2019 Journal of Community Bank Case Studies

Eastern Kentucky University

SECOND PLACE:

Figure 2. Kentucky Bank Provisions Chart. Jan. 2019

Balance Sheet ($)

Net Income ($)

Provision Bank (Y/N)

Simplified Capital Rules

68,614,400 1,463,545

Yes, but...We currently have a leverage capital ratio of 9.2% and a total capital ratio of 14.7%. The leverage ratio takes into account the types of assets we have on our balance sheet. The lower the perceived risk of an asset, the lower capital we are required to maintain. Therefore, when the capital requirements were revised downward, we theoretically could book more or different types of loans without issuing new stock. However, in practice, we want to manage our underwriting standards to ensure we maintain favorable asset quality trends. Therefore we do not intend to dramatically lower our underwriting standards to book additional loans. However, in the long run the lowered capital requirements will allow us to continue to grow. As an example, using our year- end 2018 gross loan balance, if we were able to book an additional 10% or $68.6 million in loans at an average APR of 5%, we would yield an additional $1.5 million in net income after reducing for 1% provision expense, 2.25% funding and overhead costs, and 21% for taxes. Maybe – We currently do not have any intentions of utilizing the debt limits outlined in the small bank holding company debt threshold but may in the future. As an example, if we were able to borrow $20 million to buy a $100 million bank instead of issuing stock that would not dilute our current shareholders we could increase our net income approximately x — assuming borrowing costs of 6% and a return on equity of 12%. Yes, but...The change now means that all loans we keep on our portfolio are considered a Qualified Mortgage (QM). This is important because QM loans are exempt from the Ability-to-Repay (ATR) requirement of Dodd Frank. This is important because it reduces the risk of forfeiting a lien position on a mortgage loan. However, we never offered “no doc” loans nor did we ever offer “negative amortization” loans. These two loan types were the primary reason for QM and ATR. Therefore, the change in regulation reduces some legal risk for us but does not change the products or services we offer to our customers. As an example, the exemption of the bright line test regarding the Debt to Income ratio does help us offer non-traditional borrowers such as self employed borrowers (i.e. contractors with rental houses) and individuals with uneven income sources (i.e. farmers) mortgages without increasing our legal risk (lien position). As an example, using our year-end 2018 gross loan balance, if we were able to book an additional 10% or $68.6 million in loans at an average APR of 4%, we would yield an additional $900 thousand in net income after reducing for .50% provision expense, 2.25% funding and overhead costs, and 21% for taxes. No – We are over the 500 mortgage threshold so we did not see any reduction of resources on the changes to HMDA. In 2018, the required number of reported fields went from approximately 30 to over 100. We had to upgrade our software, retrain our employees, and redesign our process. Yes – We are now on an 18 month joint exam cycle by the FDIC and KDFI rather than a 12 month exam cycle. This means we receive two exams every three years rather than three. We allocate approximately 250-350 people hours per exam. So, on average the change in exam cycle saves us between 250-350 hours every three years or approximately $20,000.

Small bank holding

100,000,000 1,200,000

company threshold

Qualified Mortgage

68,614,400 937,753

HMDA

–

–

(30,000)

Exam cycle

–

–

20,000

45