in turn, exempt the arrangements from the hybrid prepaid credit card rules. Lastly,

the Amendments make edits to both Regulation E and Regulation Z to correct typos, provide for more consistency between the rule and the regulations, and to correct other minor oversights.

Again – the effective date for these change was April 1, 2019.

Finally, the Reg. CC amendments add a presumption and clarify the scope in disputes involving substitute/electronic checks and alterations/unauthorized signatures. The presumption addition may be summarized as follows: when an original (paper-based) check is not available for inspection, it shall be presumed that a substitute or electronic check was altered in certain situations. It should be noted, however, that the breadth of the presumption is fairly limited.

In conclusion, 2019 will pack quite a punch. Compliance Alliance can help you keep track of these changes, though.

One tool I highly recommend is the Regulatory Change Management Tracker: https://www.compliancealliance.com/finda-tool/tool/regulatory-change-management-tracker . It is updated regularly and lists out major provisions that banks should be aware of. If you have any questions, our experts are here to help you: hotline@compliancealliance.com or (888) 353-3933

Sarah serves as Associate General Counsel for Compliance Alliance. She is an Honors Program graduate who graduated summa cum laude from Lamar University in Beaumont, Texas where she received her bachelor’s degree. While at Baylor Law School, Sarah heavily studied the financial aspects of the law—focusing her attention on secured transactions and the Uniform Commercial Code. Before coming to Compliance Alliance, she worked at Frost Bank within their Credit Administration Department.

As an attorney with Compliance Alliance, Sarah is eager to help members with their compliance and regulatory questions.

Community Trust Bank Honored Community Trust Bank, Inc. was recently honored for the 10th consecutive year with the “Gold Lender Award” from the United States Small Business Administration (SBA) as Kentucky’s top volume SBA 7a Community Bank lender. The award was presented November 9, 2018 at the SBA Lender’s Conference in Lexington, Kentucky.

Additionally, Community Trust Bank was the top SBA 504 “Third Party Lender” in Tennessee in federal fiscal year 2017– 2018, with $11,480,850 of permanent loans and $6,989,000 of interim 504 loans.

During the 2017–2018 federal fiscal year, Community Trust Bank funded a total of 87 SBA 7a and 504 loans, providing access to $32,018,926 in permanent financing and $12,140,000 in interim financing for small businesses in five states (Kentucky, West Virginia, Tennessee, Virginia and Ohio). Over the last ten federal fiscal years, Community Trust has funded more than 850 SBA 7a and 504 loans, providing in excess of $165 million for small businesses in the region. In Kentucky, Community Trust Bank had 59 new SBA 7a loans authorized for $6,968,400 during the fiscal year.

“Community Trust serves many states but we are particularly grateful for the work we do together in Kentucky,” said Ralph Ross, Kentucky District Director for SBA. “Community Trust has led the way with SBA lending for many years in Kentucky and the small business lending we do together makes a big difference in our local economies. ” In the 2017–2018 fiscal year, 28 different Community Trust employees closed SBA loans.

Commercial Loan Officer Bob Watson in Versailles, Kentucky was the top SBA lender for Community Trust Bank in number of loans for the 10th consecutive year. Mr. Watson closed or increased 19 SBA loans for $752,800. He was recognized by SBA as a ten-time member of SBA’s Kentucky “Heavy Hitter” Team at the SBA Lender’s Conference.

25 | KENTUCKY BANKER

THIS IS AN ADVERTISEMENT

BEWARE OF THE RISKS OF RESTRICTED ACCOUNTS

by John T. McGarvey

mpmfirm.com

If a customer asks your bank to be surety on a bond required for her to be appointed guardian for a minor’s assets, your answer would almost certainly be an emphatic: “Our bank does not do that!”

However, that is almost exactly what you’re doing when you open a restricted or blocked account for the deposit of a minor’s assets on which the guardian has not obtained surety. This typically happens when a minor is a tort victim and receives a settlement or judgment award.

While the law requires a guardian to post a bond, with surety, to assure the faithful discharge of her duties, it also allows for an exemption from the surety requirement if the minor’s assets are deposited in a “restricted account.” The account must be in a bank “subject to withdrawal by the guardian or conservator only upon authorization of the District Court.”

The account is usually opened upon presentation of an “Order of Appointment of Guardian/ Conservator for Minor”. The typical language directs the guardian to deposit the assets “into a blocked account…withdrawn only with leave of the Court…”. Even more problematic are the orders that provide the assets can be “expended” only with leave of the Court.

While your bank may view itself only in a depository role, the Court will view it as also having to enforce the Court’s order on use of the deposit account.

Your personnel essentially become special deputies to guard the minor’s assets.

Restricted accounts can be very attractive deposits; substantial average daily balances, and little account activity. But beware of the associated risks.

How will you flag the account in the computer system? Will the account screen adequately warn that a court order must authorize the withdrawal?

If you change your core system, will the restriction carry over in the new system? Is the expenditure for the benefit of the minor if the Order contains that sort of restriction?

LEXINGTON

LOUISVILLE

In our experience, once a defalcating guardian learns the depository bank is not policing the restrictions of the Order under which the account was opened, it won’t take long for a series of subsequent transactions to drain the account assets. What if the minor is only eight years old when the assets are improperly dissipated? Your bank will not only be liable for money illicitly withdrawn, it will also be on the hook for interest on each withdrawal from the date it was paid until an action is brought to recover the funds, usually after the minor is 18 and seeks the benefit of the account.

Are there defenses to a claim the bank violated the terms of the Order under which the account was established? Lawyers can always, or nearly so, find a defense. But consider the facts; a bank that may not have precisely followed a court order versus a child tort victim. Those are facts under which the scales of justice will not be balanced.

Our purpose is not to dissuade you from accepting restricted accounts. We only warn of the risks associated with them and advise you to make sure your operating system adequately notifies branch personnel of the restrictions on the account.

For checks not presented at a teller’s window, make sure the processing system kicks them out for manual review. You might consider a special account agreement that conspicuously sets out the rules with which the guardian acknowledges and agrees.

Restricted deposits can be valuable assets of a bank but the failure to properly administer even one can wipe out the profits of the entire account category.

Morgan Pottinger McGarvey is a leading banking and finance law firm representing financial institutions, businesses and individual clients throughout Kentucky and Indiana.

NEW ALBANY

BOWLING GREEN

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