Mark Green: You’ve been with Community Trust Bank for a long tenure, pretty much your entire adult life except for teaching high school one year, and you’ve watched the bank grow from $18 million in assets to $3.7 billion as of the 2014 annual report. It’s Kentucky’s largest domestically based bank. What are the unique strategies that have been involved in Community Trust Bank’s long-running success?
Jean Hale: I became president and CEO of Community Trust Bancorp in July of 1999 and added the position of chairman in 2004. I am also chairman of Community Trust Bank and Community Trust and Investment Co., our two subsidiaries. Prior to that, I served as president and CEO of the bank from 1993 to 1999. I served in other executive leadership positions with the bank and the bank holding company since 1991.
Community Trust currently holds the position of the No. 1 deposit market share for Kentucky-domiciled institutions and is the second-largest by assets. Community Trust implemented its strategic plan for diversification of the company when Kentucky changed its banking laws to allow for multibank holding companies and for branching across county lines. That was about 1985 or 1986. They weren’t changed at the same time. They allowed for multibank holding companies a couple of years before they allowed for branching across county lines.
We have always operated with a two-pronged growth strategy: organic growth for all of our market locations as well as growth by acquisitions. Since 1987, we have acquired 15 banks and 17 branches, expanding our franchise in Kentucky and entering into West Virginia and Tennessee.
One of the factors contributing to our success has been our ability to properly execute our business model of community banking, which provides for decentralized decision-making and centralized risk management. Customers in each of our communities want to do business with their local banker, who has the ability to make the decision. Decentralized decision-making – I use that phrase in most of my investor presentations as one of the bullet points. We talk about the fact that we do have decentralized decision-making and centralized risk management. We recognize our strengths, and focus on the execution and delivery of great products and services to our customers.
MG: That 2014 annual report showed $2.7 billion in loans, an increase of 4.6 percent over 2013. How is your loan portfolio distributed by business sector and geography? Is there a strategy there?
JH: Yes, there is. We currently operate the company with four regions. Each of those regions represents a unique business environment, allowing for diversification in our loan portfolio. As of June 30, 2015, our Eastern region’s loan portfolio was $867 million. That’s followed by our other three regions: our Central region has $627 million, our South-Central region $597 million, and our Northeast region $347 million.
MG: Is there a business-sector targeting?
JH: There’s not a business sector targeting. Our goal is to have 50 percent of our portfolio being commercial-related credits and 50 percent of our portfolio being consumer-rated, consumer-directed: being residential real estate mortgages, automobile lending and direct personal loans. So we look for a balance of 50/50 between our commercial lending and our consumer-related lending.
MG: To what extent is that distribution the result of predetermined goal-setting versus market mechanics?
JH: We have an expectation of growth in each of our markets and regions. However, we do recognize the economic conditions in any region at any given time can vary and impact their growth opportunities.
MG: When and why did Community Trust initiate its separate wealth management subsidiary, and what’s the status of that business?
JH: Over the years with our acquisitions of financial institutions, we acquired several small trust operations. We believe very strongly that our trust and wealth management business provides us the greatest opportunity to grow the fee income for the company. To be successful in doing so, we needed to consolidate the assets and operations of the smaller entities into one and have employees who specialize in those products and services that are provided to trust and wealth management customers. Community Trust and Investment Co. currently has $1.9 billion in assets under management, including the bank’s investment portfolio. As of June 30, they had annualized revenues of $13.1 million.
MG: The Federal Reserve has maintained the federal funds interest rate at very near zero percent for six years now, since the Great Recession and the economic crisis of late 2008. That compares with interest rates that were at or sometimes much higher than 5 percent for most of the last 50 years. How have those very low interest rates affected banking management and profitability?
JH: The Federal Reserve’s decision to maintain the interest rates near zero during the past six years has had a negative impact on the net interest margin of all banks. The net interest margin is the primary driver of profitability for most banks, particularly community banks.
MG: How differently do banks manage themselves, conduct themselves, when the economy is growing versus when it’s in difficulty or even in recession?
JH: That’s a very good question, because how banks conduct themselves, whether it’s during robust or weak economic conditions, depends upon the company’s business model and operational philosophy. A robust economy will provide greater opportunity for bank growth and profitability than weaker economic conditions, which result in limited lending opportunities. Successful banks understand the impact that varying economic conditions can have on their customers and their profitability.
MG: The economy has been out of recession, technically, for six years. Official unemployment is below pre-recession levels, and the stock market, although turbulent, has hit record highs in the past couple of years. The GDP growth rates have been low and rather inconsistent. What’s your general view or the bank’s general view of the condition and health of the U.S. economy?
JH: I believe that the U.S. economy has been improving, but at a very slow pace. We still have not seen a growth in wages, which is a very important part of a strong economy. Also, inflation is still below the Federal Reserve’s desired level. Unfortunately, the jobs that have been added in the recovering economy are not as good as the jobs that were lost during the recession. Our economy is currently a work in process.
MG: Although intended to curb risky practices by large institutions whose failure could damage the whole U.S. economy, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act has been criticized as having placed unnecessary regulatory burdens on smaller banks. From your view, has Dodd-Frank accomplished its stated goals, and what unintended consequences has it generated?
JH: I do not believe that Dodd-Frank has accomplished its intended goal. It has not adequately addressed the too-big-to-fail institutions. Consolidation is occurring in the industry, and with the consolidation comes larger banks, and you’re not seeing de novo banks begin operations. Although Dodd-Frank contains some exemptions for community banks, most of the exemptions have become the unintended consequences as the regulatory burden has flowed down to small community banks. Small community banks cannot afford to hire the compliance expertise required for today’s regulatory environment.
This is not only an impact on the bank but on the customers of all banks. It is particularly challenging in small towns, where most community banks do business and are important drivers of economic activity.
MG: So Dodd-Frank has impacted the typical consolidation that takes place in the industry and distorted that normal process and caused more consolidation to larger banks that may lead to less local decision-making?
JH: Yes, I think that’s correct. It has driven and will continue – unless there are changes in the regulatory environment – to drive mergers and acquisitions.
MG: When Kentucky bankers talk to banking industry policymakers in Washington, what type of changes are they advising or seeking?
JH: When I speak with industry policymakers in Washington, I’m usually talking about relief from the current regulatory burden placed on community banks. I believe that our representation in Washington is trying to address the issue, but it’s a challenge to change laws and regulations once they’re in place.
MG: Do you have an expectation that any significant change will occur in the near-term?
JH: I think that there is an opportunity not to necessarily repeal Dodd-Frank but to make changes that will make the implementation of Dodd-Frank better for the financial services industry.
MG: When a business or individual entrepreneur comes to Community Trust Bank seeking financing, what characteristics does a borrower have who tends to be successful in obtaining a loan and paying it back?
JH: Community Trust has a comprehensive underwriting process for all commercial loans. We analyze the financial information for the borrower to see if they have the ability to repay. However, we also look at other business factors including collateral, credit history, the business plans and the knowledge of their business, and above all, their character.
MG: Have new requirements for lending that have come on the scene as the result of Dodd-Frank made it harder for businesses to get loans?
JH: It’s not impacted businesses as much as it has the consumer. The consumer has been the most adversely impacted by the regulatory changes coming from Dodd-Frank.
MG: How have they been impacted? Costs, fees?
JH: They’ve been impacted by time delays because of some of the requirements on the disclosure side. They have been impacted by the definition of what is a qualified mortgage and not a qualified mortgage, and financial institutions’ decisions whether to make loans that are not qualified mortgages.
MG: What’s the trend today in the rate of nonperforming loans, especially among commercial customers?
JH: It’s positive. Nonperforming loans have declined for most banks as existing problem loans are resolved and the economy continues to improve.
MG: In the past decade especially, there’s been an ongoing shift towards online and mobile banking, and some banks are closing and selling branches as a result. Has this impacted Community Trust Bank significantly, and are there further technology-driven changes in operations that business and individual customers might be seeing soon?
JH: Community Trust provides competitive products and services in online and mobile banking. The banking industry has seen a decline in transaction volumes at branches, which is why you’re seeing branch closures, sales consolidations and reconfigurations. We continually look at how best to deliver our products and services to our customers. The industry will need to be adaptable to the changing consumer, because the delivery of products and service to millennials is not the same as to baby boomers. We will continue to see changes in operations driven by technology, which I believe will only be tempered by cyber-security risks.
MG: How big of an issue is cyber security? It continues to grow in frequency and in the news.
JH: I think cyber-security risk is a risk faced by not just financial institutions. As we have seen in some of the breaches in the past – it impacts retail businesses, as well as the healthcare industry, as well as the government itself. It is a huge risk, and a lot of resources and time are being spent in ensuring that your systems can withstand an attempted breach.
MG: You also are chair of the Kentucky Economic Development Finance Authority (KEDFA) board, which authorizes the state’s economic development incentives, usually in the form of tax breaks for business investment and job creation in Kentucky. Some people question the need for incentives or criticize them. But what’s the role of economic development incentives in today’s world?
JH: In today’s world, certain economic incentives are needed to be competitive in business recruitment, but a large focus in Kentucky over the past several years has been with the continuation and support of existing businesses already operating within the state as well as new businesses. I’m talking about entrepreneurs and small business. There are several tax programs that have been put in place to support small businesses – those that make the improvement of one employee and a small addition to their fixed assets, as well as for entrepreneurs. There are angel tax credit programs. There are business pitch competitions where the state is pulling out the entrepreneur and putting them in a position to find investors. The entrepreneurial effort is really strong in Kentucky right now.
MG: How does Kentucky’s portfolio of economic development incentives compare to those of neighboring peer states?
JH: I would say competitively. I do not have, of course, the exact information available to me at this time regarding what other states are doing. I will point out, of course, there was news this week from Florida’s governor being in Kentucky and being successful in recruiting one of Kentucky’s businesses. So I think it’s important for Kentucky to be competitive in its incentive programs with other states.
MG: In addition to being chair of the KEDFA board, you’re a member of the Kentucky Economic Development Partnership board that oversees the Cabinet for Economic Development, and you serve on the board of Commonwealth Seed Capital. Does the Kentucky business community have sufficient options to finance its operations and fulfill growth potential?
JH: I believe that it does. The different programs offered through KEDFA, combined with those that are offered by other entities – Commonwealth Seed Capital is exactly what it says: It’s investing in businesses that are in the early stages of development. And then you have the tax incentives for small business. So I think Kentucky has a good menu of support for the business.
MG: Beyond some of the public structures, does Kentucky business have access to as much money as it wants to?
JH: I think that’s a very good question. Community Trust Bank has been named by the Small Business Administration to be the No. 1 community bank lender in Kentucky for the past six years. Community Trust is also a USDA-guaranteed lender. A lot of people think that USDA-guaranteed lending is just for farming, but it’s not. It involves different types of businesses that are located in rural-designated markets.
You also have a lot occurring at this time with private equity investors within the state. A good example of that is the public-private partnership that Kentucky has underway now with KentuckyWired, associated with SOAR (the Shaping Our Appalachian Region initiative). You have a lot of philanthropic opportunities for funding as well, depending on what the project would be. There’s a lot of support philanthropically within the state now.
MG: Give us your perspective on SOAR and how they’re doing with that effort. With what kind of a time frame should people view its various undertakings?
JH: I think SOAR is the greatest opportunity that 54 of Kentucky’s 120 counties have had to make a change economically for the future. The unprecedented bipartisan participation of (Democratic) Gov. Steve Beshear and (Republican) Congressman Harold Rogers supporting the SOAR initiative has created significant changes, I believe, at the grassroots level. You’re seeing more cooperation between counties and cities. You’re seeing individuals cooperating with each other and taking a personal interest in the changes that are taking place as a result of the SOAR initiative.
It’s very inspiring. I’m personally involved in it, and I feel it’s very inspiring to see this level of interest and this level of cooperation. I made the comment the other day to someone, in talking about SOAR, that while Kentucky’s motto right now is “United We Stand, Divided We Fall,” I believe the motto should be “United We Succeed, Divided We Fail.” I think that is reflective of what’s occurring within the SOAR initiative.
This is a long-term initiative. It is not something that will be instantaneous or just a few years. When you’re talking about changing the entire economy, you’re talking about all aspects of the economy. You’re talking about not only the creation of jobs and entrepreneurship; you’re talking about healthcare, education, tourism. You’re talking about a dramatic overall change in everything that impacts business and the quality of life for individuals living in the SOAR region.
MG: Do you have a closing comment, or are there other topics we haven’t touched on that you’d like to address?
JH: The one subject that I especially want to touch on, we have, which is the SOAR initiative. I just believe so strongly in what SOAR is doing, because when you’re talking about representing 54 counties out of Kentucky’s 120 counties, what happens in the SOAR region is not just important to the region; it’s important to the state of Kentucky.