Kentucky Banker Magazine - Summer_Fall 2020 by Kentucky Bankers Association

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KENTUCKY BANKER

KENTUCKY BANKER MAGAZINE OFFICIAL KBA PUBLICATION SUMMER FALL 2020

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EDUCATION SCHEDULE

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General Banking School NEW DATES September 28 - October 1

The Foundations of Banking School

Cybersecurity Virtual Program October 6 - 7, 2020 Cash Flow Virtual Program October 13, 2020 Loan Review Virtual Program October 14, 2020 Real Estate Evaluations 101 Seminar October 15 (Louisville) Internal Audit Virtual Series November 3-5 Business Development: The Basics and Beyond Seminar November 5 (Louisville) Consumer Lending School NEW DATES October 26 - 29 (Louisville) Foundations of Banking School November 30 - December 4 (Louisville) kybanks.com/education

November 30 - December 4, 2020 (Indiana Wesleyan University, Louisville) The Foundations of Banking School (formerly The Essentials of Banking School) curriculum walks the banker through the bank using the balance sheet and income statement as the guides for understanding bank profitability. Several additional components have been added to the curriculum to enhance an individualâ&#x20AC;&#x2122;s grasp of the material and to strengthen their ability to interact and relate to their peers, employer and the organization. This innovative curriculum was developed especially for Kentucky bankers.

Who Should Attend? The New Bank Employee: This individual may have a college background. However, they are new to the industry and will benefit from a program that introduces them to banking from a practical perspective. The Experienced Bank Employee: This individual is someone who has been with the bank for several years and has not had the time or opportunity to take advantage of banking education programs, AIB or college related courses. This individual knows his or her job well but may lack knowledge of how the whole bank and financial system interact. The Bank Employee on A Career Track: This individual is someone who plans to attend the KBA advanced General Banking School but needs the prerequisite training courses in Accounting, Money and Banking, or Banking Fundamentals. Successful completion of The Foundations of Banking School satisfies these prerequisite requirements.

Benefits of Attending - The curriculum consists of practical classroom sessions and experience with a computer-generated bank simulation. - An increased understanding and appreciation of all functions within the bank, allowing participants to contribute more effectively to their bank. - An understanding of bankingâ&#x20AC;&#x2122;s role in the financial services industry. - The opportunity to expand skills and knowledge beyond on-the-job training as preparation for additional responsibilities. - An excellent foundation for bank continuing education. - The school serves as a prerequisite for the advanced curriculum of the General Banking School. CONTACT PAULA CROSS @ THE KBA pcross@kybanks.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

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 Education Schedule 7 Chairmanâ&#x20AC;&#x2122;s Corner 9 Straight Talk 11 My Two Cents 15 Compliance Alliance 16 Thornberry 50 Years 16 Central Bank 17 Forester 50 Years 18 Haberfeld 19 Compliance Corner 21 Dinsmore 22 Pedro Bryant 23 OneBeacon 26 Ncontracts 28 KBPAC

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

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++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + JPMorgan Capital Corporation + ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + + ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + + + + Bank ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ +Kentucky ++ ++ ++ ++ ++ ++ ++ + ++ ++ ++ ++ ++ ++ ++ + + + + + Sheppard ++ ++ +ACD ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + Highland ++ ++ ++ ++ +Village ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + + + + + + + + + Louisville, ++ ++ ++ +++++++++++++++++++ ++ ++ +Kentucky ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ + Highland ++ ++ ++ ++ +Heights, ++ ++ ++ + 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I welcome your inquiries and the opportunity to discuss the benefits and features this CRA investment provides. Jonathan Welty Vice President 614.224.8446

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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

WHAT A YEAR TO END MY CAREER 2020 will be a year forever etched in my memory! It was supposed to be a year of celebration. I was going to be able to celebrate my retirement year as chairman of the KBA. I looked forward to all of the wonderful events – Spring Conference, Washington trip, in-person group meetings, and, of course, the Annual Convention.

October 29, 1969 First message was sent from computer to computer on ARPANET

But, the unexpected happened – the CORONAVIRUS PANDEMIC! It changed everything. It not only put a road block into what I was looking forward to – it shut down a global economy! This invisible enemy is still impacting our country today and will not be controlled until a proven vaccine is in place. Let’s hope this occurs by year-end 2020, or early 2021.

January 1, 1981 Now Accounts permitted at all depository Institutions as authorized by the “Depository Institutions Deregulation & Monetary Control Act of 1980”

Then, when we thought things could not get more challenging, came the tragic death of George Floyd. This event has ignited protests across our country against what has been termed “systematic racism.” Riots, destruction, protests and unrest continues today. These two unexpected and unparalled events have created a significant disruption to business as usual. It has caused all of us to reassess our business model and how we will address these ongoing challenges. The economic impact of the Coronavirus Pandemic on our small businesses and communities is very real. Despite this significant challenge, community banks in Kentucky stepped up! They were an “economic first responder” in providing PPP loans, loan modifications and deferments to help their small business and individual customers survive. They took significant actions to keep their employees and customers safe, while meeting their immediate needs. The response of community banks in Kentucky is an example of their continuing leadership and commitment to their employees, customers and their communities. While these two unexpected and disruptive events have created division within our country, Kentucky banks have remained strong and committed. That’s a testament to each of you! Significant Banking/Economic Events During My Career 1964 Edward T. Breathitt was Governor of KY and H. A. Rogers was Banking Commissioner June 27, 1967 First ATM opened in Barclay’s Branch in North London, England September 2, 1969 First American ATM opened in Chemical Bank at Rockville Center, New York

December 10, 1971 First email sent across a network initiating the use of the “@” sign

April 3, 1973 First mobile phone call made by Martin Cooper, a Motorola researcher and executive January 1, 1983 ARPANET and the Defense Data Network officially changed to the TCP/IP standard – hence the birth of the Internet! (Al Gore was not involved) October 13, 1983 First analog cellular system in North America – Advanced Mobile Phone System (AMPS) August 6, 1991 World wide web opened to the public 1993 First smartphone – IBM Simon was introduced June 29, 2007 First iPhone by Apple, Inc. 2007 – 2009 The Great Recession refers to the economic downturn from 20072009 – Most severe economic recession since the Great Depression in the 1930’s! March, 2020 Coronavirus Pandemic – ongoing As of December 31, 1969, there were 398 state and national banks in Kentucky; today, as of June 30, 2020, there are 134. Consolidation continues to play a key role in the financial services industry. continued on page 12

KENTUCKY BANKER MAGAZINE | 7

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

Never Been Prouder! My family writes Christmas letters. My mom wrote them for decades, and we’ve written them since 1989. Without those letters, we’d have forgotten things we need to remember. For me, this column has come to serve that same need.

work. That involved flooding our markets with loans at interest rates well under those we need to survive. And the promised fees that would help buffer our risks? Those were always behind schedule.

Let us never forget, as an industry, what we did in the service of our nation during a year that may live in infamy. The year began with CNN Business headlines about American economists being bullish on growth in 2020: over 2/3 expected GDP growth to grow by as much as 2% and about 1/3 expected 3%. Survey respondents were citing record low unemployment, wage growth and successful trade agreements.

By the time the second round of PPP loans resumed on April 27, the program’s flaws had become obvious to many of our customers. Guidelines for use of those funds were failing to sync up with marketplace realities for many businesses. Some customers returned funds borrowed from the first round, and a dwindling number of takers resulted in millions that have never been lent out.

Then, on January 31, the federal government declared a public health emergency in response to COVID-19. By March 13, that had escalated to presidential proclamation of a national emergency. Kentucky high school seniors left their classrooms that Friday not knowing it was their last day, in a sense.

Fast forward three months and we’ve got Congress in a battle over a fourth round of COVID-19 stimulus funding in an election year. Potential winners of that battle? Some political office holders, maybe. Sure fired losers? The rest of us. Meanwhile, the federal government promises to the banking industry on loan forgiveness seem to be on the back burners.

By Monday, March 16, Governor Beshear had announced Kentucky’s first COVID-19 death, along with closures that teed up an equally grim prognosis for Kentucky’s small businesses. That’s when banks became the first line of defense in the struggle to survive for many small businesses. Well before the federal government could get its PPP in place, banks were already supporting their customers with loan modifications and deferrals to stave off job losses and their devastating impact on local economies. Meanwhile, the federal relief plan that became the CARES Act was taking shape with banks being the delivery system. The billions to be disbursed to keep payrolls stable were to come from banks. The source of all that largesse would only become tax dollars if and when those loans were forgiven and reimbursed from federal funds.

All this is playing out as part of a pandemic response without precedent in recorded history, especially in respect of its political dimensions. We endured the first half of 2020 with hope for a return to normalcy in the second half, a hope that has faded as COVID-19 rates spike in places and headlines tally the mounting number of business closures and bankruptcies. We anxiously await the day a headline announces a vaccine or a treatment. Thanks to the way our government and scientists have united against this virus, that day is coming sooner than later. A lot of businesses who make it until that day comes will get there because a banker went the extra mile, whatever the risks. I’ve loved our industry from the moment I performed my first banking service as a fifteen year old teller. But I’ve never been prouder of it than in this moment.

As the evolving plan positioned the SBA as the arbiter of PPP program rules (that were changing daily), banks had good reason to balk. We’ve had decades of close dealings with the SBA and seeing how much litigation they get themselves, and banks, into. Every banker I know weighed those risks and ultimately put the interests and needs of their communities ahead of their own. Even as Treasury and SBA changed rules on the fly and retroactively, we did whatever had to be done to make the program KENTUCKY BANKER MAGAZINE | 9

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

It’s a Family Affair... Our member banks and bankers are more than members, they are our family. I don’t know that I knew that back in 1997, when I joined the Kentucky Bankers Association, but I came to know and believe now that it is true. Since 1997 we have had more good times than bad together, but when it is bad, watch out! COVID-19 has once again proven that to be true.

ral as the KBA Director of Education. Natalie stays on top of the issues and understands which changes to laws and regulations can be easily assimilated into bank policies and processes and which will need more intense educational assistance. But, even beyond that Natalie continues to assist some bankers with compliance questions—some habits are hard to break!

COVID-19 has not only caused self-quarantines, “exceptions” to regular legal and compliance requirements, PPP loans, and travel bans…it has also forced us to find a new way to serve customers (in your case) and help family (in our case). In case you have been too busy to look at what we have to offer during times of need, let me remind you of a few.

Just think of the services and resources available to you in just those two! We are only one of a few state banking associations with three attorneys on staff. And the legal capacity allows us to do so much more for you in the areas of legal, compliance, government relations and education.

We are exceptionally pleased to have the assistance of THREE attorneys in our office. This is the first time the KBA has had three attorneys on staff. In addition to me, we have Tim Schenk who is the Assistant General Counsel and Natalie Kaelin who is Director of Education. Tim joined us almost two years ago, replacing Natalie Kaelin’s position when she joined the management team as Director of Education. If you have not yet met Tim, I recommend that you give him a call or send an email to introduce yourself or ask a question. Tim is all things compliance with a strong history of legal and operational experience both in private practice, as well as from in-house with a community bank. He is always ready to help you find your way to the right compliance answer or to make suggestions if your issue is more complex and may require independent legal counsel. Tim is happy to answer your emails and will pick up the phone to call you if it is an issue that needs to be worked through together. I am happy to have him on our team, as Natalie was difficult to replace! Although Natalie originally joined the KBA as Assistant General Counsel, her experience in both private practice and operational banking experience (with a focus on training) from working in a community bank made her a natu-

And, while we are on the topic of legal, please make sure that you let the KBA know when you are involved in a lawsuit on a legal issue that would impact the industry as a whole, particularly on PPP issues. Lawsuits are popping up all over the country on various issues. There are several issues on agent fees, all in other states. It appears that some CPAs think that they should be paid regardless of the work that they did and regardless of whether the bank knows that they were involved. Courts will ultimately resolve these issues and we want to make sure that we are there to help get the best resolution possible. Now, for all those Neil Diamond fans, I recommend that you go to https://www.youtube.com/watch?v=sPLgsV_ Ms3Q and watch his COVID-19 modified version of Sweet Caroline. Or, if you just want a laugh, this meme was on Facebook: NEIL DIAMOND: Hands CDC: Wash your hands for at least 20 seconds! NEIL DIAMOND: Touching hands CDC: Please don’t touch hands, use elbows. NEIL DIDAMOND: Reaching out CDC: Avoid that too. NEIL DIAMOND: Touching me! CDC: Absolutely not, we have to set an example. NEIL DIAMOND: Touching you!! CDC: WE ARE DOOMED…

KENTUCKY BANKER MAGAZINE | 11

Chairman’s Corner continued from page 7

An End of a Career Brings Fond Memories As my year as Chairman comes to an end, and I approach my retirement, I have a lot of fond memories. My first involvement with KBA goes back to teaching at KBA General Banking Schools and working on intersession problems. To end my career while serving as Chairman of the KBA is something I will never forget. During the past year, I have served with some great bankers on the KBA Board. Thanks to each of you for your counsel and support! And, of course, words cannot express my appreciation for the outstanding KBA staff. There is not a more qualified, trained or motivated staff among any of the state banking associations across the country. Ballard and his team stepped up and provided the support, counsel and tools needed for community banks to meet the unexpected challenges. A special thank you for the commitment, support and kindness you have afforded me!

I am humbled and honored to have served as Chairman of the KBA. I never would have thought that the son of a tenant farmer would have ever had this opportunity. I may retire from “active duty”, but I will always be a community banker. I will always be available to provide assistance, so don’t hesitate to call. God bless you and your families! And remember: “Be pleased, not satisfied!”

Happy Retirement Lloyd! From your friends at the

I will retire on September 30, 2020, after 56+ years in banking. But 2020 will be a year I will never forget! KBA_ halfpg_2020_v3.pdf 3 8/14/2020 8:35:51 AM

Count on us…

JAMES BROWN James Brown has over 25 years of banking experience in Retail, Small Business, Corporate and Correspondent Banking.

(502) 625-9330 james.brown@syb.com

CORRESPONDENT BANKING LENDING SERVICES DEPOSIT & TREASURY SERVICES INTERNATIONAL SERVICES MEMBER FDIC

EQUAL HOUSING LENDER

WEALTH MANAGEMENT & TRUST NOT FDIC INSURED

MAY LOSE VALUE

NO BANK GUARANTEE

Changes to Eligible Retained Income by John Berteau, Compliance Alliance Assistant General Counsel In response to the potential economic effects of the coronavirus, the OCC, FRB and FDIC (“the agencies”) published an interim final rule on March 20, 2020 proposing to revise the definition of eligible retained income. On March 26, 2020 the FRB published an interim final rule which revised the definition of eligible retained income for institutions subject to the FRB’s total loss-absorbing (TLAC) rule. The agencies recently published a final rule which made final both of these interim final rules, without changes. The goal of this final rule is to help strengthen the ability of banks and TLAC institutions to continue lending and conducting other financial intermediation activities during stress periods by making distribution limitations more gradual, as intended by the agencies. Under the capital rule, banks must maintain a buffer of regulatory capital above their required minimum risk-based capital and leverage ratio requirements to avoid restrictions on capital distributions. The agencies established the capital buffer requirements to encourage better capital conservation and to enhance the resilience of the banking system during stress periods. Capital buffer requirements as initially implemented were intended to gradually limit the ability of banks to distribute capital if their capital ratios fell below certain levels. Banks under the capital rule were generally subject to a fixed capital conservation buffer requirement, composed solely of common equity tier 1 capital, of greater than 2.5% of risk-weighted assets. On March 4, 2020, the FRB introduced a stress capital buffer requirement which provides that a covered holding company will receive a new stress capital buffer requirement on an annual basis, which replaced the existing greater than 2.5% capital conservation buffer requirement. Under the capital rule, if a banking organization’s capital ratios fall within its applicable minimum-plus-buffer requirements, the maximum amount of capital distributions it can make is a function of its eligible retained income. Prior to the issuance of the March 20, 2020 interim final rule, the capital rule generally defined eligible retained income as four quarters of net income, net of distributions and associated tax effects not already reflected in net income. The interim final rule revised the definition to be: “(i) The eligible retained income of a national bank or Federal savings association is the greater of: (A) The national bank’s or Federal savings association’s net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the national bank’s or Federal savings association’s net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter.”

The requirements in the total loss-absorbing capacity (TLAC) rule build on and complement the capital rule. Back in 2016, the FRB issued the TLAC rule to require the largest and most important bank holding companies (U.S. based) and foreign banking organizations (U.S. operations) to maintain a minimum TLAC amount, consisting of minimum amounts of long-term debt and tier 1 capital. In addition, the TLAC rule prescribed buffer requirements above the minimum TLAC amount which institutions must maintain to avoid restrictions on capital distributions. As with the capital rule, the TLAC buffer requirements were established to encourage better capital conservation and enhance the resilience of the banking system during stress periods. TLAC buffer requirements were implemented to gradually limit the ability of institutions to make capital distributions under certain circumstances, thereby strengthening the ability of these institutions to continue lending and conducting other financial intermediation activities during stress periods. Institutions with a TLAC level that falls below the applicable minimum plus-buffer requirements face limitations on capital distributions, in a manner designed to parallel the restrictions on capital distributions under the capital rule. The maximum amount of capital distributions that a TLAC covered company can make is limited as a percentage of its eligible retained income, as defined in the TLAC rule. Prior to the issuance of the March 26, 2020 interim final rule, the TLAC rule generally defined eligible retained income as net income for the four calendar quarters preceding the current calendar quarter, based on the globally systematic important U.S. bank holding companies’ FR Y-9C, net of any distributions and associated tax effects not already reflected in net income. This final rule revised the definition to be: “(i) The eligible retained income of a global systemically important BHC is the greater of: (A) The global systemically important BHC’s net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the global systemically important BHC’s net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding.” These revised definitions of eligible retained income should allow institutions to gradually reduce distributions as they enter periods of stress and provide institutions with stronger incentives to continue to lend and carry on other business functions. This although both interim final rules were effective as of the date they were published, the new final rule will be effective January 1, 2021.

The revised definition of “eligible retained income” under this final rule applies to all of an organization’s buffer requirements, including the fixed greater than 2.5 percent capital conservation buffer and the countercyclical capital buffer. Once the stress capital buffer requirements apply on October 1, 2020, the revised definition would also apply to all parts of a covered holding company’s buffer requirements. Having one definition of “eligible retained income” for all organizations under the capital rule should simplify the regulatory capital framework and ensures fairness across organizations of all sizes. KENTUCKY BANKER MAGAZINE | 13

OCCH Achieves $5B in Equity Raised With $302M Closing of Latest Fund Columbus, Ohio based financial intermediary Ohio Capital Corporation for Housing reached a new milestone with the closing of Ohio Equity Fund XXX (OEF XXX) at $302 million. Having secured commitments from 25 investors, including 2 new investors, OCCH has now raised over $5 billion in private equity investment and financed more than 50,000 affordable housing units for families, seniors, and special needs populations. Ohio Equity Fund for Housing (OEF) XXX will provide over 3,100 units of affordable housing in 38 projects, enlarging OCCH’s footprint in Ohio, Kentucky, West Virginia, and Pennsylvania. “We are pleased that during this unprecedented pandemic and economic uncertainty, OCCH, with support from our investment partners, is able to continue the impactful and essential work of providing affordable housing opportunities to low income households in rural and urban communities,” said Peg Moertl, OCCH president. “With this substantial investment, our partners will continue to preserve and create much needed affordable homes that make a difference to the quality of life in our communities.” “OCCH has been fortunate to retain a stable base of investors throughout the years who are committed to strengthening and growing vibrant, sustainable, and affordable communities” said Jon Welty, OCCH vice president. “OCCH is especially grateful to the ‘Impact Investors’ of OEF XXX, those who commit a percentage of their equity investment to the Ohio Capital Impact Corporation (OCIC). OCIC administers all philanthropic activities that benefit our residents and neighborhoods, such as summer camps and educational and economic opportunities, and we are grateful for their combined $1,000,000 to support OCIC programs.”

The investors that comprise OEF XXX include the following financial institutions: JPMorgan Capital Corporation Huntington CDC* Private Investment Key CDC* US Bank CDC Fifth Third CDC Park National Bank Westfield Bank WesBanco Bank* Premier Bank* Republic Bank* Stock Yards Bank & Trust Co. First Financial Bank* LCNB National Bank Civista Bank* Citizens Union Bank Farmers and Merchants State Bank Richwood Bank The Union Bank Co. Unified Bank CF Bank* First National Bank of Pandora First State Bank* Hocking Valley Bank RiverHills Bank* *Impact Investor

$90,000,000 $50,000,000 $35,000,000 $30,000,000 $25,000,000 $15,000,000 $10,000,000 $8,500,000 $7,000,000 $6,000,000 $5,000,000 $5,000,000 $3,000,000 $3,000,000 $2,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $500,000 $500,000 $500,000 $500,000 $500,000

Ohio Capital Corporation for Housing (OCCH) is an independent, non-profit corporation created in 1989. OCCH has raised over $5 billion in corporate equity for LIHTC projects involving more than 860 transactions and 50,000 units of affordable housing in Ohio, Kentucky, Indiana, Pennsylvania and West Virginia. OCCH has an affiliated property management and supportive services organization, Community Properties of Ohio Management Services, a lending subsidiary, Ohio Capital Finance Corporation, a certified Community Development Finance Institution (CDFI) and a member of the Federal Home Loan Bank of Cincinnati and a philanthropic affiliate, Ohio Capital Impact Corporation. OCCH is an endorsed business partner of the Ohio Bankers League and the Kentucky Bankers Association. KENTUCKY BANKER MAGAZINE | 15

Central Bank receives Global Service Quality Award We are proud to announce that Central Bank was honored with a 2019 Visa Global Service Quality Award for Highest Authorization Approval Rate - Consumer Debit. This award recognizes issuers that display a commitment to customer service through high authorization approval rates while helping to control risk. The Visa Global Service Quality Awards (GSQA) program was established in 1992 for clients in the U.S. region and was further expanded in 2009 to include international regions. This annual program honors some of Visa’s highest-performing acquirers, issuers and issuer processors. GSQA recipients exemplify the Visa-client partnership, fulfilling our brand promise through excellence in innovation, operational efficiency and cardholder satisfaction. “Central Bank has long been known statewide for our commitment to providing excellent customer service,” stated Central Bank Chairman, President & CEO Luther Deaton. “We are honored to now be recognized on a global scale for our work as a consumer debit card issuer.”

Yvonne Thornberry Honored for 50 Years of Service Yvonne Thornberry began her banking career at First Federal Savings Bank of Kentucky after graduating from Anderson County High School in 1970. Recently she was honored for her 50 years of employment at the bank. “I’ve always been in the loan department,” Thornberry, who is now a Vice President and head of loan servicing, told The State Journal. “I process loans, take care of insurance, pay escrows. “She was ready and eager to go to work,” Joyce Jennings, who was Vice President at First Federal prior to her retirement, said to the The State Journal. “From the very first day on the scene, she had a desire and determination to learn every phase of the loan department. She accomplished this very well and became the go-to person for information and help in this department.” “Nobody else has the knowledge she has,” Teresa Hulette, Executive Vice President, told The State Journal. “She’s easy to work with; she’s very reliable and dependable. We almost have to make her take off.” Thornberry said she has no plans to retire. “I enjoy the work,” she added. “And the people are awesome.”

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Forbes names Community Trust Bank Pikeville one of the World’s Best Banks Digital and mobile technologies are revolutionizing the global banking market and it’s a matter of adapt or die for the world’s biggest lenders and the up and comers looking to supplant them. When the coronavirus pandemic closed main streets around the world, banks saw firsthand the need for rock-solid online banking capabilities, digital payments technologies, and smartphone applications that clients could use while in quarantine. Even before Covid-19 changed everything about the way we live, customers around the world wanted and expected the ability to check balances, cash checks, and apply for loans with just a few easy clicks. For the second year running, Forbes has partnered with market research firm Statista to produce our list of the World’s Best Banks. Forbes named Kentucky bank Community Bank Pikeville as one of the world’s best. Instead of gauging the balance sheets and P&L statements, as Forbes does for its ranking of the 100 largest publicly-traded U.S. banks published annually, Forbes surveyed more than 40,000 customers around the globe for their opinions on their current and former banking relationships. Banks were rated on general satisfaction and key attributes like trust, fees, digital services and financial advice; they chose the best banks from 23 different countries.

Forester Celebrates 50 Years in Banking Alicia Forester has been with The Bank of Harlan, and now Monticello Bank, for 50 years! She has worked in most every department in banking at some point over the years, and is now the drive through teller at our Village Center branch.

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Upside Down Thinking on Efficiency by Dr. Sean Payant, CCO, Haberfeld Many financial institution executives spend considerable time thinking about strategies to improve efficiency in order to improve overall profitability. The efficiency ratio is the ratio of non-interest expenses (less amortization of intangible assets) to net interest income and non-interest income, so it is effectively a measure of what you spend compared to what you make. The very name – “efficiency ratio” – makes us think about how efficient we are with those precious income dollars. If a financial institution has a high efficiency ratio, they are simply spending too much of what they make…right? That is exactly what the name implies (emphasis on the spending side of the equation). But this is just a ratio of two numbers, and as we all know, there are two ways to bring the ratio down – reduce costs or increase revenues. The focus across industry press and conference best practices is generally aimed at strategies to cut expenses – using technology, looking at staffing levels, increasing productivity, etc. Although this advice is sound, what happens when a financial institution has already cut what can be cut AND it is still struggling with efficiency? It is sometimes difficult to save your way to prosperity. For many financial institutions, the focus should also be on the bottom portion of the equation – increasing revenues. Let’s look at an institution that has $500 million in assets, a good return at 1% ROA, and a reasonable efficiency ratio of 60%. Let’s assume the FI can improve its efficiency ratio by 5% through revenue increase or expense reduction. It shouldn’t be surprising that increasing revenues provides better performance even though this sometimes seems like a counterintuitive approach. Because many financial institutions need to increase investments for growth in order to significantly grow their revenues, thereby increasing the expense side of the equation, and because of their excess capacity, this will actually make them more efficient over time. Many financial institutions have cut expenses almost to the bone and can’t materially improve their efficiency ratio by further reducing costs. They need to take a step back and realize some fundamental business dynamics that are often ignored in our industry. Most community financial institutions still have tremendous excess capacity, meaning they could serve significantly more customers without significantly increasing expenses. The answer to improving the efficiency ratio is to fill excess capacity with brand NEW profitable customers. How do other businesses look at the issue of excess capacity – for example a manufacturing company? • The facility is running at 50% of the capacity it was built to produce; • The factory has done everything it can to be as efficient as possible – evaluate staffing levels, implement technology solutions, etc.; and • Management’s major goals and objectives are still focused on improving profitability by further evaluating already efficient processes and selling more to current customers. 18 | KENTUCKY BANKER MAGAZINE

Given the excess capacity at the manufacturing company, wouldn’t it also make sense to evaluate if more widgets can be run through the facility? Would the market support providing more products to more people in order to increase net income without substantially increasing expenses? The manufacturing company analogy is very similar to the situation being faced by community financial institutions. They have branches currently attracting 30% - 50% of the new customers they were built to serve each year and it is getting worse as transaction volume continues to decline in branches. Most financial institutions have used technology and staff reductions to become more efficient; however, they still spend much of their time, effort and energy focusing on cost reductions and additional efficiency enhancement. When a community financial institution starts welcoming significantly more new customers per year, fixed costs do not substantially change – no new branches have been built, no additional employees have been hired. Actual data from hundreds of community financial institutions illustrates the impact on actual expenses is just the marginal costs – generally an additional $30 - $50 per account per year (even if we must mail a paper statement). Conversely, the same data base shows the average annual contribution of each new account per year is between $250 - $350. When comparing clients that have embraced this strategy to the overall industry over a three-year period of time (2014 to 2017), their improvement in efficiency ratio was 63% better. This has been accomplished by significantly increasing the number of new customers coming in the front doors of existing branches. There is only so much blood in a turnip. Controlling costs, embracing technology to reduce process costs and evaluating staffing are all things financial institutions should be doing; however, if they have already become very efficient in these areas, the focus must shift to driving revenue. Most financial institutions have tremendous excess capacity in their existing branches today. The solution is to start filling them up. Sean C. Payant, Ph.D., is Chief Consulting Officer at Haberfeld. Sean can be reached at 402.323-3614 or Sean@haberfeld.com.

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

QUESTIONS & ANSWERS

The world of virtual examinations has begun and compliance is again at the forefront in a pandemic world. We received some good questions over the past month and wanted to share our answers in the event they impact your institution.

ing intended to become the consumer’s principal dwelling. (vi) A reverse-mortgage transaction subject to 12 CFR 1026.33(a). (vii) An extension of credit that is a refinancing secured by a first lien with some additional requirements.

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

You are essentially asking if you fit within 2016.35(c)(2)(i) for an exemption for a qualified mortgage on the basis of your institution size and volume. This is a little tricky because the exemption states 15 U.S.C. 1639c. However, the CFPB guidance on “Qualified Mortgages” on page 11 states that “Qualified Mortgages” includes those defined in Reg Z section 1026.43. https://files.consumerfinance.gov/f/201401_cfpb_tila-hpml_appraisal-rule-guide.pdf

Q: I am working on the policy changes for the HPML mortgage requirements. One of the exemptions of the HPML requirement is Qualified Mortgages. Within the definition of a qualified mortgage is a small creditor category of QMs. Essentially it states if a bank has less than $2B in assets and originates 500 or fewer first mortgages per year, loans and hold in the loan portfolio are QMs as long as you have considered and verified a borrower’s debt-to-income ratio. We’re way below $2B in assets and originate considerably less than 500 first mortgages per year. Additionally, we verify the borrower’s debt to income on all our loans. If we meet the test of a small creditor with respect to QMs, shouldn’t our bank’s HPML mortgage loans all be exempt from the appraisal requirements? The answer to your question is it depends. I’ll try to give a logical following of the statute to show how it aligns. I think it important to start in 1026.35(c)(3) which states: (3) Appraisals required. (i) In general. Except as provided in paragraph (c)(2) of this section, a creditor shall not extend a higher priced mortgage loan to a consumer without obtaining, prior to consummation, a written appraisal of the property to be mortgaged. The appraisal must be performed by a certified or licensed appraiser who conducts a physical visit of the interior of the property that will secure the transaction. There is an affirmative presumption of an appraisal being conducted. The list of exemptions, 2016.35(c)(2) is: (i) A qualified mortgage as defined pursuant to 15 U.S.C. 1639c; (ii) An extension of credit for which the amount of credit extended is equal to or less than the applicable threshold amount, which is adjusted every year to reflect increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers, as applicable, and published in the official staff commentary to this paragraph(c) (2)(ii); (iii) A transaction secured by a mobile home, boat, or trailer. (iv) A transaction to finance the initial construction of a dwelling. (v) A loan with maturity of 12 months or less, if the purpose of the loan is a “bridge” loan connected with the acquisition of a dwell-

Looking at 1026.43(e)(5), the exemption for small banks states: i) Notwithstanding paragraph (e)(2) of this section, a qualified mortgage is a covered transaction: (A) That satisfies the requirements of paragraph (e)(2) of this section other than the requirements of paragraph (e)(2)(vi) and without regard to the standards in appendix Q to this part; (B) For which the creditor considers at or before consummation the consumer’s monthly debt-to-income ratio or residual income and verifies the debt obligations and income used to determine that ratio in accordance with paragraph (c)(7) of this section, except that the calculation of the payment on the covered transaction for purposes of determining the consumer’s total monthly debt obligations in paragraph (c)(7)(i)(A) shall be determined in accordance with paragraph (e)(2)(iv) of this section instead of paragraph (c) (5) of this section; (C) That is not subject, at consummation, to a commitment to be acquired by another person, other than a person that satisfies the requirements of paragraph (e)(5)(i)(D) of this section; and (D) For which the creditor satisfies the requirements stated in § 1026.35(b)(2)(iii)(B) and (C). (ii) A qualified mortgage extended pursuant to paragraph (e)(5)(i) of this section immediately loses its status as a qualified mortgage under paragraph (e)(5)(i) if legal title to the qualified mortgage is sold, assigned, or otherwise transferred. If your bank can meet all of those requirements, including 1026.35(b)(2)(iii)(B) and (C), it would qualify for QM status and not be subject to an appraisal so long as the loan is maintained in your portfolio. Q: Does Kentucky required commercial guaranty forms be notarized? Having found KRS 371.065, which was effective July of 1990, I felt it was best to reach out for assistance. You are correct that KRS 371.065 sets forth the requirements for a valid guaranty. However, there is no requirement that the guaranty be notarized.

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COMPLIANCE CORNER: QUESTIONS & ANSWERS Q: We have 2 loans (1-4 Family, 1 is a HELOC) that have been applied for and are closing simultaneously. Would it be okay for compliance if we use the same flood determination? It is our practice to get a different determination with each loan, but we are trying to save the customer. We have bounced this idea amongst ourselves and we can see it both ways.

Q: In light of Covid-19, so much more is being done remotely resulting in a rise in requests to use electronic signatures. We allow it on certain documents, but never had a circumstance that required an electronic signature on a Declaration of Loss. Do you know if there’s any guidance on the acceptance of an electronic signature on a Declaration of Loss on Cashier’s Checks?

A: Yes, that would be acceptable in your case. Here is the answer from the flood Q&A, just for reference.

This is a pretty technical question so I will walk through it to make sense.

Question: If a borrower requesting a loan secured by a junior lien provides evidence that flood insurance coverage is in place, does the lender have to make a new determination? Does the lender have to adjust the insurance coverage?

KRS 355.3-312 governs declarations of loss. I am sure you are familiar with those requirements, but it is essentially article 3 of the UCC.

Answer: It depends. Assuming the requirements in Section 528 of the Act (42 U.S.C. 4104b) are met and the same lender made the first mortgage, then a new determination may not be necessary, when the existing determination is not more than seven years old, there have been no map changes, and the determination was recorded on an SFHDF. If, however, a lender other than the one that made the first mortgage loan is making the junior lien loan, a new determination would be required because this lender would be deemed to be “making” a new loan. In either situation, the lender will need to determine whether the amount of insurance in force is sufficient to cover the lesser of the combined outstanding principal balance of all loans (including the junior lien loan), the insurable value, or the maximum amount of coverage available on the improved real estate. This will hold true whether the subordinate lien loan is a home equity loan or some other type of junior lien loan.

Electronic signatures are governed by KRS Chapter 369. KRS 369.103(2) states that the electronic signature statutes (KRS 369.101 to 369.120) does not apply to a transaction to the extent it is governed by: (b) KRS Chapter 355 other than KRS 355.1-107 and 355.1-206, and Articles 2 and 2A of KRS Chapter 355. Consequently, electronic signatures do not apply to Declarations of Loss.

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Kentucky Adopts the Uniform Power of Appointment – What Banks Need to Know by Marty Tucker, Dinsmore & Shohl LLP

From the Donor Issuing the Appointment:

On March 27, 2020, Governor Beshear signed House Bill 154 into law (the “Act”) - an act relating to grants of legal authority by individuals. This article focuses on the portion of the Act containing the Uniform Power of Appointment Act and highlights things Kentucky banks need to know about powers of appointment that are effective starting July 15, 2020.

• “I appoint to such of my descendants as the powerholder may select …” o This is an example of an exclusionary power because the powerholder may appoint to any one or more of the donor’s descendants to the exclusion of the other(s). • “I authorize the powerholder to appoint to all and every one of my children in such shares and portions as the powerholder shall select...” o This is an example of a nonexclusionary power because the powerholder cannot make an appointment that excludes any permissible appointee from a share of the appointive property.

What is a Power of Appointment? A power of appointment (a “POAppt”) is NOT a power of attorney. A POAppt allows a beneficiary, or appointee, typically in a non-fiduciary capacity (an “Appointee”), the power to direct the distribution of certain real or personal property to permissible beneficiaries. Kentucky banks will see POAppts most commonly in regards to bank accounts, trust assets, or beneficiary designations where the donor wishes to avoid probate as to that specific asset. The POAppt can be general or infinitely specific. However, because there is a presumption of unlimited authority in these appointments, Kentucky banks should interpret the creation of a POAppt as general unless: (1) the terms of the instrument indicate otherwise; (2) the power is exercisable only at the donor’s death and the permissible Appointees are defined and do not include the donor’s estate, the donor’s creditors, or the creditors of the donor’s estate as permissible Appointees. If there is any question about the scope or extent of a POAppt you should consult your in-house our outside counsel. What Will a Power of Appointment Look Like? A POAppt is common in estate planning and typically found in either a will or trust. The new law provides for a POAppt to be exercisable by a separate “instrument” and Kentucky banks should expect to see these POAppts in deeds and other forms of documents as well. The types of provisions you should expect to see in a POAppt are: From the Powerholder Exercising its Appointment: • “I exercise the power of appointment conferred upon me by my father’s will as follows: I appoint [details of appointment].” o This is an example of a specific exercise clause since it refers to the particular power of appointment in question. Specific exercise clauses are highly encouraged. • “I exercise any power of appointment that I may have to appoint any property over to [details of appointments].” o This is an example of a blanket exercise clause. Blanket exercise clauses are highly discouraged.

• “I authorize to such of the powerholder’s descendants as the powerholder may select, except the powerholder, the powerholder’s estate, the powerholder’s creditors, or the creditors of the powerholder’s estate….” o This is an example of an exclusionary power with permissible appointees. How is a Power of Appointment different from a Power of Attorney? While a POAppt and a power of attorney sound similar, they have very different meanings. A POAppt is where the owner of the property, or donor, actually gives a named person the power to direct the distribution of the identified property or amount to a specified group of permissible beneficiaries. And, the donor can either be living or deceased when the power is to be exercised by the donee, depending on the type of appointment. A power of attorney on the other hand only contains the power to grant to an agent, or attorney in fact, the power to do whatever the principal can do while living – typically financial and healthcare decisions. When and How Can a Power of Appointment be Exercised? A POAppt can be exercisable immediately, can be postponed until the occurrence of a specified event, or exercisable in conjunction with a will. In all instances, a POAppt cannot be exercised until the document containing the POAppt is effective and assuming the underlying document (e.g. will, deed) is valid under applicable law. For example, a POAppt contained in a deed is exercised when the deed is effective; a POAppt in a will is exercised generally at the testator’s death. In the event an Appointee comes to the bank in attempt to exercise a “postponed” POAppt – a POAppt exercisable upon the occurrence of a specified event - the occurrence of that specified event must be verified. Your in-house or outside counsel can help through this process. Further, although a POAppt may be amended by the donor, a POAppt is not transferrable by an Appointee and is extinguished upon the Appointee’s death. KENTUCKY BANKER MAGAZINE | 21

Republic Bank Launching $3M Community Loan Fund; Pedro Bryant to Lead Effort Republic Bank & Trust Company announces the addition of Pedro Bryant as EVP, Managing Director of Community Lending. In the newly created role, Bryant will help economically challenged communities and small businesses grow through new programs, including a $3 million Community Loan Fund to support small businesses and promote business development and job creation in low-to-moderate income communities. The Community Loan Fund is designed to serve a diverse group of businesses and focus on the operating needs in all industry segments. It will initially be focused in the Louisville metropolitan statistical area (“MSA”) and rolled out to all communities served by Republic. In order to increase the number of loans deployed, the Community Loan Fund will be available just to businesses seeking loans up to $50,000. “We’re stepping forward to help meet the needs of members of our community who have struggled because of inequity and inadequate access to financial capital,” said Steve Trager, Chairman and CEO. “We’re excited to have Pedro lead initiatives that support small businesses owned and operated by the members of these communities. He adds deep banking leadership experience in community-focused services to our already strong executive team.” As previous CEO and President of Metro Bank in Louisville, Mr. Bryant is recognized as an exceptional leader in the community. He has also served in leadership roles at other banks throughout the South. “Since 1982, Republic Bank has played a leading role in the growth of this community,” said Mr. Bryant. “I want to contribute to this tradition of putting customers first to ensure it continues for years to come.”

Dinsmore continued

What Banks Need to Know About POAppts Conclusion Although POAppts are not necessarily new, the fact that the Kentucky legislature felt it necessary to codify certain rules and regulations governing a POAppt makes it seem likely that POAppts may become even more common and Kentucky banks should be on the lookout and generally understand what they look like, the powers that they convey to the Appointee and what issues, if any, they should be aware of when considering who might have the authority to act in regards to certain types of property. In the event there are any questions about those rights and how to limit any potential risk in dealing with a POAppt, be sure to consult your inhouse or outside counsel.

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Keeping Customers Safe in a Remote Environment - Wire Fraud by Craig M. Collins, President OneBeacon Financial Services These days more people are working remotely than ever before and many tasks previously done in person are happening online - including banking. Unfortunately, fraudsters are aggressively taking advantage of potential vulnerabilities that arise from this increased online activity. Businesses are acclimating to the current unusual circumstances by offering additional services virtually. For community banks, this means working with customers by email or online, allowing electronic signatures on important documents, among other virtual services, which opens up the door for an exposed environment. Should these cyber criminals gain access to Personally Identifiable Information (PII), they can easily pose as the bank “customer”, another financial institution, another party to the transaction, or even someone else within the bank looking to transfer funds. While wire transfer fraud is certainly not a new source of loss for community banks, criminals have been exploiting the increase in electronic and remote banking. They are constantly finding different ways to perpetrate this type of fraud. Therefore, it’s extremely important to stay vigilant while customers and employees are remote. Wire Transfer Fraud involving Real Estate Loan Proceeds There has been a significant uptick in wire transfer fraud schemes involving real estate loan proceeds and wire transfer instructions purportedly from a title attorney/agent or someone else in the bank. The transfer requests and wire transfer instructions are coming in via phone, fax and email. Whenever requests and instructions are received via phone, fax or email – whether from a customer, another financial institution, a title attorney, a real estate agent, or even someone else in the bank – consider having employees follow the same out-of-bank verification procedures that would be performed on any other wire request. Not just with the initial request and instructions, but also with any change in the request of instructions (i.e., when new receiving bank account information is received). Perform a Wire Transfer Risk Management “Check-up” This could start by reviewing the requestor’s account and confirm that the bank has a written agreement with the customer authorizing the bank to transfer funds on deposit in reliance on instructions received via phone, fax or email. Other considerations may include: • Is it unusual for this customer to request a wire transfer? • Has there been a recent transfer of funds into the account from a home equity line of credit? Fraudsters frequently target home equity lines of credit since customers are not as vigilant in checking the status of these accounts. Additionally, information on the existence of these accounts is publicly accessible. • Are the funds being transferred to a foreign account?

• Does the customer seem to be in a great hurry to complete the transfer? • Is the request coming from a legitimate email address? Fraudsters often use email addresses that are very similar to a customer’s legitimate email address (i.e., using the number “1” in place of the lower case letter “l”). Review email addresses closely. • Has the phone number on file for this customer recently been changed? • Has the receiving bank account information, or any other material detail of the request, recently been changed? Additional steps to help mitigate risk could include: • Updating customer files with alternate phone numbers so that callbacks can be made to multiple phone lines. • Using a multi-factor authentication method. Work with your customer in advance to record at least three different security questions and answers that only they would know the answer to. When performing a callback during a transfer request, ask the customer each question. • Establishing alternate electronic verification methods, such as PIN numbers or security tokens. • Executing a written agreement that details who is authorized to execute a transaction, which accounts are eligible for transfers, what security measures and verification steps are in place, which communication methods are used and who is liable (and for what) if fraud were to occur. • Elevating all out-of-the ordinary requests, and encouraging employees to view every wire transfer request with a healthy dose of skepticism. While it is understandable that the bank would like to make the transfer process as easy as possible for its customers and others involved, it is important for the bank to recognize the risks and take the necessary steps – before and after receiving the request – to protect its customer’s money and its own money. Customers and others involved should understand that such measures are to their benefit, and they should appreciate the relatively minor inconveniences associated with verifying the legitimacy of the requests. With wire transfer fraud schemes becoming more frequent and complex, it is more important than ever for banks to protect themselves against this formidable risk.

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

Property & Casualty / Collateral Protection Employee Benefits / Fee Income Cyber / BOLI Contact

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RESOLUTION OF THE BOARD OF DIRECTORS OF HERITAGE BANK INC. In Memory of Chris Caddell WHEREAS, the Heritage Bank Board of Directors wish to express their gratitude for the service, leadership and vision of Chris Caddell, Chairman of the Board and Chief Executive Officer. WHEREAS, Chris learned banking from the ground up and grew into a widely admired and emulated servant leader working alongside his father and Heritage Bank founder, Arnold Caddell. WHEREAS, When Chris was named Chairman of the Board then Chief Executive Officer, he preserved the essence of an award-winning culture key to the bank’s success while casting an inspiring vision for Heritage Bank’s growth and growing impact across Cincinnati and Northern Kentucky. WHEREAS, In just two years at the helm, Chris expanded the bank’s footprint in Kentucky and into Ohio; embraced new technology while reinforcing the importance of relational banking; championed the expansion of Treasury Management services as well as consumer-facing products; signed a legendary local broadcast journalist as the bank’s official spokesperson, and negotiated naming rights for the Heritage Bank Center – the region’s largest venue for entertainment and professional hockey. WHEREAS, Chris and his devoted wife, Eleni, made a profound impact on their community through the charity they founded and through their support of local nonprofits and the Kentucky 4-H Foundation. WHEREAS, Chris’ life and his service to Heritage Bank, Inc. was shaped by a deep and abiding Christian faith. His faith continues to be reflected in the bank’s support of employees during times of struggle. His values continue to shape how customers are treated. BE IT RESOLVED,that this Resolution be entered into the minutes of Heritage Bank, Inc., that a copy be sent to Kentucky Banker Magazine, and copies be provided to his wife, Eleni, and his children, Steven and Alexis. Unanimously adopted this 15th of July, 2020 at a regular Board of Directors meeting.

H. David Wallace, Esq., Chairman and CEO

Charolette Vermillion Chairperson

Eleni Caddell Director

Larry Burcham Director

Robert Lightner Director

Gary Wilmhoff Director

W.Lee Scheben President

Steven Caddell Director

Verne Epperson Director

Gary Griesser Director

Dan Catalano Director

We Have Our Roots Where Others Have Their Branches

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Vendor Due Diligence:

Are You Making This Common SOC 2 Mistake? by Michael Berman, Founder & CEO, Ncontracts KBA Endorsed Vendor You know SOC 2 reports are a great vendor management tool, but are your critical vendors’ SOC 2 reports telling you everything you need to know about how well they protect your data? Not necessarily. It depends on which report you are getting. What Is A SOC 2 Report? SOC 2 reports (short for Service Organization Control 2 reports) summarize results of an independent audit known as an SSAE 18. The SSAE 18, developed by the American Institute of Certified Public Accountants, is the gold standard for auditing how a company manages customer data, including data stored in the cloud. These comprehensive audits are conducted by independent auditors over several months, culminating with an onsite audit to authenticate the effectiveness of policies and controls. Unlike a SOC 1, which focuses on financials, a SOC 2 is all about compliance. It covers five areas: 1. 2. 3. 4. 5.

Security Availability Process Integrity Compliance Confidentiality

SOC 2 reports come in two types. Type 1 reports test controls at one specific point in time. Type 2 reports test controls repeatedly over a period of time to reveal trends. Because they cover a longer period of time, SOC 2 Type 2 reports are more useful. How Does A SOC 2 Report Help with Vendor Due Diligence & Vendor Management? An SSAE 18 audit covers nearly everything you need to know about how an outside company protects your data—from data security and privacy to business continuity and internal policies and procedures for personnel. It also shows how exceptions are corrected—or aren’t corrected—to determine vendor reliability. It’s all about risk management. A SOC 2 evaluates internal controls to see how well a company identifies, assesses, mitigates, and monitors risks. From the board to everyday operations, a SOC 2 can give you confidence that your critical vendor is following best practices to protect your data. 26 | KENTUCKY BANKER MAGAZINE

This includes: Risk assessment. A SOC 2 will let you know how effectively a critical third-party vendor is assessing potential threats to your data. From hardware and software to the potential of staff falling for phishing attacks, the SSAE 18 audit can give you confidence that your vendor is actively uncovering potential risks. Cybersecurity controls. Once risks are identified, controls need to be put in place to mitigate those risks. A SOC 2 will verify the effectiveness of controls. Internal & external communication. Data security is about more than firewalls and intrusion detection. It also requires strong communication to ensure that software is proactively patched and updated, new threats are identified, and that staff is regularly trained and reminded of security protocols. A SOC 2 lets you know how well your vendor communicates when it comes to these and other critical areas. Monitoring, prevention & maintenance. Cyber controls are not a “set it and forget it” type of project. They require ongoing cyber monitoring to ensure they continue to perform as designed. A SOC 2 shows you how effectively your vendor monitors its controls. It gives you confidence that controls are more than just empty promises—that they are fully fleshed out and active. The SSAE 18 also requires written attestation from management that system descriptions are true and complete, providing additional assurance by creating liability and pressure for management. All of this makes SOC 2 reports an extremely valuable vendor management tool—but only if the SOC 2 reports on your third-party vendor’s entire operation. Avoid This Critical SOC 2 Mistake Vendors are happy to give you a SOC 2 report when they have one. An SSAE 18 audit is a major undertaking and companies that choose to go through the audit must be confident in their risk management to make the process worthwhile. The problem is when a vendor gives you a SOC 2 report for its cloud data center instead of for its company. Yes, you want to be confident that the data center your critical vendor uses to store your data is safe and secure. That is critical information. But it’s not everything.

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Avoid Critical SOC 2 Mistakes A critical vendor is more than just a data center. It’s employees who have access to your sensitive data. It’s a vendor that uses your data to conduct activities on your behalf. A data center SOC 2 can’t tell you everything you need to know about the vendor you’re contracted with. It only covers the vendor’s data center. You still need to engage in due diligence with your third-party vendor to understand: •

How the company is structured. This includes risk governance and oversight. A company can have the most secure data center in the world, but if the company isn’t proactively managing risks internally, data can still be exposed.

•

Who has access to your data? Access to your data should be limited and need-based. Employee access should be curtailed when an employee moves on.

•

How fourth-party risk is managed. If your vendor outsources to other third-party vendors and shares your information, you’ll want to know how well your vendor is managing that fourth party. You want evidence of good vendor management.

•

How the critical vendor uses your data.

•

The overall company’s IT systems and controls. It doesn’t matter how secure the data center is if other parts of the company’s IT systems aren’t secure.

•

Physical access and controls. Data can still exist on hard drives and in hard copies. How safe are these?

•

Incident response and notification. If something goes wrong somewhere in the process, how will the vendor respond? Will they tell you about it? When?

What If A Critical Vendor Doesn’t Have a SOC 2 Report? Not every vendor is willing to go through the effort of an SSAE 18 audit, but that doesn’t mean they can give you a copy of their vendor’s data center SOC 2 and call it a day. If a critical or high-risk vendor does not have a SOC report, it’s still necessary to engage in due diligence to address operational risk and ensure data is protected. It requires collecting documentation to review policies related to organizational governance, risk oversight, personnel, information security, vendor management, data and physical security, cyber controls, data privacy standards, and incident response and notification, among other areas. Collecting this due diligence information puts a burden on financial institutions. That’s why it’s worthwhile to choose a vendor that’s elected to undergo regular SSAE 18 audits. The transparent and objective view of compliance controls can give you confidence in your vendor’s internal operations and demonstrate its commitment to being a partner that is dedicated to rigorous security, compliance, and operational controls. Michael Berman is the founder and CEO of Ncontracts, a leading provider of risk management solutions. His extensive background in legal and regulatory matters has afforded him unique insights into solving operational risk management challenges and drives Ncontracts’ mission to efficiently and effectively manage operational risk.

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

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