Economic Commentary

Economic Commentary, Features, Features

CPAs Counting On Best Year in a Decade


National GDP might be mired in the low single digits, but the state’s CPA firms think they could see double-digit growth.

We take notice when a member of the traditionally conservative CPA sector says it could be the best year economically in a decade. Economic outlook projections among Kentucky’s CPA firms are strikingly rosy, though. Generational retirements in the baby boomer cohort are driving demand at accounting firms for succession planning across many commonwealth business sectors, even among CPA firms. Meanwhile, strong growth is expected this year in construction, equine, healthcare, manufacturing and bourbon. Another broad trend, the ongoing growth of online sales, is benefitting Kentucky’s national logistics hub. National GDP might be mired in the low single digits, but the state’s CPA firms think they could see double-digit growth.



Diane Medley, Managing Partner, Mountjoy Chilton Medley

Diane Medley

Diane Medley

“As a managing partner of a large accounting firm and as the chair of Greater Louisville Inc., keeping an eye on the economic forecast is a part of my job. Economic activity for the country appears stronger this year, particularly with anumber of large-scale mergers and acquisitions transactions in the headlines. We also need to be keeping an eye on changing global economies, which will inevitably impact our own. From an industry perspective, talent retention in accounting continues to be a challenge. Kentucky’s current tax policy and economic situation are also challenges – they hamper our ability to compete with neighboring states and greatly impact clients.”



G. Alan Long, Managing Member, Baldwin CPAs

G. Alan Long

G. Alan Long

“2016 will be a good year for accounting firms. The strengthening economy along with increased regulation and accounting standard changes will drive more need for services. The connectivity of the world is driving large and small businesses to seek opportunities in the global market, and CPA firms are well positioned to deliver these new services. The biggest obstacle for firms will be finding enough qualified employees to handle the additional work. The “boomer” factor is changing the dynamics of the economy. More are looking to retirement and succession planning, which is creating additional opportunities to provide clients with other necessary planning they need. Succession planning also is driving M&A activity among accounting firms of all sizes as more of the owners are looking to move into retirement.”



David Bundy, President/CEO, Dean Dorton Allen Ford

David Bundy

David Bundy

“At Dean Dorton we are very optimistic about 2016 and have expanded a great deal to be prepared to assist clients as needed. We expect many of our clients, especially those in the construction, equine, healthcare and manufacturing industries, to see continued strong economic growth. However, we do realize that the economic growth is not consistent across the commonwealth. Many of our clients, especially those outside of the Louisville and Lexington metropolitan areas, those in the natural resources industry, and those impacted heavily by government funding, such as higher education, may experience little to no growth and face on-going business challenges in the year ahead.”



Mike Stigler, Director, Blue & Co 

Mike Stigler

Mike Stigler

“Unemployment will continue to decline to 4.6 percent. The state will benefit from major manufacturing investments by the automotive industry (Ford and Toyota) and their component suppliers. Completion of the Louisville river bridges will impact investments in distribution and logistics in the regional market. Construction will benefit from demand for commercial and residential building inventory. Uncertainties that could negatively impact the economy are legislative management of state pension funding (second worst funded in the United States), potential changes to Medicaid coverage expansion (affecting 400,000 citizens and $1 billion of federal funding) and lack of readily available skilled labor.”



Penny Gold, CEO, Kentucky Society of CPAs

Penny Gold

Penny Gold

“While there has been troubling volatility in the stock markets recently, and some indicators show slowing manufacturing and retail sales, consumer confidence runs relatively high. The bright spot for Kentucky is automotive manufacturing; this remains strong, and U.S. optimism has been an important driver. While retail may be sluggish, online sales hit record highs this holiday season. Kentucky is a logistics hub for the nation, so continued growth in this segment is likely. And, of course, Kentucky bourbon and spirits are enjoying strong growth internationally. This provides Kentucky another economic cushion in hard times. The United States is a bright spot in the global economy, and Kentucky is well positioned for a good year.”



Steve Jennings, Crowe Horwath LLP, Local Office Managing Partner, Lexington

Steve Jennings

Steve Jennings

“What we’re seeing in Kentucky is a reflection of the U.S. economy. While the economy continues to grow, in some areas it is at a slower rate, while other areas are expanding faster. We’re seeing that at Crowe as well with a projection of growth overall, and in many of our practice areas, an expectation of double-digit growth. We continue to use our deep industry expertise to provide audit services to public and private entities while also helping clients reach their goals with tax, advisory, risk and performance services.”



Matt Coffey, Partner, BKD

Matt Coffey '

Matt Coffey

“We have seen a tremendous increase in demand for consulting and advisory services and expect that trend to continue. Clients’ outlooks of “cautiously optimistic” that were prevalent during the past five years have shifted noticeably during the last 12 months. Clients are proactively making investments and hiring talent to drive growth in their businesses. There continues to be a significant level of activity related to business succession driven by both the number of baby boomer owners looking to retire and the amount of capital available to fund buyouts. The growth within public accounting will be limited only by our ability to continue to develop and retain talent within our profession. I believe 2016 represents a better opportunity for growth than any year in the past decade.”

Advanced Manufacturing, Current Issue, Economic Commentary, Economic Development, Education, Fast Lane, Faster Lane, Features, Features, March 2015, One-On-One, One-on-One, Technology, Workforce Development

One-on-One: Kentucky auto manufacturing finds its voice

Tatman 81414-4

Dave Tatman was recently named as the inaugural executive director of the Kentucky Automotive Industry Association. He also serves at Western Kentucky University as associate vice president for advanced manufacturing. Tatman retired after a 34-year career at General Motors, where he most recently served as plant manager for the Corvette Assembly Facility in Bowling Green. During his time at the Bowling Green plant, Tatman led five consecutive model-year launches and oversaw a $131 million investment to upgrade the plant and equipment, adding 350 new jobs, to produce the all-new 2014 Corvette Stingray, which was named as the NA Car of the Year in January 2014. Tatman, who holds a bachelor’s degree in science, industrial and systems engineering from Ohio State University and a master of business administration, corporate policy from Michigan State University, recently co-authored a book on leadership entitled “Building Cathedrals – The Power of Purpose.”

Ed Lane: In April 2014, Gov. Steve Beshear announced the formation of a new entity, the Kentucky Automotive Industry Association (KAIA). The association has a 12-person board of directors and is chaired by Larry Hayes, secretary of the Cabinet for Economic Development. Secretary Hayes in July announced your selection as the executive director. You have been in your new position about eight months. What are your specific duties as executive director of the KAIA?
Dave Tatman: Let’s step back to March 2014, when I retired from Corvette (as manager of GM’s Bowling Green Assembly Plant). I decided to retire because my family and I wanted to stay in Kentucky. I had a terrific 34-year career at General Motors; I loved every minute of it. There are some challenging times, as you well know, but the Corvette plant had been my 13th GM location, and I didn’t want to have a 14th. My wife and daughter and I had fallen in love with Kentucky. I chose to leave General Motors, without a real clear plan for my next career steps. But I had this notion that I wanted to work on a little larger scale. I had enjoyed tremendous success with General Motors, capped off by the incredible launch and success of the new Corvette Stingray.
I was starting to explore some options when I got a phone call from Secretary Hayes. He congratulated me on my GM retirement and then asked what my next steps would be, and I said I wasn’t sure. He said he had an idea. And so that began our conversations, even before the announcement had been made about the (formation of) KAIA. On the first of July, I started full-time as executive director with the association. It was very important to the governor and the KAIA board of directors that the organization be seen and perceived as industry-driven. The KAIA fit perfectly into what I wanted: to work on a larger scale. My charge, at the direction of our board of directors, is to build the KAIA into a common voice for the auto industry in Kentucky. The industry is vital to the economy of the commonwealth, but prior to last summer Kentucky really didn’t have an organization that represented the state’s auto industry.

EL: What are the primary missions of the KAIA?
DT: The KAIA has established four objectives. The first is branding. The auto industry doesn’t have a brand in Kentucky. When the governor goes to speak to the conferences in Germany, they’ll often scratch their heads and say, “Kentucky?” When I talk to groups around the state and the country about Kentucky being the third-largest state in terms of automotive production, they’re like, “Really?” So we need to brand the industry and demonstrate that Kentucky is a great place to operate an automotive business.
The KAIA’s second objective is advocacy – to be a voice for the auto industry. This is actually a very comfortable position for me because I understand the life of my colleagues in the industry throughout Kentucky. The fact is, the pace of the automotive business is such that managers rarely have time to look beyond today or tomorrow. And the issues that we face as an industry in terms of our opportunities for growth and overcoming obstacles to expansion are issues a plant manager doesn’t address because he doesn’t have time. You worry about it, but it never gets to the top of your to-do list. I spent 34 years running operations.
I know how to run a factory. I know I ignored important objectives during that time because they were outside the four walls of my plant. I didn’t have to worry about “that” issue; I was hoping somebody else was doing that. Well, I’m doing that now for the automotive industry. That’s the advocacy piece.
toyotas-crew Our third objective is leadership. Because auto manufacturing lacked a common voice as a Kentucky industry, it never really stood up as an industry and said, here’s our perspective. (It didn’t answer questions about) what does the automotive industry think about this?
The fourth and final objective, and really probably the one I spend the most of my time on, is workforce development. The biggest challenge we face in the automotive industry is having talented workers ready to take the jobs that are becoming available. And so that’s how I spend a lot of my time. I’m in middle and high schools; I’m at colleges and universities; I’m in the community and technical schools, working to ensure that exceptional occupational opportunities of our industry are known.

EL: How big is Kentucky’s automotive industry?
DT: The automotive industry in the state of Kentucky is comprised of about 460 different manufacturing plants, employing almost 90,000 employees. It’s a huge impact. It exports over $5.5 billion worth of automobiles and automotive products every year. In 2014, the state of Kentucky built over 1.2 million light vehicles and passenger cars. When you think about that in the context of things, that puts Kentucky third, behind only Michigan and Ohio. The epicenter of the automotive business is moving south, and Kentucky is right in the heart of that growth area and has the ability to take advantage of its central U.S. location.

EL: Is the KAIA underwriting a state auto industry economic impact study?
DT: The KAIA has partnered with UofL’s Urban Studies Institute to do an economic impact study for the automotive industry in Kentucky. It’s very similar to the study UofL did for the distilling industry – primarily the bourbon industry – that they released last fall. We want to fully understand that (dollar and job) multiplier effect of the auto industry. Is it four, is it nine, is it 12? There are a lot of jobs created for every job created in an auto manufacturing plant. We want to understand the metrics of economic development growth as it compares to neighboring states and to our competition. So we’re going to use that study to conduct nine regional workshops throughout the state in the spring and summer. Eighty of Kentucky’s 120 counties have some form of automotive business in them.

EL: Is the move to the South partly because of right-to-work?
DT: That’s a great question. I expected to talk about right-to-work today. I tend to agree with Gov. Beshear’s position. Right-to-work is very much a sensitive political issue today. We’re seeing the debate going on. About 25 of the 50 states now have some right-to-work legislation. We’re seeing the debate in Wisconsin right now. Michigan and Indiana both chose to go right-to-work recently. It is a tool for economic development. I think it was a very attractive issue for a lot of the European and Asian automakers who have located in the South. But in our state, we find both union and nonunion firms working very effectively.
I’ve got members on both sides of the equation, so I don’t take a firm stance on right-to-work. I say, let’s leave it to the legislature; see what the government decides to do about it. There are potentially companies who won’t consider Kentucky because it is not a right-to-work state, and I suppose – but I don’t know for a fact – the reverse could be true as well, that there are companies who located here because Kentucky does welcome unions. The evidence suggests that Kentucky’s done a tremendous job of attracting businesses in spite of a lack of right-to-work legislation.

Tatman-Vette-textEL: How was your working relationship with unions when you worked for GM?
DT: I worked 34 years in a union environment, and I never found a union official that I couldn’t work with. At the end of the day, we’re just a couple of people trying to make a living for our families. You approach it that way and you don’t say, “You’re wrong and I’m right.” Collaboration is the name of the game, so I’m not overly pro-union or right-to-work. I think both concepts can peacefully coexist, as they have in Kentucky for a long time.

EL: Does the free-market system equalize prices and wages in the auto industry? If you are a manufacturer and nonunion, you have to pay competitive wages to attract quality employees.
DT: Yes, especially in this environment of scarce labor. You know, we’re seeing that happen all the time. Walmart, for heaven’s sake, raised its minimum wage. All the guys at McDonald’s and Burger King are starting to scurry, and we just heard yesterday that Target is raising its wages. It is so interesting that states are having a debate on (raising their) minimum wage. Meanwhile, free market forces have taken over, and employers are starting to respond.

EL: Even though Ford had been manufacturing cars and trucks in Kentucky since 1913, do you think Toyota locating in Kentucky 30 years ago was especially important because it was a catalyst to expand the state’s automotive industry? At the time, the state’s economy was weak and population growth was static because not that many people were inmigrating to Kentucky, and some were outmigrating because they didn’t have jobs.
DT: Certainly Toyota deciding to build its operations in Georgetown was a huge benefit for the state of Kentucky. I congratulate all the leaders who recruited Toyota. Georgetown is now one of Toyota’s largest manufacturing facilities in the world and, of course, Toyota is going to launch the new Lexus there. But moreover, Toyota has exercised terrific corporate citizenry in the time they’ve been here in Kentucky. As Toyota worked to develop infrastructure, it also worked to develop relationships with government and jurisdictional entities, and Toyota has brought other businesses with them.
crossoverThere’s a huge incentive and impetus in the automotive industry to locate supplier plants in proximity to assembly plants. And as we move further in the technology of vehicle assembly, the original equipment manufacturers, or OEMs, do less and less in their plants utilizing their employees and rely more and more on service providers. So that industry is growing as well. Toyota has been here about 30 years; GM has been in Bowling Green about 30 years; Ford has been in Louisville over 100 years. Those OEMs are the foundations upon which Kentucky has built a terrific base of automotive business.

EL: How will the KAIA be funded?
DT: Upon founding the KAIA, each board member was regarded as a founding member. Our board is comprised of the three OEM members, a member from the Kentucky Economic Development Cabinet (Hayes as chairman) and eight other significant suppliers. And each of these firms primed the pump for the KAIA with a founder’s fee. And every member pays annual dues, so as the KAIA grows, dues revenue grows. And we’ll continue to see additional funding from special events and sponsorships to auto-related events that will continue to propagate the organization.

EL: What is your relationship with Western Kentucky University?
DT: At the same time that I was having conversations with the state and the KAIA, I was approached by WKU to talk about how the university could leverage my background, skills and experience to further auto industry relationships with the university. And so I work on a very limited part-time basis for WKU, connecting the dots in the south-central Kentucky region, in WKU’s region of influence, to try and ensure that when industries seek university assistance or partnerships, I can help facilitate that.

EL: Would WKU provide specialized training for people in the automotive industry, or would that be specifically through the Kentucky Community and Technical College System, which created the successful Advanced Manufacturing Technician program?
DT: It could be all of the above. One of the things we’re having a lot of discussion about is that there’s this very significant aluminum business development in south-central Kentucky and up along the Owensboro corridor, and the industry needs materials science and metallurgical engineering. The University of Kentucky is now setting up a terrific program in those areas, but short-term certification training is also needed, so WKU is focusing on that. The relationships that are most leverageable for an educational institution like WKU or UK or the University of Louisville are those collaboratively working with the auto industry on applied research. The auto industry doesn’t have the time, resources or desire to do a lot of research for research’s sake, but universities do, and they’ve got terrifically talented great young minds available. Those kinds of partnerships and industrial relationships have been developing for a long time and continue to develop in a significant way.

F-150EL: One of the highest priority issues for the auto industry is workforce development. What are some of the training programs available for persons who are interested in an auto manufacturing career?
DT: You’ve hit on a really critical issue here in Kentucky. Our situation, in terms of workforce readiness, is quite frankly no different than we see in other auto manufacturing centers around America. I heard all about it in South Carolina (in late February). Toyota and GM have been here about 30 years, which is the duration of a normal automotive career path – 30 or 35 years. Employees are now starting to retire. Job openings are also occurring because the auto business is globally expanding – the North American market is continuing to expand unbelievably – it hasn’t been that long ago 9 million cars a year were built in North America; now the industry is looking at building 18 million cars this year.
So not only is there increased auto sales, but we have a huge attrition of (retiring) employees also going on. The auto industry has a significant crisis on its hands with having people ready for these jobs. So I applaud the efforts of the Kentucky Federation of Advanced Manufacturing Education (KY FAME). KY FAME is spreading statewide out of a program that was started in Georgetown by Toyota and the Bluegrass Community and Technical College. It’s a five-semester cooperative internship educational experience where the student goes to school two days a week full-time – and this is not two or three classes; they go from 8 a.m. to 5 p.m., a full work day – and they work three days a week. And after five semesters, students graduate with a dual-tracked apprenticeship now that allows them to become skilled maintenance technicians.
The skill sets that Kentucky FAME also teaches include problem solving, teamwork, and many other so-called softer side skills. Those are very important in the world that we work in today. I would venture to guess there are very few automotive employees in the state of Kentucky who don’t work in small groups, working on problems that their group faces. So all of those dynamics are in play as well.
There are a number of companies involved in FAME; it’s been around for about 13 years. In a conversation at a KAIA event in October 2014, I was talking with some of our members up in Northern Kentucky, which is a hotbed for some German auto (parts) manufacturers. At this event, we discussed what’s going on in Georgetown at the KCTCS school there, and the idea to start copying and pasting that training program around the state. So now we’ve got this terrific initiative going on with Kentucky FAME: A chapter is now operating in Northern Kentucky at Gateway Community College; in Louisville, Ford has a program at Jefferson Community College; a chapter is planned in Elizabethtown.
Much like Toyota, Ford had been working on this effort for a while, and the domestic big three have had a long history of apprenticeship programs. General Motors had stepped away from them for a long period of time because its auto production was shrinking; GM still had all these employees, so it didn’t have any need to train new employees. Well, now all of a sudden GM is saying, oh my gosh, we need qualified employees. If Ford were to graduate apprenticeships into regular skilled trades type of work, those employees could transfer under the provisions of the Ford UAW international agreement to other Ford plants around the country.

KFAM-EdBdEL: You started your career at GM as a college intern and retired from the company in 2014 as the plant manager of GM’s Corvette plant in Bowling Green. Are you a “poster boy” for a career in advanced manufacturing?
DT: I certainly was blessed with a terrific 34-year career at GM. I actually was selected in my sophomore year of college, in a competitive interview process, to be what was then called a “GM scholar,” where GM paid for my tuition and books and gave me a summer internship my last two years of school. So that set me on the path that said maybe this was a potential career. There was no obligation to go to work for GM when I graduated. I interviewed – it was a very good time to graduate; I had a number of offers – but I found myself comparing the other offers to the job I was going to do at GM. In some respects my career path at GM could be considered a case study. I got my master’s degree at night; I worked all day and went to the University of Michigan at night, and GM paid all my tuition and books for that degree.
That certainly facilitated my learning and knowledge of business systems. And things progressed from there. If one chooses that kind of career today, that’s certainly a typical or potential career path that may require sacrifices. You’d better be prepared for moving your family, working in a number of different locations, and that would usually include some international locations. I worked in three different countries: Canada, the U.S. and Brazil. And I moved my family five times. The four-year degree, starting with a business or engineering degree, and then working your way up, is absolutely a clear career path. But as I said, not everybody is motivated that way. When you look at a trillion-dollar student debt problem in this country, maybe college isn’t the right answer for everybody. Successful is a relative definition. Success could be having a satisfying career in advanced manufacturing that allows you to provide a quality lifestyle for your family.

EL: Since a limited number of the general public has actually been inside an “advanced manufacturing auto plant,” is there a perception about working in an auto plant that does not reflect reality?
DT: Absolutely! That’s a big problem. Not only do auto employers need to convince elementary, middle and high school students of the attractiveness of auto manufacturing jobs, but they’ve got to convince their parents of that as well. The Corvette plant is open to the public for tours every day that it runs cars. There are four public tours a day. In many ways, that was the only impression of GM and of automotive manufacturing that many people would ever get. Now Toyota does tours, and Ford does some limited tours, so there are those opportunities, but it was very important to me that whoever came in the door to see our plant walked away saying that it was a clean plant, well-lit, with workers fairly tasked with the jobs they have to do, that they’re ergonomically sensitive, that all those kinds of things were true.
That’s the manufacturing world we work in today. Now there are some tough jobs in manufacturing; don’t get me wrong. But by and large, the auto industry has elevated the whole scheme of things in manufacturing to where the jobs are good jobs. It will probably take another generation of workers until the perception that manufacturing is ‘dark, dirty and dangerous’ is completely eliminated. Employers expect you to come to work every day, to stay drug-free, to be at work on time, and to work until the end of the shift. But what’s wrong with that? That’s just a good work ethic.

EL: What are the pay ranges (for new trainees to highly experienced workers) in auto manufacturing jobs?
DT: It varies a lot from company to company. Probably the bottom end is around $15 an hour, and the top end can be north of $30, plus overtime. Plus Ford and GM both have, as part of their national agreements with the UAW, a profit-sharing plan that kicks in extra money. It’s a pretty good compensation package with benefits.

EL: Do you have a closing comment?
DT: As I said, I woke up every day and was excited to go to work at GM. I am so blessed to have a second career chapter that is equally exciting and fun for me. For 34 years I was confined to the four walls of a factory; I could hardly leave for lunch, and my life went in 6-second increments. So I’m enjoying very much the opportunity to travel the state, to get into different suppliers and automotive companies, to talk and to learn what really is on people’s minds. A huge amount of the automotive supplier business is done by very small firms. There are also some megaplayers in the supply business, as big as the OEMs, but the reality is that there are a lot of small shops around the state that, prior to the KAIA’s formation, never knew how they could get their voices heard. Well, there’s a way now, and I love being the person to talk to about Kentucky’s auto industry. ■

Banking and Financial Services, Departments, Economic Commentary, Features, March 2015, Wealth Management

Banking Merger and Acquisition Activity Accelerates

Bank KYThin margins and fat compliance costs
lessening numbers of Kentucky’s community banks

Kentucky bank valuations are still well below those of a decade ago but have risen a quarter to a third from post-recession lows, which is helping facilitate ongoing consolidation in the commonwealth. With a slowly improving economy in 2014, U.S. bank merger and acquisition deal numbers increased 50 percent.

Industry consolidation is a decades-old trend, but state banking experts credit some of the recent acceleration to a combination of slim margins – a product of still historically low interest rates – and increasing compliance costs created by tougher federal and even international regulations.

Deals offer owners an instant return on their capital while ending operational headaches. In the United States, there were 340 whole bank mergers in 2014, said Debra Stamper, general counsel and executive vice president of the Kentucky Bankers Association. That’s up from 227 mergers and acquisitions nationally in 2013, according to numbers from American Banker magazine. And it marks the fourth consecutive year of growth in M&A activity.

Across the country, October 2014 yielded the most bank M&A transactions in 15 years with 36 bank deals announced, according to Scott Harrison of the Nashville Business Journal. The Kentucky Bankers Association reports eight completed state institution mergers and acquisitions between March 2014 and January 2015. Those include Your Community Bank’s acquisition of First Federal Savings Bank in Elizabethtown; Commonwealth Bank & Trust Co.’s acquisition of Florence-based First Security Trust Bank; and Citizens National Bank of Paintsville’s acquisition of Peoples Security Bank in Louisa.

Ballard Cassady

Ballard Cassady

Another five announced between September 2014 and February 2015 await final regulatory approval, according to Ballard Cassady, president/CEO of KBA. The biggest is North Carolina-based BB&T’s agreement in September to purchase Crestview Hills-based Bank of Kentucky for $363 million in cash and stock, an acquisition that garnered national headlines. Others include Kentucky Bank of Paris’s acquisition of Madison Bank in Richmond; and the merger of First Federal Savings and Loan Association of Hazard with First Federal Savings Bank of Frankfort.

In the current climate, BB&T’s purchase of Bank of Kentucky was notable, for both its size and purchase price. Bank of

Walter Byrne

Walter Byrne

Kentucky had been one of the state’s largest community banks, with $1.6 billion in deposits, 32 branches and $1.825 billion in total assets. (Only eight other Kentucky-based banks have more than $1 billion in assets.)

“Of the recent (state deals), BB&T and Bank of Kentucky was the big one,” said Walter Byrne, a banking attorney with Stites & Harbison in Lexington. “I doubt you’ll see one that size again. It’s possible, but not soon.”

Charles Vice

Charles Vice

Charles Vice, commissioner of the Kentucky Department of Financial Institutions, took note of the BB&T-Bank of Kentucky deal as an indication that community bank valuations are recovering. In the industry, he explained, purchase prices are typically described as a multiple or a percentage of the bank’s total capital, which is its “book” value. “If you look at the BB&T deal, (the price) was right at 2.1 times book (for Bank of Kentucky). So potentially we are entering this phase again of higher prices for banks,” Vice said.

Other recent commonwealth bank purchases are occurring at lower book values. “In the heyday of pre-2007/2008 recession,” he recalled, “when things were going well in the economy, bank (acquisition) prices were typically going 2 to 2.5 times book. Meaning that, if you had $10 million in capital, some other bank would be willing to pay you $20 to $25 million.”
The climate changed when the recession and financial crisis struck, however.

“Post-2007, if you were a strong bank with no problems, the typical selling price would be 1.1 to 1.2 times book, just a 10-20 percent markup,” Vice said. With increased M&A activity in the last two years, Vice feels the selling prices for banks are inching back up – though they are not to pre-recession levels.

“What we are typically seeing now are selling prices in the 1.4 to 1.5 times book range,” he said. “I think it’s going to stay Printsteady for a while or maybe increase a bit, because some of the uncertainties have gone away in the market, and competition is starting to come back in.” Don Mullineaux, emeritus professor of banking at the University of Kentucky and chairman of the board of the Federal Home Loan Bank of Cincinnati, agrees.

“For a long time, almost all the deals you were seeing were what are called ‘distress’ deals, where one bank was buying another bank that for all practical purposes was going to be closed down by the FDIC. And when you buy a bank in distress, you are not going to pay a big premium,” Mullineaux said. “Those deals are largely over. And now we are starting to see an increase in premiums.”

Donald Mullineaux

Donald Mullineaux

While Winston-Salem, N.C.-based BB&T’s relatively high purchase price for Bank of Kentucky makes it an outlier in terms of current market trends, the move gives BB&T a coveted entry into the Cincinnati metropolitan area market and its first Ohio branch. “The Bank of Kentucky is a good match for BB&T due to its similar community bank operating model and culture, its focus on customer relationships and its commitment to employee engagement and local communities,” said David White, vice president of corporate communications for BB&T. “Also, this will improve BB&T’s ranking in Kentucky from a No. 4 to a No. 2, add 32 new branches in a strategically attractive market, establish BB&T at No. 7 in the Cincinnati MSA and add $1.6 billion of largely core, low-cost deposits.”

Regulatory demand driving force behind M&A

But what does the continuing M&A trend mean for Kentucky’s remaining community banks? The answer is complicated.

In some instances, mergers can lead to stronger, streamlined, more economically sound banks able to offer a wider range of services, such as wealth management advising, to their customers, Mullineaux said. On the other hand, many in the industry are concerned by the continuing decrease in the number of community banks nationally from a peak of 14,400 in 1984 to 5,571 in fourth quarter 2014, according to Federal Reserve Bank of St. Louis figures. During the same 30-year period, community banks’ share of total U.S. banking assets fell from 41 percent to just 18 percent, while the nation’s largest banks’ asset share grew from 18 percent to 46 percent, according to

In Kentucky, the number of commercial banks (not including savings and loans) has dropped from a high of 336 in 1984 to 168 at the end of 2014, the St. Louis Fed reports. By the FDIC’s count, as of late February there are 176 banks headquartered in Kentucky, including savings and loans and both state- and federal-chartered institutions. Of those, 151 are state-chartered banks, Vice said. In the past three years, 14 state bank charters have been surrendered due to mergers and acquisitions, he said, but no state-chartered bank in Kentucky has failed since 1987.

The decreasing ranks of community banks is not a new trend. But many, including the KBA’s Cassady, feel the decline of

New Albany, Ind.-based Your Community Bank completed a deal at the beginning of 2015 to merge all locations of First Federal Savings Bank of Elizabethtown into its system. The acquisition brings Your Community Bank’s total number of financial centers to 41 in Southern Indiana and Kentucky.

New Albany, Ind.-based Your Community Bank completed a deal at the beginning of 2015 to merge all locations of First Federal Savings Bank of Elizabethtown into its system. The acquisition brings Your Community Bank’s total number of financial centers to 41 in Southern Indiana and Kentucky.

community banks accelerated post-recession in large part due to increased compliance and regulatory costs created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. While purportedly drafted to rein in America’s largest banks – especially lending to underqualified borrowers that was at the center of the financial crisis – Dodd-Frank’s regulatory restrictions and compliance demands apply to all U.S. banks, regardless of size.

“Dodd-Frank is killing community banks” is now a common battle cry. It is heard in hometown bank boardrooms; in Congress, as the U.S. Senate Banking Committee began hearings in February on possible concessions for America’s smallest banks; in the media, including Carrie Sheffield’s Feb. 5 opinion piece on; and even in academia, with the Harvard Kennedy School of Government’s recently published comprehensive research report, “The State and Fate of Community Banking.”

In that report, researchers note that since the second quarter of 2010, around the time of Dodd-Frank’s passage, community banks have lost market share at double the rate they had during the previous four years. “The burden of over-regulation since the passing of Dodd-Frank is the No. 1 reason (for the increase in M&A activity),” Cassady said. “The burden of overregulation and compliance is outrageously high. You’ve got a $50 million bank in Anytown America that has to abide by the same rules that a $200 billion bank has to abide by, and that’s just ridiculous.”

Lock dialCassady points to additional regulations following adoption in 2013 of the international banking Basel III rules by the FDIC, the OCC and the Federal Reserve as particularly burdensome for community banks. (Broadly speaking, Basel III requires banks to maintain higher capital ratios than under previous regulations, with stricter definitions as to what constitutes capital.)

“Basel III capital rules were designed for banks that do international capital, only. And yet here in the U.S., regulators decided to make all banks abide by Basel III capital, across the board,” Cassady said. “The original intent of Dodd-Frank was not to hurt community banks; it was meant to keep big banks from doing proprietary trading,” said Dianna Preece, a professor of finance at the University of Louisville who teaches classes on bank management. “And yet all these new requirements that are a function of Dodd-Frank – regulations about mortgage lending and additional reporting requirements, for example – have now hit small banks. There’s been a real sea change because of the regulation, when you look at how banking has changed between 2006 and 2015.”

While the largest banks originally targeted for regulation can afford to hire teams of lawyers and staffers dedicated to compliance, small community banks in Kentucky often “are lucky to have one compliance officer” to tackle the same amount of work, Cassady said. Faced with growing compliance costs that are cut into profit margins already made thin in an era of very-low-interest-rate loans, some small bank boards increasingly view merger as a means of streamlining their overhead, experts said.

“Some of these smaller banks are now looking at merger that may not have even been willing to look at it three or four years ago, before the regulation,” Preece said. “When we see these in-market mergers, of one small to mid-size bank buying another bank that it’s competing with, the primary reason is to cut costs,” Mullineux said. “It’s a means of blending technologies, reducing staffs and finding economies of scale.” Given the climate, experts predict M&A activity to be robust again in 2015.

“I would not be surprised to see another five or six Kentucky banks merge this year,” said Vice. “I do think the M&A trend will continue.” “I would estimate somewhere between seven to nine transactions in Kentucky in 2015,” Byrne said. “That puts us right on par for last year. People are saying the M&A trend could stretch for five to 10 years.” Still, in the wake of Basel III, Preece said, “Everyone is skittish now about how regulators are going to look at their assets, and the quality of their assets, and all of that plays into whether or not M&A deals are going to be approved.”

The role of community banks

In the tumult and public outcry for reform following the Wall Street banking crisis, regulators felt compelled to apply the newvault door compliance standards to all banking institutions without regard to size, Cassady said, largely because there is no commonly agreed upon standard within the industry as to what delineates a national “Wall Street bank” from a local “community bank.”
Recently, Cassady was part of a four-state team of Bankers Association leaders that drafted a proposed definition of a “community bank” based in part on limited size, cross jurisdictional activity and complexity. They submitted it to the chairman of the U.S. House of Representatives Financial Services Committee for consideration.

Team members came to the conclusion that delineating between bank types solely using asset size is misguided. Instead, “you have to look at the bank’s complexity of operations,” Cassady said. “The more complex a bank is, the more regulation it needs. What we found is that there are some $20 billion banks that only take deposits and make loans, which is a very basic, non-risk operation. Then there are those really big banks that get into (securities) ‘market making,’ international activities, derivatives and the like.” The latter type of banks, Cassady feels, do require the type of heightened regulation Dodd-Frank and Basel III outline.

By almost anyone’s definition, all banks based in Kentucky are “community” banks. The Harvard report, for example, defined “community” banks as institutions with less than $10 billion in assets. In Kentucky, more than two-thirds of the state’s 176 banks have less than $250 million in assets, according to the FDIC. Only 48 Kentucky-based banks have assets between $250 million and $1 billon. And just nine have assets greater than $1 billion – eight after Bank of Kentucky’s sale to BB&T is finalized.

A large role in local economies

While Congress may yet offer community banks wholesale relief from various aspects of Dodd Frank’s 90 provisions – a hot-button issue in Washington this year – Cassady feels the more likely outcome may be piecemeal “rifle-shot reform,” such as an exemption from Basel III requirements for community banks. Many in the industry hope regulatory relief – as well as the entry of new banks into the market when regulators become open again to approving new charters – can help community banks retain their market share so that they can continue providing a vital role within their communities.

“If you see a community that is growing, you will find an active community bank in that community,” Cassady said.
Vice agrees. Despite their smaller market share, community banks provided 48.1 percent of small business loans in the United States in 2013, he said. According to the Harvard report, they make 77 percent of all agricultural loans nationally, helping drive business in small-town and rural economies.

“Community banks are a huge boost to their local economies,” Vice said. If public opinion is a sound determiner, it seems safe to say that while M&A deals are likely to continue, community banks won’t disappear entirely.

A recent KBA telephone poll of 600 Kentucky registered voters found that 70 percent of the respondents said they prefer to bank with a locally owned bank, Cassady said. And 85 percent believe that local banks have a positive effect on the quality of life in their communities. ■

Robin Roenker is a correspondent for The Lane Report. She can be reached at

Banking and Financial Services, Departments, Economic Commentary, Economic Development, Features, March 2015

It Keeps Getting Better in 2015

shutterstock_128809243Consumer spending is stimulating business investment and hiring,
which means fewer problem loans

While significant uncertainties remain, Kentucky bankers are optimistic about 2015 as the year opens. They see increasing consumer spending generating business investment and hiring, with better employment levels meaning decreases in the number of problem loans. Low energy prices are a significant bonus for the economy, and historically low interest rates are a benefit to the housing sector, even if it means slim margins within which to generate bank profits. The Kentucky banks expect GDP growth will be in the 2 percent to 2.5 percent range. The bigger metropolitan areas are experiencing improvements before the rural areas. There is an expectation that sometime in the second half of this sixth year of slow economic recovery, the Federal Reserve will begin to increase interest rates.

Bill Jones

Bill Jones

Bill Jones, Division Manager, US Bank: “Overall economic activity throughout most of the state continues to improve. Companies both large and small are looking to invest for the future, and consumer spending levels have picked up. It is particularly encouraging to see the consumer activity pick up as that is the fuel for a healthy economy. Export sales are one area that Kentucky continues to see positive trends, although a strengthening dollar may put pressure on this sector. Interest rates, for the first time since 2008, are projected to increase in the second half of the year, with the precise timing uncertain and dependent on economic developments. The banking industry across the board continues to adapt to the new regulations brought on by Dodd-Frank legislation.”

Luther Deaton

Luther Deaton

Luther Deaton, Jr., Chairman, President and CEO, Central Bank: “Kentucky will continue its slow recovery from the recession in 2015. Thanks to the diversity of its economic base, employment will slowly improve. Two major goals need to be creation of high-value jobs and funding for all levels of education. Consumer spending is recovering as confidence improves and the housing industry will rebound if interest rates continue at current levels through the end of 2015. The slow-growth economy has challenged community banks to adopt new standards and strategies. Our bank is working with consumers and businesses to pursue available opportunities that lead to better growth and prosperity for our communities.”

John Taylor

John Taylor

John T. Taylor, President/CED, PBI Bank: “We believe we’ll see more of the same in 2015. We expect moderate overall GDP growth in the 2.0 percent to 2.5 percent range. Levels of uncertainty remain high in our economy, including geo-political risks and their potential impact on energy costs, the unknown associated with increased business regulation costs and the continued roll out of the Affordable Care Act. Finally, the cost of capital for businesses may increase as the Federal Reserve has signaled a potential rate increase in mid-2015. Competitive loan pricing and terms may partially offset these headwinds as banks work to deploy excess liquidity.”

Bill Alveson

Bill Alverson

Bill Alverson, CED, Traditional Bank: “2015 marks our economy’s sixth year operating in an expansion. Our climb out of recession has been slow and steady, with a few obstacles along the way. But as economic fundamentals improve across most sectors, we see the climb poised to pick up momentum, especially as it relates to local business, where we sense a positive shift towards increased investment and hiring. A rise in Kentucky employment and income will equate to reduced financial delinquencies and an increase in demand for housing and other consumer goods, providing a boost to our economy. Most economic experts agree that our economy will sustain economic growth of 2 percent or higher in the coming year. Community banks will continue to play a vital role in providing credit and liquidity services to business owners and consumers, helping to spur economic growth in Central Kentucky and beyond.”

Tucker Ballinger

Tucker Ballinger

Tucker Ballinger, President/CEO, Forcht Bank: “The economic outlook for Kentucky continues to show signs of improvement, however several challenges remain unchanged. Most counties are still experiencing elevated unemployment rates, the state continues to lag behind the nation in terms of labor force participation, and the lack of job growth makes it difficult for many communities to attract new people to the region. However, we remain optimistic as the larger metro markets are beginning to show signs of improvement and are gaining momentum. Loan demand in both the consumer and commercial segments remains soft but has improved over the past 12 months. As a local community bank, we are committed to helping our communities grow and developing business that can stimulate and revitalize the region.”

Tom Partridge

Tom Partridge

Tom Partridge, President/CEO, Fifth Third Bank (Kentucky): “The U.S. economy will continue to expand in 2015, supported by cheap energy prices and an improving labor market. However, labor and manufacturing constraints will limit economic expansion. Fifth Third Bank’s Investment Strategy team expects GDP growth between 3-3.5 percent in the intermediate-term. The decline in oil prices represents a tremendous global stimulus, a windfall whose impact will take time to develop. Federal Reserve policy will take center stage in 2015 and rate normalization might begin without any evident signs of inflation.”

Jean Hale

Jean Hale

Jean Hale, President/CEO, Community Trust Bank:“The Kentucky economy, like the U.S. economy, is seeing indications of recovery. The economic recovery is somewhat regionalized, as was the level of economic downturn, due to the diversity of our economy. Improvements in unemployment rates and business activities have been positive for the banking industry as we have seen increases in loan demand and reductions in problem loans. However, we will continue to experience pressure on our net interest margin as long as the Fed continues to hold interest rates low. We see improvement in most communities we serve in Kentucky, West Virginia and Tennessee; however, some business sectors, particularly coal and natural gas, remain stressed. We anticipate eastern Kentucky and southern West Virginia will continue to have significant economic stress that will impact businesses and individuals.”

Ballard Cassady

Ballard Cassady

Ballard Cassady, President/CEO, Kentucky Bankers Assn.:“2015 started out and will more than likely stay under a cloud of uncertainty. With oil prices falling, the threat of European deflation, guessing when the Fed raises rates and of all things, a strengthening dollar’s negative effect on multinational companies it’s enough to make even the best economist blush with uncertainty. The U.S. economy is still growing slightly above trend, according to federal statistics, and corporate earnings continue to perform to the upside of expectations. With interest rates remaining low for most of 2015, it should be a good year for the stock market and home ownership.”

Heath Campbell

Heath Campbell

Heath W. Campbell, President, Kentucky Region, Branch Banking & Trust: “As 2014 concluded, we have solid reasons to be optimistic about the U.S. economy in 2015. The domestic economic fundamentals are strong with sustained GDP growth in 2014, solid and improving U.S. job markets resulting in unemployment of 5.8 percent, combined with increasing consumer confidence and spending. While our outlook for 2015 remains positive, our optimism for the U.S. markets and Kentucky must realistically be tapered by looming global economic challenges (China and Eurozone).”


Jim Rickard

Jim Rickard

Jim Rickard, President/CEO, Your Community Bank: “Your Community Bank is optimistic about economic growth in the region for 2015. Loan demand increased moderately in 2014, and we expect that to continue this year. We are seeing improvement in construction, both residential and commercial, and businesses are increasing their capital investments. The outlook for interest rates is less certain, and everyone will be watching the Fed closely. We will continue to focus on providing excellent customer service to our clients and strong returns to our shareholders. Finally, we are excited to welcome our new customers from our recent merger with First Federal Savings Bank in Elizabethtown.”

Louis Prichard

Louis Prichard

Louis Prichard, President, Kentucky Bank: “In 2014, Kentucky Bank expects marginal economic growth not only in its 10 central and eastern Kentucky counties but throughout the state. Improved employment will be a driver of any sustained growth. Kentucky unemployment is likely to be around 6.7 percent most of the year; as a result, we expect the economy to grow at a 2 percent rate. Home refinancing has virtually stopped; the shift will be towards home purchases, but we do not expect significant residential real estate market growth. Commercial loan growth is improving, but borrowers are still cautious about the uncertainty of the economy surrounding the healthcare Affordable Care Act and additional regulatory burdens on businesses.”

Lloyd Hillard

Lloyd Hillard

Lloyd C. HIllard, Jr., President/CEO, Farmers Capital Bank Corp.: “I’m much more optimistic as we enter 2015. With improvement in employment, there appears to be more confidence among consumers and small businesses. Our loan pipeline reports are improving and small-business lending is up. We’re certainly not back to the pre-crisis levels, and some customers are waiting for more signs of recovery before making any significant expansion decisions. However, the new activity is encouraging. As we see the economy continue to improve and inflation ticks up, we expect action by the Fed in June of this year. We are projecting the Fed Funds Rate to increase 50 basis points by year-end and another 50 to 75 basis points in 2016.”

John Gohman

John Gohman

John Gohman, Regional President – Lexington, PNC Bank: “Lexington’s economy generated momentum in the second half of 2014 that I foresee continuing in 2015. The pace of job growth in the region lagged the nation, but payroll employment is now above its pre-recession peak level compared to the national level. Central Kentucky has a variety of growth drivers to lean on as manufacturing becomes a smaller share of employment. This creates the possibility that incomes grow faster than expected. The drop in gasoline prices will boost consumers’ real disposable income and reduce input costs for manufacturers. Continuing to diversity our industrial base is essential to building on our success.” ■

Banking, Banking and Financial Services, Banking Outlook, Departments, Economic Commentary, Economic Development, Features, March 2015, Wealth Management

Another Up Year for the Stock Market

nest egg

Kentucky wealth management advisers see the likelihood of a seventh consecutive year of the stock market gains, although more modest in 2015 than the remarkable year-on-year returns since 2009. Advisers forecast gains for the year will be under 10 percent.

Despite weaknesses and lingering uncertainty that prevent long-term planning, the U.S. economy is the strongest in the world and its equity market continues to attract investment from foreign as well as domestic sources. The Federal Reserve is expected to begin increasing interest rates in the second half of the year, and continued strengthening of the U.S. will weaken overseas income for multinational corporations. Markets are likely to remain reactive and volatile, which increases the need to exercise care to invest in strong, well-managed companies.

Michael Weiner, Chief Investment Officer, Unified Trust Co.

Michael Weiner

Michael Weiner, Chief Investment Officer, Unified Trust Co.: “Two big-picture themes should dominate the investment landscape for 2015, namely, the price of oil and the relative value of the U.S. dollar. If a barrel of oil falls 10 to 15 percent more in price, producers and oil-producing nations will be in serious trouble and the consequences could be dire. We believe oil prices will be higher this time next year. The U.S. dollar is likely to appreciate versus its partners, and that will help keep interest rates low in the United States and provide a serious headwind for developing nations.”


James R. Allen

James R. Allen

James R. Allen, Chairman and CEO
J.J.B. Hilliard, W.L. Lyons LLC: “Moderate economic growth, low inflation and an accommodative Federal Reserve have pushed stock prices to record highs while keeping interest rates near historic lows. These conditions have many investors in a quandary as they look to allocate new capital. Will the Fed finally begin to push rates higher late in 2015? Will the likelihood of higher interest rates thwart some of the euphoria for U.S. equities? The answer to both questions is likely to be “yes.” We can expect slightly higher interest rates, lower bond prices and modestly (4 percent to 6 percent) higher stock prices by the end of 2015.”

Dave Harris

Dave Harris

Dave Harris, Senior Partner, MCF Advisors: “The United States will maintain its position as the world’s economic leader through 2015. Global growth concerns, deflation, geopolitical threats and a stronger dollar could take our rates to new lows in 2015, but we view this as unnatural and unsustainable. We expect the Fed to increase interest rates, though not until later in the year. We continue to emphasize quality in both equity and debt portfolios as volatility likely will remain or increase in 2015. This market volatility could provide an opportunity to increase international allocations as improving fundamentals and the European Central Bank’s loose monetary policy may boost international markets.”

Ernest Sampson

Ernest Sampson

Ernest Sampson, CEO, Private Client Services: “Don’t expect your investment portfolio to have a double-digit return in 2015. Depending upon your portfolio’s asset mix of equities and fixed income, you might do well to break even despite improving unemployment rates and generally positive economic conditions. The Federal Reserve will most likely inch up interest rates by year-end, pushing bonds in an opposite direction along with other fixed-income securities. Equities would have to offset this, which would require a seventh consecutive year of positive returns, which hasn’t occurred before. Lower oil prices will pay an economic dividend throughout the year, pleasing long-term investors.”


Todd P. Lowe

Todd P. Lowe

Todd P. Lowe, President, Parthenon LLC:“Taking into account slow global growth but modest and steady U.S. growth, broad domestic markets should experience lower returns than in the past two years. The strong U.S. dollar will provide headwinds for multinational companies, further dampening returns in 2015. Interest rates should rise modestly in the second half of the year. Investors should position their portfolios to take advantage of opportunistic situations in both equity and fixed-income markets. It will be a ‘stock pickers’ year.”

Martin Ruby

Martin Ruby

Marty H. Ruby, CEO, Stonewood Financial Solutions:“In 2015, one word will likely drive our economic outlook: uncertainty. The stock market will stay volatile. Foreign events will have a significant impact on domestic markets. One of the most interesting areas of uncertainty this year is taxes. As the president’s budget proposal showed, Washington is looking for creative ways to raise revenue, including targeting savings products many American rely on, like 529 plans and 401(k)s. There’s also pressure to squeeze more taxes from gross adjusted income. Between taxes, the stock market and an economy that still struggles, many people will rightfully feel economically unsettled as we push through 2015. ?

Banking and Financial Services, Departments, Economic Commentary, Features, Features, Healthcare, Legal Affairs, March 2015, Medicine, Technology

Rising Cyber Insecurity


Tumb chain 1st graphic

Potential dire effects vary by business, the type of computer-reliant operations it has and the nature of its data, and these effects can range from mere irritation to significant financial loss all the way up to a closing of the company doors.

Information technology security issues grow more important and urgent for business and industry week by week. Commerce-critical data today is made with intention at work stations as well as streamed by always-connected apps and devices into the cloud – streams that simultaneously make operations more efficient and more vulnerable.
Managers, accountants, healthcare providers, lawyers, retailers, bankers, public officials and more all are joining IT professionals in spending more of their time and energy on cybersecurity matters.

Anti-virus expert Eugene Kaspersky said at an IT security conference in October 2013 that the cost of data system disruption to business is “many times more than $100 billion.” Since then, data breaches have occurred at Target, Neiman Marcus, JP Morgan Chase, Home Depot, Sony Pictures, Anthem and others. However, while these large events attract news coverage, much of the overall cost of data breaches actually occurs at small- and medium-sized businesses because they are often easy targets.

John Askew

John Askew

“You have to assume that you have already been breached to some extent and determine how to continue running your business with that assumption,” according to John Askew, consulting manager and security team lead for SDGblue, a Lexington-based IT services firm.

“Hacking” into computer systems started three decades ago, largely among young men wanting to impress friends with their technical savvy. Nearly all data breaches today are by criminals looking to make money using an array of methods and powerful tools. The realities of computer security are much different than even just five years ago.

One result is that no one is too small to be a target. Thieves formerly tended to individually target the high-dollar score, like fishing with a large pole for that “big one.” Computer-powered automation today, however, enables thieves to fish with a net – which because of volume targeting creates large cumulative results.

Security experts all estimate the likelihood that a specific business’ computer systems will crash or be compromised at 100 percent – a matter not of if but of when. They also agree that most incidents are either preventable or can be cleaned up quickly with proper preparation. Money-sapping downtime can be averted or recovery expedited, reducing costs across the board. This security has a price, but prevention and planning tend to be far cheaper than curing a system shutdown for which a business is unprepared.

Most businesses today can’t run without computers, which are service platforms for credit card processing, tax filing, business websites and interacting with suppliers and customers.

Another recent computer security issue is that Kentucky and 47 other states along with Puerto Rico, the District of Columbia and the Virgin Islands have laws that punish companies found negligent in handling customer data, or that do not notify customers of a breach in a timely fashion.

Barbarians at the gate – and inside

Think of data security, experts say, in terms similar to doors to your business: The more data connection doors you have, the more security you need since doors are generally the most vulnerable points for unauthorized entry – or exit. Every email account is a potential door.

Further data vulnerability exists because businesses have to go through lot of other people’s “doors,” too. Cyber criminals watch that activity with programs designed to sniff out your and their weaknesses.

Many business people are shocked to learn that various studies find from 45 percent to 80 percent of data security issues originate inside the company. Not all are malicious; sometimes an employee password is easily hacked, like the word “password” or “1234567890” or their password is pasted on their desk for anyone passing by to see.

Data security becomes compromised because employees often aren’t trained, or no security guidelines exist and they innocently do something inappropriate. It can be a disgruntled employee or one paid to steal company data. “Drive-by downloads” into business networks can occur when an employee visits a web page with a malware delivery mechanism that is disguised as an ad. Sometimes network anti-virus programs are inadequate (such as free versions) or are not installed at all.

Phishing is most common attack mode

Internal breaches commonly come from “social engineering” attacks, which prey on human behavioral weaknesses. “Phishing,” a common social engineering method, is the most commonly used data assault process seen by those interviewed for this article. And it achieves the most success against users.

Phishing2Phishing criminals, usually using stolen email addresses, “bait” users at a target business with what appears to be an urgent email from a familiar company, such as a bank or retail chain they use. Problems begin if a recipient clicks a link or opens an attached file promising f urther details. The 2013 Target stores holiday shopping season breach that led to 110 million customer credit card records being stolen started with a phishing attack against employees of a subcontractor; Home Depot’s 100-million-customer-records breach in 2014 was a phishing attack.

Phishing messages whose official-looking logos, headquarters information or other content succeed in prompting a click for details instead initiate a download of malware onto the recipient’s device that propagates across the network. The many variations of this trick have worked worldwide millions of times.

“Phishing is the No. 1 problem for us on campus, and that is across faculty, staff and students,” said Brian Purcell, Murray State University’s information security officer and the school’s interim chief information officer. “If we see a phishing attack on campus, we proactively look to see who has responded to it by examining data traffic leading to the offending site. We then change their password and user identification and notify them that we have done so … because data breaches are very expensive to correct.”

A sophisticated variation is “spear phishing” in which attackers research individuals at a company and target them with sometimes surprisingly personal appeals. This technique increases the odds of success so much that spear phishing accounts for 91 percent of attacks. At financial institutions specifically, reported individual losses average $55,000 and some have exceeded $800,000, according to the Washington-based Internet Crime Complaint Center.

Phishing is one of the most common consumer complaints the Kentucky Attorney General’s Office gets, said Daniel Kemp, deputy communication director.

“Many of the calls lately extended from attempts to dupe consumers affected by the recent Anthem (Blue Cross Blue Shied) data breach,” Kemp said. “Getting trained in spotting these threats is one of the most effective defenses a business or consumer has. We have staff who go around the state training consumers in our Scam Jam classes. Face-to-face training is always effective, and every business should consider it for their employees.”

Who are the phishers? They come from around the world. The Chinese and North Korean governments have often been accused (e.g., the Sony Pictures Entertainment hack), as have criminals in former communist bloc countries, South America and in the United States. A town in Romania’s Transylvanian Alps, Râmnicu Vâlcea, population 120,000, is called the cyber-crime capital of the world, but it has only two government agents assigned to combat digital law-breaking. Regardless of their origin or motivation, the criminals are after your system, your data, your customers and your money.

Those illegally harvesting customer data often bundle their stolen info and sell it to others to avoid being caught using it – they let others do the phishing or scamming. It makes arrests and prosecutions difficult, and even if they are caught, restitution for victims’ losses is rare.

Assessing costs, value, safety and savings

Brian Purcell, Information Security Officer, Murray State University

Brian Purcell, Information Security Officer, Murray State University

The good news is that with appropriate measures, a business network can be kept reasonably-to-very safe. Although the due diligence of installing, maintaining and securing computer systems can be costly, security breach costs can be far, far more.
“PCs and computing resources are now a utility, not a luxury. IT security is often regarded as a discretionary cost, but it’s not – it should be fixed in the budget of every business,” Purcell said.

The term “disaster recovery” refers to being able to restore a computer system to the state it was in a short time before a failure. Only very rarely is this the result of a fire, flood, lightning strike or tornado, although those are considerations. Much more commonly it means a single computer’s hard drive fails and ruins all its data, which a business must recover to get back to work; or a server dies, corrupts a wider swath of data and shuts down daily operations.
Business IT disaster recovery plans often mean having off-site backup in case equipment is

tolen or offices are too damaged to use. With off-site data storage, operations can be restored in a temporary location and to continue to serve customers and avoid losing revenue also.

 Dave Sevigny, President, DMD Data Systems

Dave Sevigny, President, DMD Data Systems

“A company with six PCs that has no regular service vendor for support, and that hasn’t been getting regular system evaluations, is usually down two or three days,” according to Dave Sevigny, president of Frankfort-based DMD Data Systems, a regional IT services provider. “A company that has an established relationship is usually down about a half day. There is no substitute for qualified help.”

Sevigny and others advise considering the question: How would being without computers for two or three days affect your company?

“Today’s technology is more robust, more resilient and has more ‘call home’ properties that alert us, often before the customer knows they have a problem,” he said. Clients “have fewer problems if they make an effort to keep up their systems and allow us to help them. That’s what IT professionals do.”

An office technology policy can avert some of the latest threats to business. Sevigny advises caution regarding “the bring-your-own-device (BYOD) trend of letting employees bring smart phones and tablets into the office with no supervision, and even letting them do (company) work with them.

“While an employer might think he’s saving money by having employees use their own equipment to perform tasks for which the business formerly provided the equipment,” he said, “they are also opening themselves up to some real security problems. Giving someone open access to a business network when you can’t control what happens with that device after work is a very risky proposition.”

Lack of knowledge, lack of preparation
Investing in IT security and disaster recovery is less costly than restoring data from bits and pieces, or going back to printed records. Data breaches mean lost customers and tarnished business reputations, especially when customers must be contacted to inform them sensitive personal data is now “in the wild” and in the hands of criminals.

In calculating a budget for IT security and disaster recovery, managers are advised to consider their company’s average revenue or profit per hour or per customer, then assess the potential cost of lost operating hours or customers. At what point would losses become critical? At what point would the business be fatally crippled?

Many businesses lack security and data recovery plans.

Russ Hensley, CEO,  Hensley Elam Associates

Russ Hensley, CEO,
Hensley Elam Associates

“Kentucky lags the national averages for a variety of reasons,” said Russ Hensley, CEO of Hensley Elam Associates, a regional data services firm with headquarters in Lexington. “Despite the routinely quoted (estimate that there are only) 30 percent of businesses with adequate protection, we may be as low as 10 percent for companies with appropriate backup and disaster recovery plans.”

Lack of knowledge is thought to be the main reason why. “Most of them simply don’t know the risks, or they think it won’t happen to them because it hasn’t happened yet,” Hensley said. “They don’t realize their employees are usually their biggest threat. They often see the backups and IT security as something being sold to them versus being a real asset. Since they have never had an incident – despite some of them already being infected with malware and they don’t know it – they either balk at the cost or don’t see the need.”

Studies estimate the cost of repairing a data breach at $185-$195 per customer. That’s $18,500 for 100 customers or $185,000 in losses for 1,000 customers. Repairs can take months as little issues continue to present themselves. It’s fairly common for some data to be lost forever, complicating making financial books whole again. Damage to reputation and trust can mean a loss of current customers and future business.

Studies show preventive measures do reduce per-customer losses for data breaches: $14 less for companies with comprehensive security policies and procedures; $13 less when the company has an incident response or disaster recovery plan; another $7 less if a well-trained staff person serves as the chief information security officer. Those steps lower average losses to $151 per customer.

Mitigation but no 100% guarantee
Locks“There’s a saying in our industry that computer security always seems to cost too much, but still is never enough,” said Jerry Bell, a computer security consultant and founder of the website and blog in Atlanta. “Computer security is something like what they say about those who fight terrorism: We have to be right all the time, but they only have to be right once.

“There is no 100 percent guarantee against hacks or data loss,” Bell said. “Everyone is a target, too. There are breaches and attacks going on at all levels – from giant financial firms all the way down to parking garages. Statistics don’t tell the whole story because many breaches are not reported to authorities. The fear of damage to a company’s reputation is pretty powerful.”

One product that can mitigate the cost of data breaches, he said, is cyber-security insurance, which many companies now offer. Data breach coverage can mitigate costs in any case, and especially when the policyholder is not to blame.
“When a breach happens and a claim is paid, the insurance companies are looking for those responsible for the breach,” said Bell. “If (the insurance company) pays a claim, then someone else is likely to wind up paying the insurance company.

“Take some of the big, well-known, national companies whose data breaches made headlines in 2014. There are lawsuits against some of them by their vendors, like credit card processing companies, and those vendors’ insurers to cover the costs of cleaning up the mess,” he said. “They lay the blame at the feet of the big company, and that mess includes new cards, reimbursements, credit monitoring and many other charges.”

All the experts in this article concur that, on average, only about 30 percent of businesses today have adequate security and a disaster recovery plans – not elaborate security, but decent protection and enough to help with recovery.

“The one thing that keeps me awake the most at night is how our data is handled,” said Purcell at Murray State. “We’ve been collecting people’s personal data since the late ’80s, and the standards for security were different then. We’re like any other business in that regard. That legacy data is very valuable, and we have the responsibility for protecting it.” Most businesses are in the same boat.

The most common lament among the IT security professionals interviewed is that customers reel when told the cost to adequately protect their systems but don’t understand the value of that investment.

For example, initiating recommended system security measures might cost a small to medium-sized business $10,000 up front and another $300 in costs per month to monitor the system security, perform maintenance and pay for regular professional services ($3,600 per year). Under this scenario, first year expenses are $13,600; subsequent years might total $5,000 when software upgrades, checkups, equipment replacements, etc., are included. This is a five-year cost of $33,600, or $6,720 per year. It’s a considerable budget line.

If this business has 300 customers, however, using the $185-per-customer cost for a breach that studies found, a data system problem could cost $55,500. That’s about $22,000 more than the cost of IT system security.

Compliance does not mean security

Michael Gilliam, Security Team Lead, SDGblue

Michael Gilliam, Security Team Lead, SDGblue

In managing costs, businesses generally opt for meeting legal or regulatory obligations as an expense baseline.
“Compliance does not equal security,” warns Michael Gilliam, consulting manager and security team lead for SDGblue. “Security is a very complex issue to tackle (and) it becomes harder to defend the individual information systems and the organization as a whole as it grows.”

A lack of dedicated resources to implement an effective security program is the biggest issue SDGblue sees, Gilliam said.
“Security (is) often viewed as a cost center that needs to be minimized,” he said.

That anemic approach is further weakened when “combined with a confusion with regulatory compliance,” The word Compliance in blue 3d letters surrounded by related terGilliam said. A managerial view that data security resources are “dedicated to avoiding fines stemming from violations makes security often nothing more than an afterthought, prioritized only when it is too late.”

State and federal government requirements to notify customers of a breach are considered burdensome and complicating factors. However, the cost of doing so is small compared to the fines and penalties for not doing it in a timely fashion, and far less than criminal or civil charges, or lawsuits by customers.

There are major additional compliance issues in the medical field, which also must comply with complicated federal HIPAA and HITECH regulations.

The Health Insurance Portability and Accountability Act of 1996 mandates the confidentiality and security of healthcare information. Health Information Technology for Economic and Clinical Health Act of 2009 anticipates a massive expansion in the exchange of electronic protected health information.

“The cost of a breach to medical clinics can be staggering,” Hensley said. “One doctor had a laptop stolen with 2,000 patient records, and none of the data was encrypted (to make it unreadable to the thieves). They were fined $150,000 by the government for non-compliance – un-encrypted laptops are the No. 1 cause of fines. It used to be that large clinics were the ones fined, but now smaller offices are seeing fines, and they are never cheap. For the largest companies, there have been fines of $12-14 million. It’s quite serious.”

Breaches trigger legal obligations
Hensley holds the advanced Certified Information Systems Security Professional credential, which in addition to technical expertise requires knowledge of IT’s legal and financial issues. The CISSP credential is valued especially in the healthcare sector and other operations with high-stakes compliance obligations. Hensley said it improves his ability to advise clients about avoiding potentially expensive situations.

“For instance, I’ve seen cases where attorneys took a patient’s medical records into their office for a case. This puts the lawyers at tremendous risk because they think the attorney-client privilege protects them, but that’s not entirely true,” he said. “By assuming responsibility for those records, they are now under HIPAA laws and subject to penalties.”

Meanwhile, state legislatures are enacting new cybersecurity laws and reporting requirements, creating legal obligations sometimes to notify customers and staff about a data breach – or to not notify them because the breach is under a criminal investigation.

In Kentucky, HB5 and HB232 cybersecurity laws passed in the General Assembly in 2014 are now in effect. They changed the way the commonwealth’s businesses are required to store customer data and protect confidentiality. Depending on who is potentially affected, businesses and other entities that experience a data breach must contact the Kentucky State Police, state auditor of public accounts, state attorney general, Kentucky Department of Education or the Council on Postsecondary Education.

HB 232 defines what businesses must know about an electronic security breach, sets deadlines for informing customers and staff and whether to notify law enforcement.

Frank Goad is digital editor of The Lane Report. He can be reached at

Business Briefs, Business Briefs, Economic Commentary, Economic Development, Features, February 2015, Lane List, The Lane List

The Lane List: Kentucky Cash receipts from farm commodities

white fence2010-2014 (in current thousands of dollars)

The National Agriculture Statistical Service significantly revamped its process for gathering and reporting farm commodity cash receipts in the past year. Gone are familiar line items such as Equine, whose cash receipts figures are now incorporated into the Miscellaneous Livestock line and measured in a manner that drastically trims what is counted for Kentucky.

Under the new federal reporting process, said Dave Knopf, regional director of the NASS office in Louisville serving Kentucky, North Carolina, Tennessee, Virginia and West Virginia, revenues accrue to the home state of the owner of a horse operation rather than the state where the operation takes place. That has a large impact for Kentucky, where many of its Thoroughbred farms have owners who live in other states or overseas.

The NASS farm cash receipts reporting process yields figures for a calendar year in the final quarter of the following year, so the most recent Kentucky report is for 2013 and the previous three years. The new reporting process brought downward revisions of 8.3-9.5 percent for Kentucky farm gate receipts for 2010-2012.

The commonwealth’s 2012 receipts figure of $5.28 billion is revised to $4.84 billion in the NASS report released late last year using the new methods. Much of that decrease can be attributed to the new measure for equine operations. Under the previous system, Kentucky’s equine receipts were part of the Other Livestock line item that for 2012 was reported at $882.2 million. The new Miscellaneous Livestock figure for 2012 is revised to $315.8 million.

farm3_fullThe good news is that cash receipts for Kentucky farms in 2013 jumped 17.5 percent from 2012 to a total of $5.69 billion.
The Oil Crops category, which includes soybeans and canola, had a dramatic gain of 45.5 percent in receipts to $1.05 billion in 2013. That moved it far ahead of Corn, which had been the top Crops receipts category, but decreased 10.4 percent from 2012 to $782.5 million. Crops collectively increased 15.5 percent in 2013 to an overall $2.89 billion in Kentucky.

The Livestock and Products category increased 19.6 percent in 2013 to a total of $2.8 billion overall. The Miscellaneous Livestock category, including the rebounding equine sector, grew its measured receipts by 28.7 percent in 2013 to $406.5 million. The Cattle/Calves category increased 28.8 percent to $835.8 million in the 2013 receipts report.

Other significant gains occurred in Wheat, which increased 42.7 percent in 2013 in Kentucky to $280.1 million, and in Broilers, which increased 16.7 percent to $1.01 billion.

Kentucky crop





Economic Commentary, Economic Development, Faster Lane, Healthcare

Poll results: Kentuckians delaying medical care due to cost

Kentucky Health Issues Poll shows 22% needed care but did not get it due to cost

Fdn Healthy KyLOUISVILLE, Ky.— Poll data released today by the Foundation for a Healthy Kentucky and Interact for Health indicate that lower-income Kentuckians are much more likely to forgo medical care and have more trouble paying for health care than those with higher incomes. Meanwhile, the Kentucky Health Issues Poll (KHIP) data reveal three out of every four Kentucky adults now have a usual or appropriate source of care.

KHIP highlights include:

• More than two in 10 (22%) said they or a family member in their home needed care at some point over the past 12 months but they did not get care or delayed getting it because of cost; in 2009, 32% reported delaying or skipping needed care due to cost.
• Almost one third (32%) of adults who earn at or below 138% Federal Poverty Level (FPL) indicated they did not get or delayed medical care due to cost while 14% of those making more than 200% FPL reported they had to forgo or delay coverage because of cost.
• Three in 10 (31%) reported that they or a family member in their home had trouble paying a medical bill in the past twelve months.
• Almost 5 in 10 (47%) of uninsured adults indicated they had trouble paying medical bills at some point during the past twelve months.
• Nearly 8 in 10 (77%) of insured adults have a typical and appropriate source of care compared to 5 in 10 (51%) of uninsured adults with a typical and appropriate care source.

“Being able to afford needed medical care and having access to appropriate usual sources of care are two important challenges that may prevent a person from receiving care,” said Susan Zepeda, President/CEO of the Foundation for a Healthy Kentucky. “KHIP data indicate lower income Kentucky adults have to forgo treatment more often than their higher income neighbors and are more likely to have problems paying for their care.”

KHIP was funded by the Foundation for a Healthy Kentucky and Interact for Health, based in Cincinnati. The poll was conducted October 8, 2014—November 6, 2014, by the Institute for Policy Research at the University of Cincinnati. A random sample of 1,597 adults from throughout Kentucky was interviewed by telephone, including landlines and cell phones. The poll has a margin of error of ±2.5%.

More health care related posts:

Economic Commentary, Economic Development, Education, Healthcare, Perspective, Political Commentary

Don’t just keep up — aim to be the best

When Kentucky’s legislators gather in January for the 2015 General Assembly, they will face issues that could have a major impact on the business community.

The Kentucky Chamber, the state’s largest business association, will watch closely, looking for ways to make state government more effective and accountable.

Improving education will continue to be the No. 1 priority of the chamber because education represents the future of Kentucky’s workforce. Supporting our schools and Kentucky’s core academic standards is critical to our success.

Resolving the state’s public pension problems is also a priority. Despite important reforms in recent years, the system is still struggling. Lawmakers must find the funds needed to keep promises made to state workers and retirees while balancing long-term sustainability. Our pension obligations have already downgraded the financial standing of our state, and how we address them will affect everything else state government does – like funding our schools, repairing our roads and other important priorities to help us be the best.

The chamber will again support a bill that will encourage partnerships between private companies and the government. This legislation – which we refer to as P3 for public-private partnerships – would create jobs while saving tax dollars and providing needed projects and services. The chamber’s legislative agenda is a comprehensive approach to creating a competitive business climate and investing in the future of the commonwealth. Other areas of focus include:

Kentucky Competitiveness

• The chamber supports the need for the General Assembly to address the long-term need for comprehensive tax reform that would include, among other items, a simplified tax code, a focus on prioritized government spending and support of growth-oriented policies that would improve the competitiveness of Kentucky’s business climate.
• The chamber supports an amendment to the Kentucky Constitution that would allow cities and counties the choice, with voter approval, to enact a local sales tax with a sunset provision, dedicated for the funding of transformational local projects.
• Right-to-work legislation that prohibits requiring any worker to join a union as a condition of employment is strongly supported by the chamber. The chamber believes union membership should be a matter of personal choice, and that enacting this legislation would put Kentucky on a level playing field with surrounding states when it comes to business recruitment


• The chamber will support the enactment of a charter school law to give all children access to the highest-quality education possible.
• The agenda also includes support for early childhood education and for protecting school funding.

Health and Wellness

• The Chamber will continue to support the creation of incentives for workplace-based wellness programs and enactment of a statewide smoke-free law.
• Improving the medical liability climate through medical review also is a priority item.


• Supporting the infrastructure of Kentucky’s signature coal industry has long been a priority for the chamber and that will continue in the 2015 session.
• The chamber will advocate for policies that strive for energy independence and encourage a sensible regulatory approach

Dave-Adkisson-President-CEO,-Kentucky-Chamber-of-Commerce-Frankfort-Kentucky must consistently double down on its efforts to be competitive and to out-think other states in terms of creating jobs. Each time our policymakers come to Frankfort for a legislative session, we need to be there with solid proposals – not just about how we can keep up with the competition but how Kentucky can be the best!

— Dave Adkisson is president and CEO of the Kentucky Chamber of Commerce

Economic Commentary, Passing Lane, Political Commentary, Uncategorized

Kentucky’s Underfunded Pension Plans

By underfunding pension plans during the last decade, the Kentucky General Assembly and Governor’s Office have jeopardized the state’s credit rating and its ability to pay the future benefits it is obligated to provide retirees. This is a complex and serious financial issue facing state government.

Facts about Kentucky’s pension plans

The Kentucky Retirement System manages retirement investments contributed by state employees and those paid from the General Fund as a benefit for qualified employees. Kentucky’s pensions have defined benefits. An employee receives a stipulated retirement benefit based on their age at retirement, average annual salary, years of service and other factors. The state’s consistent failure to make timely annual payments has not only obviously underfunded the pension fund but also does not provide funds to be appropriately invested over time to create investment income for the funds.

The actuarial data in the first chart (KERS Chart 1) reflects a 2014 estimate that KERS, the state’s largest pension fund, has an unfunded liability of 79 percent and has funding available to meet 21 percent of its future obligations to retirees. Based on 2012 data published by Policypedia, the state’s pension funds in Kentucky are listed in the second chart (KERS Chart 2).

KERS_chart_1-2A 2012 report by Ballotpedia indicated that Kentucky’s pension funds had a combined estimated total liability of $52.3 billion: a fund value of $26.0 billion, and an unfunded liability of $26.2 billion. Current data for FY15 are not yet available, but because of continued underfunding the total unfunded liability is likely greater.

The state’s FY15 General Fund revenue (money received from fees and taxpayers) is forecast at $10.2 billion, which provides a relative measure of how serious the pension funds’ $26.2 billion in unfunded liabilities are relative to annual General Fund revenue.

Moody’s Investor Services and Fitch Ratings have rated Kentucky’s pension debt in terms of unfunded liabilities as among the worst in the nation. Pension debts have been cited as a key factor in multiple downgradings of Kentucky’s bond rating. The Pew Charitable Trusts review of the KRS determined that flawed actuarial assumptions – used by the system in determining contributions – were significant factors in underfunding.

Questions surround fund practices

Concerns also have been raised about the investment practices of the KRS. Excessive fees paid to investment advisers and agents, below-average returns on investments, questionable hedge fund investments, and lack of transparency regarding investment fees are some of the issues noted by the Pew review.

In 2012, Kentucky’s pension plan was ranked 49th worst in the United States. The plans had 463,836 pension fund members, of which 215,687 were active. Kentucky Chamber of Commerce President Dave Adkisson was quoted by the Louisville Courier-Journal regarding a proposed audit of KRS: “… the chamber is seeking bipartisan support to avoid creating a ‘political football.’ We are not attacking the system. We simply want to put the system under a magnifying glass.”

The Lane Report supports the recommendations of the Kentucky Chamber and other organizations for the office of the auditor of public accounts to conduct a performance audit of the Kentucky Retirement System. When billions of Kentucky’s taxpayer dollars are at risk, now is an appropriate time for maximum transparency of the state’s pension funds.     — Dave Adkisson is the Kentucky Chamber of Commerce President

“Kentucky has had one of the most unfunded pension liabilities in the country, so I decided we needed to address that. There’s no overnight solution to an unfunded liability. It takes years to get into that situation, so it takes years to get out of it. But we brought in the Pew Foundation, organized a task force and asked their experts to work with us to come up with solutions. The task force worked for about a year and came up with a number of recommendations. During a session of the General Assembly, I got the House and Senate leadership together and worked through the issues, and we enacted new pension legislation in the way that the Pew Foundation recommended and also committed to fully funding the actuarially required contributions. The first opportunity we had to fully fund the budget was in this last session when we drew up the new biennial budget. I recommended fully funding it, and the legislature went along. We’re on our way to getting the pensions back on solid ground.”          — Kentucky Gov. Steve Beshear, June 2014, The Lane Report