KENTUCKY BANKER December 2014
Key To Success Providing products designed specifically for community banks is key to becoming the best correspondent bank in the marketplace. Let The Bankers’ Bank of Kentucky offer your institution innovative solutions to meet the challenges of today’s complex banking environment.
• Daily Settlement & Cash Management • Federal Funds Lines of Credit • QNET correspondent connection • Loan Participations Buy/Sell • Holding Company Loans • Secondary Market Mortgage service • Safekeeping / Bond accounting • Asset liability management • ACH Origination • International Wire Transfer • Foreign Item Collection • Merchant Services • Visa Gift Card Program • IT Outsourcing* • And more!
Please contact a member of our Correspondent Banking Team at
800-248-3229
December 2014 | 2
for a personal appointment.
CONTACTS BOARD OF DIRECTORS Mr. Gordon Kidd United Cumberland Bank
Mr. H. Lytle Thomas Heritage Bank, Inc.
Mr. William Alverson Traditional Bank, Inc.
Mr. Michael H. Mercer First Security Bank of Kentucky
Mr. Frank B. Wilson Wilson & Muir Bank & Trust Company
Mr. James W. Beach Peoples Bank & Trust Company Owenton
Mr. Glenn Meyers Kentucky Federal Savings & Loan Association
Mr. Greg A. Wilson The First Commonwealth Bank
Mr. William F. Brashear, II Hyden Citizens Bank
Mr. Michael Mineer Citizens Deposit Bank & Trust
Mr. J. Wade Berry Farmers Bank & Trust
Mr. Bill Allen Bank of the Bluegrass and Trust Company
Mr. Neil S. Bryan The Farmers Bank of Milton Ms. Lanie W. Gardner First National Bank of Muhlenberg County Ms. Elizabeth Griffin McCoy Planters Bank, Inc.
Cover Photo taken by Lanny Hubbard “Roll of Hay�
for the Scenes of Kentucky Photo Contest
Mr. Louis Prichard Kentucky Bank Mr. Thomas J. Smith, III American Bank & Trust Company, Inc. Mr. Ryan Steger Commonwealth Bank FSB
KBA STAFF Ballard W. Cassady Jr. bcassady@kybanks.com President & CEO Debra K. Stamper dstamper@kybanks.com EVP / General Counsel / Director of Compliance
Michelle Madison mmadison@kybanks.com Information Technology Manager Lanie Minton lminton@kybanks.com Administrative Assistant
Paula B. Cravens Sturgeon pcravens@kybanks.com Director of Education Solutions
Tammy Nichols tnichols@kybanks.com Convention & Membership Services Coordinator
Selina O. Parrish sparrish@kybanks.com Director of Vendor Solutions
Katie Rajchel krajchel@kybanks.com Staff Accountant
Matthew E. Vance mvance@kybanks.com Chief Financial Officer Miriam Cole mcole@kybanks.com Executive Assistant
Yvonne Savage ysavage@kybanks.com PAC Services Coordinator Angie White awhite@kybanks.com Manager, Communications Solutions
Paula Cross pcross@kybanks.com Education Services Coordinator
Steve Whitlow swhitlow@kybanks.com Systems Engineer
Jamie Hampton jhampton@kybanks.com Education Services Coordinator Natalie Kaelin nkaelin@kybanks.com Assistant General Counsel
Consultant
John P. Cooper jcooper@kybanks.com LegislativeSolutionsConsultant
KBA Insurance Solutions
KBA Benefit Solutions
Brandon Maggard bmaggard@kybanks.com Account Representative
Lane Hettich lhettich@kybanks.com Benefit Manager
Audrey Whitaker awhitaker@kybanks.com Insurance Services Coodinator
Donna McCartin dmccartin@kybanks.com Benefit Support Specialist
Chuck Maggard cmaggard@kybanks.com President & CEO
Tim Abbott tabbott@kybanks.com Account Representative
Lisa Mattingly lmattingly@kybanks.com Director of Sales & Service
HOPE of Kentucky Billie Wade bwade@kybanks.com Executive Director
CONTRIBUTING EDITORS Lane Hettich lhettich@kybanks.com
Angie White awhite@kybanks.com
CONTACT 600 West Main Street Suite 400 Louisville, KY 40202
Phone: 502-582-2453 Fax: 502-584-6390 www.kybanks.com
December 2014 | 3
CHAIRMAN’S CORNER gun to realize the importance of local banking…the difference between Wall Street Banks and Main Street Banks. The general public and our elected officials understand that community banks are the very essence of what makes our country the best the world has to offer.
Mr. H. Lytle Thomas Heritage Bank, Inc. Merry Christmas and a happy New Year from your friends at the Kentucky Bankers Association! Year end is always an exciting time in banking, as loans are rushed to closing and budgets are finalized for next year. While this is a hectic time, it is also a time to reflect and be grateful for those most important to us – our employees, customers, friends, and family. As I look back on 2014 I feel a sense of renewed optimism for our industry. I say this because people have be-
Our banks are what make capitalism work. Our banks provide opportunity for people of all walks of life to pursue their hopes and to realize their dreams. I believe that people in our communities recognize the value and importance of our banks and the critical role that we play in our success of the community. Elections have consequences! One of the greatest frustrations we share as an industry is regulation that makes it more difficult for us to serve the needs and wishes of our customers. I hope that Washington understands the message that we the people are not happy with the direction of the country. Our elected officials must hear our message loud and clear: Onerous regulation is hurting the very people it was intended to protect – our customers. Risk cannot be regulated out
of capitalism. By its very nature free enterprise is about managing the balance of risk and reward. Our bankers are prudent protectors of their depositors’ money and their shareholders’ capital while actively participating in the calculated risk of lending. Lending is the life blood of small business. Small business is the economic engine that drives our economy! Now, more than ever, we need to stand together and sound the horn for regulatory relief! I am confident that together, we will dramatically improve the regulatory environment for our community banks. Together, through the KBA, our voice will be heard. As we move into the holiday season, I want you to know I am very thankful to be in this business and to spend my volunteer time serving our banking industry. We have many challenges, but so many opportunities! As I sit down at our table with my family, fold my hands and give thanks, know that I am grateful for all of you that serve our Kentucky banks.
THERE’S STILL TIME... Trying to find ways to raise contributions to help your bank meet it’s 2014 KBPAC goal? Try an Ugly Christmas Sweater Day or maybe an Ugly Christmas Tie Day. You have until December 31 to get your contributions in for 2014! Contact Yvonne Savage if you have questions. ysavage@kybanks.com Contributions to Kentucky Bankers PAC and Kentucky Bankers Committee for State Government (each referred to as KBPAC in this disclosure) will be used in connection with state and federal elections, respectively. Contributions to KBPAC are voluntary and may not be deducted as charitable contributions. KBPAC may not accept corporate contributions. Contributions will be reported to the Kentucky Registry of Election Finance and the Federal Election Commission, as required. You may decline to contribute without fear of reprisal. You may contribute more or less than the amounts suggested and you will not benefit or be disadvantaged because of the amount contributed or decision to participate at all. 2014 | 4 December
We Are Thankful.... Ballard Cassady, Executive Office...”I am thankful for our military, young men and women who put themselves in harm's way everyday to insure our freedoms (from external threats).” Katie Rajchel, Finance...”I am thankful for seat warmers!”
Miriam Cole, Executive Office...”I am truly thankful for my family.”
Donna McCartin, Insurance Solutions...”I am thankful for pleasant and kind HR Administrators who often wear many hats at their banks, but who always have time for nice!” Selina Parrish, Executive Office...”At the close of another year, I wish you a season filled with many cherished memories from the joy of celebrating with family and friends! Thank you for your support of the KBA, and I’m wishing you all the best in the New Year!” Lane Hettich, Insurance Solutions...”I am thankful for an eclectic group of friends, family, and cranberry sauce Michelle Madison, IT Solutions...”I am thankful to have the in a can.” opportunity to be a mother and to live in a peaceful community.” Steve Whitlow, IT Solutions...”I am thankful for family, freedom and faith."
Natalie Kaelin, Compliance Solutions...”I am thankful for the KBA family - coworkers who care and are always willing to lend a helping hand.” Jamie Hampton, Education Solutions...”I am thankful for my family, friends, health, happiness and 21 years with my KBA family!”
Angie White, Communications Solutions...”I am thankful for my family and friends for their support and unconditional love.”
Audrey Whitaker, Insurance Solutions...”I am thankful for my family and to spend time with them over the holidays.” Billie Wade, HOPE of Kentucky...”I am thankful for having three healthy and married kids (and for their spouses) that live nearby and seven wonderful grandkids to spoil and a beautiful wife to help me.”
Lanie Minton, Solutions for every KBA Department...”I am thankful for good health! I don't take it for granted anymore!!”
Tammy Nichols, HOPE of Kentucky...”I am thankful for the health and happiness of my family.”
Paula Cross, Education Solutions...”I am very thankful for my family, friends and co-workers. A great place to work and a warm/nice home to live in.”
Debra Stamper, Executive Office...”We don't always get or take the time to thank the people who mean the most to us. I want to take this opportunity to thank the entire KBA staff, who are second to none; to thank the KBA membership (and, I don't mean just CEO's) who make my job a joy and provide me with a sense of purpose; and, to remind each of us to thank our family and friends each and every day.”
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STRAIGHT TALK United We Stand, Divided We Fall, PERIOD! bank categories is the one D-F took: bank size. As every banker knows, a $100M dollar bank and a $50B bank can both be traditional banks on the basis of what they do – both of them apples, just different sized apples. Any attempt to segregate traditional from ‘mega’ banks on the basis of size is going to result in some nonsensical outcomes.
Some dead poet once said, “The world is too much with us.” That’s how I feel about Dodd-Frank (D-F). Every other phone call from one of my members raises some issue that renews my frustration with its pernicious blight on our industry and our economy. After decades of relentless change, I get the temptation to think of D-F as just one more, punch to roll with. Given what we’ve already seen of its intended and unintended consequences, however, I’m thinking this is a punch we cannot role with. We must find a way to slip it. Several of my state banking association exec brethren and I have spent the better part of a year thinking about just how to do that. It is clear to us that the most conspicuously misguided elements of D-F have pointed up its failure to fathom the character of traditional banking. Whatever the justified appropriateness may have been of D-F for the kind of institutions who spent 2008 in the headlines, traditional banks have been made collateral damage on a scale that makes D-F a pyrrhic victory even for its supporters. As that realization has dawned, so has the common sense solution: banking must be defined in ways that relate more rationally to legislative and regulatory concerns. The most simplistic and inadequate approach to this crucial question of December 2014 | 6
The meaningful differences between banks are based on the complexities of a bank’s products, services and transactions. What I’ll call ‘complex banks’ operate at a level of such sophistication as to no longer be an ‘apple’ – they actually make markets, deal in significant international transactions and underwrite hedge funds. They are in a position, nationally and internationally, to make a profound difference in economies. The profound difference from the vast majority of US banks was underscored for me by a banker from New Zealand who called on me a few years ago while visiting Kentucky. He asked about our priority issue and was floored when I included Basel III. His bank was subject to it – his bank held $1 TRILLION in assets and had a presence in Europe, the US and Asia – but he was shocked to realize that every bank in the US, regardless of its size or the nature of its transactions, was laboring under it. The truth is that most traditional banks have more than enough capital to meet Basel III standards, but it illustrates the irrationality and inadequate fundamentals of banking regulation in the US that our regulators were willing to apply its international rationale to traditional banking. The viability of traditional banking hinges on our ability to fundamentally change the regulatory conversation in Washington. Rather than criticize every regulation that is presented or lament the impossibility of repealing D-F, our in-
dustry and its regulators must have a clear basis for discerning when a proposed regulation makes sense as applied to all banks and when it can only be reasonably applied to complex banks. The fact that regulators have some discretion in performing a small bank analysis is both an admission of a problem and a woefully inadequate solution; discretion is too prone to being exercised in arbitrary ways. With size as the decisive factor, we will never succeed in differentiating the applicability of regulations between traditional and complex, and I agree with that. No bank should be exempted from full compliance with any regulation that applies to its business model, regardless of how small or large. The converse is also true. No regulation should apply to every bank just because the regulation exists. So, this is the question we are faced with, how can traditional banking be defined narrowly enough to ensure that complex institutions do not escape comprehensive overview and broadly enough to ensure that the delineation between traditional and complex banks is not arbitrary? We have been working on that exact issue, along with some state banking association execs and bankers from every region of the country, for the better part of a year. We sought terms that would enable us to respond to proposed regulation on the basis of their purpose and applicability, to focus the conversation where it belongs – on risk rather than assets. We’ve gotten to the point of the attached definition of a traditional bank, on which we’re now inviting additional review and comment. A simple definition can address the issues that have pushed us toward bifurcation without any need to
take that ruinous course. Washington acknowledges that much of D-F is inappropriate and inapplicable to ‘traditional banks’, but that’s where the conversations have been ending. Defining traditional banking is the only way we change that and keep the conversation going.
Traditional Bank: For purposes of this subsection a “traditional bank” is defined as:
12USC 1851 (d)(1)(F) acting as principal and agent in transactions of insurance company securities.
1. A financial institution duly chartered under the laws of any state or of the United States as a commercial bank, bank, thrift, savings bank or credit union;
12USC 1851 (d)(1)(G)—Organizing, controlling or offering certain hedge funds or private equity funds
EVERY financial institution (regardless of size or complexity) has reason to support this kind of transactional, complexity-based delineation. As with Graham Leach Bliley (GLB), it doesn’t make the same kind of difference for every kind of bank, but it makes all the difference to banking. Few small traditional banks had any interest in the other side of the investment walls that GLB brought down, but they recognized that their own long-term health was tied to the industry’s health. We spoke with one voice, and we made it happen.
2. A financial institution the deposits of which are insured by the Federal Deposit Insurance Corporation or National Credit Union Administration;
With all that is at stake for the industry, we’d be smart to address this definition in the same way. If we undertake work on this language as an industry, we can create a reasoned, workable delineation between traditional banks and complex institutions that solves problems without creating new ones, one that gives traditional banking a shot at long-term viability while imposing no additional burden on complex institutions. Will we have a fight on our hands? Sure, but it’s one a united banking industry can win. The alternative gives us far more to dread, and that’s waking up one morning with no fight to go to.
3. A financial institution which does not participate in activities allowed by 12 U.S. Code Section 1851(d)(1) (B), (F) (G), (H), or (I); and 4. A financial institution that has not been designated as “systemically important” by the Financial Stability Oversight Council as provided in 12 USC § 5321, et seq. (Title I, Subtitle A of the Wall Street Reform and Consumer Protection Act, PL 111-203),unless that financial institution does not participate in the activities identified in paragraph 3 above. Notes: 1. The first paragraph should be as broadly encompassing as possible. The goal is to include any provider of traditional banking services. 2. The second paragraph is consistent with the general understanding that basic deposits of traditional banks are and must be protected by the federal government through the FDIC (for banks and thrifts) and NCUA (for credit unions 3. The third paragraph identifies categories of services which separate traditional banks from other banks, by the sophistication/complexity of products and services. The activities which would exclude banks from being considered a traditional bank would include: 12 USC 1851 (d)(1)(B) includes “underwriting or market-making-related activities.”
12USC 1851 (d)(1)(H)—Proprietary trading occurring outside of the US. 12USC 1851 (d)(1)(I)—ownership or sponsorship activities of certain hedge funds or private equity funds offered outside the US. 4. The fourth paragraph would exclude any institutions which are determined, in accordance with DoddFrank standards, to be systemically important unless they do not participate in activities under #3. (ii) the appropriate Federal banking agencies, after consultation with the Financial Stability Oversight Council and the relevant insurance commissioners of the States and territories of the United States, have not jointly determined, after notice and comment, that a particular law, regulation, or written guidance described in clause (i) is insufficient to protect the safety and soundness of the banking entity, or of the financial stability of the United States. (G) Organizing and offering a private equity or hedge fund, including serving as a general partner, managing member, or trustee of the fund and in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund, including any necessary expenses for the foregoing, only if— (i) the banking entity provides bona fide trust, fiduciary, or investment advisory services; (ii) the fund is organized and offered only in connection with the provision of bona fide trust, fiduciary, or investment advisory services and only to persons that are customers of such December 2014 | 7
services of the banking entity; (iii) the banking entity does not acquire or retain an equity interest, partnership interest, or other ownership interest in the funds except for a de minimis investment subject to and in compliance with paragraph (4); (iv) the banking entity complies with the restrictions under paragraphs (1) and (2) of subparagraph (f); (v) the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the hedge fund or private equity fund or of any hedge fund or private equity fund in which such hedge fund or private equity fund invests; (vi) the banking entity does not share with the hedge fund or private equity fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name; (vii) no director or employee of the banking entity takes or retains an equity interest, partnership interest, or other ownership interest in the hedge fund or private equity fund,
except for any director or employee of the banking entity who is directly engaged in providing investment advisory or other services to the hedge fund or private equity fund; and (viii) the banking entity discloses to prospective and actual investors in the fund, in writing, that any losses in such hedge fund or private equity fund are borne solely by investors in the fund and not by the banking entity, and otherwise complies with any additional rules of the appropriate Federal banking agencies, the Securities and Exchange Commission, or the Commodity Futures Trading Commission, as provided in subsection (b) (2), designed to ensure that losses in such hedge fund or private equity fund are borne solely by investors in the fund and not by the banking entity. (H) Proprietary trading conducted by a banking entity pursuant to paragraph (9) or (13) of section 1843 (c) of this title, provided that the trading occurs solely outside of the United States and that the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States
Have you checked out our online communities? www.kybanks.com • Compliance • Communications & Marketing • Bank Security • Human Resources • Internal Auditor • Trust
December 2014 | 8
or of one or more States. (I) The acquisition or retention of any equity, partnership, or other ownership interest in, or the sponsorship of, a hedge fund or a private equity fund by a banking entity pursuant to paragraph (9) or (13) of section 1843 (c) of this title solely outside of the United States, provided that no ownership interest in such hedge fund or private equity fund is offered for sale or sold to a resident of the United States and that the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more States. (J) Such other activity as the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission determine, by rule, as provided in subsection (b)(2), would promote and protect the safety and soundness of the banking entity and the financial stability of the United States.
Subpoenas Duces Tecum – How should a bank respond? How can it protect itself? by Tom Coffey Banks often struggle with how to appropriately respond to a subpoena duces tecum for customer records while also complying with federal law that protects a customer’s information. A bank may be required to comply with the subpoena, it may choose to comply in order to accommodate the court or it may refuse to comply all together if it has sufficient legal reasons to do so. A bank may be served with a subpoena duces tecum from several different parties, including federal or state grand juries and third party litigants. Its response will vary depending on the party issuing the subpoena, those involved in the lawsuit and the content of the subpoena. Receipt of a grand jury subpoena involving a criminal matter can be especially alarming for a bank and requires special attention Subpoenas can come with a variety of problems for a bank. For example, the request for documents may be so vague that a bank has difficulty figuring out how to respond. In the alternative, a subpoena may request so many documents that it might be deemed oppressive by a court. In particular, a subpoena may be written in such a way that compliance would cause the bank to violate a federal consumer protection statute. There are obviously many factors that a bank must take into consideration when deciding how to appropriately respond.
In making that decision, a bank should consider whether it has any grounds to move to quash or modify the subpoena duces tecum as being oppressive or unreasonable. Those grounds can include: (1) that the requested documents are irrelevant; (2) that the subpoena fails to allow reasonable time to comply; (3) that the subpoena requires disclosure of privileged or other protected matter; (4) that the subpoena subjects the bank to an undue burden; or (5) that the subpoena fails to identify the desired documents. If there are sufficient legal grounds, a bank should strongly consider making such a motion. This will allow a bank time to consult with its attorney and, if permissible, notify its customer of the request. By notifying its customer, a bank provides the customer with the opportunity to contest the disclosure. Additionally, the motion gives the bank an opportunity to argue that the cost of the production should be borne by the requesting party.
If your institution has received a subpoena duces tecum and has questions about how to comply with the subpoena and how to best protect itself, please call Tom Coffey at Morgan & Pottinger, PSC.
M&P is a leading banking and finance law firm representing financial institutions, businesses and individual clients throughout Kentucky and Indiana. Tom Coffey is a senior associate at Morgan & Pottinger, P.S.C.
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MY TWO CENTS PLUS SOME
A month or so ago, I sent an e-mail out asking you whether you have any employees who speak languages other than English and asking how you service customers who do not speak English. I sent the email because I had recently experienced a situation at the Department of Motor vehicles with a woman in line who spoke only Basic English. She came up to the young lady that I was with, assuming that she was Latina, and immediately started speaking Spanish. My friend did not speak Spanish, so I pulled out my phone and loaded Google Translate. Google Translate (and other similar
apps) allows you to type or speak words in one language and the app translates it to your selected language. Using that app, I was able to determine that she needed a state issued ID. She had all of her documentation to establish that she was in the country legally and to establish her address. I was able to explain to her what she could expect when her turn came up. Luckily, the clerk that she was assigned to spoke Spanish, so she had no further problems and I was able to go about my business. The next day I ran into her near our offices and she recognized me and stopped and thanked me again. It was an interesting experience and it made me wonder how our members cope with changes in demographics. The results from the survey were interesting and varied: Of the responses received, many banks have no bilingual employees. Some indicated that non-English speaking customers usually bring someone in with them who can interpret. Some indicated that they do have one or more bilingual employees, but have never needed to
use them for interpreting customers. Some banks indicated that they hire local interpreters, when needed, to assist in person or on the phone. It was interesting to me that some of our banks could be considered overprepared, with employees who are bilingual in a variety of foreign languages and dialects. Other banks had no staff on hand and handled the situation as it presented itself. As our demographics change, I wonder how this will play out in the future. I am not aware of this issue being raised by the regulator, but I would suggest that your bank look for the easiest way to offer service to a customer who speaks little English or one who only knows sign language (there is also a translator app for that.) Like everything, you need to look at your options, weigh them against your needs, and vet the potential solution carefully.
Proudly Serving KentucKy BanKS for 25 yearS t ax -f ree /t axaBle M uniciPal B ondS • uS t reaSurieS /a gencieS
Bill Barker Toll Free: 800.292.4563 bbarker@rsanet.com
One Riverfront Plaza • 401 W Main St, Suite 2110 • Louisville, KY 40202
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UPCOMING EDUCATION EVENTS & SEMINARS
BSA/AML Pegasus Seminar January 20 Elizabethtown January 22 Bowling Green January 26 Paintsville January 27 Somerset January 28 Lexington January 29 Gilbertsville
Appraisals and Evaluations Compliance Review Seminar: An In-depth Study January 21 Lexington January 22 Bowling Green
How to Improve Your Collection Department Seminar January 28 Louisville
Bank Accounting & Audit Issues Update Seminar February 11 Paducah
Deposit Compliance Fundamentals Pegasus Seminar March 17 Elizabethtown March 19 Lexington March 24 Somerset March 25 Bowling Green March 26 Gilbertsville
Deposit Account Administration Pegasus Seminar March 23 Gilbertsville March 24 Bowling Green March 25 Elizabethtown March 26 Lexington
Consumer Lending School Two-day Program March 24 & 25 Bowling Green March 26 & 27 Lexington
Bond University Seminar February 24 Louisville
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Jim McKenzie
Correspondent Banking
Count on us. In today’s environment, Correspondent relationships are more important than ever and Stock Yards Bank & Trust is committed to working with the community banks in Kentucky. As one of the largest and strongest Kentucky based community banks, we understand the complex issues your bank is facing today. When your bank has needs around capital, liquidity, acquisition financing, stock buy backs, retirement plans or trust services we want to be your bank’s trusted Correspondent partner. Chances are we know you, your bank and your community. Give James or Jim a call and put our experienced team to work for your bank.
James Brown
Correspondent Banking
The Correspondent Banking Team Jim McKenzie has over 40 years of banking experience, 36 years of those years as a correspondent banker.
James Brown has over 20 years of banking experience in Retail, Small Business, Corporate and Correspondent Banking.
(502) 625-0878 jim.mckenzie@syb.com
(502) 625-9330 james.brown@syb.com
Lending Services Holding Company Shareholder Groups Bank Credit Needs And More! Deposit Services Fed Fund Sweeps Wire Transfer Automated Clearing House And More! International Services Foreign Exchange (CHECKS & WIRES) Letters of Credit And more!
www.syb.com December 2014 | 14
Stock Yards Trust Company Services Retirement Plans Investment Management Insurance Trust Partnering And More! NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Want to know what’s trending in the industry?
2015
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Jarrod Orr, Thomas Richards, Jamie McCune, Terry Bunnell, Justin Augsback, Melissa Banta, Max Mitchell (Not pictured: Jona Moore)
In November, the Emerging Leaders participated in a Leadership Training Day at the KBA Offices. We were inspired by Hank Allen, Chairman and CEO of Commerical Bank of West Liberty; Terry Bunnell, Chairman, President and CEO of The Peoples Bank of Marion, and Billie Wade, Executive Director of Hope of Kentucky, LLC. The Emerging Leaders also spent some time completing a personality test and learning how to work with different personalities and how to resolve conflict.
Max Mitchell Elected to Hazard Independent School Board This year has been one of new experiences for Max Mitchell of 1st Trust Bank in Hazard. In addition to being the Group 9 Representative of the current Emerging Leaders Class, he was recently elected to the School Board of the Hazard Independent School District. While community bankers statewide are actively involved in local organizations and boards, Max chose to pursue a publicly elected position for reasons that hit close to home. “It starts with the fact I have two young daughters (Mallory and Megan). One is already in the system and one will be coming along in the next two years. The timing seemed right to get involved and this is the avenue I chose. I believe education begins at home, but if I can be a small part of helping the district to improve on its already strong reputation and standing in the community then I believe I’ll have done my job.” While his daughters prompted his interest, the district has always been close to his heart. “I’m a product of the December 2014 | 16
Hazard Independent Schools system and I’m proud to be a Bulldog. Whether the district is proud of that is up for debate, but beyond my daughters the main reason I’m involved is because I feel education is now even more important to our area. I went to high school with kids who could go to work in the coal industry and make $50,000 or more within a couple of years of graduating high school so furthering their formal education wasn’t a necessity in their minds, much less a priority. Now as those jobs become more scarce, they are left with few options if they want to stay in the area. I want the Hazard Independent school district to prepare each child for the challenges they will face in life and give them the opportunities to chase their dreams whether they are in Eastern Kentucky or beyond.”
WHAT DO YOU THINK OF THE EMERGING LEADERS PROGRAM SO FAR? “The Emerging Leaders Program has given me a new foundation in banking that provided me with a higher level of exposure. I have a greater understanding of my position as a Banker and my commitment to our most important goals and objectives. This experience has been very rewarding to furthering my knowledge and career. “ - Melissa Banta, Citizens Union Bank
“The KBA Emerging Leadership Program has been an excellent learning experience for me as a banker. I’ve created relationships that will assist my bank & me well in the future. And I now know that the KBA works daily to serve Kentucky banks from Middlesboro, KY all the way up to Washington, DC on a daily basis.” - James McCune, Home Federal Bank
“I entered the Emerging Leaders Program in part to gain a further understanding of the Industry we as a group are “emerging” into. I’ve been afforded many experiences in my nearly 8 years with 1st Trust Bank, but being part of a young and growing bank means dealing with issues in front of you on a day-to-day basis and that can narrow your view. Through the Emerging Leaders Program, I’ve attended both the Spring Conference and Annual Convention for the first time and had the opportunity to hear from a variety of speakers, and peers alike, their thoughts on reasons for optimism and their very real concerns facing the industry in their community and beyond. The program broadens your network, your knowledge base, and your appreciation for how the KBA works to bring all of Kentucky’s community banks together to move forward united.” - Max Mitchell, 1st Trust Bank
“The emerging leaders program has been a great experience thus far. I have developed a reliable network of fellow bankers and friends with whom I can share product ideas, procedures, and even concerns. I have also made connections at KBA events that have enabled me to earn new business within my market area. Furthermore, the program has expanded my knowledge of the regulatory issues facing community banks and the role the KBA plays in helping protect our industry.” - Jarrod Orr, River City Bank
December 2014 | 17
Award-Winning Eclipse Bank Rated 5-Stars by BauerFinancial Eclipse Bank, Louisville, Kentucky isn’t just a bank. It’s an award-winning, 5-Star Superior bank. Setting itself apart and above, Eclipse Bank has earned this highest rating from the nation’s bank rating firm: BAUERFINANCIAL, INC., Coral Gables, Florida. The 5-Star rating is based on June 30, 2014 financial data. Karen L. Dorway, president of BauerFinancial, congratulates Eclipse Bank on its continued success. “Community banks, like Eclipse Bank, are an integral part of the communities they serve, so to say that the bank is ‘award-winning’ is to say that the community is as well. Congratulations on their continued success.” Established in 2005, Eclipse Bank has been part of the fabric of this community for nine years. It operates through a conveniently located branch office on Shelbyville Road in Louisville and can also be found on the internet at www.eclipsebank.com. Eclipse Bank is a member of the FDIC and an Equal Housing Lender. Eclipse Bank: “A Fresh Way to Bank.”
Lincoln National Bank and Kentucky Home Bank Announce Plans to Merge Lincoln National Bank, a subsidiary of HAMBAC, Inc., announced today plans to merge with Kentucky Home Bank, a subsidiary of Kentucky Home Bancshares, Inc. The merger is contingent upon customary conditions, including regulatory approval and the approval of KHB’s shareholders. The joining of Kentucky Home Bank with Lincoln National Bank will allow the combined organization to more effectively expand products and services with greater customer convenience throughout Central Kentucky. Lincoln National Bank is the largest independently-owned and operated community bank in LaRue County, Kentucky. LNB headquarters is in Hodgenville, Kentucky. The bank is a wholly-owned subsidiary of HAMBAC, Inc., a registered bank holding company.
Anthem Blue Cross and Blue Shield. We believe healthy employees make for a healthy business. Research shows that companies with wellness programs have less sick leave, lower direct health care costs and fewer worker’s compensation claims.* That’s why Anthem Blue Cross and Blue Shield offers a variety of health and wellness programs. They all work together to help your employees manage and improve their health. Learn more about what Anthem Blue Cross and Blue Shield has to offer at anthem.com/connects2.
* The Economic and Health Impacts of Obesity, Institute on the Costs and Health Effects of Obesity, National Business Group on Health, February 2009. Anthem Blue Cross and Blue Shield is the trade name of Anthem Health Plans of Kentucky, Inc. Independent licensee of the Blue Cross and Blue Shield Association. ®ANTHEM is a registered trademark of Anthem Insurance Companies, Inc. The Blue Cross and Blue Shield names and symbols are registered marks of the Blue Cross and Blue Shield Association. 36501KYAENABS 3/13
December 2014 | 18
Morgan & Pottinger Announces New Office in Bowling Green Morgan & Pottinger, P.S.C. today announced that the firm will open a new office in Bowling Green, KY, to serve existing clients and to expand the firm’s presence in South Central Kentucky. The new office will initially focus on banking and finance law, bankruptcy, real estate law, and commercial litigation. Morgan & Pottinger was founded in 1974 in Louisville. The firm has long served the banking and finance industry, and its practice areas have grown to include real estate law, commercial litigation, equine law, and white-collar criminal defense.
for 2013-2014 and 2014-2015, and is licensed to practice in Kentucky, Tennessee and Indiana. He is a graduate of the University of Kentucky College of Law. Morgan & Pottinger also has offices in Louisville and Lexington, Ky., and New Albany, Ind. Please visit morganandpottinger.com for more information. About Morgan & Pottinger, P.S.C. - Established in 1974, Morgan & Pottinger, P.S.C., is a full-service law firm representing large and small financial institutions, businesses and individual clients throughout Kentucky and Indiana
“Our growth is a direct reflection of our commitment to making decisions based on what is in the best interests of our clients,” said John McGarvey, shareholder and chairman of the firm’s executive committee. “South Central Kentucky is the fastest growing region in the state, and we have several clients who are thriving there. We look forward to working alongside them and being a part of that success.” Bradley Salyer will lead the new office, located at 2501 Crossings Blvd., Suite 209, in Bowling Green. Salyer was recently named a “Kentucky Rising Star” by Super Lawyers® THIS IS AN ADVERTISEMENT.
M&p is heading south for the winter (and spring, summer, fall…). Morgan & Pottinger, P.S.C. is pleased to announce a new office in Bowling Green, Ky. We look forward to serving existing clients and expanding the firm’s presence in South Central Kentucky. The new office will focus on banking and finance law, bankruptcy, real estate and commercial litigation.
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December 2014 | 19
IMPACTING KENTUCKY COMMUNITIES – ADDRESSING THE AFFORDBALE HOUSING NEEDS OF KENTUCKIANS WHILE MAKING CRA PROFITABLE The Kentucky Bankers Association is pleased to announce our endorsement of Ohio Capital Corporation for Housing (“OCCH” www.occh.org) for syndication services related to affordable housing in Kentucky. OCCH is a financial intermediary that provides developers of affordable housing with access to capital markets and serves as the region’s largest Low-Income Housing Tax Credit equity provider. With over 25 years of affordable housing experience, OCCH is a mission driven nonprofit organization which causes the construction, rehabilitation, and preservation of affordable housing in Kentucky and Ohio. OCCH has raised more than $3 billion in private capital for investment in 675 projects, creating over 33,500 homes. OCCH has invested in 84 of Ohio’s 88 counties and also maintains a growing portfolio in Kentucky, having invested over $250 million in 53 projects and creating over 2,132 affordable housing units. More than 90% of OCCH’s investor base and development partners are repeat partners, and several new investors are now working with OCCH to strengthen and stabilize local communities in both Ohio and Kentucky. Investors in OCCH sponsored equity funds receive positive CRA investment credit as well as a market rate of return. OCCH addresses the housing needs of Kentuckians and is strengthening communities for a secure future! To learn more about OCCH and its 2015 private offering, contact KBA’s HOPE of Kentucky Executive Director, Billie Wade, at (502) 736-1285 or bwade@kybanks.com; or OCCH Vice President, Jonathan Welty at (614) 224-8446 or jwelty@occh.org.
December 2014 | 20
COURTS REQUIRE PRECISION IN CUSTOMER REPORTS OF CHECK FRAUD he statute of repose in UCC 4-406(f), KRS 3.55-4-406(6), is frequently the best weapon in a bank’s arsenal to Tdefend against customer claims that it paid an unauthor-
ized or altered item from an account. If a customer does not discover and report the unauthorized or altered item within one year after the account statement or items are made available, the customer is precluded from asserting the forgery or alteration against the bank.
This one-year non-claim provision is in addition to the three-year statute of limitations found in UCC 4-111, KRS 355.4-411. Moreover, the one-year reporting deadline applies “without regard to care or lack of care of either the customer or the bank....” On the bank’s side, the trigger for the running of the one year is the sending or “making available” to the customer of a statement of account or the items paid UCC 4-406(f) requires the customer to report the unauthorized checks to the bank but does not specify what information rises to the level of a “report” by the customer. The Official Comments to UCC 4-406 note only that, if the drawer “has not notified the payor bank within the one year period, the payor bank may not choose to recredit the drawer’s account....” But what sort of “report” does it take from the customer to stop the clock on the preclusion period? What are the minimum elements of a report and adequate notice to the bank that paid the checks or other items in question? The drafters of the UCC require specificity by the bank for the monthly bank statement: “The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.” UCC 4-406(a). But does this same standard apply to the customer’s duty to notify the bank of a wrongful debit? The only clue offered by the language of 4-406(f) is its reference to an unauthorized signature or alteration “on the item....” The inference is that a report by the customer of suspicions that unauthorized items are being paid from the account is not a report sufficient to stop the one-year clock. The report must be item-specific. That inference has not been lost on the courts called to look at the issue.
checks drawn by a bookkeeper using an unauthorized signature stamp. It placed a blanket stop-payment order on all outstanding checks on the account and requested copies of checks and bank statements. But it was not until April 1997 that the customer identified to the bank the specific items it claimed were unauthorized. The Texas court of appeals held that to make a “report” the customer was required to “make known to the bank the specific...check, on which the unauthorized signature appears” and “...the account should be specifically identified.” The court said general references to a possible forgery were insufficient. Hatcher Cleaning Company v. Comerica Bank — Texas, 995 S.W.2d 933, 38 UCC Rep. 2d 1248 (Tex. App. 1999). When the bank’s customer’s name is EZ Pickins there is essentially a form of notice in the name itself, but an Illinois court required more. EZ Pickins’ controller did not have authority to sign checks, but that did not stop him from writing checks to a fictitious payee. EZ Pickins’ owner satisfied the first part of the 4-406(f) test by discovering the fraud. He then requested copies of checks from the bank. Next, he sued the bank to recover payment of the unauthorized checks. However, prior to the lawsuit, there was no “report” to the bank, and the one-year period ran before suit was filed. The Illinois Court of Appeals found that for a report to be sufficient under 4-406(f) it must “at least identify the quantity of checks involved, their amounts, the dates and check numbers, the names of the payees, or any other specific information upon which the bank could have acted.” The court found that the customer’s conversations with the bank about the theft were devoid of specific information and did not constitute a “report.” Watseka First National Bank v. Homey, 686 N.E.2d 1175, 35 UCC Rep. 2d 582 (Ill. App. 1997). New York, ruling under its older version of the statute of repose, 4-406(4), reached the same conclusion. A bank customer’s request for copies of previous bank statements and cancelled checks did not constitute a “report” under the statute. New Gold Equities Corporation v. Chemical Bank, 674 N.Y.S.2d 41 (1st Dep’t 1998). Not even a report to the payor bank that a specific employee of the customer had embezzled funds by forging checks paid by the bank rises to the level of “a report” of “the item” that was unauthorized. Under that fact scenario, a New Jersey court ruled that the customer should have reported “exactly which items bear the forged signatures.” Villa Contracting Co., Inc. v. Summit Bancporation, 695 Aid 762, 33 UCC Rep. 2d 1177 (N.J. Super. Ct. Law Div. 1996).
In July 1995, a Texas company became suspicious of December 2014 | 21
It's a jackpot defense to a check fraud suit. There is a clear takeaway from this case law: UCC 4-406 calls for a full description of each "item" that was unauthorized or altered. Relaying concerns about "irregular account activity," or making general allegations that the bank has paid over unauthorized signatures, doesn't cut the mustard. Layering the minimum requirements of the "report" on top of the one-year period in which it must be delivered to the bank is what makes UCC 4-406(f) such a powerful defense against customer claims of check forgery or alteration. The statute of limitations to bring a claim for a bank's breach of its duties under Article 4 is three years "after the claim for relief occurs" (UCC 4-111), but the ticket for admission through the three-year door is a proper "report" of the unauthorized or altered item under UCC 4-406. Otherwise, the preclusive effect of the statute of repose blocks
any cause of action based on the bank's payment of an unauthorized or altered item not properly reported to the bank within the one-year period. This story was written by John T. McGarvey, a banking attorney in Louisville, Kentucky. Mr. McGarvey is Chairman of Morgan & Pottinger, PSC and heads the Legislative Council of the Uniform Law Commission. This article was originally published in Clarks’ Bank Deposits and Payments Monthly, September 2014 issue, and is reprinted with permission of the publisher, Lexis/Nexis
Community News
In 2014, FNB Bank donated $4,000 to the Feeding America Program benefiting students from Mayfield and Graves County Schools. For the past four years, FNB employees from the Graves County offices elected to serve the Feeding America BackPack Program through their philanthropic fundraising efforts. Since 2011, FNB has donated over $12,000 to the Feeding America BackPack Program benefiting qualifying students from Mayfield and Graves County Schools.
December 2014 | 22
Employees of Town & Country Bank and Trust Co. donated canned goods and other non-perishable items during a Thanksgiving Food Drive held on Friday, November 21st. Items collected by the branches in Nelson County were donated to St. Vincent de Paul’s Food Pantry in hopes of helping those less fortunate have a nice Thanksgiving. The picture shows just a few of the main office staff employees standing next to the bags of groceries donated by employees.
Loan fraud strikes FCS association?
was profitable over that period of time.
Details are still sketchy, but Farm Credit Services Southwest (Southwest), which serves most of Arizona as well as California’s Imperial Valley, has been hit by an accounting scandal so severe that Southwest eliminated the links on its website to its prior financial statements. Worse, the Farm Credit Administration (FCA), the FCS regulator, has removed the links on its website to all the call reports Southwest filed after 2009. According to an update Southwest posted on its website last month, the Southwest board determined that Southwest financial statements issued since 2009 “can no longer be relied upon. Accordingly, the Association expects to restate such financial Statements.” In the seventeen years that I have been writing the FCW, I have never seen such an announcement.
If the accounting restatement results in a loss equal to 25% of Southwest’s net worth, that suggests that the recently discovered loan problems entail a credit loss in the range of $50 million, or about 5% of its outstanding loans at June 30, 2014. On that date, Southwest had $16.7 million of nonaccrual loans and a loss reserve of just $3.2 million, which gives an idea of the magnitude of the lending problems that have been uncovered. In the FCS’s Information Statement for the third quarter of 2014, a note on the FCS’s financial statements, reported that its financial statements for the “quarter ended September 30, 2014 includes an out-of-period adjustment to the provision for loan losses for $42 million and the transfer of $49 million in loans to nonaccrual status.”
Southwest further stated that “during the third quarter of 2014, Association management noted a sudden significant increase in the level of delinquent loans affecting an identifiable portion of the Association’s lending portfolio. An in-depth investigation is currently being conducted regarding the cause of this unexpected increase, including the potential for fraud, internal and/or external.” Southwest, in an attempt to reassure its borrower/stockholders, stated that “these [restatement] amounts are not expected to exceed 25 per cent of total members’ equity . . . [and are] the result of a material weakness in certain internal controls.”
Of course, if there was widespread loan fraud within Southwest, compounded by weak internal controls, then the hit on Southwest’s net worth could be much worse. A recent news report indicates that a large dairy operation in a Chapter 11 bankruptcy proceeding owes Southwest approximately $19 million. According to a Bankruptcy Court filing, the debtor blames its problems on a “2011 milk crisis.” If Southwest was a heavy lender to dairies, dairy loans may be a key element of Southwest’s problems as dairy loans have caused significant losses at other FCS associations,.
Southwest, headquartered near Phoenix, had $1.04 billion of assets at June 30, 2014, according to call report data I downloaded before the FCA pulled Southwest’s call reports. Interestingly, according to the most recent of the currently available call reports, Southwest had $1.09 billion of assets at the end of 2009, which means that Southwest shrank slightly from the end of 2009 to mid-2014. Its loan book also shrank over that period, from $1.03 billion to $956 million. However, Southwest’s net worth rose from $127 million to $190 million, which indicates that it
The big unanswered question so far is who on Southwest’s management team was responsible for these lending problems and the breakdown of internal controls? I could find no news reports about Southwest’s problems, but a May 28, 2014, newspaper article reported that a Roger Becker had been selected as Southwest’s new president and CEO. Although the article did not say who Becker’s predecessor was, it appears that he replaced Gary Dyer, who had been Southwest’s president since 1990. The article reporting on Becker’s promotion stated that “for the past 10 years, Roger has served [Southwest] by managing risk in the portfolio and was promoted to Senior Vice President – Risk Management Officer in January 2013.” Becker’s promotion to CEO is quite puzzling since Southwest’s problems stem from poor risk management. The Southwest fiasco raises many questions. First, the supervision of FCS associations is shared by the FCA and the FCS bank which funds the association. In Southwest’s case, this is CoBank. In addition to funding and overseeing 26 associations, CoBank also is the FCS’s exclusive lender to agricultural and rural utility cooperatives. Did CoBank fail to properly oversee Southwest as its lending problems grew and its internal controls broke down? More broadly, has CoBank been so busy expanding its investment banking activities, such as providing $750 million of credit
to Verizon and a $350 million credit agreement for Frontier Communications
agreement for Frontier Communications Corporation, that it has dropped the ball on its more mundane, and less profitable, job of overseeing the FCS associations it funds? Equally important, where were the FCA examiners? Why didn’t they short-circuit this lending fiasco?
Farm Credit Banks Funding Corporation (the FCS’s access to the capital markets) and the FCS’s 77 direct-lending associations. The line-of-credit expired on September 30 of this year. Not surprisingly, it was quietly renewed for another year and will now expire on September 30, 2015.
Second, what impact will Southwest’s accounting problems have on the FCS’s ability to produce timely year-end financial statements? The FCS’s third-quarter 2014 Information Statement contained a cryptic note that the FCS “has determined that [Southwest’s] errors are not material to the current and previously issued [FCS] combined financial statements.” However, the investigation into Southwest’s financial reporting may reveal “material” problems, especially if Southwest sold participations in dodgy loans to other FCS institutions. The FCS’s Annual Information Statement, which should be issued by the end of February 2015, should provide some interesting reading.
A Treasury Department letter sought to justify the renewed line-of-credit by claiming it is intended to provide liquidity as a “last resort” only if “a broad credit market disruption prevents the FCS from accessing the market,” but not to avoid higher FCS funding costs or to “address a capital or solvency problem at FCS banks.” The letter does not explain how to differentiate liquidity from solvency problems. Treasury further asserts that it does not need statutory authority to issue the line-of-credit, but fails to cite any legal authority for doing so. Finally, Treasury claims the new line-of-credit clarifies that “advances may only be made under exigent circumstances involving a broad disruption across U.S. credit markets” without explaining how a broad disruption will be identified as such.
FCSIC renews $10 billion Treasury line-of-credit As FCW reported earlier this year, the Farm Credit System Insurance Corporation (FCSIC) obtained a $10 billion lineof-credit from the Federal Financing Bank (FFB) in September 2013. The FFB is an arm of the U.S. Treasury that provides credit to federal agencies. The FCSIC can draw upon the line-of-credit “to provide assistance to the [FCS] Banks in exigent market circumstances which threaten the Banks’ ability to pay maturing debt obligations.” The four FCS banks act as the funding intermediary between the Federal
Report FCS lending abuses to: green-acres@ely-co.com Bankers are continuing to send FCW reports of FCS lending abuses, such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses in your market to: green-acres@ ely-co.com. Please provide as much detail as possible about any loan which violates the spirit, if not the law, governing FCS lending.
! ! T U O OUT
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Congratulations to Central Bank on being named
ONE OF THE BEST BANKS TO WORK FOR by American Banker!
December 2014 | 24
Directors: Be Diligent And Document Your Diligence By: R. James Straus1
Serving as a community bank director can be both a rewarding way to serve your community and a source of what may seem like endless discussion of director liability (and for the unfortunate few, actual liability). Banking is a highly regulated, supervised and complicated business that touches every aspect of commerce and the economy. It takes real work to obtain the information and understanding required to diligently perform as a bank director. On December 4, 2009 the Federal Deposit Insurance Corporation (“FDIC”) was named receiver of the Buckhead Community Bank in Atlanta, Georgia. Assets were about $890 million and the estimated loss to the deposit insurance fund was about $240 million. According to the Material Loss Review prepared by the FDIC’s Office of Inspector General, Buckhead failed because the Bank’s board and management did not implement adequate controls to identify and manage the risks associated with the Bank’s significant commercial real estate loan concentration, in particular residential and commercial acquisition, development and construction loans, primarily in and around Atlanta.2 The Review also found that the Bank relied on potentially volatile non-core liabilities such as brokered deposits to fund growth. These weaknesses were “exacerbated by the precipitous economic decline in the Atlanta metropolitan real estate market that began in 2007 . . . .”3 At one point the Review speculates that examiners may have been less harsh in their CAMELS ratings for the Bank “based on the examiners’ determination that Board members had significant personal financial resources” to fulfill “verbal promises to provide additional capital as needed . . . .”4 But strikingly, the Review made no mention of violation of law, selfdealing, intentional disregard of enforcement orders, ignored “matters requiring intention” from exam reports, or other wrongdoing. The FDIC sued nine former Buckhead directors and officers alleging that they were responsible for negligence or gross negligence with respect to loans which resulted
1
R. James Straus is a member of Frost Brown Todd, LLC in Louisville, Kentucky. The author wishes to acknowledge the contributions of Nina B. Couch, an associate at Frost Brown Todd.
2
Office of Inspector General, Material Loss Review of the Buckhead Community Bank, Atlanta, Georgia, June 2010.
3 4
Id. at 3. Id. at 14-15.
in $22 million of the Bank’s losses.5 The FDIC’s Complaint also alleged that the defendants “recklessly and on an uniformed basis caused Buckhead Bank to embark on an aggressive growth strategy.”6 The defendants moved to dismiss the FDIC’s lawsuit on the grounds that the “business judgment rule” relieves directors and officers of liability for negligence.7 The FDIC responded that the business judgment rule is not part of common law in Georgia, and that even if it were, it does not apply to bank directors and officers since a Georgia statute provides that “directors and officers of a bank . . . shall discharge the duties of their respected positions in good faith and with the diligence, care, and skill which ordinarily prudent men exercise under similar circumstances and like positions.”8 The U.S. District Court for the Northern District of Georgia certified the following question to the Georgia Supreme Court: Does the business judgment rule in Georgia preclude as a matter of law a claim for ordinary negligence against the directors and officers of the bank in a lawsuit brought by the FDIC as receiver for the bank? Generally, under Kentucky (and Georgia) law, a director must discharge his or her duties in good faith, on an informed basis, and in a manner the director honestly believes to be in the best interests of the corporation.9 The obligation to act on an informed basis is referred to as the duty of care. Directors must also act in good faith, placing the interests of the corporation and its shareholders ahead of any personal interests.10 This is the duty of loyalty. Kentucky has a specific statute setting forth the standard of conduct for a bank director, which states, “each director shall exercise such ordinary care and diligence as necessary and reasonable to administer the affairs of the bank in a safe and sound manner.”11 A classic statement of the business judgment rule is that mistakes in the exercise of honest business judgment do not subject directors to liability for negligence in the discharge of their fiduciary duties, assuming that the directors have exercised reasonable diligence in the discharge
5
Complaint at 11, FDIC v. Loudermilk, D. Ga., N.D.G.A., filed Feb. 19, 2013.
6 7
Id. FDIC v. Loudermilk, S14Q0454, Supreme Court of Ga., July
11, 2014.
8 9 10 11
Id. Ky. Rev. Stat. Ann. § 271B.8-300 (1) (West). Ky. Rev. Stat. Ann. §271B.8-310 (West). Ky. Rev. Stat. Ann. KRS 286.3-065 (West).
of those duties. “Courts have properly decided to give directors a wide latitude in the management of the affairs of a corporation provided always that judgment, and that means an honest, unbiased judgment, is reasonably exercised by them.”12 The rule protects directors from liability for what turn out to be, in hindsight, unfortunate decisions, but only if the directors were diligent and acted in good faith in a manner consistent with their duties of care and loyalty. The Georgia Supreme Court held that the business judgment rule is part of Georgia’s common law and that “the business judgment rule precludes some, but not all claims, against bank directors and officers that sound in ordinary negligence.”13 Those claims not precluded have to do with the manner in which decisions are made rather than the wisdom of the decisions. The process that directors employ to make decisions is open to judicial scrutiny. In addition to the duty of care and duty of loyalty, bank directors have duties specified and elaborated on by their regulators. For example, the FDIC states that directors should (1) select and retain competent management; (2) establish, with management, the institution’s long and short term business objectives, and adopt operating policies to achieve these objectives in a legal and sound manner; (3) monitor operations to ensure that they are controlled adequately and are in compliance with laws and policies; (4) oversee the institution’s business performance; and (5) ensure that the institution helps to meet its community’s needs.14 The challenge can be daunting, especially when banks are governed by everything from Regulation A to Regulation YY.15 A director who violates any banking law or regulation, engages in an unsafe or unsound banking practice or breaches a fiduciary duty (or permits another person to do so) may be subject to civil money penalties, administrative actions, or other sanctions. The director may be held responsible either alone or jointly with other board members.”16 The DoddFrank Act and the regulations enacted in its wake have expanded responsibilities for directors, particularly those of larger institutions, such as responsibility for enterprise
risk management.17Prudential bank regulators seem less and less reluctant to send “15 day letters” to directors asking them to respond in 15 days explaining why they shouldn’t be fined or prohibited from serving in federally insured financial institutions because of repeat inattention to matters requiring attention, law violations cited in examination reports, failures to comply with enforcement orders, or failures to follow bank or regulatory policies. Instead, regulators are routinely recommending civil money penalties in the $10,000 to $75,000 range. Bank directors cannot underestimate the importance of being diligent and documenting that diligence, including recording reliance on information from Board Committees, management and professionals.18 Bank directors should take the time to read and understand the duties expected of them from regulators. The FDIC, Federal Reserve, and the Office of the Comptroller of the Currency publish guides for directors.19 Directors should (1) make sure that complete and accurate minutes of both Board and Board Committee meetings are maintained and set forth the rationale for important decisions; (2) ensure that they take the time for training through the numerous excellent programs available to directors; (3) understand examination reports and third party financial and compliance audits and reviews; (4) ask questions of examiners and auditors in executive session without management present; and (5) assure that the bank follows up on all regulatory criticisms and matters requiring attention, and on third party audit and review recommendations.
17
Edward D. Herlihy and Lawrence S. Makow, The Fed’s Wakeup Call to Bank Directors, The Harvard Law School Forum on Corporate Governance and Financial Regulation, June 18, 2014.
18
Under Kentucky law, a director is allowed to “rely on information, opinions, reports, or statements, including financial statements and other financial; data, if prepared or presented by: (a) one or more officers or employees of the corporation whom the director honestly believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants, or other persons as to matters the director honestly believes are within the person’s professional or expert competence; or (c) a committee of the board of directors of which he is not a member, if the director honestly believes the committee merits confidence.” Ky. Rev. Stat. Ann. §271B.8-300.
19 12 Loudermilk, S14Q0454, quoting Casey v. Woodruff, 49 N.Y.S. 2d 625 (1944).
13 14 15
Loudermilk, S14Q0454. FDIC, Pocket Guide for Directors.
Federal Reserve, http://www.federalreserve.gov/bankinforeg/ reglisting.htm.
16
Office of the Comptroller of the Currency, Comptroller’s Handbook, Safety and Soundness Insider Activities, November 2013.
December 2014 | 26
The Federal Reserve of Chicago, Bank Director’s Desktop, http://www.bankdirectorsdesktop.org; The Federal Reserve Bank of Kansas, The Basics for Directors, http:// www.kc.frb.org/publications/banking/basics/index.cfm; The Federal Reserve Bank of Atlanta, The Director’s Primer, http://www.frbatlanta. org/filelegacydocs/primer_english.pdf; The OCC, Duties and Responsibilities of Directors, http://www.occ.gov/ publications/publications-by-type/comptrollers-handbook/directors1. pdf; The FDIC, The Director’s Resource Center, http://www.fdic.gov/regulations/resources/director/index.html.
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December 2014 | 27
Happy Holidays from all of us at the KBA December 2014 | 28