Sarah Mattingly Joins Industry Leaders to Discuss the State of Banking
June 2, 2025 – InsightIn May 2025, Sarah Mattingly, a Louisville-based partner in the Firm's banking and financial services practice, participated in an executive roundtable alongside four top leaders from regional banks. Together, they discussed the evolving challenges and opportunities shaping the banking industry today.
You can watch the full interview on Louisville Business First here.
Below are selected highlights from Sarah’s contributions to the discussion.
Moderator: The early days of the Trump administration have brought turmoil to the stock market and uncertainty about where the economy is headed. What are the things that are keeping you busy right now, and what are the things that are keeping you up at night?
Sarah Mattingly: What we’re trying to do is really to reconnect with our clients and talk to them about the status of their workout officers and any re-education that’s needed or appropriate right now on the management of distressed loans. We’ve found that a lot of those workout officers that existed a decade ago worked themselves out of a job. There weren’t a lot of bad loans in the last decade, and so that institutional knowledge is gone or is substantially decreased. So, we’re reconnecting with our clients and working on re-educating them on how to deal with the stress loads on the legal side.
Moderator: Sarah, can you speak a little bit about loan quality? Are you seeing any increase in loan delinquencies?
Sarah Mattingly: We have been predicting a recession for a long time and trying to gear up. And we’re honestly not seeing the volume that we thought we would. There are things on the margins: We’ve been repossessing some cryptocurrency loans recently, which made their way to Kentucky. We’ve got some developments that went south, but that’s really more because of a management issue, not on the bank side, but the borrower itself. I think the industry we’ve been dealing with the most and seen the most increase in delinquency is health care. There’s been a massive uptick in health care delinquencies and distress. A little of that is due, I think, to reimbursement rates and the structural crisis undergoing the health care industry right now. But like the bankers here, we keep waiting for the shoe to drop and we just don’t see the volume like we anticipated we would right now.
Moderator: You mentioned at the top of the conversation some concerns around lack of institutional knowledge when dealing with delinquent loans. Talk a little bit more about what that means and what you’re seeing.
Sarah Mattingly: Historically what happened was when loans got delinquent in the last recession, you allowed the loan officer to be the point of contact for your borrower. But what a lot of people didn’t realize was that could be a risk. Your loan officer wants to keep the relationship, wants to make sure the borrower stays and continues in the future. But when you get a distressed loan and you get collateral that’s deteriorating or needs some more active engagement, having your loan officer involved really becomes a liability from a banking standpoint and not an asset anymore. So, you need to go back and retrain what we would call “workout officers” who come in, don’t have that existing relationship, won’t make any promises that the bank really won’t keep and helps get the loan into a position where — maybe you do keep the relationship but you’ve shored up the collateral and gotten repayment terms that the borrower can make in the short term, and a plan to help the borrower move forward or to help liquidate the collateral.
What we saw in the last round was that too many loan officers were involved and banks took those loan officers out of the picture too late, before they ended up with lender liability claims or really deteriorated collateral. We’re just encouraging our clients to learn some of the lessons from before to work us out of a job. We want you to get in there, get a hold of the issue as quickly as possible, get a plan in place and take us out of the picture and avoid protracted litigation. We’re trying to help re-educate the next generation about how to address those issues.
Moderator: How is the use of AI evolving at your banks?
Sarah Mattingly: We do see check fraud increasing. I think the good news about check fraud is the law is well established in terms of who bears the liability there. We are seeing an increase in overall fraud on accounts, both from a wire ACH and a check transaction standpoint. Honestly, we used to see that occurring at the larger institutions. And we think that the fraudsters made their way through the larger institutions, and the larger institutions learn how to put up roadblocks. So, they’re just kind of working their way down with old game plans.
We’re working with our clients mostly to understand where they’re exploring AI uses, what the options are and then the data governance. For us, internally, we’re still in exploration mode about where it works best for the firm. Where I see it a lot in my practice is in loan servicing. We have a data system; X gets put in and AA comes out. My job is to figure out where the system went wrong, where it didn’t work. A lot of where we advise our clients as they continue to explore AI is improvements and enhancements, because so long as your customers pay on the first and the exact amount they’re supposed to, nothing goes wrong with the system. It’s when they don’t do that, a percentage of the time things can go badly. More of our advice right now is enhancements in what the system can’t properly manage and how to figure out that issue and address it.
Moderator: What do you think the landscape of the banking industry is going to look like in the next year?
Sarah Mattingly: I’ve been trying to evaluate the impact I think the residential housing market is going to have on the economy and the commercial market. Between 60% and 65% of the residential market is insured by the federal government, and the VA just lifted the moratorium it had put in place for foreclosures following COVID. So we’re seeing a swath of foreclosures start making their way through the system in the residential market. One of the things we saw following COVID were loan modifications to 30-year residential loans, moving them out to 40 years. The federal government wants to keep people in their houses, but they don’t want their monthly payment to go up.
So if you don’t pay your loan during COVID and rates go up when you get a mod, how do you stop the monthly payment from going up? You just extend the term, and you may have extended the term 40 years for a loan that’s 15 years already through the 30-year process. I’m just trying to grasp the impact of the changes in how we view the consumer market, and how we treat consumer loans and the wealth that may be taking out of the market and the potential impact it will have on a commercial market later. Because last recession, we had all these balloon loans in the residential market, all these unexpected things. We know how to do modifications to the residential market now, but we’re doing some really weird stuff. And it’s making the mortgages look a little bit more like long-term leases in the residential space. I’d just be interested in how that ultimately affects the economy.
Sarah specializes in commercial litigation and banking and finance law, handling contested litigations, bankruptcies and real estate transactions, regularly advocating for clients in state and federal courts, focusing on creditors’ rights, bankruptcy, workouts, foreclosures and retail banking disputes. She graduated from Centre College, earned her J.D. from the University of Kentucky College of Law and is admitted to numerous United States Bankruptcy Courts.
