Guest Post: Second Quarter Economic Commentary by Dorothy Jaworski

The Crisis Begins

If your country was in default on its debt, in economic distress, and almost out of cash, would you vote “no” to a potential deal to get out of immediate trouble?  Even if it meant spending less money- that you don’t have?  None of us would do that, but tell that to the Greeks.  60% of them voted “no” in a national referendum on July 5^th and thus rejected a deal with creditors and the likely chance to stay in the Euro.  Greece may have to go bankrupt, impacting the many financial institutions who own the sovereign debt of Greece and impacting the many consumers who will lose part of their deposits as banks fail.

And so, the crisis the world has feared for several years is here.  Investors will now worry about the ripple effect from other countries with debt levels that are unsustainable, including Spain, Portugal, Italy, and closer to home, Puerto Rico, and who have economies that are weak.  All of this Greek drama could hurt the Euro initially, but it could actually improve if Greece exited.  If selling in stocks and bonds begins in earnest over this crisis, we will have some of the first tests of liquidity in the markets since new regulations kicked in and restricted financial institutions from trading or making markets. 

After calls by the IMF and the World Bank for the Federal Reserve to postpone interest rate hikes, the calls seemed to be falling on deaf ears.  Fed officials keep telegraphing rate hikes later this year “if the economy improves.”  The Greek referendum and Puerto Rico’s threat of bankruptcy may do the trick.  The Fed keeps insisting that they will tighten this year enough though we have had negative growth of -.2% in 1Q15 and 2Q15 growth does not look all that great.  Inflation remains low.  The European drama may change their minds, along with a greater than expected, or publicized, slowdown in China and recession in Brazil and Russia.  Japan seems to have the only economy with decent GDP growth near 4%.

Unemployment Measures

The Fed keeps pointing at the low unemployment rate and saying that is their reason to raise rates.  Have you seen the unemployment rate in June?  It was reported at 5.3%, down from 5.5% in May.  Payroll jobs grew a modest +223,000, but household employment fell by -56,000, while the labor force was declining by -432,000.  So job growth is negative and the labor force declines, making the unemployment rate drop.  And that is supposed to be so good that rates have to rise?  Perhaps it is that the Fed “thinks” they have to tighten.  They “think” they have to return short term rates to “normal” in order to be able to lower rates when recession comes.  Yes, I actually read this recently!  It would be strange to see the Fed tighten when job growth is pathetic, wage growth is stubbornly low, and inflation is not threatening anyone. 

While the unemployment rate may appear to be “good” at 5.3%, so many other employment measures are weak.  The labor force declined in June and the labor force participation rate dropped to 62.6%, matching a low from 1977.  The pool of available workers is still high at 14.4 million, with the augmented unemployment rate high at 8.8%.  Greenspan would never tighten with the pool of labor so high!  There are plenty of job openings, over 5 million, but employers are having trouble matching workers with the requisite skills.  Part-time jobs are still the only alternative for many workers who actually want full-time work, showing how prevalent underemployment really is.  Meanwhile, workers continue to exit the workforce, including the retiring baby boomers, who are taking with them knowledge, skill, and expertise without providing that knowledge to others.  So my question to the Fed is- do you “think” you should tighten now or wait until we actually have sustainable growth? 

The so-called economic recovery is now six years old, as of June.  The longest uninterrupted recovery lasted 10.7 years under the Maestro, Fed Chairman Alan Greenspan, in the 1990s.  Growth over the past six years has averaged about 2.0%, compared to +4.5% for the past ten recoveries.  The data still point to a mix of strength and weakness, with housing showing the most strength and inflation and manufacturing data releases showing the most weakness.  Growth is high enough to just move along, but not much more.  Am I proud of the +200,000 to +250,000 payroll growth each month?  No.  Am I proud of the 5.3% unemployment rate?  No.  Do I “think” the Fed should tighten?  No.  Why do I keep questioning the Fed?  Because I see an economy barely able to generate growth and that same economy fragile enough for growth to slip away, before it ever gets to a sustainable level.  Like I have said before, go ahead and tighten.  Then you will be able to lower rates again- soon.

Large Hadron Collider Update

Our favorite machine is back in business- bigger and faster than ever!  On Easter Sunday, the Large Hadron Collider of Switzerland started up again after a two year period in 2013 and 2014 for maintenance and upgrades to add twice as much speed to the machine.  In June, the Collider began smashing protons together at 13 trillion electron volts, or “TeV,” in an effort to find new particles.  In 2012, researchers found evidence of the Higgs Boson particle, which is the particle believed to give everything mass.  What will they find this time?

First Federal Update

After our merger is approved by regulatory agencies, we will become part of Penn Community Bank.  We have great team members and everyone will be working to combine our banks and systems so that we can better serve our customers.  Stay tuned!

Thanks for reading!  07/06/15


Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

The "About Me" That LinkedIn Doesn't Tell You

How difficult is it to get to know someone that, well, you don't know? Very. Many of my readers know me. I'm not sure this is a good thing. Colleagues used to tell me that when meeting someone I should use "Jeff Lite". Just so you know... I'm not sure there is a Jeff Lite.

Most of my readers, however, don't know me. And the benefits of having a blog is that I can write what I want. I have written About Me posts in the past (see links), telling you my sports teams and some other personal information. So this post would be a complement to those.

Random Stuff About Me, June 2012

More Random Stuff About Me, May 2013

Not in My LinkedIn Bio

I think people that care too much what other people think are crazy. I think people that care nothing about what other people think are crazy too. We are all mostly in between the two crazies. I lean towards the latter. My wife thinks I lean a little too much. This leads to spirited discussions on what I choose to wear. I dress for comfort. And economy. If it were up to me, my blue jeans would come from the Dollar Store. What are they eight bucks? C'mon.

Modern day trappings are too expensive! If we had to, my family could cut our living expenses by a third. Over $200 a month for cable? Ridiculous. Two thousand dollars for a couch? You haven't been to Big Lots. Three hundred dollars for a pair of shoes? My most comfortable shoes are Tom McCann's I bought at Kmart years ago in a traveling pinch. I am convinced if I were living alone my flatware, furniture, clothes, etc. would all be bought at discount stores. I would have Tupperware-like containers that were once the olive or lunch-meat containers, and all my drink containers would be used milk jugs. I would live in an RV, like Trapper John MD. But electronics and other gizmos, that's another story.

I don't understand why a three person family would have a 4,000 square foot house. I also don't get status cars. If someone came up to you and said: "Buy this thing, it costs you 100% more than the other thing and will cost much more to operate, but people will think better of you." I don't think any of us would do it. But somehow we do. Marketing. It's all about Marketing!

I believe in personal responsibility. I was on jury duty a couple of months ago and didn't get selected. If I was on a jury and someone said "I did it, but here is why"... It probably wouldn't matter to me, with limited exceptions. They did it. A Navy lieutenant once said be careful pointing fingers, because the rest are pointing back at you. If you did something, don't say it was because of him, her, or that person over there. You did it! Own up to it. In my view, society would be a better place if I can convince everyone to think the same.

Victimhood and personal offense. There are many current events swirling around us that offend people. Most aren't even impacted by the event! I know there are bad breaks in life. But they supposed to contribute to the person we are trying to become. And if you are suffering bad break after bad break, perhaps it is because of your choices. Or you're Job from the Bible. That guy couldn't catch a break. But for others not named Job, see my personal responsibility diatribe above. We are quick to align with the victim industry. After all, protectors of "victims" are here to help, right? How is that working out? Most of those protectors have bigger than 4,000 square foot houses.

I see things in black and white. If you are a victim, this was not a racist statement. I once ordered a black-and-white milkshake and my friend worried that people would think I was a racist. That is where we are in society. A racist milkshake. But I digress. Many people think everything is a gray area. I see most things as black and white. Don't know if that's good or bad, but it's me.

American capitalism should evolve so we all strive to maximize our God-given talents, earn the fruits of our successes, and give what we don't need to the charity of our choosing, that is NOT the federal government. The challenge is to determine what we need since pensions have gone the way of the dodo bird and with 401k's we need to estimate when we'll die. I currently estimate 92. So if you see me on the street at 93, run me over because I will be broke. I will carry a note in my pocket forgiving you. As penance, though, could you run a GoFundMe campaign for my funeral? As I said, I will be broke.

I think intelligence is being aware of how much you don't know. And the ability to predict consequences further into the future. Maybe that's because I don't know so much. Like specific lines from Goodfellas.

Which reminds me, I can't channel surf past certain movies, like Shawshank Redemption and Field of Dreams. I am compelled to stop and watch. At least until the wife walks by and says something like, "oh my God this again?!". Oddly, I can surf past other fantastic movies, like The Godfather and Hot Tub Time Machine.

As in my Scranton days, I still drink beer. But my tastes have definitely evolved. Sorry Genny 12-Horse.

I would go to jail for my daughters. That is for the benefit of anyone that might contemplate harming them. I write this because I'm a bank consultant, and probably couldn't sell the polishing the rifle in the back yard bit. Because I don't own a rifle. But there are many ways to skin a cat :) 

My now-wife was my high school prom date. She saw the potential. She's wondering when I'm going to realize the potential. But hey, I'm working on it.

There you have it. Hopefully you have a better idea of the person behind the words. Why don't you tell me something about you that is surprising?

I hope you are enjoying your summer! Thank you for reading!

~ Jeff

Bankers: Build Your Own Small Business Loan Platform

Banks that grow revenues do it in spread or fees. To grow spread, increase your net interest margin, or grow earning assets while maintaining net interest margin. To grow fees, either increase your fee schedule or the activities that generate fees, or grow fee-based lines of business. 

Since 2007, banks have been challenged to grow revenues. And if the bank strategic planning sessions I attend are an indicator, bankers think small business account acquisition and growth will be a significant driver of revenues.

This presents a challenge. Many if not most small businesses are not “bankable”, in the lending sense of the word. I once offered this hypothetical situation to a senior lender: An owner of a three year old engineering firm wanted to expand. The expansion would take him into the red for the next two years and his seed capital, taken from his personal savings and a home equity loan was not enough to fund the expansion. He leased his office space. Would the senior lender make the loan? His response: “I’m glad you’re not one of my lenders.”

Would his reaction be different at your bank? Check out your current and recent past loan pipeline. How many non real-estate backed business loans did you make? Yet this hypothetical business is more typical of the businesses that will lead our economy forward. So to grow revenue, perhaps your bank should be a little more creative in getting capital to businesses of the future.

No risk appetite to do early stage business lending? There are alternatives to help that business get much needed capital to grow without plunking a risky loan on your balance sheet. Perhaps develop a small business lending marketplace with several options. One option could be balance sheet lending in the form of home equity loans or other similar avenues that fit your bank’s risk appetite. Think: Your Bank’s Small Business Capitalizer package.

If outside of your risk appetite, how about SBA lending? Ridgestone Bank, a $395 million in assets Wisconsin bank was ranked seventh in SBA 7(a) lending last year, generating between $20 – 25 million in gain on sale of loans per year. 

SBA loans not an option for our hypothetical engineering firm? How about a partnership with a peer to peer lending platform such as Prosper that can be co-branded with your financial institution? Prosper will pay an affiliate fee for each loan offered. OnDeck Capital, which specializes in business cash flow lending, will also affiliate with financial institutions, providing another avenue to fund our hypothetical engineering firm.

It’s not necessarily the affiliate fees that will move our revenue needle, but providing budding businesses within our communities the needed capital to succeed will build loyalty, deposit balances, and eventually “bankable” loans should these businesses succeed. Instead, we send them elsewhere, giving a potential competitor the opportunity to win these businesses’ relationships.

Imagine the “Your Bank” small business loan platform, with multiple opportunities for the local business person to help fund their growth. You start with the least expensive, such as “bankable” real-estate secured loans from your bank, and work through the other options such as SBA, OnDeck, Prosper, and even equity platforms such as Kickstarter. That would be a bank dedicated to small business capital formation, and growth, within their communities.

And a growing community usually leads to revenue growth at your bank.

Or you could stick to business as usual, and hope small businesses come your way. Your choice.

~ Jeff


Note: This article was previously published in the April 2015 issue of ABA Bank Marketing and Sales magazine in the Growing Revenue series.

Bankers Need to Encourage, Even Compel Employees to Use Tech Tools

Chris Cox, the head of Regions Bank eBusiness unit, was quoted in Bank Technology News on how personal financial management (PFM) tools will soon be part of a customer's everyday interaction with their bank once they login. I believe him.

But will they do it through your financial institution? In a separate article, Jim Marous of The Financial Brand, opined that Mint, a PFM tool that "screen scrapes" financial information from various financial institutions and aggregates it into their tool, is a serious threat to banks, thrifts and credit unions. I believe him, too.

PFM tools have been dogged by low adoption rates. Woe to the retail banker or IT manager in convincing the CEO that PFM is a must-have . If it was so critical, why are so few people using it? I doubt this will surprise you, but I have my opinions.

First, the likely adopters of bank technology tools are probably younger customers. I'm 49 years old and I have not demanded that my bank have a PFM tool because I don't think I would invest the time to learn and use it. In fact, I don't know if my bank has a PFM tool. My daughter is more likely to want and use such a tool. And guess what? She doesn't have any money... yet. 

Bank profits are driven from balances, and expenses are driven by number of accounts and gizmos attached to those accounts. So effectively implementing a technology gizmo that is targeted to younger customers that currently generate little revenues does not make for a solid business case.

Secondly, I believe that PFM and other customer-facing technology tools have low adoption rates by your employees. Don't believe me? Why don't you poll them. Let me know how it turns out.

People sell what they know. When I was a branch banker, I sold the heck out of home equity loans and retail checking accounts. Why? I knew them much better than business checking or a commercial line of credit. So my branch had a lot of retail deposits and loans. It was what I knew and was most comfortable.

I read an industry article, and I apologize that I can't recall where I read it or I would link to it (although I suspect it was a Jim Marous piece again), that a bank required their employees to open accounts using the same online account opening tool that customers would use if they did it themselves in their pajamas. The employees didn't have to wear pajamas, but you get my point.

It forced the employees to know the tool that was available to customers. And why wouldn't you do it this way? You invest the money in developing or purchasing an intuitive online account opening tool and then saddle your employees with opening accounts using a clunky core processor user interface (UI) or tool? Why do we need both? 

And if choosing, you should choose the one available to customers so your employees are subject matter experts on it. Imagine a customer calling the nearby branch for help using an online tool and the branch employee guides them through it, instead of transferring them to your call center or eBanking unit.  

Don't stop at account opening. Transfer the logic to other customer tools, such as PFM. First, get your employees on it and using it via their own personal accounts. Only by repetition will they achieve the subject matter expertise to enroll their clients into it, train them on how to use it, and answer "how-to" questions about it. 

And don't stop at retail banking tools. Many if not most community banks are focused on the business segment, and there are plenty of available tools to help harried business owners make their financial lives simpler. Since employees are typically not business owners, this will take a little more diligence in giving them the needed training and repetition to be fluent in the available tools. Perhaps you can set up a "test account" at a "test bank" and require employees to use the tool a certain number of times prior to crowning them "cash flow management" qualified.

Mint, Yodlee, Moven, and other technology platforms are working hard to win the loyalty of your customers via their "cool" platforms. Many, such as Geezeo, focus on helping community financial institutions offer cool tech solutions and yet retain customer loyalty through the FIs own brand. To win the loyalty of those that demand such technologies now, and when they have the wealth to drive profits, financial institutions must develop front line staff to be fluent in what is available. Only then will they enthusiastically demonstrate the technology (go into an Apple store and have a "genius" demonstrate the Apple Watch and you'll know what I mean), describe features and benefits and their own experience with the tool, get customer adoption rates higher, and build greater loyalty to your brand.

Or you could let Mint do it.

~ Jeff

Five Ideas to Build an Accountability Culture at Your Bank

I recently spoke at the ABA CFO Exchange in Nashville on building an accountability culture. Talking banker accountability to a room full of CFOs is like a politician telling senior citizens that Social Security benefits should remain untouched. It was a friendly audience.

I tried to be provocative. For example, it has been my experience that when discussing accountability, CFOs sometimes fall into the trap of talking about other departments. What about the Finance Department? How does it stack up to benchmarks, and are they realizing economies of scale, using less resources as the bank grows? They didn't flog me.

So how do you go about building a strong accountability culture at your bank? Accountability suffers a bad wrap. Most think of out-of-reach goals, difficult meetings with the boss, and recriminations for under-achievement. Does this sound like an enviable corporate culture?

Part of my coaching school curriculum for being a US Lacrosse certified coach was the Positive Coaching Alliance (PCA). This portion of the certification was not lacrosse specific. Rather, it taught how to be a coach. And by the title of the course, it was not the coach that I knew. It has adherents like Joe Ehrmann and Phil Jackson. 

The PCA discussion on "filling the emotional tank" for players has direct applicability to creating a positive culture that leads to better adjusted and happier employees, and results. If this culture interests you, I have five ideas on how you can build an accountability culture without cracking the whip and taking names.

1. Make accountabilities measurable and transparent. When I was a branch manager in the mid 90's, our sales incentive system was called RAISE (Realizing Achievement in Sales Excellence). I could calculate my quarterly bonus to the penny. I ran a spreadsheet before spreadsheets were cool. Me and another branch manager used to bet a beer each quarter on the size of our bonus. It worked. The best performers got the highest bonus.

2. Link to your strategy. Precious few banks state as their strategy to do large commercial real estate loans at very tight pricing to get deals done. Yet they continue to measure lender success by dollar production and portfolio size, incenting them to do just that. Instead, look to your strategy when building incentive systems.

3. Have a little friendly competition. As previously mentioned, my branch manager friend and me created our own internal competition that ended in a beer at the end of every quarter. It was fun, and motivated us to excel. I didn't want to show up for that meeting getting my butt kicked by my friend. Who would? Why not create ranking reports that include multiple measures, such as lender ROE, branch profitability (both ratio and dollars), or best trends in support center productivity.

4. Include support centers. Everyone thinks if only those branches would shape up, all would be well. So we prune the branch network, and branch staffing, etc. But how about all of those people in Compliance or Audit? How are they performing? It is understandably more difficult to do because we are not measuring their P&L, but we can use trends and benchmarks to highlight highly productive support centers and reward them appropriately.

5. Have an awards ceremony. When in Nashville, my wife and I bumped into a bunch of country music celebrities because it was the week of the CMA Awards. Entertainers tend to award themselves a lot. So why can't bankers? Imagine having a ceremony that celebrates your "Most Improved Branch", or "Top ROE Lender", or "Most Productive Support Unit". Imagine your own awards ceremony that creates the positive environment that promotes friendly internal competition and peer recognition for a job well done.

How do you create a positive accountability culture?

~ Jeff

Bank Board Compensation: An Amateur's View

Lately I have been asked to opine on bank Board compensation. Although not a compensation expert by any means, I suspect I am being asked for an outside-the-box opinion. This reminds me of one of my colleagues favorite quotes; "those that live outside the box have never been in it." But with most areas that are outside of my technical expertise but within my industry expertise, I tend to revert to common sense.

What are we trying to accomplish with Board compensation?

The FDIC Pocket Guide for Directors identifies the Board's responsibilities as:

- Select and retain competent management.

- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner.

- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies.

- Oversee the institution's business performance.

- Ensure the institution helps to meet its community's credit needs.

How do we establish a compensation plan that is consistent with the above?

I have opined in the past that financial institutions' fixed to variable expense equation tilts too much towards fixed. So why exasperate the situation by creating more fixed expense with Board compensation? 

But there are certain moral hazards to incentive compensation at the Board level. Basing it on short term financial performance encourages greater risk taking. And the Board is responsible for the safety and soundness of the institution. To overcome this moral hazard, I suggest two things: 1) make the incentive compensation based on three-year average performance, and 2) include safety and soundness metrics to the equation.

This is similar to an unnamed bank that was suggested to me by an industry compensation consultant. I looked it up in their proxy, and their plan, which was for both executive management and the Board, looked similar to the below table.

The unnamed bank did not name the performance metrics, calling them "Category 1", "Category 2", etc. because the actual metrics need not be disclosed. Shareholders that deem themselves compensation experts are a dime a dozen so why give them ammunition! 

So I decided to insert what I thought would be performance metrics consistent with Board responsibilities. 

The metrics are relative to a pre-selected peer group, which is very common in executive compensation. But rather than limiting performance metrics to short-term, the unnamed bank used three-year averages. Meaning that there would be no payout for the first three years. All calculations thereafter would be based on three-year averages.

This did two things: 1) encouraged longer-term thinking so strategic investments can be made so long as it improved longer term performance, and 2) discouraged short-term risk taking that might result in future losses. It is not perfect, but what plan is?

The above table goes beyond the traditional performance metrics, and includes risk ratios such as leverage ratio growth, non-performing assets to total assets, net charge-offs to loans, and the one-year repricing GAP to assets. These are all risk metrics. But they should also be consistent with the Bank's strategic plan. If the plan calls for better than market growth, perhaps the leverage ratio will decline in relation to peers, etc. In such a case, perhaps exceeding long-term projected leverage ratios would be the metric.

The final addition, which was not in the unnamed bank's comp plan, was achievement of strategic objectives. I have expressed my concern over banks short-term, budget-centric focus on business results that discourage long-term strategic thinking that builds sustainable institutions. Why would I encourage it in a Director Comp Plan? 

So achieving strategic objectives is a litmus test to making the incentive comp available for payment. Note that not all strategic objectives need to be achieved because incenting for 100% success encourages sand-bagging, which is another industry obstacle to long-term excellence.

If adopted, Director's that received $30,000 in annual compensation could be eligible for incentives that increase total compensation by one third. Not an immaterial sum. Such comp could be paid in cash or stock, and expensed as incurred.

I recently mentioned to an industry colleague and bank Board member that you don't want to create unfunded liabilities for Board compensation that will ultimately get deducted from a buyer's offer to your shareholders, should one come your way. The savvy shareholders will catch on, and could make your life a little uncomfortable. 

What are your thoughts on incentive comp for Board members?

~ Jeff

Bank Board Reports: War and Peace or Cliff Notes?

Today, Board reports closely resemble War and Peace. Why? The same reason regulators focus on the little things... to CYA! We don't want to be criticized that our Board was uninformed, so that little embarrassment about the audit exception that turned into employee fraud is on page 262 of your Board report. 

You mean you didn't see it? That's on you, fella.

Are we trying to fool ourselves into believing that all of our Board members are reading the 300+ pages we send to them two days prior to the Board meeting every month? Sure, there will be some that do. But my suspicion is there are more that do not. How could they? It's 300 pages! In two days! And most Board members have full time jobs!

According to the FDIC pocket guide for directors, a financial institution's Board should:

- Select and retain competent management

- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner

- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies

- Oversee the institutions' business performance

- Ensure that the institution helps to meet its community's credit needs

How many pages per month do we need to fulfill Board responsibilities? What is not in the above list are the following things that I often see Boards debating:

- Selecting contractors for the buildout of the new branch

- Determining raises for employees that are not Senior Management

- Credit underwriting

- Small ticket charitable donations

- Loan administration's $100 budget variance

All of these distractions take valuable time away from Boards doing what they should be doing, described above. Here is what I suggest for Board reporting:

1. Financial reports for the current period, and trends. 

2. Budget variance reports

3. Financial progress towards strategic plan

4. Financial condition and performance versus peer

5. High level risk management reports (because more granular risk reports are reviewed in Committee) and trends.

6. Compliance and audit reports, not included in 5 above

7. Other business such as approving policy changes, large/exception credits requiring Board approval as per policy.

Aside from including a whole policy (changes are blacklined so Board member doesn't have to search for them), or a credit package, I can't see why a Board package has to be more than 100 pages.

Executive recruiter Alan Kaplan recently wrote an article for Bank Director magazine titled What Makes Great Boards Great. His number one characteristic was quality dialog, debate, and discussion. With Board packages that are 300+ pages and agenda's crammed with unfocused topics not directly related to Board responsibilities, how can there be quality dialog, debate, and discussion?

Especially since most directors don't have the time to read 300 pages for their upcoming Board meeting. So they sit in silence when they should be focusing on debate emanating from what is on page 262.

Do you think Board packages focus on the right things?

~ Jeff

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