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: What’s your best advice to those who manage banks large and small?
LD: Our greatest asset is our human capital. We can’t accomplish anything without a great team of smart, dedicated, service-oriented people. That’s where it all starts.
MG: What are Kentucky banking’s 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: It’s more a question of how long it takes to meet all the requirements to satisfy the regulators. I think it’s 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. We’re finding that more borrowers have regained confidence in the economy and are planning for growth in the future.
MG: We hear sometimes that today’s “digital native” 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. We’ve recently developed round-the-clock service for credit and debit cards, because that’s 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 customer’s needs. We’re 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. We’ve 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 it’s even more true today, 71 years later.
MG: What are today’s 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 customers’ 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, it’s 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: We’ve 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. We’ve 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. We’ve always been able to accommodate the customer.
As far as bigger banks go, I guess they’re OK. But we’ve just never looked at it that way. We look at business in terms of what can we do with our local banks that’s 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, “Will you participate in that credit with us?” 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 you’re 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, “Did you take theirs, or did you do yours?” 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 don’t think they should repeal it. I think they should fix it. It’s 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 didn’t have to do a lot of those things. On a mortgage loan, we used to close one in 15-30 days; now it’s 45-60 days. And it means nothing to the customer, who just wants to know how much is my payment and what’s my interest rate? That’s what they’re worried about.
And we didn’t get into this subprime lending stuff (that caused the 2008 financial crisis, prompting Dodd-Frank’s passage). Banks in Kentucky didn’t get into any of that. Mortgage lending in our small towns, in small community banks, that’s our bread and butter. But now they have no comparable sales (information to use in qualifying the loan); people won’t appraise their properties, so they have a hard time with this. It didn’t help the consumer. It’s hurt the consumer. And it didn’t 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 don’t blame the regulators. I blame Congress. Congress passed the law, and the regulators have to do the regulation within the law. They can’t 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 don’t blame the regulators at all. A lot of banks blame them. I do not. They’re doing their jobs.
MG: Has Dodd-Frank produced any benefits to the industry?
LD: None.
MG: You are on the state’s pension system review and advisory board. Any repair or fix for Kentucky’s 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?
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? It’s 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 it’s true. Who’s going to be able to write the checks if they don’t have the money? The state employees’ pension fund is spending more money than they’re taking in.
So No. 1, they’ve 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 they’ve got to do it like a 401k, and then they’ve got to fund it. I’m not putting the blame on anybody. Gov. Matt Bevin has a tough road ahead of him. He didn’t create this, but he owns it. He’s governor, and he’s 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 don’t have enough money so here’s my proposal to fix the pension.
I will tell you I think there has to be a tax increase. There’s gotta be. You’ve got the Medicaid expansion health care thing they say is going to take $500 million in the next year or so to fund. You’ve got this pension thing that they’ve already put a billion-some dollars toward, plus they’re putting more in. And it’s not helping; they don’t have enough money. So they’ve got to come up with more revenue.
Now, can we grow jobs fast enough to increase existing tax revenue? No, I don’t think we can. What they need to look at, once they do the tax reform – and they need more revenue – I think they’ve 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 they’re supposed to be, then that sunsets and that tax comes off. I don’t 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 – not food or drugs, but other things – and see how much they could come up with. What they need to do is take those two tax reform commissions’ recommendations and look at them. Take the good and leave out the bad. That’s one place where they could start.
But (state Budget Director) John Chilton is a pretty smart guy. I think he’s 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 he’s a guy that understands the numbers, and I think they’ve 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 Tennessee’s, which is sometimes cited as a successful model?
LD: Our income tax is a big portion of our budget. I don’t 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 it’s almost impossible.
MG: The phrase “business-friendly tax code” has been used for years to describe the most desirable outcome. What is the business community’s 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 you’ve got the Tea Party and you’ve got the liberal Democrats, and they’re so far apart. They’re so far apart that they can’t come in the middle and sit at the table and say, look, let’s do what’s best for our state, for our kids, our industry, and see what we can do that’s both fair, whether it’s raising taxes or lowering taxes or whatever it might be. But make the right decision for the people of the commonwealth. I don’t 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, I’m willing to look at what’s best for this state and not what’s best for me as a Republican or Democrat or Independent. I want to do what’s right for the state; I want to do what’s right for our people. I want to educate our kids, create jobs for our kids, so they don’t have to leave home.
But I don’t think that’s possible. I hope I’m wrong.
MG: How do you make time and what methods do you use to stay informed about what’s happening in the fields that you have to keep up with?
LD: Well, it’s a passion I have. This bank has grown with small businesses; we’ve provided the capital for them to grow, and we’ve grown. That’s where I get satisfaction. I’m very involved with the Kentucky Bankers Association. I’m 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 – somewhere down the line, it’s going to come down to the people to pay for this pension. It’s gonna happen; I don’t care what they say, how they slice the cake. But how do we do it so that it’s fair, and how do we do it to make sure it’s a win-win for everybody?
That’s why I do it. Very few nights do I get home early, but I love what I do. I love taking a person that’s got a dream, that’s got a great plan, and helping fund that person and watching that person grow. We’ve done so many of those. I could tell you story after story. And that’s where I get my satisfaction.
MG: Do you do any mentoring? What best practices you can share?
LD: Well, it starts with – and I tell everybody I try to mentor, whether it’s internal or external – I say, honesty and integrity means everything. We’re not all perfect. We all make mistakes. Admit your mistakes. If you’ve got those two qualities, which creates character, just stay focused. When you think you’re right, take a stand. But if somebody says, hey, let’s talk about this, I think you’re wrong, be able to admit that you’re wrong on an issue and say, I’m wrong, and I agree with you. I’ve seen so many people, during the time I’ve been in this business – not in banking, in every business – who think they can do no wrong; and they think it’s my way or the highway. You can’t have that attitude.
In this recession that we just went through, one worst word says it all: It was greed. Greed put us where we’re 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: I’d 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 can’t hope to grow our economy and our state if we can’t afford to educate our youth and create jobs that will offer a successful future. That’s a benefit of tax reform that should be placed near the top of the list. We’re talking about a better future for our children and grandchildren to enjoy this wonderful place we call Kentucky. ■
Mark Green is executive editor of The Lane Report. He can be reached at [email protected].
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