Friday, July 24, 2015

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 5th 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.

Saturday, July 11, 2015

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.

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. Many people think everything is a gray area. I see most things as they are. 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

Thursday, July 02, 2015

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.