Mark Green: What sets the most successful bankers apart from their peers? Skill, hard work (more due diligence), luck, the ability to assess character?
Luther Deaton: Hard work, integrity and service are the keys I stress to our team of Central Bankers. There is no way to short-cut success. It takes time, dedication, long hours and a service mentality.
MG: Whatâs your best advice to those who manage banks large and small?
LD: Our greatest asset is our human capital. We canât accomplish anything without a great team of smart, dedicated, service-oriented people. Thatâs where it all starts.
MG: What are Kentucky bankingâs biggest challenges today?
LD: Finding the right people who want to build a banking career. We need talented people and will need even more of them in the years to come. We can deal with all the other issues if we have folks who can develop creative solutions to customer needs.
MG: What is the most common form of lending in Kentucky?
LD: Commercial lending is our largest category. Our mortgage business is really good due to the demand for homes and favorable interest rates.
MG: Are home buyers having problems qualifying for mortgages?
LD: Itâs more a question of how long it takes to meet all the requirements to satisfy the regulators. I think itâs harder for first-time borrowers because the process has become so cumbersome and difficult to understand.
MG: What is the rate of non-performing loans today versus in the past, and are there any surprises here?
LD: Our non-performing assets have declined to the lowest point in years, just 1.3 percent of assets. This has been a steady improvement as the recovery has progressed. Weâre finding that more borrowers have regained confidence in the economy and are planning for growth in the future.
MG: We hear sometimes that todayâs âdigital nativeâ young adults have different expectations about banking relationships versus those of previous generations. Do you see that?
LD: You bet they do. They want service, now! They want it wherever they are, and they want it round the clock. Mobile banking is our fastest-growing product, especially for millennials. Mobile deposit is especially interesting due to the convenience it provides. Weâve recently developed round-the-clock service for credit and debit cards, because thatâs where most customers have questions. We would never have done that a few years ago. The fact that our population is so active and so connected to their mobile phones makes customer support a critical service for us.
MG: The impacts of evolving technology on banking are diverse. Direct deposit and online banking have reduced the number of face-to-face interactions. Do banks need fewer physical locations? Do you foresee this changing appreciably in the next five to 10 years?
LD: Most customers still prefer to establish new relationships in a branch, even if they use mobile banking for transactions. Frankly, a lot depends on whether the customer sees the bank as a place to do transactions or as a place they go to for advice and assistance with more complex financial questions. Many aspects of banking require discussion and advice to ensure the relationship is structured to meet all of the customerâs needs. Weâre involved in insurance, investments and wealth management in addition to banking. Most people still prefer to have those types of discussions face-to-face.
MG: Where do we stand in the business cycle? Still expanding? Stuck in low gear?
LD: It all depends on where you are. Lexington is just emerging from the recession, and growth is just beginning to ramp up. Weâve seen much more business expansion in our markets in Northern Kentucky and Louisville. They seem to be ahead of us in that regard.
MG: What are your expectations regarding Federal Reserve interest rate policy this year and next? What will the impact of rising interest rates be for business and individuals in the long run?
LD: The Fed is concerned about inflation and is monitoring rates very closely. They are poised to raise rates if they detect any signs the economy is heating up. I think we need to be really careful with that. Higher rates could really affect the mortgage industry and expansion by small business.
MG: The appearance seems to be that fewer banks are domiciled in Kentucky but more banks are competing for business, especially in the larger markets. Is this, in fact, true? If so, why?
LD: Banking in our markets is strong. We have 97 bank charters with $37 billion in deposits in our markets. In Lexington, we have 38 bank charters and $8 billion in deposits. And we now have 137 banking offices in Fayette County. Other banks are opening offices here because Lexington is such an attractive market, really the most attractive in Kentucky.
MG: What are the key issues for businesses looking to establish a good relationship with a bank?
LD: They want several things. Will this bank be here to serve me when I need them? Are they large enough to have the resources to meet my technology needs, my borrowing needs and other services such as insurance, investments and wealth management? Do they know about my business, and are they willing to learn more? It takes a dedicated service attitude to make a banking relationship work. Our bank was founded on that concept and itâs even more true today, 71 years later.
MG: What are todayâs top community banking lines of business? Which are generating the most business and revenue for banks today?
LD: Obviously, commercial lending and commercial real estate lending are very important, because those relationships can uncover other needs such as cash management, insurance, retirement plans, investments, etc. Mortgage is a good area for us, and we stress it in all our markets. Insurance is one of our fastest growing areas that fits our high-service business model.
MG: How big today, to both banks and bank customers, is the threat of cyberattack?
LD: The risk is there because customers want convenience and ease of use without it being slowed by safeguards. We are continuously adding more systems to protect the bank and our customers. We are constantly risk assessing our systems and our customersâ use of them. We monitor our website constantly for any hint of a cyberattack. We are using social media to help educate our customers on what they can do to protect themselves and their money. Still, itâs always a worry.
MG: Does Kentucky business have enough access to capital, or might the state need bigger banks to finance projects? Is syndicated financing adequate?
LD: Weâve got some syndication, what we call participation loans. We put the loans together, just in Kentucky, to give you an example, $75 million to $100 million. Our lending limit is almost $40 million; then we get banks out there that have a pretty good-sized lending limit and bring them into the credit, if it takes that. Weâve got six or seven banks that we work with and we trust each other; we do the analysis of the credits, and we all buy in, and we participate it out to the other banks. So this bank has never had a problem handling any type of credit. Weâve always been able to accommodate the customer.
As far as bigger banks go, I guess theyâre OK. But weâve just never looked at it that way. We look at business in terms of what can we do with our local banks thatâs home-grown here in Kentucky.
MG: How often are participation lending projects done? Is that common?
LD: That happens pretty regularly. And the good part about that is that if we participate in some bank, and they are over their line on one of their credits, they call us and ask, âWill you participate in that credit with us?â And we participate in that. So we go back and forth on different credits and different banks, and we reciprocate to them, they do for us as well.
MG: Does it make it more complicated to finance a project if youâre doing participation financing?
LD: No.
MG: Does a lead bank handle all of the qualification?
LD: We lead it. But the other banks have to do their own enquiries. They have to do their own credit analysis and all that, too. Because the regulators, when they come in, ask, âDid you take theirs, or did you do yours?â And so they have to do theirs, too.
MG: So you are actually backing each other up with double, triple due diligence?
LD: Right.
MG: The banking community has been asking for repeal or revision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act since 2011. Do you support repeal or reform of Dodd-Frank, or specific parts of it?
LD: I donât think they should repeal it. I think they should fix it. Itâs far too complicated and has provided very little benefit for consumers. Congress has attempted to control the large banks while restricting how community banks serve the needs of their customers. There is no question it has become more challenging for community banks to operate and to meet the needs of their markets. They have made it so difficult on the consumer.
Is credit hard to get? Yes, because you have to do so many things in order to take care of a customer. Before, you didnât have to do a lot of those things. On a mortgage loan, we used to close one in 15-30 days; now itâs 45-60 days. And it means nothing to the customer, who just wants to know how much is my payment and whatâs my interest rate? Thatâs what theyâre worried about.
And we didnât get into this subprime lending stuff (that caused the 2008 financial crisis, prompting Dodd-Frankâs passage). Banks in Kentucky didnât get into any of that. Mortgage lending in our small towns, in small community banks, thatâs our bread and butter. But now they have no comparable sales (information to use in qualifying the loan); people wonât appraise their properties, so they have a hard time with this. It didnât help the consumer. Itâs hurt the consumer. And it didnât do anything to fix Wall Street, either.
MG: Should the more-difficult mortgage qualification regulations be rolled back?
LD: Yes; they have to do that. I donât blame the regulators. I blame Congress. Congress passed the law, and the regulators have to do the regulation within the law. They canât change what Congress said, so the regulations that are interpreted and put into effect have to match up with what Congress says you have to do. I donât blame the regulators at all. A lot of banks blame them. I do not. Theyâre doing their jobs.
MG: Has Dodd-Frank produced any benefits to the industry?
LD: None.
MG: You are on the stateâs pension system review and advisory board. Any repair or fix for Kentuckyâs now worst-in-the-nation unfunded pension liability is going to be costly and painful. Is there any least worst way to begin to take on this problem?Â
LD: The first thing they need to do is tax reform: How much money can we come up with that can go toward the pension obligations, if any? Itâs going to be a hard fix. Everybody says that has to be paid for before anybody else can be paid a pension, which I guess itâs true. Whoâs going to be able to write the checks if they donât have the money? The state employeesâ pension fund is spending more money than theyâre taking in.
So No. 1, theyâve got to find out how much money they need to fix this pension. I think what they have to do is they need to freeze it. I think theyâve got to do it like a 401k, and then theyâve got to fund it. Iâm not putting the blame on anybody. Gov. Matt Bevin has a tough road ahead of him. He didnât create this, but he owns it. Heâs governor, and heâs going to have to take a stand to fix it. If I were him, I would do tax reform first, see how much money I could come up with, and then I would say, OK legislature, we donât have enough money so hereâs my proposal to fix the pension.
I will tell you I think there has to be a tax increase. Thereâs gotta be. Youâve got the Medicaid expansion health care thing they say is going to take $500 million in the next year or so to fund. Youâve got this pension thing that theyâve already put a billion-some dollars toward, plus theyâre putting more in. And itâs not helping; they donât have enough money. So theyâve got to come up with more revenue.
Now, can we grow jobs fast enough to increase existing tax revenue? No, I donât think we can. What they need to look at, once they do the tax reform â and they need more revenue â I think theyâve got to look at an increase in sales tax of 1 or 2 percent and say this is going toward the pensions. Once we get them stabilized where theyâre supposed to be, then that sunsets and that tax comes off. I donât believe anybody who says they can fix this pension without tax reform and without a tax increase. I think it has to happen.
MG: The governor is aiming to reform the state tax system and fund the pension shortfall later this year. Is there any kind of low-hanging fruit to go after?
LD: Gov. Brereton Jones had a tax reform commission, and Gov. Steve Beshear did as well. And I sat on the one for Gov. Beshear, and I went to all the meetings. There is some low-hanging fruit. A cigarette tax; they could do that. They could put a tax on dry cleaners or whatever â not food or drugs, but other things â and see how much they could come up with. What they need to do is take those two tax reform commissionsâ recommendations and look at them. Take the good and leave out the bad. Thatâs one place where they could start.
But (state Budget Director) John Chilton is a pretty smart guy. I think heâs got the right guy doing the budget, and the right guy looking at tax reform, and the right guy looking at pension reform. I think heâs a guy that understands the numbers, and I think theyâve got to listen to him.
MG: What will be the obstacles to overcome if Kentucky attempts to shift from an income-based tax revenue to consumption-based revenue, such as Tennesseeâs, which is sometimes cited as a successful model?
LD: Our income tax is a big portion of our budget. I donât have the numbers, but if they try to eliminate income taxes to do that right now the sales tax would go out the roof. I think itâs almost impossible.
MG: The phrase âbusiness-friendly tax codeâ has been used for years to describe the most desirable outcome. What is the business communityâs preference for a tax base structure that best supports economic growth, job growth and personal income growth in Kentucky?
LD: I think any good, well-run business would be willing to accept a tax increase if it would fund the right things: education, number one. The business community has proven that it wants to fund education. And education has been neglected. There are some kids right now who cannot go to school because of the tuition. The state has to come up with something to fund education; it has to happen. If that means a tax increase, it means a tax increase.
But the problem we have in this state and in this country is youâve got the Tea Party and youâve got the liberal Democrats, and theyâre so far apart. Theyâre so far apart that they canât come in the middle and sit at the table and say, look, letâs do whatâs best for our state, for our kids, our industry, and see what we can do thatâs both fair, whether itâs raising taxes or lowering taxes or whatever it might be. But make the right decision for the people of the commonwealth. I donât see that happening.
Last year they elected twenty-some new Republicans to the state House of Representatives, and they now control the House. I would hope the people who came in there say, Iâm willing to look at whatâs best for this state and not whatâs best for me as a Republican or Democrat or Independent. I want to do whatâs right for the state; I want to do whatâs right for our people. I want to educate our kids, create jobs for our kids, so they donât have to leave home.
But I donât think thatâs possible. I hope Iâm wrong.
MG: How do you make time and what methods do you use to stay informed about whatâs happening in the fields that you have to keep up with?
LD: Well, itâs a passion I have. This bank has grown with small businesses; weâve provided the capital for them to grow, and weâve grown. Thatâs where I get satisfaction. Iâm very involved with the Kentucky Bankers Association. Iâm on the board of the American Bankers Association. I go to all the conventions, all the seminars. I get involved in the state, like the pension shortfall issue â somewhere down the line, itâs going to come down to the people to pay for this pension. Itâs gonna happen; I donât care what they say, how they slice the cake. But how do we do it so that itâs fair, and how do we do it to make sure itâs a win-win for everybody?
Thatâs why I do it. Very few nights do I get home early, but I love what I do. I love taking a person thatâs got a dream, thatâs got a great plan, and helping fund that person and watching that person grow. Weâve done so many of those. I could tell you story after story. And thatâs where I get my satisfaction.
MG: Do you do any mentoring? What best practices you can share?
LD: Well, it starts with â and I tell everybody I try to mentor, whether itâs internal or external â I say, honesty and integrity means everything. Weâre not all perfect. We all make mistakes. Admit your mistakes. If youâve got those two qualities, which creates character, just stay focused. When you think youâre right, take a stand. But if somebody says, hey, letâs talk about this, I think youâre wrong, be able to admit that youâre wrong on an issue and say, Iâm wrong, and I agree with you. Iâve seen so many people, during the time Iâve been in this business â not in banking, in every business â who think they can do no wrong; and they think itâs my way or the highway. You canât have that attitude.
In this recession that we just went through, one worst word says it all: It was greed. Greed put us where weâre at. They forgot what makes this country and this state better, which is small businesspersons helping their businesses, creating jobs and educating our kids.
MG: Do you have a closing comment?
LD: Iâd like to say something more about education. Last week we learned that UK only receives about 15 percent of its budget in state funding while other comparable universities in more prosperous states get 40 percent of their funding that way. We canât hope to grow our economy and our state if we canât afford to educate our youth and create jobs that will offer a successful future. Thatâs a benefit of tax reform that should be placed near the top of the list. Weâre talking about a better future for our children and grandchildren to enjoy this wonderful place we call Kentucky. â
Mark Green is executive editor of The Lane Report. He can be reached at markgreen@lanereport.com.
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