Banking CEO Round Table

William Hayes of Kish Bank, Jack Infield of Centre First Bank and Eric Renner of First Summit Bank look back on 2021 and forward to 2022

Hayes

Hayes

As part of this Banking/Financial Quarterly, we wanted to explore the implications of a fragile economy emerging from the pandemic and its impact on the banking industry in central Pennsylvania. We were fortunate to gather the thoughts of three of the banking CEOs in our area on some of the key financial issues of this year and the outlook for 2022. William Hayes of Kish Bank, Jack Infield of Centre First Bank and Eric Renner of First Summit Bank have graciously shared their thoughts on some key questions from Pennsylvania Business Central. Their insights provide a valuable look into the post-pandemic economy.

PBC: Cyber security issues have risen to the fore after several sensational hacks at national financial institutions. How are regional banks, and your institution in particular, addressing the increasing cyber threat and protecting your customers?

Renner: Cyber security is the number one concern from a risk standpoint in our company. That’s the enemy you can’t see, and they’re getting better and better every day. We continue to fortify our defenses and security posture to be sure we are impenetrable. The bank has worked tirelessly to improve our cyber security infrastructure and our internal procedures and practices. For example, we’ve implemented new firewalls, real time vulnerability scanning, and new systems to ensure our computers are always patched and up-to-date. I feel comfortable with the way we’ve been doing this, but you can never let your guard down. Once you feel you’ve gotten to a good point, you have to continue challenging yourself to improve.

Renner

Renner

Hayes: The most prominent attack vector for cyber criminals is to get bank employees to click on malicious links through phishing or email spoofing. This has become far more prevalent than brute force attacks,

which are traditionally protected by layers of detection and protection systems. In addition to these traditional systems, Kish has implemented a security awareness program that regularly tests employees with phishing and email spoofing attempts. We have increased our password security through new length and complexity requirements, and we are also rolling out multifactor authentication for all employee system access. In 2020, we migrated to a virtual desktop environment that builds a new desktop instance upon every login and eliminates any malicious software that may have been installed. In addition to blocking the entry points, we have enhanced our monitoring using a live information security dashboard that aggregates all of our threat detection data.

Infield

Infield

Infield: Banks have among the highest level of security of critical US industries and unlike most businesses are examined by government regulators for their compliance. Banks are committed to safeguarding customer information. We need a national cybersecurity environment that does not conflict with bank regulation or simply become an exercise. Banks and customers need to work together to protect accounts. Customers should be required to use strong passwords, keep them confidential, monitor their accounts regularly and alert their bank as soon as they suspect fraud. At Centre 1st we work hard to educate our team and customers relating to cyber security. We believe in maintaining several layers of security to help protect our customers, but it is the delivery of our concierge approach to more personalized service and understanding our client’s business that enhances our security environment.

PBC: Rising inflation is not only threatening the economy, but the credit market as well. Do you think the Federal Reserve will raise interest rates in the near term, and what will be the impact on regional banks?

Infied: It is inevitable that rates will increase at some point as history has shown. Our focus is and continues to be on our customers which creates an opportunity for community banks during economic fluctuations to be able to react quicker as we know our customers’ needs. Community banks have continued to meet their customers’ needs for a broad array of financial services, deposits and loans as well as through affiliate investments and insurance despite the pandemic. Conventional wisdom is that bank stocks do well

in a rising rate environment unlike many industries whose values decline when rates rise. No matter where the rates go, our bank is well positioned to support our local community with the best of class products, technology and service.

Renner: I feel that interest rates are a year away from increasing; we will exist next year in an ongoing flat rate environment. The inflation we are experience right now is somewhat transitory

and temporary because of supply chain issues, cargo ships, and the effects of production that came about through the pandemic shutdown. That should go away, and the current inflation should trickle back down. Wage inflation, on the other hand, is permanent. What happens with that permanent inflation will cause other costs to stay higher. Depending on where that settles, that will determine when the Federal Reserve will increase interest rates.

Hayes: The Chair of the Federal Reserve seems committed to the idea that inflation is transitory, which is consistent with the administration’s position as well. That is not shared by many economists. In fact, the Fed has already commenced a reduction in its accommodative monthly asset purchases, an important step if they are to keep inflation at bay. However, the potential for a permanent escalation in prices is reflected in fundamental changes in commodity prices (especially energy) and threatens the purchasing power of all Americans. It also is reflected in a gradual rise in long-term rates, which is good for depositors and savers but negative for mortgage lending and the impact on real estate values. Rising rates also represent a headwind for business borrowing generally, although the availability of credit should not be impacted, just its cost. The Fed controls short-term interest rates directly but not long-term rates. Bond and fixed income investors will demand to be paid for perceived future inflation risk in the form of higher long-term rates of return. That has important implications for the stock market and stock valuations as well. Sustained inflation and higher rates eventually lead to economic dislocation or recession, which is certainly a negative for the banking industry.

PBC: Two of the most pressing problems business – especially small business – is experiencing nationwide is a shortage of workers and the supply-chain breakdown. Have these issues had any impact on the banking industry as a whole, or your institution in particular?

Hayes: The shortage of individuals to work in all categories is impacting most of Kish Bank’s business customers. While there are many reasons for this sustained labor shortage, the reality is that many businesses have not been able to return to full operations due to a shortage of workers. This has had an impact on productivity as well as economic recovery. Also, wage competition has become a reality because if businesses are to return to partial or full capacity, they must attract critical workers. The shortage has impacted all businesses and all levels of employment from healthcare to hospitality/ food service to manufacturing. Banking, including Kish, has certainly not been immune from the high demand for qualified individuals, although we have continued to be successful in attracting candidates for key positions. Supply chain dislocations will not be quickly or easily resolved and will be a drag on economic growth for some time to come while simultaneously contributing to inflationary pressures.

Infield: Banks have remained a stable source of employment throughout the pandemic. With thousands of baby boomers retiring in the next decade, career opportunities exist in our ever-growing industry. I would encourage those considering a career for the first time, or a job change, to consider banking which provides competitive compensation and benefits as well as an opportunity to help the community thrive and prosper. Many banks are moving beyond the “teller service” to “universal bankers”. There are banking careers in technology, marketing and finance as well. Many banks have fast track training programs to onboard new talent and provide career paths for success. The recent pandemic created a golden opportunity to showcase the community bank model through the Paycheck

Protection Program (PPP). Our Bank serviced over 500 companies receiving over $300 million dollars of payroll and operational support. Of these, we were able to deliver core banking products and services to over 50% of our PPP customers.

Renner: One of the biggest issues that banks are currently dealing with is the wrestle with remote working arrangements. So many people migrated out of the office during the pandemic. After close to two years, their routine has been established with many functions and job duties being completed offsite. Banks are grappling with how to maintain culture in a company with a partially remote workforce. Remote working is a thing of the future; it is here to stay. Companies will have to figure out how to maintain elements of a strong culture despite people working remotely. It will put a burden on managers to figure out how to keep employees connected to the workplace. As for the shortage of workers, finding employees is still a challenge for many businesses. I don’t believe that will change in the near future.

PBC: The expansion of FinTechs and alternate forms of financial services has only increased during the pandemic. What has been the impact of this expansion on traditional qualified banking and how are you adjusting to it?

Renner: I don’t feel that banks can look at FinTech companies as straight competition. a The banks that succeed will find ways time to partner with FinTech companies for the betterment of their customers. FinTechs have incredible intellectual capital, and banks have thousands and thousands of customers. The industry and community benefits for the two to find ways to partner could be a huge endeavor for both.

growing Hayes: By integrating with fintech providers, Kish is embracing the expansion a of services fintechs are providing. In which2020, Kish completed our transition to and a new core banking technology provider that gives us access to APIs for building Many integration with fintech solutions. We will be the first bank on our core banking platform to create a direct API integration to provide full-service video banking through our ATMs. In 2020, we also leveraged an existing fintech partnership to fordeliver an online portal for the Paycheck a Protection Program, which allowed Kish Bank to provide more PPP loans than ANY other bank in each of Centre, Huntingdon, Mifflin, and Juniata counties. Kish Bank

has also partnered with Giv Local, a fintech startup that allows businesses to give back to their community through their credit card processing solution. Kish has also partnered with two fintech providers to offer online loans for consumer, mortgage, and small business in early 2022. We are also evaluating a partnership that will allow our clients to exchange crypto currency through our digital banking solution.

Infield: If the pandemic taught us anything, it taught us that technology is critical to bank’s sustainability. Community banks, which had to restrict access to their lobbies, were able to meet their customers’ needs through enhanced technology. Some of that was traditional means like drive throughs, but much of it was web and mobile-based technology. Banks were the original fintechs. Community banks have innovated throughout history and embrace change. We simply seek bank-like regulation for bank-like activities conducted by new market entrants. Businesses and customers should expect no less. However, even the best technology does not replace our personal touch to customer service which is the core principle of our bank.

PBC: The past few years have seen a wave of consolidation within the banking industry in our region through mergers and acquisitions. Is this a positive trend for the industry and the individual and business financial customer?

Infield: Consolidation in our industry provides opportunity for new market entrants, like Centre 1st, to build upon its foundation and deliver more personalized service for customers as they may experience unwelcomed

change due to merger and acquisition. As long as the financial and regulatory environment make it easier for new banks to enter the market then the wave of consolidation should not negatively impact small businesses and individuals seeking a true locally owned bank.

Renner: There are both positives and negatives to this trend. Consolidation probably doesn’t help communities from the way that a community bank can support the people of a community. When a larger bank comes in, the money is typically spread much more widely. The community’s non-profits will typically lose in that situation.

On the other hand, our country has gotten very small and transient. People are moving. The larger banks having a presence across the country reduces customer attrition. Ultimately, the continuation of community banking is so important to the small business market – from an access to capital to resources being available. The PPP program was tremendous, for example, and one of the reasons is because of community banks. We were able to get that money into the hands of people that needed it.

Hayes: Actually, merger activity was quite subdued during the pandemic. This was a function of depressed stock prices as well as the disruption created by COVID-19 itself. While there has been an uptick as we move slowly past the coronavirus threat and stock prices recover, bank earnings will face continued headwinds from low interest rates (if they are sustained), so merger activity may well increase in the face of earnings pressures. While consolidation of the banking industry has been an ongoing phenomenon that has improved efficiencies for many banks, it does have the practical effect of reducing competition and choices for consumers and businesses. Kish Bank remains committed to remaining independent as a means of sustaining Kish’s nimble, client-focused approach to community banking. We believe businesses and consumers all benefit from having a diverse banking industry.

PBC: What have been the major milestones for your institution this year? With an increasingly volatile economy, how is your institution positioning itself to meet the challenges and opportunities in the coming year?

Hayes: Major milestones for Kish Bank over the past year have been significant and meaningful. Our ability to be responsive to business and consumer needs throughout the COVID-19 pandemic produced unprecedented growth in both loans and deposits, mortgage originations, and revenues from our non-bank financial units. Total assets will end the year at approximately $1.25 billion, a new high for Kish Bank by more than 15%. At the end of the third quarter, year-over-year earnings growth was approximately 40%. The successful issuance and subsequent forgiveness of PPP loans has been prominent among our major achievements. The opening of the Kish Innovation Center in Mifflin County was a significant step forward in the expansion of our capacity to

deliver digital banking solutions. The successful integration of Sausman Insurance Agency in Juniata County, which Kish acquired in 2020, has now doubled the size of our property and casualty insurance practice. Our drive to expand the geographic area we serve has been reflected in our increased presence in Juniata and Blair Counties. Particularly noteworthy in our growth over the past year has been the meaningful contribution of our commercial real estate development lending group in northeastern Ohio. Over the past several years, the Kish team has displayed a remarkable capacity to adapt and respond to rapid and unexpected changes in the operating environment, so we are confident that we are well positioned for the challenges and opportunities that lie ahead.

Infield: We continue to grow at a very steady pace and have delivered some very successful products and services to the local community. Our successful implementation of the PPP program, our mortgage operation, and our focus on commercial lending and treasury services have resonated in the community. However, it is our attention to detail and the focus on the delivery of personal service that will enable our bank to meet the challenges of the coming year. We anticipate reaching a billion dollars in assets in the near future. We attribute this increase in growth to our employees, shareholders and customer base who value the benefits of a community bank.

Renner: Our bank is very well capitalized. Over the past two years, we’ve been leveraging technology to make the bank more efficient. We now provide a better digital experience for our customers, which is on par with our larger bank brethren. We’ve also noticed how resilient our customers are. Early in the pandemic, there was a concern from a credit quality standpoint, and that never materialized. It was a pandemic and not an economic crisis. Fundamentally, the economy was in good shape at the beginning, and it will recover quickly once we move out of this. Overall, we learned a lot about our customers and the type of service that they need. We’ve found that branches are still critical for clients. There were long lines in drive-throughs and long lists of requests to talk to bankers face-to-face during the pandemic. Some number of branches will continue to be important as we move into the future. We just need to transition the environment from transactional in nature to conversational and advice-driven.

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