Kentucky Bankers Magazine March/April 2022

2022 ANNUAL CONVENTION / SEPTEMBER 17-20 JW Marriott / Marco Island / Florida

KENTUCKY BANKER

SPRING 2022

Official Publication of the Kentucky Bankers Association

Patience . Patience. Patience. page 9 Just Because You Said It Doesn’t Mean It Is So page 11

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Homepage banner image taken by: Frank W Baker II, Hyden Citizens Bank Full image located on back cover.

When was the last time you visited your Association’s website?

Now is a good time!

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Ballard W. Cassady Jr.

Brandon Maggard

President & CEO bcassady@kybanks.com

Account Representative KenBanc Insurance bmaggard@kybanks.com

Debra K. Stamper

Chuck Maggard

EVP & General Counsel dstamper@kybanks.com

WHO WE ARE: The KBA is a nonprofit trade association that has been providing legislative, legal, compliance and educational services to its member institutions since 1891.

KBA's directors and staff work together with its members to make the financial services industry a more effective and successful place to work. The strength of the KBA is bankers unifying as an industry to speak as one voice.

WHAT WE DO: The purpose of the Kentucky Bankers Association is to provide effective advocacy for the financial services industry both in Kentucky and on a national level; to serve as a reliable and responsive source of information and education about areas of interest to the industry; and to provide a catalyst and forum for collective industry action. The KBA does this in 4 ways:

Miriam Cole

President & CEO KenBanc Insurance cmaggard@kybanks.com

Lisa Mattingly

Executive Assistant mcole@kybanks.com

Director of Sales & Service KBA Benefit Solutions lmattingly@kybanks.com

John P. Cooper

Donna McCartin

Legislative Solutions jcooper@kybanks.com

Benefit Support Specialist dmccartin@kybanks.com

Paula Cross

Tammy Nichols

Education Coordinator pcross@kybanks.com

Finance Officer HOPE of the Midwest tnichols@kybanks.com

Josh Fischer

Katie Rajchel

Director of Communications jfischer@kybanks.com

Nina K. Gottes

Accounting Manager krajchel@kybanks.com

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

1. Government relations & industry advocacy 2. Information interchange 3. Education 4. Products and services

Sponsorship & Business Development ngottes@kybanks.com

Casey Guernsey

Timothy A. Schenk

kybanks.com

Jamie Hampton

KENTUCKY BANKERS ASSOCIATION 600 West Main Street, Suite 400 Louisville, Kentucky 40202 KENTUCKY BANKER is the official bi-monthly magazine of the Kentucky Bankers Association (KBA). No part of this magazine may be reproduced without express 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 KENTUCKY BANKER editorial team.

For more information, or to submit an article, pictures or pass on a story lead, contact Josh Fischer, Managing Editor, 502-736-1283 or jfischer@kybanks.com

Enrollment and Billing Specialist cguernsey@kybanks.com

Education Coordinator jhampton@kybanks.com

McKenzie Just Caldwell Staff Accountant mcaldwell@kybanks.com

Assistant General Counsel tschenk@kybanks.com

Jennifer Schlierf Sales Support KBA Insurance Solutions jschlierf@kybanks.com

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

Natalie Kaelin, Esq.

Billie Wade

Director of Education Alliance nkaelin@kybanks.com

Executive Director HOPE of the Midwest bwade@kybanks.com

Tamuna Loladze Chief Operating Officer HOPE of the Midwest tloladze@kybanks.com

Audrey Whitaker Insurance Services Coordinator awhitaker@kybanks.com

Michelle Madison IT Manager mmadison@kybanks.com

facebook.com/kybankers Bold frame denotes management team member. Please feel free to email us, we are here to help!

2021-2022 OFFICERS & BOARD CHAIRMAN James A. Hillebrand, Chairman & CEO Stock Yards Bank & Trust Co.

PAST CHAIRMAN J. Wade Berry, President & CEO Farmers Bank & Trust Co.

VICE CHAIRMAN Ruth O’Bryan Bale, Chairman South Central Bank, Inc.

KBA PRESIDENT & CEO Ballard W. Cassady, Jr. Kentucky Bankers Association

TREASURER Mark D. Strother, President & CEO The Commercial Bank of Grayson GROUP REPRESENTATIVES Represents Group 1 Randell Blackburn Market President, McCracken County Community Financial Services Bank

Represents Group 8 Anthony Kinder President & CEO, Peoples Bank of Kentucky, Inc.

Represents Group 2 Michael W. Hunt, President/CEO The Sacramento Deposit Bank

Represents Group 9 April R. Perry Chairman & CEO, Kentucky Farmers Bank Corporation

Represents Group 3 Greg Pawley President & CEO, The Cecilian Bank Represents Group 4 Michelle Coleman CEO, Bank of Edmonson County Represents Group 5 Gregory D. Goff President & CEO, First National Bank of Kentucky Represents Group 6 Charles Beach, III Chairman, Peoples Exchange Bank Represents Group 7 D. Alex Cook President & CEO, Hearthside Bank

EDUCATION ALLIANCE REPRESENTATIVE Lanie W. Gardner Community President First Southern National

THRIFT REPRESENTATIVES Jaime Coffey President & CEO First Federal Savings & Loan of Hazard BANK SIZE REPRESENTATIVES Represents Banks with Assets of $1B or more Elmer K. Whitaker President & CEO Whitaker Bank Represents Banks with Assets at Least $200 M; less than $1B H. Alexander Downing President & CEO Franklin Bank & Trust Company

KBA BENEFITS TRUST COMMITTEE W. Fred Brashear, II President & CEO Hyden Citizens Bank

ADVERTISE IN KENTUCKY BANKER Want to advertise in KENTUCKY BANKER magazine?

CONTACT Nina Gottes Sponsorship & Business Development ngottes@kybanks.com 513-293-2467

WANT TO BECOME A KBA SPONSOR? Visit: kbasponsorship.com

KENTUCKY BANKER SPRING 2022 3 7 9 11 12 13 17 18 24 25 26 27

NEW KBA Website Chairman’s Corner Straight Talk Debra KY Banker Milestones Fair Lending KY Banks Finish 2021 Strong Cybersecurity Strength Larry Conley Pete Mahurin Bobby G. Wells Louisville/Lexington Geek

ADVERTISERS 2 6 8 15 16 19 20 22

ICBB OCCH Morgan Pottinger McGarvey K4 Architecture & Design ImageQuest IntraFi Servis 1st Bank BHG Bank Group

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READ MORE PAGE 27

2022 KBA Spring Conference Scrapbook Pages 17/19

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kybanks.com

KBA CHAIRMAN’S CORNER by James A. Hillebrand Chairman & CEO, Stock Yards Bank & Trust Co. 2021-2022 KBA Chairman

Making the Most of Your Next Conference I love attending conferences. Each one is a new chance to improve my skills and learn new ways to better the banking business. With numerous roundtables and other enlightening events throughout the year, the KBA keeps a steady stream of occasions to grow and learn.

Q: So how do I make the most of each one?

A: I bring the right attitude and a plan.

about each session available and its speakers to find out what makes the most sense to attend or send a colleague.

It’s not practical to have your entire team attend a conference, but don’t leave them out. Show the schedule of events to your managers along with the vendor list to see what interests them. Collect any questions they have or topics they’d like to know more about to be able to explore on-site and report back.

For me, the KBA Convention last fall went by entirely too quickly.

The excitement of seeing colleagues and vendors for the first time after a long pandemic-imposed separation made it hard to focus on education. These are awesome opportunities to engage with others and educate ourselves – so I do put extra work to make sure they aren’t wasted.

I suggest spending time looking at the attendee list too. This is a chance to think about the new players you’d like to meet, who you haven’t connected with in a while and who might appreciate an introduction to someone else.

Here are a few things I do to make the most of each conference experience.

Conferences are a great time to build relationships, so don’t lose sight of the importance of dedicating meaningful time to connect with others. If networking is outside your comfort zone, find an ally to help introduce you to the people you want to know better. If you already know a lot of people, look for someone who could benefit from an introduction by you.

1. Clear the calendar.

If you’re doing it right, there should not be a lot of free time at a conference. To take advantage of all a conference has to offer, it’s important to commit to truly being there.

We all have calls we have to take and meetings we can’t miss. I suggest doing whatever you can to clear out your calendar during conference days to ensure you can stay engaged and in the moment.

Doing it halfway won’t do you any favors. If you’re spending too much time trying to juggle work back at the office with networking and education at the event, you’ll lose out. It’s worth the time and effort, even if it means a busy few days afterward, to attend the entire conference and be present when you’re there.

2. Do the homework.

Conferences are a fantastic time to get a refresher on the simple things we often forget and make new connections. Plus, we have a wealth of experts at the ready to help us get up to speed on the latest and greatest vendor offerings. Keeping track of everything you want to cover can be overwhelming.

Education is an important part of our job as bankers. Our customers rely on us to be up to date on the latest technology with the sharpest skills to help them meet their financial goals. I spend time reading

3. Engage with others.

If you’ve done several conferences before, think back to your first conference and who helped you get a foot in the door. Now is a chance to pay that forward.

Remember: we’re all people and we’re all bankers.

Whether you are representing the biggest bank in the state or the smallest, we have a lot in common. Our priorities for customers have nothing to do with our bank’s size, so don’t be afraid to start up a conversation with other bankers.

4. Maximize time.

It may sound basic but one of the best things you can do for yourself during a conference is to get some sleep. (Been there. Done that.

Probably will break this advice again.)

It’s tempting to stay out a little later to network but you’ll pay for a late night the following day. To be present and ready to maximize your time at a conference, you need rest.

CONTINUED ON THE FOLLOWING PAGE

KENTUCKY BANKER | 7

continued: Make the Most of Conferences Our industry is always changing, even more now due to the impacts of the pandemic and rapidly evolving technologies. Focus on the topics that matter to you and your customers most when choosing speakers to hear and events to attend.

the notes that you made while you were away and make a point to connect with anyone who may benefit from them.

You’ll likely be busy making up for time away from the office, so be intentional about sharing and assigning action items for what’s next. Ask your teams for their reactions to what you’ve learned to keep things moving.

For me, I’m particularly interested in the potential for blockchain technology in decision making – whether that’s in lending or hiring.

I seek out the panels, speakers and vendors that interest me most and mix that in with the interests of my customers and teams.

Hopefully your colleagues will reciprocate the next time they go to a great event too!

You may need to divide and conquer. If more than one member of your team can attend a conference, be sure you split up to get the full picture of all the hot topics that are gaining traction.

5. Take action.

You went to this conference to learn, so bring that back and use it!

Annual Convention September 17-20, 2022

You’ll soak up a lot of knowledge and make plenty of new connections if you’ve made the most of your time at the conference – so don’t let it stop there.

Room block opens June 2022 Stay tuned to your inbox for more information visit kbaconvention.com

Continue the momentum of what you’ve learned by sharing it with others. Set up a meeting with your management team or add time to your next group meetings to pass on valuable information. Take

Change is inevitable, but it doesn’t have to be hard.

We stay ahead of the curve on new state and federal laws and regulations so you don’t have to.

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kybanks.com

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

PATIENCE. PATIENCE. PATIENCE. When it comes to virtues, Patience is on the ropes these days.

Instant gratification is barely fast enough. We’re a culture of executive summaries and same-day deliveries. Playing the long game takes days rather than decades, unless you’re the Senator from Kentucky. But patience remains a virtue for a reason. Of all the wise things said about it, I like Aristotle’s claim that “patience is bitter but its fruit is sweet.”

That sums up the 2022 legislative session, which saw the passage of two important bills that had taken years of patience and intense frustration. But the fruits are sweet indeed.

First HB 284 (Michael Meredith sponsor). This bill requires the Transportation cabinet to establish an electronic title application and registration system that allows submission and access to facilitate title transfer, fleet registrations and permanent fleet registrations.

Second SB 135 (Jason Howell sponsor), which establishes deadlines for county clerks to establish and maintain portals for the electronic filing and search of recorded instruments.

I can’t speak highly enough about our legislative team. After years of negotiations with the County Clerks, a re-booting of Frankfort and one Pandemic, we were able to bring to a close a long game strategy for our bankers. We missed any chance to be on the cutting edge with e-filing, as Kentucky is way behind other states on e-filing (none of which had 120 counties at the table). But patience, tenacity, and a won’t-quit attitude from both some key legislators, and your KBA legislative team, pulled this across the finish line. There’s more to be said on that, but I’m saving it for our May Group Meetings.

Developments at the national level are a very different story.

Anyone paying attention can see that our industry is losing the really critical battle; and, I don’t see how it’s a virtue to be patient about that.

“

Unity has never been as critical as in this moment, but it won’t be enough if we can’t figure out how to also fight harder and smarter –– and in a hurry.

ALL our regulators and our national trade group are pursuing Environmental, Social and Governance goals at any cost. Do you know anyone who doesn’t want clean air and equal opportunity for all? I certainly don’t. But can those goals be pursued rationally and honestly by means that do not destroy American industry and norms in the process? Can we acknowledge across our partisan divide that America could go to zero carbon output without making a significant dent in the global carbon footprint? Will ‘equal opportunity’ become an empty phrase when the private sector is crushed beneath the weight of ideologically skewed wish lists? And can we not admit the obvious truth that an industry like banking cannot be governed properly by people who have never in their lives worked a day in that industry –– much less by people with overt contempt for it.

The long game we should be following is the one being played by idealogues in the federal bureaucracy. Maybe it’s a game our founders didn’t see coming, because their Constitution failed to protect us from a bloated bureaucracy that largely evades any accountability to the electorate. Presidents come and go, leaving them in place to seize opportunities as they come to transform America to their taste.

In recent months, they’ve had opportunities galore. One was the coup d’état of FDIC Chairwoman McWilliams by the Acting Chairs of the FDIC, OCC and CFPB. I’ve never, in my 40+ years of banking, seen these agencies work in such tandem, which suggests her competence and stature was a significant threat to their goals. One goal was apparently to discredit our industry with consumers. How else to explain references like “junk fees”?

At the risk of having thought police at my door before dark, I’m disgusted by what I see unfolding in Washington. Self-interest, hypocrisy and incompetence are nothing new in any nation’s seat of government. But it may have taken the reliable cover of a national media to allow the kind of brazen indifference to the governed that sums up Washington DC today.

CONTINUED ON THE FOLLOWING PAGE KENTUCKY BANKER | 9

SINCE 1891

continued: Patience. Patience. Patience.

For the banking industry, the rapid reversal in regulatory attitude from the current regime stings in a particular way. When the COVID-19 pandemic hit, the ONLY way the federal government could get to the American public with speed, efficiency and safety was through the banking system. No one reading this needs reminding what we did as individuals and as an industry to mitigate the economic fallout of a mismanaged pandemic response. Practically overnight, we became villains?

I’m not buying it and neither is the American public. For example, Morning Consult found that nine out of ten consumers value overdraft protection offered by their bank.

Regulators do everything in the name of the consumer.

What they don’t see, that we do on a daily basis, is that just about every change they are trying to make is hurting the consumer and costing them more money. It’s because of that, I feel there is a long game being played against our industry.

10 | KENTUCKY BANKER

Elections have consequences. And when it comes to the federal bureaucracy, it can feel like they don’t offer much hope of change. Patience with that stopped being a virtue a long time ago. There’s not a banker in America that can afford the self-interest, hypocrisy and incompetence that we’re up against.

Unity has never been as critical as in this moment, but it won’t be enough if we can’t figure out how to also fight harder and smarter –– and in a hurry.

kybanks.com

Just Because You Said It Doesn’t Mean It Is So UDAAP is not a friend to customers or bankers.

I have felt the irritation of UDAAP stuck in my craw since it was amended to add that second “A” in 2010. The change did not seem meaningful or necessary.

Before the passage of UDAAP, we all pretty much new what was covered by UDAP and how to compliance with its restrictions.

The standards for each term, “unfair” and “deceptive” were pretty clearly established.

Also, it was considered common practice, if not part of the actual definitions, that a bank had not committed a UDAP violation if there were other regulations that governed the act being reviewed that established consumer protections—like disclosures and such.

Because it was so definitive, a cited UDAP violation prior to 2010 was already considered to be a very bad mark on a bank’s reputation and goodwill.

Then comes Dodd-Frank in 2010 and a new term “abusive” is added to the mix, making the acronym UDAAP-pronounced the same, but applied very differently.

Now, we have two terms defined, but one not. And the one that is not defined causes the problems. The first problem that I had right off the bat is that the term abusive is by anyone’s natural instinct much harsher than either unfair or deceptive.

I know you already know this, but let me just vent a bit. Let’s use the following non-bank example: • If you are preparing dinner for two children, it could be considered unfair if you only allowed the children 10 minutes to eat their dinner before the food was removed so that you could get an early start on the dishes. One, it could cause substantial injury by removing necessary nutrition before it is able to be consumed. Two, it cannot be reasonably avoided because you are their primary or sole provider of nutrition. Three, the benefit of cleaning up earlier does not outweigh the possible injury to the children.

• If you are preparing dinner for two children, it could be considered misleading if you tell the children that because you like to clean up early there may be lollipops provided to

children who finish dinner in less 10 minutes and the scenario goes like this: The first child finishes in 8 minutes and is given a lollipop. The second child finishes in 9 minutes, but you explain that there was only one lollipop and that you are so sorry that you can’t give them a sucker, but explain that they did not have to finish their dinner in less than 10 minutes. That could be considered misleading because you left out the material information that there was only one lollipop and a child misinterpretation is reasonable. It does not matter what your intent was or that you truly believed that your second child, who is a slow eater and does not like what you served, would not make the cut off or that you actually believed that Amazon would deliver a box of fresh lollipops that day!

• Finally, abusive. Dodd-Frank provides that abusive applies when the practice 1) materially interferes with the ability of “a” consumer to understand a term or condition “or” 2) takes unreasonable advantage of “a” consumer’s: lack of understanding of the risks, costs or condition; “or” inability to protect its interest; “or” reasonable reliance on a covered person to act in their interest.

I have the word “a” in quotations because it is uncertain whether that means the customer abused or any customer.

Meaning, the parents in the example above might be abusing both children in the following example, even if one of the children understands everything that is going on.

What gets us into trouble is not what we don’t know.

It’s what we know for sure that just ain’t so.

Mark Twain

So, continuing with our story. Two children sit down to dinner.

The parent places two lollipops on the table says that a lollipop will be provided to the first child that finishes dinner in less than 10 minutes, but one child is under the age of two and unlikely to understand the directions.

CONTINUED ON THE FOLLOWING PAGE

KENTUCKY BANKER | 11

SINCE 1891

continued: Just Because You Said It...

The younger child, who does not understand the directions finishes the dinner within the time allotted, but does not accept the lollipop offered. The second child finishes just after ten minutes but is told they cannot have the lollipop.

Is that ABUSE? Maybe, but was anyone really harmed. The small child did not want the lollipop and the older child did not win it.

It is definitely bad parenting, but is it abuse? I think it is hard to know without more guidance, such as: 1. Does it apply to the “abused” customer or any (“a”) customer?

2. Does the customer have to be vulnerable?

3. Is intent required?

4. How do you know if the customer does not understand or cannot protect their interest?

Guidance would be helpful, but is not likely to appear until more court cases are brought. In the meantime, your bank is at constant increased risk and the CFPB will likely continue to expand their hold, just as they have last week by increasing the reach of discriminatory practices violations into ALL banking practices, not just lending…through the use of UDAAP. And before anyone says banks should not be discriminating against customers, I think we all agree. All customers should be provided the same products and services regardless of age, race, sex etc. However, think of products that are designed for particular stages in life—maybe for first year college students, maybe for people entering their golden years after age 70, maybe for customers who have multiple products with the bank already. How would you like to be charged with discrimination for trying to meet your customers where they are?

KENTUCKY BANKER MILESTONES Bentley Retires as Chairman of the Bankers Title of Central Kentucky Board of Governors After serving as Chairman of the Board at Bankers Title of Central Kentucky since the Agency was organized in October 2001, Mr. Claude Bentley has retired from the board and was presented a plaque acknowledging his 20 years of service to the Bankers Title of Central Kentucky. Mr. Bentley currently serves as a Director at Peoples Exchange Bank, Winchester. The Bankers Title of Central Kentucky board elected Mr. Hank Allen to serve as Chairman. Mr. Allen also serves as Chairman of Commercial Bank in West Liberty. Pictured: Hank Allen, Claude Bentley and Norma Carrol.

Traughber Recognized for 50-Year Career Gary M. Traughber, Chairman, President & CEO of Elkton Bank and Trust Co., was honored for his 50 years in the banking business.

12 | KENTUCKY BANKER

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COMPLIANCE CORNER

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

FAIR LENDING

The Challenge of Meeting Regulatory Change On March 16, the Consumer Financial Protection Bureau (CFPB) “announced changes to its supervisory operations to better protect families and communities from illegal discrimination.” “The CFPB will scrutinize discriminatory conduct that violates the federal prohibition against unfair practices. The CFPB will closely examine financial institutions’ decision-making in advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.”

While these announcements from the CFPB, and many other agencies, are not new, the question remains, what is “fair lending”?

Practitioners can look to laws like the Equal Credit Opportunity Act (ECOA), Consumer Financial Protection Act (CFPA), Home Mortgage Disclosure Act (HMDA), Fair Housing Act (FHA), the Real Estate Settlement Practices Act (RESPA) and others for direction. In reality, however, these laws generally only provide a baseline standard that tells what is not fair lending; not “what is fair lending.”

When you talk to regulators and regulatory experts, most say, “You will know a fair lending violation when you see it” and it is not fair lending if your practices have a “disparate impact.” That doesn’t really provide clear guidance which we look for as practitioners. Furthermore, the regulatory enforcement action database generally only tells us the worst of the worst with acts of clear discrimination and redlining that leaves out real guidance for those institutions working to implement a robust compliance management system.

The reality is that banks must be proactive in utilizing every tool at their disposal to ensure fair lending. This includes understanding that review is not just at consummation at the loan; but rather throughout “the life” of the loan.

In reviewing loan practices at the time of consummation or “front end,” there are a number of areas to review for compliance. This includes reviewing the numbers of applications and approvals in low-to-moderate income areas. It includes ensuring that your marketing targets everyone in your service area, not just specific income levels and that your strategy is understandable to all people, including those individuals with English as their second language. This also includes reviewing loan policies to ensure your underwriting policies are non-discriminatory and that your employees fully understand the policy. A compliant fair lending program avoids minimum loan amounts and programs that may have unintended negative consequences.

For loans in default, the CFPB and other regulators expect banks to have resources to respond to requests and applications for loss mitigation assistance to reduce “avoidable” foreclosure. These action

items include: being proactive; working with borrowers; addressing language access; evaluating income fairly; handling inquiries fairly; preventing avoidable foreclosures; and using all tools to communicate with borrowers within legal confines.

Regardless of whether you are viewing fair lending at the beginning, middle or end of a loan, the key to a successful fair lending management system is to analyze data and document your actions. In order to be successful at fair lending, an institution must implement a system of oversight and accountability. One expert that I talk to regularly working with banks in the regulatory process always says, “You tell your story. Do not let a newspaper tell it for you.”

“Telling your own story” is a process. This means instituting a robust compliance management system that can monitor loan processing and underwriting activities for compliance and issue reports related to compliance. Your compliance management system should test, monitor and audit your loan activities and be able to conduct a comparative analysis for peer groups within similar markets. Your compliance management system should be able to identity disparities between groups in key-lending metrics. If you see disparities, determine whether that disparity equates to discrimination and if so, determine what you will do to remedy it. By addressing all of these areas prior to examination, you can explain any differences and show how you are taking steps to ensure that your institution is fair lending compliant.

It is also important to understand the systems implemented to protect your institution. You have three lines of defense: (1) your front-line business unit and partners; (2) your compliance risk management system and compliance department; and (3) your internal and external audits.

Fair lending is making sure that problems areas do not make it through the first line of defense, but certainly not all three lines of defense. While these lines of defense can seem burdensome, they will protect your institution from fair lending risk and ensure a culture of fair lending compliance.

The reality is that all banks face ever-changing fair lending risk. Asset size does not matter when it comes to enforcement. All agencies are expected to issue new regulations and enforcement items related to fair lending. While we expect regulatory enforcement to increase, we do not expect new guidance directing banks how to lend and further defining “fair lending”. This can be challenging for banks. However, if you properly analyze your data and focus on your three lines of defense, you are likely to be deemed a fair lender regardless of what definition of “fair lending” is being utilized.

KENTUCKY BANKER | 13

SINCE 1891

PORTFOLIO STRATEGIES

The Traditional Approach to NIM is Dead

by Robert Biggs, Duncan Williams VP & Senior Market Analyst, Fixed-Income Strategies Preceding the pandemic, the average Yield on Earning Assets for Kentucky Banks ranged from a high of 7.58% (2021) to a low 4.12% (2016) over the past two decades, while Cost of Funds varied from 3.71% to .43%. Despite the wide variances in YoEA and COFs, Net Interest Margin stayed within a 32-bps range (3.97%-3.69%). The past two years bucked the tight range trend as NIM fell to 3.58% in 2020 and then to 3.37% in 2021. What changed in the past two years, and why is the traditional approach to NIM Dead?

Historically, CEOs and CFOs had to implement an asset and a liability strategy to achieve an attractive NIM. While the components of NIM are unchanged, their characteristics and risk profiles are wildly different from previous years.

YoEA’s declined by over 100 bps in the past two years as asset sizes ballooned in a low-rate environment, but YoEA is not to blame for compressing NIM. From 2007 to 2009, YoEA fell by 145 bps, and NIM only compressed by three bps because COFs also dropped by 143 bps. During the pandemic, COFs fell by only 59 bps to 30 bps, which did not compensate enough for declining YoEA. With excess liquidity and prolonged low overnight rates, banks have lost the ability to sufficiently contract their funding rates to bolster NIM. Consequently, liabilities have become more negatively convex, with significantly more opportunities for COFs to move higher and no room for them to fall. In managing net interest income moving forward, CEOs and CFOs must recognize that they can only materially affect one side of the balance sheet to prepare for a falling rate environment.

However, banks also feel little pressure to raise the COFs. From 2003 to 2007, Kentucky banks had a COFs Beta of 35% relative to the effective fed funds rate. The beta plummeted to 16% during the 20152019 rate hikes. The beta should fall further in the current tightening cycle as banks are less exposed to wholesale funding—11.7% of liabilities in 2015 Q3, 6% of liabilities in 2021 Q4—and excessive liquidity mitigates depositors’ pricing power. The stickiness of the current COFs range mutes the need for a traditional liability strategy.

While YoEA fell by over 100 bps in the past two years, the interest income only dropped by 5% because the 22% growth in assets supported revenue at the expense of margins. In the era of low rates, revenue is created in volume, not spread, but the volume approach is not without risks. The increased economic value of equity exposure is a natural byproduct of ballooning asset sizes, but also more challenging as financial institutions are undertaking more market value risk to earn less revenue. Examining the bond portfolio, many banks have the lowest investment yield coupled with the largest loss in their organization’s history.

14 | KENTUCKY BANKER

The dual side of the balance sheet approach to creating a compelling NIM appears to no longer be necessary. A/L Committees should focus almost solely on the asset side to generate interest income with manageable exposure to rising interest rates and call protection to defend NIM against falling interest rates.

Floating-rate assets protect EVE in a rising rate environment but often fail to generate sustainable revenue. Longer-duration assets offer attractive yields but expose the bank to rising interest rates. A barbell approach of pairing longer-duration assets with floating-rate loans and investments should create income while managing interest rate risk. Unfortunately, many institutions look at their reports and see tremendous unrealized losses. They only feel comfortable adding the floating rate component despite multi-year high yields.

In the new banking environment with bloated securities and cash positions, financial institutions should begin evaluating their excess liquidity with their investment portfolio to understand their risk tolerances better. Excess liquidity is not a placeholder for potential lending opportunities; it is a measurable opportunity cost that reduces the bank’s exposure to rising interest rates and lowers their loss percentage when paired with the investment portfolio.

Unless we see a meaningful decline in the monetary supply, banks will continue to generate net interest income by a volume approach.

Ignoring multi-year high entry points out of fear of compounding unrealized losses eliminates the opportunity to finally add accretive revenue to the income statement. Excess liquidity, if not invested, should at least be considered in the bond portfolio’s analytics to measure risks tolerances, and most banks will find that they have room to take advantage of the current interest rate environment.

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Commercial Banks in Kentucky Finish 2021 in Strong Position

by Carl White, Senior VP of the Supervision, Credit and Learning Division Federal Reserve Bank of St. Louis U.S. commercial banks continued their bounce back from pandemic-related challenges in 2021, recording satisfactory levels of earnings and asset quality measures well above industry benchmarks. Banks in Indiana fared better too, with profitability, asset quality and regulatory capital ratio averages largely in line with national peers. Despite a slight dip between the third and fourth quarters of 2021, return on average assets (ROAA) for U.S. banks increased a robust 51 basis points from its year-end 2020 level to 1.22%. Kentucky banks fared even better, with average ROAA increasing from 1.19% in 2020 to 1.27% in 2021.

KENTUCKY BANK SCORECARD Performance Metric 2020:4Q 2021:3Q 2021:4Q ROAA 1.19% 1.32% 1.27% NIM 3.55% 3.39% 3.37% Loan Loss Provision/AA 0.26% 0.05% 0.06% Noninterest Income/AA 1.17% 1.02% 1.02% Noninterest Expense/AA 2.93% 2.62% 2.63% Nonperforming Ratio 0.72% 0.55% 0.51% Tier 1 Leverage Ratio 10.48% 10.43% 10.38% SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports).

Provisions Reversal Provides Earnings Boost

Asset Quality, Capital and Liquidity

For a number of banks, one of the biggest contributors to the improvement in earnings in 2021 was the sharp reduction in—and in some cases, reversal of—loan loss provisions. Loan loss provisions were ramped up significantly in early 2020 at the start of the pandemic, when the economy shut down and massive loan losses were feared. As pandemic-related programs like the Paycheck Protection Program bolstered consumers and businesses and economic conditions improved, banks began to unwind some of the precautionary measures they had taken in anticipation of losses.

Loan quality, as measured by the percentage of loans 90 days or more past due or in nonaccrual status, also continued to improve throughout 2021. The nonperforming loan ratio for all U.S. banks declined 6 basis points during the last quarter of the year to 0.89% and was down 30 basis points from its year-ago level. The same pattern is observed in Kentucky, where the nonperforming loan ratio declined 21 basis points in 2021, remaining well below the national average. Despite the economic hardship brought about by the pandemic, nonperforming loan ratios stayed well below those of the last several recessions and near historic lows.

For U.S. banks overall, loan loss provisions as a percentage of average assets declined 77 basis points between year-end 2020 and year-end 2021, falling from 0.64% to -0.13%; in aggregate, then, 2021 provisions added modestly to banks’ net income rather than subtracting from it. Provisions also fell significantly at Kentucky banks. For 2021 as a whole, the average loan loss provision ratio in Kentucky dipped to 0.06%.

The loan loss provision reductions masked continued weakness in net interest margins. Although steady between the third and fourth quarters of 2021, the average net interest margin (NIM) at all U.S. banks has declined steadily from its last peak in early 2019.

Nationally, the average net interest margin fell 26 basis points to 2.49% in 2021; the average NIM at Kentucky banks declined slightly less. Higher loan demand and interest rates will likely lead to improvements in margins in coming quarters.

Banks, including those in Kentucky, remain well capitalized. The average tier 1 leverage ratio at year-end 2021 stood at 8.71% for U.S. banks overall and a robust 10.38% in Kentucky. Liquidity levels remain strong and continue to be elevated. Average loan-to-deposit ratios nationally and in Kentucky are still well below pre-pandemic levels, indicating ample room to support increased loan demand.

What’s Next U.S. banks, including those in Kentucky, are healthy and well positioned to finance increases in loan demand. They weathered the pandemic, receiving assistance from government programs that financed loans to strapped customers and provided payments to consumers that helped boost deposit balances.

KENTUCKY BANKER | 17

SINCE 1891

Five Strategies for Strengthening Your Bank’s Cybersecurity Posture

by Steve Sanders, CSI’s Chief Information Security Office In its seventh annual survey, CSI asked banking executives from across the nation about their top strategies and priorities for 2022. The results were used to inform the 2022 Banking Priorities Executive Report, which details the challenges and opportunities in today’s financial landscape.

When asked about the one issue that will most affect the financial industry in 2022, it’s no surprise that cybersecurity (26%) outranked the other two leading issues—recruiting/retaining employees (21%) and regulatory change (14%).

What Did Bankers Identify as the Top Cybersecurity Threats for 2022?

According to the 2022 results, an overwhelming majority of bankers view employee-targeted phishing (57%) as the top cybersecurity threat, with customer-targeted phishing (51%) following closely. Often the result of social engineering schemes, 48% of bankers are worried about the threat of ransomware.

As cybercriminals enhance their tactics to continue targeting data-rich institutions, this concern is well-founded. Ransomware is a type of malware that locks out the authorized user once installed and encrypts the available data to hold for ransom, posing operational and reputational risk. Incidents of ransomware have risen, with the global attack volume skyrocketing by more than 150% for the first half of 2021 compared to the previous year.

The current geopolitical climate, greater reliance on digital channels and increased turnover in a variety of industries have created an environment ripe for vulnerabilities. And cybercriminals are wasting no time in exploiting weaknesses and vulnerabilities of systems to launch sophisticated attacks.

Unfortunately, the availability and automated nature of modern ransomware allows an attack to be initiated with limited upfront costs and maintenance from criminals. Since ransomware attacks pose little risk to the hacker, provide a quick pay out for criminals and are carried out relatively easily and anonymously, institutions should remain on high alert to identify and combat these threats.

How to Strengthen Your Bank’s Cybersecurity Posture As incidents of ransomware and other attacks increase in frequency and sophistication, consider the following strategies to enhance your bank’s cybersecurity posture.

• Prioritize Cybersecurity Training: With 41% of bankers placing emphasis on employee/board cybersecurity training, most understand that the “people factor” represents an institution’s biggest potential weakness.

To create a cybersecurity-focused culture, ensure employees are familiar with the latest threats and know how to identify the warning signs. If employees fail social engineering tests, revisit your strategy to provide real examples of phishing as well as incentives for employees to do their part.

18 | KENTUCKY BANKER

• Raise Customer Awareness: Only 18% of bankers identified customer cybersecurity training as a top tactic in 2022, but it’s important to remember that banks benefit significantly from an informed customer base. Since customers, especially those newest to digital banking, are another component of the “people factor,” institutions must ensure they reinforce the importance of good cyber hygiene through cybersecurity awareness programs, which could include videos and gamification.

• Update Your Incident Response Plan (IRP): Institutions must consider all the operational, financial and reputational implications of being held hostage to ransomware. Your bank’s IRP should include planning for data and system backups, communication plans, business continuity plans if employees or customers were unable to access your systems and dealing with the attackers. You don’t want to confront those issues for the first time during a ransomware attack. With 23% of bankers reporting IRP testing as a top tactic to combat cyber threats, remember that maintaining a tested IRP puts your bank in a stronger position to withstand an attack.

• Conduct Vendor Due Diligence: Even if your internal systems and employees are prepared for a cybersecurity attack, your bank is vulnerable if an external vendor is not adhering to the same level of defense standards. Appropriate cybersecurity due diligence and regular monitoring should be conducted on all third-party vendors, especially any external vendor who has access to your sensitive data or systems. This process is critical to mitigate risk of supply chain attacks, which have surged in the past year.

• Implement Multi-Factor Authentication (MFA): Incorporate MFA into all applications where employees—or customers—must enter their credentials. With MFA, multiple authentication factors are required to verify a user’s identity, preventing unauthorized account access. This verification strengthens resiliency and provides an effective defense against the two largest threat vectors: social engineering and phishing.

When confronted with this extra obstacle, many hackers will move on to a less secure target.

Maximize Protections with a Layered Approach to Cybersecurity As institutions navigate the changing cybersecurity landscape, embracing a layered approach to cybersecurity will maximize protections for your bank. Implementing multiple layers of security—including cybersecurity training and tools—makes it more difficult for cybercriminals to infiltrate your systems and keeps employees and customers secure.

Download CSI’s 2022 Banking Priorities Executive Report for additional insight into bankers’ perceptions of cyber threats & more: https://why.csiweb.com/2022-banking-priorities/

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2022 KBA SPRING CONFERENCE SCRAPBOOK APRIL 24-26

RISING STRONG

Lanie Gardner, Community President at First Southern National, once again is the event’s emcee.

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2022 SPRING CONFERENCE SCRAPBOOK

RISING STRONG

The Spring Conference once again ended with a banker panel. Topic: Real Life Lessons from a Business Continuity Perspective Panel. On the panel (left to right) Charles Vice, Department of Financial Institutions; Jeff McDaniels, Farmers Bank and Trust Company; Lanie Gardner, First Southern National; David A. Long, First Kentucky Bank.

Spring Conference attendees listen to the panel.

Billie “Plumbob” Wade, Executive Director of HOPE of the Midwest, playing the Donald Ross Golf Course in French Lick, is hoping his golf ball floats.

Event Coordinator, and KBA Director of Education, Natalie Kaelin, and Keynote Speaker Darryl Strawberry.

RESOLUTION OF THE BOARD OF DIRECTORS OF THE CECILIAN BANK IN MEMORY OF PETE MAHURIN WHEREAS Pete Mahurin served as a Director of The Cecilian Bank from January 1, 1988 to October 27, 2021 at the time of his passing, WHEREAS we knew Pete Mahurin as the man who grew up understanding family core values and a strong work ethic and he put that into practice every day of his life, WHEREAS his leadership and mentorship in the success of The Cecilian Bank is a legacy that will live on as we all stand on his shoulders as he is one of those people in the bank’s history that has carried us here, WHEREAS he had a thirst for knowledge that could not be satisfied and he supported all of our bank staff’s educational and training efforts to become Career Bankers, BE IT RESOLVED, that we celebrate the life and friendship of Pete Mahurin by dedicating our training facility in his memory as MAHURIN TCB ACADEMY, BE IT FURTHER RESOLVED, that this resolution shall be entered into the permanent record of the minutes of The Cecilian Bank, this 25th day of February, 2022.

Approved unanimously by all Directors: Chairman Bob Owsley, Secretary Don Wise, President & CEO Greg Pawley, Sarah Mahurin, Garry Watkins, Lindsey Alicna, Joe Wright and David Hawkins.

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How to Avoid QR Code Scams

by Ben Lawrence, Managing Partner, Louisville Geek QR codes are popping up everywhere, from parking meters to TV ads to the night sky. Unfortunately, as handy as these quick response codes are, criminals are exploiting them for malicious purposes.

Smartphones, of course, easily scan the machine-readable optical labels and then interpret and execute the data embedded within. Therein lies the potential trouble. The underlying code can direct users either to safe, legitimate actions—such as viewing a restaurant’s menu, accessing a parking payment portal or viewing detailed information about a product—or infect or otherwise compromise the user’s device, files and connected resources.

Fortunately, you don’t need to stop using QR codes altogether. There are several ways you can help protect yourself from unknowingly falling victim to a QR code scam. Here are tips we urge you to consider before clicking on the next quick response code you see.

The first recommendation is don’t just scan and follow random QR codes.

That’s a bad idea.

Yet if, as some 117 million estimated viewers did, you watched the 2022 Super Bowl, you may have noticed the 30-second commercial consisting of nothing but a mysterious QR code bouncing around the screen. In just one minute, that Coinbase advertisement lured over 20 million people to scan the QR code not knowing whose it was or what would happen. The corresponding traffic proved so intense the cryptocurrency exchange platform could not manage the load and subsequently crashed.

This particular incident confirms just how readily people click on QR codes without thinking twice. Unfortunately, bad actors know this and are actively taking advantage.

In fact, QR code scams work much like phishing attacks. Doctored items pose as legitimate links in the hopes people will click on them. But instead of directing a user to a legitimate site or file, phishing attacks either install infectious code that then compromises, steals and encrypts data, holding the information hostage until a handsome ransom payment is made, or direct users’ devices to malicious sites that steal sensitive credentials, bank information or credit card numbers.

Last December, for example, police in San Antonio, Texas, warned citizens to be cautious when using public parking spots after fraudulent QR codes offering quick and easy payments were discovered on parking meters throughout town. When people scanned the QR code, the subsequent code directed them to an imposter website where submitted payments were sent to a fraudulent vendor.

Such events are not isolated. The same problem occurred the next month in Boston, Massachusetts, and Austin, Texas. Texas, it seems, has a thing for QR codes.

During the popular SXSW festival held annually in Austin, some 400 drones filled the sky in March to form a QR code. Some 300 feet tall by 600 feet wide, the purple matrix directed those scanning the image to an advertisement for a new streaming Halo TV series. Not everyone was thrilled, with many Reddit and news article comments deploring the stunt and some of the resulting fears—not everyone witnessing the event understood the flying objects and corresponding noise were just an advertisement.

Many of the subsequent comments provided sound advice, such as never randomly scan QR codes. That is great counsel.

Instead, preview a QR code’s URL. Many smartphone cameras, including iPhones running the latest version of iOS, provide a preview of the code’s URL when you first scan the matrix image. If you do not recognize the site, or if the link looks strange, do not continue; do not click the subsequent link.

Avoid, too, downloading an application from a QR code. Use your phone’s app store—Apple’s App Store on an iPhone or the Google Play Store on an Android model, instead. By selecting the program from the official app store, you can have confidence the app is, indeed, genuine.

Do not click on QR codes you receive via text from unknown parties or via email from people or companies you do not know. This is especially true when you are not even expecting the QR code.

Similarly, do not trust QR codes when connecting to an unfamiliar wireless network. Ensure you trust any corresponding signage—at large events it is not much trouble for malicious actors to print and place various fraudulent signs featuring imposter QR codes throughout a facility—when connecting to a WiFi network.

Avoid, too, using applications dedicated specifically to scanning and executing QR codes. Most smartphones’ internal cameras now readily provide that function. So there is no need to risk a third-party application tracking your QR code activity.

FOR MORE INFO SCAN THE NON-SCAM QR CODE KENTUCKY BANKER | 27

Photo by: Frank W Baker II, Hyden Citizens Bank