2019 Journal of Community Bank Case Studies

2019 COMMUNITY BANK CASE STUDY COMPETITION

Kentucky Bank and Peer Group 4 Capital Levels

banks. Kentucky Bank is above its counterparts in Peer Group 4 in all but one category, Tier 1 Leverage Ratio. This classification of being well capitalized provides a safeguard to shareholders and customers and further reflects the institution’s focus on service. Simplified capital rules implemented with EGRRCPA in 2018 allowed for Kentucky Bank to pursue opportunities that did not meet

Peer Group 4 Average Kentucky Bank

Tier 1 Leverage Ratio (5%Well Capitalized)

Common Equity Tier 1 to Total Risk Based Capital Ratio (6.5%Well Capitalized)

Tier 1 to Risk–Based Capital Ratio (8%Well Capitalized)

Total Capital to Risk Based Capital Ratio (10%Well Capitalized)

0 2 4 6 8 10 12 14 16

leases and US Treasury and agency securities both saw significant increases from 2017 to 2018, while municipal securities decreased. Net loans and leases as a percentage of total assets were consistently lower for Kentucky Bank compared to the peer group. The asset growth rate for Kentucky Bank was significantly higher than peer group average, exceeding the 80th percentile when compared to Peer Group 5 ($300Million - $1 Billion). After transitioning to Peer Group 4 in 2016, at the low end of the $1Billion - $3Billion peer group, the growth rate was lower than peer group average for 2016-2018. Capital Levels The Office of the Comptroller of the Currency’s Prompt Corrective Action thresholds reflect that a well-capitalized bank will have at or above the following minimum ratios: (FDIC): Total Capital to Risk Based Capital ratio = 10%; Tier 1 to Risk Based Capital Ratio = 8%; Common Equity Tier 1 to Total Risk Based Capital Ratio = 6.5%; and Tier 1 Leverage Ratio = 5%. Kentucky Bank is above all minimum ratios set forth in the Basel III requirements for “well capitalized”

the previous, more stringent requirements. However, Kentucky Bank advised that they will not lower bank standards to pursue this additional opportunity. Liquidity Kentucky Bank’s Loan-to-Deposit Ratio has hovered around 80% for the last 5 years. It has remained about 10% lower than its peer group since 2016. Industry standard loan-to-deposit ratios used to hover around sixty percent, but have climbed in recent decades to between eighty and ninety percent. Multiple factors determine why a bank chooses to remain more or less liquid than their peers. For Kentucky Bank, keeping cash on hand in case of a crisis outweighs loss of profit from loans not made. Kentucky Bank has a higher proportion of government deposit accounts compared to peers which require collateral backing, which is why it’s pledged securities to total securities ratio has remained in the 90-95th percentile compared to peer banks. Kentucky Bank experienced loan growth of $37,174,000 from 2017 to 2018.

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