Kentucky Banker Magazine - Summer 2020

KENTUCKY BANKER WE ARE

y k c u t n e K 129th Annual Convention THE GREENBRIER SEPTEMBER 20-22, 2020

STRONGER TOGETHER Today, more than ever, a strong Correspondent Banking partner is vital to Kentucky’s Community Banks. At The Bankers’ Bank, our experienced lenders stand ready to help keep Kentucky Open For Business.

Q. Could a Short-Term Bank Holding Company Loan support your need for additional Liquidity?

Q. Are you experiencing high volume requests for the SBA Paycheck Protection Program?

Stephanie Oerther CHIEF CREDIT OFFICER

soerther@bbky.com Office: 800-248-3229 ext. 229

Brandon Feltner

SENIOR LOAN OFFICER

bfeltner@bbky.com Cell: 606-233-1259

Q. Would your bank benefit from a Low Interest Federal Funds Line of Credit?

If you answered yes to any of the questions above, contact us today for assistance.

Need Advice?

Our Lenders can provide expert financing and credit analysis advice. This service is provided at no cost, and available to customers and non-customers alike. It is our pleasure to help Kentucky’s Community Banks in any way we can during this unprecedented national pandemic emergency.

"Stronger Together"

www.bbky.bank

Attend KBA’s Annual Convention with

Confidence

KBA staff and registered attendee responsibility

• If you are experiencing any symptoms of Covid-19 or running a fever prior to departing for The Greenbrier, seek medical attention. Please contact the KBA and the hotel and DO NOT head for the Annual Convention until you have been cleared by your doctor.

• The Greenbrier will perform a temperature screen for all those entering the resort. Those with a temperature over 100.4 or greater will be denied entrance.

• If you are registered to attend in-person and decide you’re not comfortable attending as the date nears, we are happy to convert your registration to a virtual registration that can be used by anyone in your bank. (Please ask Nina for complete details.)

Face covering

Registration

General Information

Please register online via www. kbaconvention.com. Note: Please be sure to name your bank’s voting delegate.

Golf Tournament The Golf Tournament will be held on Monday, September 21, 2020, with a 1:00 p.m.

Shotgun Start. The registration fee includes a boxed lunch, forecaddie and cart, beverage carts and golf shirt.

The Greenbrier will store your clubs and send to the clubhouse for the tournament or your personal reserved tee times, so please be sure to put your name on your clubs.

Rental clubs are available for a fee through the clubhouse — please call 855-453-4858 for more information.

Golf If you wish to make a tee time for casual golf, you will first need to be a registered guest at The Greenbrier, then call 855-453-4858 to schedule a tee time.

The greens fees for golf are as follows:

• In compliance with an order issued for all of West Virginia, The Greenbrier is requiring all guests to wear a mask covering your nose and mouth while in public spaces on resort property.

• Old White TPC: $395pp++ and the forecaddie fee is included in rate for foursomes or two players. Single playing guests charge is an additional $40 fee.

• Meadows: $245pp++ • Greenbrier (9 holes): $175pp++

• Each registrant will receive a KBA logo mask that you can use if you do not have one of your own.

Lodging

Practice physical distancing, health and hygiene • There will be health, hygiene and social distancing reminders throughout KBA event space.

• Custom buttons will be available to attach to your attendee badge to acknowledge your comfort level of handshakes, etc., to friends.

Wash hands frequently • Hand Sanitizers will be placed at each seat at every table during General Session.

• Sanitization stations are available throughout public spaces at Greenbrier.

Adhere to additional health measures that may be required throughout your stay at The Greenbrier • Greenbrier Covid-19 Response Plan available on request.

Please call 1-888-889-0965 and reference that you are part of the Kentucky Bankers Association Annual Convention. Our room block is for arrival on Sunday, September 20, and departure on Wednesday, September 23. Room Rates start at $239 per night plus applicable taxes and fees. A deposit will be required. For additional days beyond our room block or other special requests regarding rooms, contact The Greenbrier for rates and availability. Unsold rooms in our block will be released on August 12, 2020, so book your room quickly!

Resort Fee A reduced resort fee of $32 per room, per night, plus applicable tax for all KBA guests. Resort fee includes, but is not limited to the following: • Morning Coffee Service • Afternoon Tea • Nightly Movies in the Theatre • Historical Presentations (Bunker Tours excluded) • On-Property Transportation • Resort-Wide Wireless Internet

Parking • Self-Parking is complimentary.

• Valet Parking is discounted $25 per vehicle per night to KBA guests.

Dining

Please visit www.greenbrier.com and click on Dining. Please note that restaurants are operating at reduced capacity. It is suggested you make dinner reservations in advance by calling 1-855-729-3778. Reservations are taken with physical distancing in mind. If you are unable to secure a reservation in onsite dining facilities, you might want to consider the nearby town of Lewisburg which has several restaurants to choose from: visitlewisburgwv. com/dining

Spa It is suggested you call prior to arrival to schedule Spa appointments by calling 1-888-598-8412. Reservations will be taken with physical distancing in mind as well as reduced capacity. Guests will be required to wear a mask and have their temperature taken.

Dress Code Please visit www.greenbrier.com dresscode to review dress code requirements during your stay at the resort.

Activities For information on adventure and recreational activities you may access The Greenbrier’s website at: www.greenbrier. com/activities

General Session Meetings, Receptions and Banquet Covid-19 Guidelines KBA is working closely with The Greenbrier to take proactive steps to help safeguard the health of our attendees during the annual convention by establishing the following social distancing procedures.  Seating for business meetings and meal will be limited to six people per 72” roun table, with each table a minimum of six fe part. Please contact Nina Gottes at ngottes@ kybanks.com if you and other bankers woul like to sit at the same table(s).  All coffee services will be setup one side with a Greenbrier banquet team membe serving guests.  During the scheduled receptions, servic from the bar directly is prohibited Greenbrier banquet team member wil obtain your order and deliver.

Questions?

If you have questions please call Nina Gottes at 502-736-1284 or email ngottes@kybanks. com. You may also visit: www.kbaconvention. com

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

Tamuna Loladze Chief Operating Officer, HOPE of KY tlodadze@kybanks.com

Natalie Kaelin, Esq. Director of Education nkaelin@kybanks.com

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

Billie Wade Executive Director, HOPE of KY bwade@kybanks.com

Katie Rajchel Staff Accountant krajchel@kybanks.com

Josh Fischer Director of Communications jfischer@kybanks.com

Casey Guernsey Enrollment and Billing Specialist cguernsey@kybanks.com

Miriam Cole Executive Assistant mcole@kybanks.com

Chuck Maggard President & CEO, KenBanc Insurance cmaggard@kybanks.com

John P. Cooper Legislative Solutions jcooper@kybanks.com

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

Michelle Madison IT Manager mmadison@kybanks.com

Brandon Maggard Account Representative, KenBanc Insurance bmaggard@kybanks.com

Steve Whitlow Systems Engineer swhitlow@kybanks.com

Donna McCartin Benefit Support Specialist dmccartin@kybanks.com

Nina K. Gottes Sponsorship & Business Development ngottes@kybanks.com

Audrey Whitaker Insurance Services Coordinator awhitaker@kybanks.com

FOLLOW US ON FACEBOOK! facebook.com/kybankers

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

KENTUCKY BANKERS ASSOCIATION | 600 West Main Street, Suite 400, Louisville, Kentucky 40202 | kybanks.com

2019-2020 OFFICERS & BOARD Chairman Lloyd C. Hillard, Jr. Chairman of the Central & Southern KY Region, WesBanco, Frankfort

Represents Group 6 Darin L. Young, President & CEO, Century Bank of Kentucky, Lawrenceburg

KBA Vice Chairman J. Wade Berry President & CEO, Farmers Bank & Trust Company, Marion

Represents Group 7 Steve Tolliver, Market President, The Monticello Banking Company, Harlan

KBA Treasurer James A. Hillebrand, CEO, Stock Yards Bank & Trust Company, Louisville KBA Past Chairman David M. Bowling CEO, Citizens Union Bank Shelbyville Ballard W. Cassady, Jr. President & Chief Executive Officer, KBA, Louisville GROUP REPRESENTATIVES Represents Group 1 Randell Blackburn Market President McCracken County Community Financial Services Bank, Benton

3 7 8 9 11 12 15 16 17 19 20 22 24

Represents Group 9 Andrew Jones, Regional President, Community Trust Bank, Ashland THRIFT REPRESENTATIVES Shanda L. Smith, President & CEO, Blue Grass Federal Savings & Loan, Paris

KBA Convention Chairman’s Corner Box Lake Networks Straight Talk My Two Cents Duncan-Williams Where are We Now? Focus Marketing Group Game Changer Compliance Corner Digital Banking Creating a Path Forward Lessons from Recession

BANK SIZE REPRESENTATIVES Represents Banks with Assets of $1B or more Elmer K. Whitaker, President & CEO, Whitaker Bank, Lexington Represents Banks with Assets at Least $200 M; less than $1B David W. Hobbs, President River City Bank, Louisville

Represents Group 3 John W. Key President, Commonwealth Bank & Trust Company, Louisville

EDUCATION ALLIANCE REPRESENTATIVE

Represents Group 5 Gregory D. Goff President & CEO, First National Bank of Kentucky, Carrollton

SUMMER 2020

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

Represents Group 2 J. Jason Hawkins President & CEO, First United Bank and Trust Company, Madisonville

Represents Group 4 Michelle Coleman, CEO, Bank of Edmonson County, Brownsville

KENTUCKY BANKER

Lanie W. Gardner, Community President, First Southern National, Central City KBA BENEFITS TRUST COMMITTEE REPRESENTATIVE W. Fred Brashear, II, President & CEO, Hyden Citizens Bank, Hyden

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 contact Josh Fischer, Managing Editor, 502-736-1283 or jfischer@kybanks.com

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.

Mission Statement 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: 1.

2.

3.

4.

Government relations and industry advocacy Information interchange Education Products and services

$

+ Billion 4.5 of private investor equity

47,750

OCCH Investment Partners

units of affordable housing

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++ ++ ++ ++ ++ ++ ++ ++ +Key ++ + ++ +CDC +++ +++ +++ ++ + ++ + + ++ + ++ +++ +++ +++ ++ + ++ + ++++++++++++++++++++ + ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + ++ + ++ +++ +++ +++ ++ + ++ + + ++ + ++ +++ +++ +++ ++ + ++ + ++++++++++++++++++++ ++ ++ ++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++ + +++++++++ ++ + + +++++++++ ++ +

840

developments and partnerships

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

+ + + + + + + + + Life + + + + Insurance +++++++++++++++++++++++ Nationwide ++++++++++++++++++++++++++++++++++++ Company ++++++++++++++++++++++++++++++++++++

++++++++++++++++++++++++++++++++++++ + + + + + +Exchange + + + + + + + + + Bank +++++++++++++++++++++ Peoples ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ + + +Bank +++++++++++++++++++++++++++++++++ PNC ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ Republic + + + + + + +Bank +++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ + + + + + + + + +State + + + + + Bank ++++++++++++++++++++++ Springfield ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ ++++ + + + + +Bank + + + + +& + +Trust ++++++++++++++++++++ Stock Yards ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ U.S. + + +Bancorp + + + + + + + +CDC +++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ +++++++++ +++++++++++++++++++++++++++ WesBanco Bank ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++

Peg Moertl, CEO and President 88 East Broad Street, Suite 1800 Columbus, Ohio 43215 614.224.8446 | www.occh.org

CHAIRMAN’S CORNER by Lloyd C. Hillard, Jr. WesBanco / 2019-2020 KBA Chairman

The NEW YOU in the Post-Covid19 World 2020 will be a year we will always remember because of the significant and unexpected events that impacted us all. The coronavirus and the protests across the country in response to racial injustice has affected our banks, and their employees; our customers and our communities.

Our response will be the key to our future viability and success.

Significant events may change the way you do business, i.e. deliver service, but it should not “blur” or change your message! Your core values should provide a solid foundation to guide you forward.

I think we can all agree that you want to provide a safe and secure work environment for your team members, provide a memorable and positive experience for your customers and strengthen the communities you serve, while maintaining financial strength. This will be a necessity in the post-COVID19 environments.

We are entering the unchartered territory of uncertainty. Managing through this crisis requires understanding the challenges and perseverance to survive. Focus on the fundamentals that have proven effective for your bank.

Some key questions that must be addressed are as follows: •

How will it be different for your employees? Will they be eager to return? Will they feel safe and secure?

•

Do your employees feel positive about your bank’s diversity and inclusion culture?

•

Will you continue the option to work from home for selected employees or departments? How will this impact your internal culture?

•

•

•

What changes will you make in delivering in person and online service to your customers? Will they feel safe and secure in returning to your lobbies and/or conducting online transactions?

How will you communicate to your employees, customers and the communities you serve? Regardless of the communication means, it must be clear, concise and consistent!

Remember, speak with one voice.

What will be the impact on your markets? How long will economic recovery take - three months, six months, one year or more?

•

What will be the impact on the quality of your loan portfolio? Will borrowers be able to resume operations and make loan payments after deferment ends?

•

Do you have sufficient capital to manage through the crisis?

Your Pandemic Task Force can be the leader in this transition process.

They should develop a written plan to address reopening your lobbies, coordinate implementation and develop appropriate communications.

This plan should be thoroughly reviewed and vetted by senior management, approved and endorsed by the CEO and presented to the Board of Directors for approval. (This may vary from bank to bank depending on size and complexity).

The plan should include actions that will enable team members and customers to feel safe, comfortable and secure in delivering and conducting their banking transactions, whether in person or online. It should also identify areas for potential change and improvement.

This process will prove to be invaluable in improving the strength, viability and profitability of your bank. Evaluating new, improved and more efficient customer service and product delivery options is essential for your bank to thrive in the future. The alternatives should address all segments of your customer base. Some will want to return to your lobbies, while others prefer to do everything online. You have to satisfy both!

Community banks that embrace change, manage adversity and proactively respond to unexpected events in a structured manner will be the winners in the post-COVID19 world.

The KBA, as always, will be ready to provide resources and assistance with this process. The staff is already working hard in preparing to help you as we transition to the post-COVID19 environment.

Are you prepared?

Food for Thought Loving your neighbors is to be a family and is far beyond DNA connection. Blood may be thicker than water, but love, kindness, trust and ability to empathize with each other in the face of every adversity is what we should call ‘my family.’

Kenny Nola KENTUCKY BANKER | 7

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We’ve spent the past 15 years getting to know Kentucky Banks and their IT needs.

Through this journey we have built a program for becoming the one-stop shop for the IT services banks need. In our experience, many banks are wasting time and resources working with multiple vendors to accomplish their IT goals.

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

THE SAD CAT There are times I feel like I’m stuck in the “Sad Cat Diary” YouTube video, where the cat opens each entry with “Dear Diary” and laments the indignities suffered at the hands of his humans, aka The Authorities.

When in need of some quick entertainment, look it up.

Treasury is indicating, however, that they will send out a less confusing forgiveness form, maybe six pages instead of 11. At the end of the day, our federal government in election year mode operates on its own principles, God help us. Further comment could only get me in trouble.

However much I’ve felt like a hostage to the times, our KBA staff has managed to sustain its work and find new ways to serve our members.

In better news, our banks are starting to receive some of their fees for making the loans, an encouraging sign as we continue to work on simplifying the forms.

Virtual group meetings? None of us could have imagined it, until we had to. The positive reception has inspired a fresh look at many facets of our service delivery, and we appreciate the feedback that is guiding that work.

We were able to nominate three new directors to the board pending the vote at convention (though that vote will involve challenges of a different order). They are: Group 6 - Charles Beach III Chairman, Peoples Exchange Bank Beattyville Group 7 – Alex Cook CEO, Home Federal Bank Corp of Middlesboro Group 8 - Anthony Kinder CEO, Peoples Bank of Kentucky, Inc., Flemingsburg The Nominating Committee also nominated Ruth Bale as the incoming Treasurer. Ruth Bale is the Chairman of South Central Bancshares of Kentucky, Inc., Glasgow.

Board service has never been more challenging, so we’re especially grateful to these Kentucky Bankers for their willingness to undertake it. For years, we’ve dealt with change as a constant, but the pace of it has accelerated to a level that few of us saw coming. For our industry, as for our states and country, we desperately need strong leadership and the right “boots under the table” to get through what lies ahead.

One of our most concerning near-term issues has been the resolution of PPP loan uncertainties. We’ve worked hard on some level of blanket forgiveness at thresholds from $150,000 to $350.000. The $150,000 level would cover 85% of all the loans, but only 26% of the money, enabling Treasury/SBA to clear the deck of 3.8 million loans out of the 4.75 million loans made. A sensible solution to a very complex problem, we thought.

FDIC Chair Jelena McWilliams and KDFI Commissioner Charles Vice met with all of our bankers to assure them that the regulatory agencies are going to be “understanding” in future exams due to the COVID19 pandemic and the PPP loan program.

You and I both know we will still need to remain vigilant in order to assure that level of understanding is available.

It’s never been more important for every bank to complete the post-exam anonymous survey we do through our Compliance Alliance partnership. These surveys from exams all over the country give us a heads-up on what to expect in terms of exam focus and complexity.

GETTING BACK TO “NORMAL” We had our first virtual board meeting in June, and we are doing everything we can to get back to normal. It appears we will be moving the Convention closer to home so that driving is an easy choice for those concerned about flying, concerns we all understand.

The year 2020 has been one wave after another of things to worry about: pandemics, empty grocery shelves, cancellations of milestone events, isolation, social unrest, murder hornets. Humor has been a life line. Last week, I ran across an internet headline, “Scientists Find 33 Creatures Living in a Cave That Was Sealed Off for 5 Million Years.”

The first person to comment said, “Seal that cave back up and walk away!!! This is NOT the year, man.”

Be safe, stay healthy, and find a reason to laugh every day until we’re through this.

But Treasury has indicated in their Senate hearings that there won’t be any forgiveness level (even though their goal is to “forgive ALL loans”) unless instructed to do so by Congress – which would take until late July since they are on summer break.

KENTUCKY BANKER | 9

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“

MY TWO CENTS by Debra Stamper KBA Executive Vice-President & General Counsel dstamper@kybanks.com

Rather than business as usual, don’t we really want business better than usual?

Banks are Community Cornerstones It seems that all I have thought about, written about and talked about in the last 2 months is PPP. I have become a one-trick pony!! But, in this article, I am going to try to talk about something else—related but different.

Banks are the cornerstone of their communities. And, nothing emphasizes that more than a crisis. Even before banks were officially labeled as “essential businesses” you guys had already figured out that banking services were essential. Lobbies were restricted, in order to protect your customers -- who love to hang around and talk to each other in the lobby -- as well as the tellers.

But banking business did not, could not, stop. Bankers continued assisting customers with everything they needed by setting appointments, using the drive thru in ways you never thought of before, and encouraging the increased use of online and electronic resources. Bankers also were there to assure and assist customers who were afraid that things were changing too much and too fast. And, now we all want to get back to business as usual. But, do we really?

And, now we have to figure out what is needed to stay in that position.

Once things settle down and the emergency of COVID-19 has passed, you will be faced with an uncertain future. You must start preparing for that uncertainty now. Look at some of the changes that you made during the last two months and see if those can be continued and marketed as additional customer conveniences.

You should also look at some of the problems that were never quite resolved when doing business during these times and see if those can’t be resolved now, in preparation for another crisis that we hope won’t come. You might want to realign personnel or cross-train more, in anticipation of maximizing services and efficiencies. Maybe opportunities will arise for your bank to move into new communities.

Another thing we have to figure out is how we can market our efforts already taken. When things go back to whatever normal will become, customers and communities will forget what you did. Market that, use it to your benefit—you deserve it!

Rather than business as usual, don’t we really want business BETTER than usual?

We need to learn from this crisis. The COVID-19 crisis had nothing to do with banking, but banking changed. We need to market that. Banks need to take advantage of this opportunity to remind their communities that they were strong and ready for anything that came their way—including COVID-19. Not only were you able to continue regular business, but you were able to start new services and offer them to numbers of customers never imagined.

Loans were modified and credit lines increased to help customers in times of need. You stepped up to make PPP loans in an unprecedented volume at a time when you were digging into COVID-19 restrictions just like everyone else. You need to remind your community that you were there working hard, getting it done…even when the regulators in charge of PPP were making it so hard.

Banks are the cornerstone of their communities.

KENTUCKY BANKER | 11

KBA COLONEL SPONSOR

Protecting Net Interest Margin

by Shannon Reburn and Chad McKeithen, Managing Director of ALM and Fixed Income Strategies Duncan-Williams Inc. Given the FOMCs forecast of rates remaining low, through at least 2022, we now have to brush off the playbook from 2008 to 2015. This is the last and only other time that the Fed has pegged the overnight rate to a range between 0 and 0.25. This time around the Fed is adding even more stimulus to the mix by purchasing long Agency MBS, Corporates, Municipals and Agency CMBS. All of this stimulus will keep rates low along all sections of the curve and in essence wipes out interest rate risk to rising rates. But banks do have a growing issue.

The Fed’s goal of keeping rates is narrowing NIM because asset yields are falling faster than deposit rates/COFs. In fact KY banks NIM just dropped to 3.80% which is just above the all time low of 3.78% that it hit in 2015. It most likely will set a new low very soon because the problem today is the COFs are much lower than where they were the last time rates fell like this in 2008. In the beginning of 2008 COFs in KY were 2.88% today COFs are 0.79%. There is simply not as much room to price deposits down if rates stay low for a long period. So what can banks do to protect their NIM?

Net Interest Margin Checklist •

•

There is little to no interest rate risk. The Fed is not going to raise overnight rates before the end of 2022. They updated their DOT plot on June 10th to show zero rate hikes through 2022. They are also keeping long-term rates low through their bond buying program. The Fed is giving a freebie on interest rate risk. This is the time to extend into longer fixed rate mortgage bonds, corporates, municipals and CMBS. The longer fixed rates will protect asset yields and NIM against low rates. Banks that did this between 2008 and 2015 insulated their NIM more than banks that remained in short duration bonds.

Sell floating rate and adjustable bonds. Why keep something that is just going to remain a low yield for the next three years. Banks do not need the asset sensitive bond.

•

Covet liquidity: If the economy gets worse and asset quality deteriorates then liquidity will be important. This is the time to clean up the bond portfolio. If there are low performing credits or odd-lot MBS/CMOs now is the time to sell them.

•

Don’t sit on cash or in overnight rates. Every day that a bank holds cash is another day of lost revenue. Even if it is a short duration bond strategy keep funds invested as much as possible.

•

Sell agency MBS and CMOs that were issued in 2018 and 2019 that have premium prices. Bonds issued in these years are the most exposed to heavy refinancing and we are beginning to see it. If they prepay faster then the price has to be amortized down to par faster and it hurts the bonds return. It could even create a negative yield. The Fed is buying these same agency bonds as part of its stimulus program and they are paying an attractive price that would normally not be available on bonds paying down this fast. So sell the mortgages with higher coupons from 2018/2019 and improve revenue.

Waiting to protect NIM will be costly and we will get to a point that it can’t be accomplished because it will be too expensive.

Take advantage of the opportunities now.

Contact: Shannon K. Reburn V.P. Fixed Income Sales (901) 260-6823 sreburn@duncanw.com

When it comes to banking law, details matter.

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Representing Kentucky banks since 1974.

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During COVID-19, did you mobilize a remote workforce?

Did this mobilization create any security holes?

COVID-19 forced workforces which are designed to be in-person and client-facing to mobilize quickly. During this unprecedented time, your organization may have seen IT security holes after mobilizing. Dean Dorton’s cybersecurity team can provide your organization with penetration testing which assesses the effectiveness of implemented security controls (whether technical or administrative) to prevent, detect, or respond to a threat actor or threat action.

Our certified cybersecurity team members have been providing penetration testing services in the financial industry for over a decade. Our penetration testing approach is highly customizable and can be conducted in either a complete “kill chain” emulation or broken up to emulate individual tactics in specific scenario based testing. Our services are designed to meet the rigorous requirements outlined for financial organizations and we can do everything remotely via our secure, encrypted testing platform.

Contact us to fill the gap on any IT security or compliance the situation has caused.

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KENTUCKY BANKER | 13

There for you when you need it most We have been confronted with decisions that have never been contemplated before. To help you through the unknowns and difficulties, MCM CPAs & Advisors has formed a group of experts to advise on accounting and business advisory services in wake of implications from the coronavirus pandemic.

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KBA PARTNER | COMPLIANCE ALLIANCE

Foreclosure Protection

Where are We Now?

by Chris Bell, Associate General Counsel KBA Partner Compliance Alliance The COVID-19 pandemic has changed American life as we know it. As the country continues to deal with the health crisis, the effects of containment measures ripple through the American economy. Unemployment remains high as state economies expand and contract in inverse proportion to the virus’s spread.

Regulators are in an arms race with rapidly changing markets, forcing banks to adapt to an ever-changing regulatory landscape.

Even as we struggle to deal with the immediate concerns, we know the effects of this pandemic will be with us for some time.

Economic shocks will continue to reverberate and play out in the housing markets around the country. As we shift into the next phase of operating in the pandemic and consider what options exist to help struggling mortgage borrowers, we should take note of the status of the expansive mortgagor protections passed by Congress, federal agencies, and other government authorities.

Protection for Federally Backed Mortgage Loans In the early days of the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. One of the primary sections of this law established a 60-day moratorium on foreclosure proceedings against homeowners with federally-backed mortgage loans. The CARES Act’s mortgage foreclosure moratorium applied to single-family residential mortgage loans secured, guaranteed, or made by FHA, USDA, VA, or Fannie Mae or Freddie Mac. Originally scheduled to expire at the end of June, the various agencies extended the moratorium on foreclosures and evictions until at least August 31, 2020.

The CARES Act also granted Federally backed mortgage loan consumers experiencing financial hardship related to the COVID–19 pandemic, the right to request six months of forbearance (with an option of six additional months), regardless of delinquency status. Congress prohibited servicers from charging any fees related to this forbearance. Mortgage delinquency status is frozen in place during forbearance, even if the bank suspends payments during the forbearance. As it stands today, customers can request forbearance under the CARES Act until the earlier

of the end of 2020, or the end-date of the national emergency concerning the novel coronavirus disease outbreak declared by the President on March 13, 2020, under the National Emergencies Act. State and Local-level Protection Many state and local authorities enacted policies to protect mortgage borrowers and renters. The details of these state and local foreclosure bans vary. Banks should refer to the official websites for their state and local governments to assess the scope and requirements of applicable prohibitions. While effective dates vary widely, many of these protections remain in effect until respective governors lift statewide emergency declarations.

Private Loans The CARES Act provided no relief for loans that are not federally-backed. Banks should refer to the appropriate investor guidelines for mortgages sold to private investors. Banks should refer to guidance from its regulators concerning their expectations regarding non-federally-backed mortgage loans held in portfolio.

Troubled Debt Restructuring (“TDR”) If neither a federal nor state moratorium applies to a residential mortgage you hold in portfolio, you may still be able to exercise your authority to assist pandemic-effected borrowers who are struggling financially. Regulators have urged banks to work with customers and prudently modify loans in a safe and sound manner. Section 4310 of the CARES Act provided banks relief from TDR. In April, regulatory agencies issued revised interagency guidance to help banks sort modification requests into three groups: (1) loan modifications covered by Section 4310 of the CARES Act; (2) those outside of Section 4310 deemed not to be TDRs; and (3) those outside of Section 4310 that may be TDRs. In June, regulators released new interagency safety and soundness examiner guidelines. These guidelines instruct examiners to not criticize institutions for doing so as part of a risk mitigation strategy intended to improve existing loans, even if a restructured loan ultimately results in adverse credit classifications.

KENTUCKY BANKER | 15

continued from previous page

Foreclosure Protection: Where are We Now? To be covered by Section 4310 of the CARES Act, a loan modification must: (1) relate to COVID-19, (2) be executed between March 1st and December 31st (assuming the current national emergency does not end earlier than the end of the year), and (3) the underlying obligation must be not more than 30 days past due. If a loan modification meets these three criteria, financial institutions do not have to report it as a TDR; however, the financial institution should maintain records of the volume of such loan modifications.

If a loan modification fails to meet any of the three criteria for Section 4310 coverage, it does not automatically result in a TDR. Regulators will deem a modification as not to constitute a TDR if it relates to COVID-19, extends no more than six months, and the underlying obligation is not more than 30 days past due. The only subjective criterion is the relationship of the modification to COVID-19. As a best practice, banks should have the borrower certify that the requested change is due to COVID-19. To not raise HIPAA concerns, the certification should be general and not address specific health details. While such a certification is not required to be in the loan file, it would show future examiners that the lender followed the guidance in good faith. If a bank receives a modification request that is outside the scope of

Section 4310 and does not meet the described criteria, the bank should assess whether the modification would be a concession to the borrower that the bank would not otherwise consider and act accordingly.

As with everything related to the COVID-19 pandemic, expect mortgage foreclosure protections to change as the county continues to deal with the long-term effects of our national crisis. The federal agencies may extend the protections relating to the loans they back, and Congress will undoubtedly reassess the CARES Act’s protections as the end of its covered period draws near.

Despite how things change, you can count on tCompliance Alliance to bring you the most up-to-date information available as we walk hand-in-hand through this crisis.

Chris W. Bell is an Associate General Counsel at Compliance Alliance. He has worked in the legal department of a federal savings bank and for the Texas Department of Banking. He is one of the C/A hotline advisors.

NEW KBA ASSOCIATE MEMBER

Focus Marketing Group The Kentucky Bankers Association would like to welcome our newest Associate Member, Focus Marketing Group!

Focus Marketing Group is your one-stop shop for promotional products and business gifts. Their extensive range of promo products will ensure you find something to suit your banks needs and requirements.

Decals, banners, table throws, flags, wearables, service awards and pens are just a few of the categories they can provide to your institution.

Put their years of knowledge about promotional products to work for your bank!

VISIT www.focusmktg.net 16 | KENTUCKY BANKER

FOR MORE INFORMATION CONTACT | Selina Parrish Director of Membership Services sparrish@kybanks.com

KBA Endorsed Vendor: Promontory Interfinancial Network

A Game Changer for Banks and Communities In the past, many large-dollar depositors, such as public entities, institutional investors, and nonprofits, were reluctant to deposit their cash at small banks because their deposits could only be insured up to $250,000. They feared losing money if their bank failed. In effect, small banks were penalized for their size on the mistaken belief that small automatically equaled risky.

This changed in 2002 when Promontory Interfinancial Network began offering the first “reciprocal deposit” placement service— CDARS® and, later, another called Insured Cash Sweep, or ICS®.

that access on funds placed into CDs. Reciprocal deposits are “sticky.” (CDARS reinvestment rates are approximately 80 percent, and banks typically see less than 5% of ICS Reciprocal accounts liquidated in any given month even as total accounts and balances steadily increase.) And, the institution accepting the deposit maintains a relationship with the depositor—typically a locally-based depositor. The safety-conscious customer is often a government organization (such as a city or county treasurer or a public school district), an institutional investor, a nonprofit, or another depositor that would otherwise

Now, many institutional and individual investors are embarking on a flight to safety, moving funds out of the stock market and into cash to manage volatility during these challenging economic times brought on by the COVID-19 pandemic. For banks that are part of Promontory Interfinancial Network’s network of banks, this shift represents an opportunity to offer customers access to multi-million-dollar FDIC insurance while using reciprocal deposits as a cost-effective way to build a stable balance sheet, acquire more funds to lend, and help the local community.

• make a large deposit in a large money-center bank, rather than a community bank (foregoing access to FDIC insurance for most of the deposit and relying on large rating agencies, like Standard & Poor’s and Fitch, and then tracking the ratings over time);

Reciprocal deposits are those that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. This means that a bank that participates in a deposit placement network can attract and retain a greater amount of deposits from local customers. Promontory Interfinancial Network, the inventor of reciprocal deposits, offers the nation’s leading reciprocal deposit placement services, Insured Cash Sweep and CDARS. How Insured Cash Sweep and CDARS Work Nationwide, thousands of banks use ICS and CDARS to provide safety-conscious customers with access to FDIC insurance beyond the traditional $250,000 per insured bank, per depositor (for each account ownership category). By splitting a customer’s original deposit into smaller increments—each below the standard FDIC insurance maximum—and placing it into deposit accounts at other banks, Insured Cash Sweep and CDARS enable safety-conscious customers to access multi-million-dollar FDIC insurance through a single bank relationship.

The Insured Cash Sweep service provides access to FDIC insurance on funds placed into demand deposit accounts and money market deposit accounts, whereas the CDARS service provides

• require that a bank collateralize or otherwise secure the deposit with Treasuries or other ultra-safe, highly liquid government securities (an added cost for the bank that could lead to the customer receiving a lower interest rate if the bank adjusts its rate to compensate for the added cost it incurs); or • manually split its large deposit among multiple banks (which requires negotiating different interest rates, signing multiple agreements, receiving multiple statements, etc.).

Bank customers enjoy peace of mind and the convenience of working through one institution. Participating banks can grow relationships and deposits from a local customer base without losing either to larger institutions, without the added costs or tracking burdens associated with ongoing collateralization requirements, and with the ability to lend the amount of these relatively low-cost funds locally. At the end of the day, it’s a win-win for banks and their customers.

Most Reciprocal Deposits Are Considered Core Deposits In recent years, community banks have received relief from certain rules and regulations through the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among the law’s many provisions, most reciprocal deposits are considered core deposits. The nonbrokered status of most reciprocal deposits presents an opportunity for banks to grow core deposits, attract high-value relationships, and make cost-effective funding available.

KENTUCKY BANKER | 17

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A Game Changer for Banks and Communities Reciprocal deposits held by an FDIC-insured depository institution are considered core as long as: 1. The bank is well capitalized and has received an “outstanding” or “good” on its most recent examination; and 2. The total amount of reciprocal deposits held does not exceed the lesser of $5 billion or 20% of the bank’s total liabilities.

which can be used to make loans locally. These are loans that can launch new businesses or help existing ones to expand, creating jobs and providing much-needed services for a community, or that can help individuals to finance a new home, college expenses, and more.

Bank-to-Bank Connections – Helping Community Banks Help Each Other

Built on relationships and serving as pillars of the community, Main Street banks are the engines behind small business growth and a key source of stability, helping many individuals not just to weather, but to shine through key events in life, including challenges like those presented by COVID-19. Armed with reciprocal deposits, representing another arrow in their quiver, banks can do more—billions of dollars more—both to help customers meet their desire for safety and to fund additional lending that otherwise might not take place. This helps communities throughout Kentucky and across the United States.

Why would a bank agree to take Insured Cash Sweep or CDARS deposits from another bank, essentially helping that other bank?

Because in a reciprocal deposit allocation service, each bank is sending an equal amount of customer deposits to other banks.

Exchanges occur on a dollar-for-dollar basis so that each participating bank comes out whole.

If you are a banker who wants to learn more about reciprocal deposits and how they compare to other funding or deposit-gathering alternatives, please visit https://www.promnetwork.com/ solutions/banks/grow-franchise-value-with-reciprocal-deposits.

And if you’re a depositor/investor who would like to learn more, please visit www.icsandcdars.com.

A bank that drops below well capitalized can continue to accept reciprocal deposits without a waiver from the FDIC, so long as the bank does not receive an amount of reciprocal deposits that causes its total reciprocal deposits to exceed a previous four-quarter average.

This benefits banks and local communities across the United States in several ways, helping Main Street banks to attract and retain the amount of deposits from local customers by • expanding the availability of deposit funding for such banks; • providing banks with more funding to make loans within their communities; • potentially lowering the cost of funding for banks over time; and • enabling banks to compete more effectively with larger, toobig-to-fail banks for stable funding.

As a result, banks have a larger source of stable deposits. And banks can replace more expensive deposits, like brokered deposits, routinely collateralized deposits, and those from listing services, with reciprocal deposits received by using CDARS and Insured Cash Sweep.

With CDARS and Insured Cash Sweep, banks can help more customers—including businesses, nonprofits, municipalities, financial advisors, and even individuals—safeguard their funds, potentially at even higher levels, while at the same time attracting locally priced, large-dollar deposits, the full amount of

FOR MORE INFORMATION CONTACT | Selina Parrish Director of Membership Services sparrish@kybanks.com

COMPLIANCE CORNER with Timothy A. Schenk KBA Assistant General Counsel tschenk@kybanks.com

As we all adjust to the new world of communicating with examiners primarily through telecommunication, the importance of compliance continues. We received some good questions over the past month and wanted to share our answers in the event they impact your institution.

Please feel free to reach out to me at tschenk@kybanks.com with any questions you may have!

My question is regarding consumer online applications not secured by real estate: Do these applications require signatures? If so, at what point in the process?

If the Insurance Disclosure is on the application, would this change anything? Is the consumer required to sign this disclosure?

There is no regulatory requirement for a signature on a consumer loan application. It is generally considered a business decision for the bank.

In answering the insurance questions, KRS 304.12-150 states, “Every debtor, borrower, or purchaser of property with respect to which insurance of any kind is required in connection with a debt or loan on the property shall be informed by the creditor or lender of his or her right of free choice in the selection of the agent and insurer through or by which such insurance is to be placed.”

It does not require a signature. As long as you disclose it, you should be good to go.

Does an application to purchase a vehicle or any other consumer purpose have to be hand written? I know that Residential Real Estate Loan Applications have to be hand written.

First, make sure that whatever you are doing fits your bank’s policies and procedures. Many banks require a written application.

In terms of regulatory guidance, a written application is not necessarily required, even for real estate.

12 CFR Part 1002(c) (Reg B) states: Written applications. A creditor shall take written applications for the dwelling-related types of credit covered by section 1002.13(a).

1002.13(a) covers applications for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling.

Also, the commentary to Reg B in paragraph 4(c) states: 1. Requirement for written applications. Model application forms are provided in Appendix B to the regulation, although use of a printed form is not required. A creditor will satisfy the requirement by writing down the information that it normally considers in making a credit decision. The creditor may complete an application on behalf of an applicant and need not require the applicant to sign the application.

QUESTIONS & ANSWERS 2. Telephone applications. A creditor that accepts applications by telephone for dwelling-related credit covered by section 1002.13 can meet the requirement for written applications by writing down pertinent information that is provided by the applicant.

3. Computerized entry. Information entered directly into and retained by a computerized system qualifies as a written application under this paragraph. (See the commentary to section 1002.13(b), Applications through electronic media and Applications through video.

You can take applications by other means, even for real estate.

We have a new loan in the amount of $255,000. It is secured by four pieces of property. Two of the properties are in a flood zone. What amount of flood insurance do we need on the loan if the total appraised values of the properties is $235,000? The properties were appraised individually.

Assuming the properties are eligible under the National Flood Insurance Program, Pursuant to 12 CFR Part 339.3, the minimum required flood insurance coverage is the lesser of: 1. The insurable value of the building or buildings located in the SFHA. 2. The outstanding principal balance of the loan or loans secured by the building or buildings located in the SFHA. 3. The maximum coverage available through the NFIP for the property type located in the SFHA. Based on the circumstances, the property insurance required will mostly likely be a number less than $235,000 depending on the individual appraisals of the properties located in the flood zone.

Does the right of rescission apply to a refinanced HELOC with an increased loan amount? We have the loan being refinanced and are doing the refinancing.

Yes, the right of rescission applies. 12 CFR 1026.15(a) states: 1026.15(a) Consumer’s right to rescind. (1)(i) Except as provided in paragraph (a)(1)(ii) of this section, in a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind: each credit extension made under the plan; the plan when the plan is opened; a security interest when added or increased to secure an existing plan; and the increase when a credit limit on the plan is increased.

Even if you were not extending new money, the right of rescission would apply as there is no new money exception. It is important to note that this is a difference from 12 CFR 1026.23 related to closed-end credit where the right of rescission only applies to the addition of the security interest and not the existing obligation.

KENTUCKY BANKER | 19

6 Digital Banking Best Practices During the COVID-19 Outbreak

by Steve Kent, Senior Director Digital Strategy, at CSI. As the financial industry navigates the uncertainty of the COVID-19 pandemic, one thing is clear: digital banking has never been more important to financial institutions and their customers.

While digital channels like mobile banking apps have always offered convenience, they now offer physical safety as well. With a digital approach to these extraordinary circumstances, banks and their customers can rest assured that social distancing does not mean financial isolation.

4. Provide Free Mobile Deposits Banks that are currently charging a fee for mobile deposits should consider making this a free service during the pandemic to further encourage customers to stay home and meet deposit needs.

5. Raise Mobile Deposit Limits Raising mobile deposit limits encourages deposits through remote channels, which also decreases the need for your customers—both consumers and businesses—to make deposits in person.

6. Implement Methods to Request Skipping Payments

Here are six best practices your institution can use to encourage and enhance digital banking channels given the unprecedented nature of COVID-19.

1. Regularly Update Customers on Hours and Closures Banks should consistently post accurate location hours on their website and other digital channels. The most effective strategies leverage custom messaging like texts to keep customers informed about branch closures, changes to hours, updates in services and operations or anything else related to COVID-19.

2. Enable Self-Enrollment Given the high demand for digital banking during this period, it is beneficial to ease the enrollment process. Encouraging self-enrollment in digital banking services allows customers to enroll in and begin using these banking services without visiting a branch or overwhelming your call staff.

For financial institutions considering flexibility on payments, custom forms can be used to create a method for customers to request skipping payments. Allowing customers flexibility on payments through digital channels like a banking mobile app can alleviate undue stress during an overly stressful time.

COVID-19 changed many aspects of society almost overnight, and led many to worry about both physical and financial health.

Fortunately, digital banking is the perfect tool to maintain a sense of normalcy despite abnormal circumstances.

Following these practices enables financial institutions to stay ahead of the uncertainty and deliver a sense of calm in the storm.

KBA THOROUGHBRED SPONSOR

3. Emphasize Your Digital Banking Services Banks can and should use social media, messaging on their website and other available channels to educate customers about the many benefits of digital banking. These messages can remind an institution’s entire customer base that they can bank safely from home with services like ApplePay/AndroidPay, mobile deposit, bill pay, P2P payments and account transfers.

20 | KENTUCKY BANKER

FOR MORE INFORMATION CONTACT | Selina Parrish Director of Membership Services sparrish@kybanks.com

NEWLY ENDORSED VENDOR BancCard of America provides a proactive merchant services partnership, and delivers the most sophisticated, secure and reliable systems for their customers.

BancCard is strategically aligned with the top three processors in the industry, assuring you of the best systems available. BancCard partners with more than 200 financial institutions in 22 states.

“We would like to personally thank all the existing bank partnerships we currently have across the state of Kentucky.

Through this endorsement with the KBA, we are excited to continue helping the banks of Kentucky and their customers.

We welcome the opportunity to personally present our program to your team as the next step in creating a long-term, value-added, successful partnership with your bank!”

Tyler Cook Regional VP of Sales

TESTIMONIALS Springfield State Bank on BancCard of America, Inc. “From the very beginning, I have been wowed by the service BancCard provides! It’s quite impressive when customers call me just to thank me for the service they received.”

Mrs. Christy L. Carpenter Executive Vice President & CTO Springfield State Bank, Springfield Hometown Bank of Corbin, Inc. on BancCard of America, Inc.

Tyler Cook, Regional VP of Sales, was born and raised in Kentucky and currently resides in the Louisville area. Tyler has been with BancCard for 17 years and leads the Kentucky market. The BancCard Kentucky sales team has over 15 Face to Face sales people with over 100 years combined experience partnering with financial institutions, and has a strong track record of successfully growing bank partnerships and merchants in the local markets the Kentucky Bankers Association serves.

Contact Tyler for more information on becoming a BancCard Partner!

Cell: (502) 494-6441 Fax: (502) 526-5632 Email: tcook@banccard.com

“Our partnership with BancCard has been night and day compared to our previous merchant provider they have done everything they promised they would do and more.”

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FOR MORE INFORMATION CONTACT | Selina Parrish Director of Membership Services sparrish@kybanks.com KENTUCKY BANKER | 21

Navigating Uncertainty

Creating a Path Forward

by David Carlson and Sean Payant, Haberfeld In times of uncertainty, organizations have a tendency to put the brakes on, losing sight of long-term strategic initiatives and established growth goals. However, history has taught us the decisions your bank makes today will have lasting implications for tomorrow. Business as usual will return and our strategic initiatives and growth goals will still be there. The key is to stay focused on growing core customers, regardless of the economic environment. Here’s why.

More Customers Cushions Profitability Having more customers is one of the best ways to guarantee strong performance in all economies. Banks executing a growth strategy consistently have up to 2x the number of customers per branch when compared to industry averages.

To get a picture of how customers impact bank performance, we need to turn to data compiled during the great recession of 2008.

For context, the average bank has approximately 1,100 retail and business checking customers per branch. Banks consistently executing a growth strategy have approximately 2,200 retail and business checking customers per branch.

An analysis of the data illustrates the impact core customers have on Return on Assets (ROA) and Return on Equity (ROE). What we learned from the “great recession” was banks that stayed focused on growth remained stronger. While everyone was challenged, growth-oriented banks fared much better. ROA declined less than the industry average (26% for growth focused vs. 56% for the industry), and ROE followed the same trend. Just as important, those banks that stayed the course through the crisis also came back stronger on the recovery side.

While nothing can completely insulate your bank from worsening financial performance during an economic downturn, the data illustrates that having more customers certainly helps.

How Do Customers “Cushion” Profitability?

Non-Interest Income: Banks executing a growth strategy simply have more non-interest income. As the customer-base increas22 | KENTUCKY BANKER

es, non-interest income also increases – not because of regular service charges, but instead through more customers utilizing income producing services, such as interchange income (average of $60 p/a/p/y) and valuing overdraft services (average of $90 p/a/p/y).

More low-cost funding: 70% of the time, the first product purchased at a bank by a consumer household is a checking account.

It’s 55% of the time for businesses. Checking deposits are the lowest cost funding available, with business checking deposits having a cost of funds less than .01%; this translates into improved NIM. Relational intensity: Checking customers buy additional products and services. Growing retail and business checking customers affords your bank first right of refusal on other products and services 73% of the time, averaging 5.64 retail and 5.86 business product and service relationships.

Loans from local markets: Having more customers also allows your bank to lend more money to more people in your local communities. These loans tend to have less risk.

Keys to Accelerating Customer Growth Get product right: People hate fees. Compressed margins and decreased profitability can lead to the discussion of increasing monthly service fees or adding minimum balance requirements.

Below is recent research on the criteria consumers use when selecting a banking provider. Interestingly, comparing consumers of all ages with consumers under 40 years of age produces very little difference as it relates to what people desire. Compression in bank earnings will have little impact on what consumers want from their banking partner. Your retail and business products must be compelling if you want to have the greatest opportunity to grow core customers.

Invest in training your team: Too often our industry treats training as an event rather than a way of life. Employees who do not understand your products and services will never be able to recognize opportunities with customers, let alone speak in terms of benefits. It is crucial your institution commit to on-going training initiatives regarding all of your products and services.

Increase your spending on strategic marketing.

• Proactive – According to Novantas, 65% of consumers only consider two options when they go to move their checking account, meaning 65% of your current customers already know where they would bank if they didn’t bank with you. You must be top-of-mind before consumers and business know they want to switch. Your marketing must create the opportunity for them to pick you.

• Targeted – You need to use data and analytics to help you understand where to market before you market. Your marketing resources must be allocated to target consumers and businesses who haven’t chosen your bank yet, but could and should.

• ROI Focused – You must define what and how you will measure success before you market, not after. Make sure your marketing investment is working to create tangible, measurable results.

The past informs the present – banks that stay focused on growth reap the greatest rewards. While it may not be intuitive, now is the perfect time to make sure you have all of the right strategies in place to capitalize on the growth opportunities that present themselves in any economic environment.

David Carlson served as the Sr. EVP of Business Development and Dr. Sean Payant serves as the 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 spayant@haberfeld.com.

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Lessons from the Great Recession

by Chad Hull, Charlie Crowley and Chris Chapman Managing Directors, Investment Banking Boenning & Scattergood, Inc. It happened so fast! One day, we had record low unemployment rates and very strong measures of banking industry health compared to historical averages (record earnings, strong capital levels and superb asset quality metrics). In a flash, large segments of the economy were shut down by the scary presence of an invisible enemy that upended the way we had always worked, learned and played. In addition to the stress related to health and safety concerns, there are widespread concerns about unemployment and whether businesses, large and small, will be able to survive. The nation’s bankers, as always, have been on the front lines in helping to ensure that businesses and consumers can still function and keep our economy alive.

Many industry observers thought that the Great Recession of 2008-2009 was no more than a once-in-a-generation phenomenon in terms of severity. Unfortunately, bank leaders today need to dust off the playbook and examine what they and others did right and wrong, navigating their way through the Great Recession and rebuilding their businesses in the challenging years afterwards.

Of course, there are significant differences between the Great Recession and the COVID-19 crash. The Great Recession was triggered by a variety of factors, including steps by Congress, Freddie Mac, Fannie Mae and rating agencies to create a more highly leveraged mortgage finance system, with nothing-down loans and cash-out refinance deals that, in hindsight, were very unwise. Mostly, the problems that ensued were the result of a cracking of the widely held, multi-generational view that housing (if not most forms of real estate) would always hold its value, thereby allowing for a high degree of leverage. Some of the Wall Street banks were facilitators of ill-conceived derivative products and securitizations, and certain Wall Street firms themselves were overly leveraged and unable to handle the liquidity squeeze that resulted from the credit crisis. Because of the many complex issues leading to the housing bubble and the Great Recession, most people (in D.C. and on Main Street) did not have a good understanding of the facts and tended to incorrectly blame banks as being the source of the economy’s problems. Although the government’s investments in banks under the TARP program actually generated a positive return, the banking industry was tarnished by having received expensive government “bailouts.”

24 | KENTUCKY BANKER

This time is different. Banks certainly did not cause the coronavirus problems, and the government was largely responsible for putting the economy into a medically induced coma in order to prioritize the safety of our citizens. The hope is that the public health issues can be controlled well enough to allow the economy to bounce back from this recession relatively quickly and decisively, as opposed to struggling through a protracted and uneven recovery, potentially requiring dramatically more governmental and taxpayer assistance than has already been supplied.

Only time will tell, but the nation has never been through an immediate economic deep freeze like this.

Like the Great Recession, this period obviously creates a tremendous amount of uncertainty for banks. Unlike the Great Recession, however, the media’s portrayal of banks’ involvement is trending more favorably today. Hopefully, the majority of people will realize that banks are working with customers and the SBA to help keep businesses and households afloat economically. Nevertheless, challenges abound. Stock prices have already been hit hard, as investors brace for darker days ahead. Loan losses for the industry are widely expected to increase, with the result that earnings are likely to be down and capital is likely to be stretched at least to a certain degree (though industry capital levels were dramatically higher this year than at the outset of the Great Recession). In challenging times like these, bank leaders will certainly be under pressure and will be presented with great opportunities to shine. In most cases, we believe that the lessons learned from the Great Recession will help the nation’s bankers today.

Reflecting on our own practice of advising community banks, we have been fortunate to have worked with many outstanding banks and bankers over the years, through good environments and challenging ones. With that experience in mind, we offer the following suggestions from observing successful clients as they worked through the Great Recession and its aftermath: Maintain focus on ALL of your stakeholders. The best bank leaders instill in their organizations a culture of serving several constituencies – employees, customers, shareholders and regulators – recognizing that the stakeholders are interconnected.

A bank that takes good care of its employees will find that its employees provide excellent service to its customers. Regular and open communication with regulators is necessary to keep them continued on page 26

It’s comforting to know if I have an issue, or need advice, I can reach out to Chuck and his team to quickly get an answer. Several times I’ve talked to Chuck, after business hours, for issues I have that can’t wait. He knows if I am waiting on a solution, our customers are also waiting. I can’t recommend KenBanc enough!

John D. Moore, EVP, Chief Risk Officer, Home Federal Bank

Your Bank faces more uncertainties than ever...

Your Insurance shouldn’t be one of them Let us review your coverage so you can get back to the business of serving your communities.

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Chuck Maggard cmaggard@kybanks.com cell 606-682-1950

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continued: Lessons from the Great Recession as an ally rather than an adversary. It is this awareness, along with prudent risk management, that can position a bank to potentially deliver acceptable risk-adjusted returns to shareholders.

For banks to emerge stronger from a difficult period, it is critical that they not lose focus on this broader mission.

the other hand, we have observed that shareholders strongly prefer that the board maintain the bank’s current dividend level if possible. For what is, in most cases, a relatively modest amount of money, a bank can send the market a strong signal of confidence in its outlook.

Take your medicine. If you have loans to downgrade or losses to recognize, it is generally prudent to do it sooner rather than later. In the early stages of a downturn, it is virtually impossible to know exactly which sectors of the economy will bounce back quickly, which will suffer the longest and how deep charge-offs will ultimately go. Whether you are in a CECL framework or using your historical methodology, the past experience in this case holds few clues as to what your actual losses will be. Of course, you need to be able to justify your decisions to auditors and regulators, but an extra-cautious posture is seemingly more appropriate at the current time than a drip-drip-drip approach.

Consider growth opportunities, including selected acquisitions and talent additions. If your bank may have been interested in acquisitions before the recent market turmoil, you should not necessarily rule out potential opportunities, and you should continue to cultivate relationships with prospective partners. Both parties will obviously need a higher degree of wariness with respect to credit diligence in the near term, but that does not mean that a deal cannot materialize. Some very attractive deals for buyers and sellers took place in the aftermath of the Great Recession. Particularly, if there is a stock component to the deal, a given seller may be able to take a buyer’s stock at somewhat depressed levels and ride back up with the buyer when market conditions improve. Whether or not you consider acquisitions of other companies, this may be a great time to add skilled bankers that will help you in the years ahead.

Communicate in an honest and straightforward manner about your financial results. After the Great Recession, a huge number of banks bent over backwards to focus on pre-tax, pre-provision earnings, almost acting as if the loan loss provisions did not matter. There are contexts where it is reasonable to discuss PTPP and other trends, but losses are losses, and the net income or loss as well as its effect on book value are of critical importance to investors. Demonstrate that you have a handle on all aspects of credit administration and risk management, and provide a meaningful amount of information about loan concentrations and other matters. If shareholders hear tough news directly from you, they may not come up with additional, pessimistic assumptions on their own.

Maintain an appropriately strong capital position. Everyone in the industry would be wise to remember the “Capital is King” mantra. That does not mean that you need to have a tremendous amount of excess capital, which will drag down your ROE levels, but it does not hurt to maintain an extra margin of safety until you have greater clarity on your asset quality and business outlook. Most banks will not want to consider raising equity capital at current valuation levels if it can be avoided. We would argue that it is often preferable to shrink your balance sheet a bit if you feel that you need to improve your capital ratios marginally. Issuing debt may be an attractive alternative and the debt markets have been receptive lately to bank issuers, but market conditions can shift quickly, especially during a crisis. Banks with a plan can move decisively when needs and market opportunities align. In the near term, it probably makes sense for most banks to stay cautious about stock buybacks, even though your stock may, in hindsight, have represented a relative bargain. On

Adopt a growth mindset from a customer standpoint. You can either sit around with a “woe is us,” defensive mindset, or you can adopt an entrepreneurial approach and find new opportunities. In the midst of the Great Recession, some of the large, regional banks were kicking out all customers in certain SIC codes or dramatically reducing commercial real estate exposure.

As a result, many long-time, solid customers were abandoned during a difficult time. Nimble community banks with a growth mindset ended up with some high-quality, new customers that may not have been previously considered potential customers.

History does not always repeat itself, but there will certainly be some attractive, free agent targets this time around as well.

Nobody wanted to be in this position from a health or economic standpoint, but we are confident that opportunities to strengthen your business will appear as we all work through the current market turmoil. By drawing on the lessons learned from the Great Recession, many of the nation’s banks will emerge as even stronger companies in the years ahead.

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2020 Virtual Financial Management Conference Wednesday, August 12, 2020 1:00 p.m. EDT Join FHLB Cincinnati for our complimentary 2020 Virtual Financial Management Conference! The conference will feature valuable insights on the economy, successful strategies in a post COVID world and using technology effectively. Speakers for this year’s event include: • Craig Disumuke, EVP and Chief Economist, Vining Sparks, IBG • Don Musso, President and CEO, FinPro, Inc. • Virginia Heyburn, Vice President, Fiserv Registration will be available soon at fhlbcin.com. Questions? Contact FHLB’s Marketing Department at events@fhlbcin.com or 877-925-3452.

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