Kentucky bankers asked to assess their business at the dawn of a new decade talk about a shrinking number of state-headquartered banks, a growing list of mergers and acquisitions, increasing competition from huge national banks, the increasing presence of intelligent/interactive teller machines from distant banks and the perpetual search for growth markets.
Common themes that seem somewhat contradictory emerge over and over among bankers who represent the fifth- and sixth-largest banks in the country and those whose institutions might rank – at best – 20th in Kentucky.
On one hand, banks want to provide every technological bell and whistle on the planet so millennials, Gen Z customers and anyone else can bank on their smartphone from Starbucks in about 11 seconds. On the other, banks want to provide a personal touch, a smile, a handshake, an acknowledgement, a unique perspective, valuable expertise.
John Key, president of Commonwealth Bank and Trust in Louisville, recalls growing up in small town Marengo, Indiana, where Saturday morning trips with his mother to a full bank lobby were both business and social.
“You knew who the tellers were. You knew who the branch manager was. You knew the president by his first name,” Key said, “and that was (the case) all over the country.”
At a time with uncertainty about what the future might look like for banks in Kentucky and elsewhere, Key is absolutely certain that crowded lobbies with velvet ropes are part of history.
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“That is never coming back. There are going to be less branches everywhere. You’re seeing banks announce consolidations,” said Key, whose bank has assets of about $1.1 billion, 16 offices and ranks 13th largest among banks headquartered in Kentucky. “The banking industry as a whole is shedding branches. For the first time ever, in the last few years you’re seeing less bank branches in the country.”
Yet banks are striving to stay in touch.
“We have to make sure that our customers don’t treat us as a commodity,” said Key, voicing a theme mentioned frequently by commonwealth bankers.
“We can’t just be a transaction like many of those internet platforms are,” said John Taylor, president and CEO of Louisville-based Limestone Bank and a 37-year industry veteran. “We’re working hard to make sure we’re adding value to the relationship so we’re not directly competing with those commodity providers of either loans or deposit-type solutions.”
The impact of fewer branches
Banking “products and services are very similar across the spectrum. That’s the business we’re in,” said Taylor. “You have to differentiate yourself based on people – the energy level, passion, training, commitment to values.”
There is industry debate on the importance of bricks and mortar when more and more customers bank with a laptop or smartphone.
Limestone, for example, opened a new office in the heart of Lexington in late January and acquired four branches from Republic Bank & Trust last November, the latter filling some gaps in a U-shaped geographic footprint that hugs much of the I-65 corridor through the state.
Debra Stamper, executive vice president and general counsel for the Kentucky Bankers Association in Louisville, is vigilant about the shrinking number of state-chartered banks as well as decisions by in-state and out-of state banks to shutter branches where walk-in or drive-in traffic is vanishing.
The most current data available from the FDIC (dated June 30, 2019) documents 172 banks operating in Kentucky with 146 of those based in the state. Twenty years ago there were 303 banks in the state and 284 headquartered here.
At this point, the state doesn’t seem alarmed about the numbers.
“For the most part, state charters (banks) are buying state charters. … It’s pretty standard that this is happening nationwide; it’s not isolated to Kentucky,” said Marni R. Gibson, deputy commissioner and securities administrator for the Department of Financial Institutions, which regulates banking in Kentucky.
She suggested DFI might be more concerned if Kentucky banks were being acquired by out-of-state institutions.
“Mergers and acquisitions usually result in more services to the customers, more options for consumers,” she said. “The main thing we’re concerned about is the protection of our consumers.”
Banks operate under either state or federal charters, Gibson said, with no substantive difference between the two for most consumers. “It’s just a matter of who your regulator is and which laws you abide by,” she said.
However, the branch closings are “a concern for a number of reasons,” the banking association’s Stamper said. “Number one is lost jobs. Number two, is it a long-term trend or is it going to change? Are they going to close now and then realize they need them?
“I talked to a banker recently who was opening branches but was uncertain about whether he was making the right decision because the trend was in the opposite direction,” Stamper said.
What do tomorrow’s clients want?
U.S. banks last year announced plans to close nearly 1,300 branches and open 432, according to WiseWage, a Durham, N.C.-based financial website. The numbers in Kentucky were modest: 14 closings and three openings, WiseWage said.
One reason for the decline in branches is the availability of loans from what Key describes as “non-bank banks,” online companies that can lend money without investing in a community and facing scrutiny from regulators.
Commonwealth, he said, saw a 7% decline year-to-year in transactions handled inside its offices, primarily because of the changing demographics of bank customers.
In downtown Covington, about a mile from its downtown Cincinnati headquarters, First Financial Bank is opening what it calls a “next generation” innovation center designed specifically for that new target demo: younger people who might want to stop in to lounge on a couch, enjoy free coffee, use the Wi-Fi and maybe – just maybe – do some banking.
Like the prototype that opened last August in Cincinnati, First Financial’s four-story Northern Kentucky headquarters building will offer a number of free-to-the-public conference rooms.
“The bank – as we build it out – will be built for the next generation, (for) the style of banking that our consumer behaviors are showing us as a society,” said Jacob Holbrook, the bank’s Northern Kentucky market president. “If you think about the 2030s …It’s what society is going to look like in 2030.”
Connection with a changing demographic
Meanwhile, Kentuckians will be learning a new bank name this year: Truist. BB&T of Winston-Salem, N.C., and SunTrust of Atlanta got the green light in December to merge and create the sixth largest bank in the country, with deposits of about $450 billion.
Truist, which has 81 offices in the state, has no plans to add branches and recently closed one inside a Northern Kentucky Walmart, according to Calvin Barker, regional president for Kentucky and Ohio. Branch numbers are about right for declining in-office transactions, he said.
“That’s what we see in the industry. For many years it had been (decreasing by) around 4%. In the last couple of years it’s accelerated to a 6% year-over-year decline,” he said.
While Truist is a major player nationally, Barker made it clear the bank believes it’s vitally important to make and maintain meaningful connections with local consumers.
“Our chairman, Kelly King, says the secret to success in this industry is the combination of trust, touch and technology,” Barker said.
While connection through technology rather than a human handshake does count as “touch,” he said, “when a client has a problem they need to resolve, even the millennials and Gen Zers want to know that they can come into their local branch and get service.”
Key, Barker and Scott Cvengros, Central Kentucky market president for Evansville, Ind.-based Old National Bank, all emphasized how changing demographics and younger consumers are impacting the industry.
“We’ll continue to see branch closings and more consolidation,” said Cvengros, whose bank entered the Lexington market with a loan office in 2015.
“I would say probably anybody under 35 never goes into a bank,” Cvengros said, “and may not even have a physical bank in their town. They’d rather go online and apply for a credit card or get a mortgage. There’s a reason why Rocket Mortgage (part of Detroit-based Quicken Loans) is No. 1: the privacy that provides the applicant.
“They’re in their house, they apply. Let’s say they get turned down; well, no harm, no foul. There’s no face-to-face interaction. Close face-to-face relationships have been eroded,” he said.
Live video chat via ITMs
Louisville-based Republic Bank & Trust, the largest state-headquartered bank and No. 6 in overall Kentucky rankings, emphasizes that its sophisticated technology meets or exceeds what the large national banks offer.
In an email, Chairman and CEO Steve Trager touted access to live customer service bankers Republic now provides its clients through interactive teller machines (ITM).
“Our ITMs allow clients to video-chat live with our reps into the evening and on weekends to conduct many of the banking activities typically done inside our banking centers,” Trager wrote. “We have nearly 50 ITMs across our footprint in Louisville, Central and Northern Kentucky, and will be adding even more in 2020,” said Trager.
Republic has about 45 offices in Kentucky, Indiana, Ohio, Tennessee and Florida.
Tim Edwards, executive vice president of London-headquartered Cumberland Valley National Bank, is among those who foresee fewer brick-and-mortar locations in the future.
But he sees more competition in markets where the economy is humming, including his bank’s backyard. Cumberland Valley, with a 166-year history in London, expanded into Berea, Richmond and Lexington in recent years.
And First National Bank & Trust, with four locations in London and Corbin, is being acquired by Commercial Bank of Harrogate, Tenn., which adjoins the Cumberland Gap.
“Right now there’s more economic growth in Central Kentucky,” Edwards said. “Part of it is a good diversity of risk along with new opportunities.”
A small bank that doesn’t have a diversity of risk could be crippled if a major employer were to close up shop, he said.
“If you look at where a lot of business is taking place, where these out-of-state banks are looking (for locations), it is in the more economically vibrant areas,” said Louis Prichard, president and CEO of Paris-based Kentucky Bank, which has 18 offices and ranks 12th in the state by assets. “The areas that these banks have gone into have been the better ones in terms of the economy.”
Shrinking risk by growing
Prichard provided three “prime examples” of out-of-state banks setting up shop in Lexington, Owensboro and Bowling Green and other cities because they see a healthy business climate and an attractive pool of potential customers.
City National Bank of West Virginia acquired Founders National in Lexington in 2015 and its three branches. WesBanco of Wheeling, W.Va., acquired 67 offices in Kentucky and Indiana through two transactions in 2016 and 2018. German-American Bank of Jasper, Ind., added 20 offices in Kentucky and Indiana by acquiring banks in Owensboro and Bowling Green in 2018 and 2019.
From no significant presence in mid-2018, German-American now has 17 full-service locations in nine Kentucky counties with just under $1 billion in assets, including five locations in Bowling Green, two in Lexington, three in Owensboro and a Louisville loan office.
A typical entry strategy is to test the waters in a market with a loan production office before making a decision to move ahead with a full-service branch.
William Jones, U.S. Bank’s Paducah-based community banking division manager for Kentucky and seven other states, explains the logic.
“Banks are chasing quality earning assets to put on their books. When you see a bank opening up a loan production office, it means that they believe that there’s an opportunity for them to attract higher earning assets to put on their balance sheet,” said Jones, a long-time executive with the Minneapolis-based bank that is fifth largest in the country and the fifth largest in the Kentucky market, according to FDIC data.
German American was in basic agreement here.
“For other banks, establishing a loan production office is where their entry into the market ends,” according to the bank. “For German American, we view a loan production office as an entry point into serving a vibrant, growing market that, after some period of time, we expect will grow into a full-service banking office network.”
Though it’s a huge institution with a headquarters hundreds of miles away, U.S. Bank doesn’t want customers to feel they are simply an account number.
“Something like 70% of all the transactions done today are done digitally. What our bank is trying to do is leverage state-of-the-art digital access with individuals from a personal standpoint,” Jones said.
In terms of bricks and mortar, U.S. Bank is the clear No. 1 in Kentucky with 123 offices in 36 counties – 35 branches more than PNC, the state’s largest bank by deposits and the seventh largest in the country. Kentucky’s five biggest banks by deposits, with a combined 37% market share, are headquartered out-of-state.
Kentucky Bank’s Prichard wonders about potential impacts as trends play out.
“My concern from a public policy point of view is, are we going to continue on to become a ‘branch state,’” he said. Could every bank in the commonwealth end up part of an out-of-state corporation?
“It probably never happens as fast as you think it will, but that is a little bit of my concern,” Prichard said. “And if banks just focus on the more economically vibrant areas, what’s going to happen to more rural areas in Eastern Kentucky?”
Greg Paeth is a correspondent for The Lane Report. He can be reached at [email protected]