Putting the "Community" Into Community Banking

Community banking has almost achieved Kleenex or Xerox fame, being generalized to the point of meaninglessness. PNC ($557 billion in total assets) calls itself a "Main Street Bank."  Citadel Credit Union's website is CitadelBanking.com. 

One of my Navy division officers once told me, "Be careful pointing fingers, because the rest are pointing back at you." And the dilution of what it means to be a community bank has been diminished not just by interlopers pretending to be sheep in wolf's clothing, but also regulators, and unfortunately, community banks themselves. The so-called fingers pointing back at us. We have not done a good job explaining what a community bank is.

Here is what @Victaurs said about a community bank on his or her substack:

"A community bank in the U.S. is generally defined as a depository or lending institution that primarily serves businesses and individuals in a small geographic area. These banks emphasize personal relationships with their customers and often have specialized knowledge of their local community and customers. They tend to base credit decisions on local knowledge and nonstandard data obtained through long-term relationships, rather than relying solely on models-based underwriting used by larger banks."

There are attributes that community banks should yell loudly from the rooftops. Because "buy local" has the greatest impact if you deposit your hard-earned money locally. Because a community bank:

- Lends 70%-80% of every dollar you deposit within your community to businesses that need capital and people that need homes.

- Donates almost exclusively to local non-profits in the communities it serves such as food pantries, affordable housing initiatives, and local youth sports organizations.

- Leaders from community banks are typically leaders in your communities, on school boards, Rotary clubs, and libraries.

- Community banks assess a borrowers' ability and willingness to pay loans back based on more than financials laid out in spreadsheets, but also based on local knowledge of the borrower, business, and markets.

- A community bank thinks your business and personal banking needs are important. Think back to the pandemic when small businesses couldn't get their big bank on the phone. They called community banks. Why? Because those businesses weren't "small" to them. 

For some reason, we have not been able to break through the public's perception that a community bank is somehow less than a big bank. Less safe and secure. Fewer products. Low tech. None of which are usually true. So why do people perceive that it is true? Again, the other fingers are pointing back at us.

What To Do

My first recommendation to distinguish a community bank from others (big banks, fintechs, other financial intermediaries), is to improve our messaging as to content and frequency. In today's digital world, we don't need a Capital One ad budget to deliver our message to our target audience early and often. I'm in a swing state and I receive political messages daily via ads, content (paid and free), and old-school direct mail. When I traveled to California recently, I got none of this, telling me that you don't have to plaster ads across large geographies. Just the geographies where we operate. This can really elevate the importance of bank marketing from what James Robert Lay of the Digital Growth Institute said: "financial marketers have been viewed internally as ‘kids who play with paint and crayons." It matters where people and businesses bank. But only if people and businesses know why it matters.

My next recommendations come from past posts because I believe now as I did then, that community banks can elevate their importance to the communities they serve. They can matter more. They would be missed if they were not there.

Build a small business banking platform. I asked Google Gemini AI who were the top 5 market cap firms in the S&P 500 and what year did they start. The response:

The top 5 companies in market capitalization in the S&P 500 as of October 2024 are:

Apple: Founded in 1976   

Microsoft: Founded in 1975   

Alphabet (Google): Founded in 1998

Amazon: Founded in 1994   

Nvidia: Founded in 1993

All started as small businesses. In addition to extraordinary founders with awesome business ideas, all needed seed capital and loans. And now they employ hundreds of thousands of people. Community banks can increase their participation in what may be the next Amazon. I wrote two articles on how they can do this. The first, Build Your Own Small Business Loan Platform confesses to a seldom discussed blind spot in how community banks build communities: they only like lending with real estate as collateral. In that post I described a bank that had several alternatives on how a community bank can make capital available to small businesses, only a couple of which would actually be on the bank's balance sheet if those loans were outside of the bank's risk appetite. It could be started today and deployed in a matter of months, if a bank chooses to do it.

Small businesses don't need loans early in their existence. They need capital. That is why I wrote Shark Tank twelve years ago. I hatched this idea prior to writing about it and bounced it off of the CEO of a New York bank when he was Chairman of the ABA. His response: "Jeff, that isn't banking." But I have not given up on the idea because there are new Bill Gates and Jeff Bezos out there who don't need loans because they don't have the cash flow yet to service loans. But they need capital.  And those who can be significant employers in your communities may not be lucky enough to get the attention of p/e firms. But a local angel fund run by the community bank? Heck I bet you could get the big banks to be an investor in it.

Another idea is to build a Financial Wellness Center (FWC) as a profit center to serve the needs of the low-mod income families in your markets. I'm talking beyond CRA. I'm talking impact. Help people go from Low to Mod, Mod to Middle, and so on. And do so profitably. I suggested how to do this in my recent article Financial Wellness as a Profit Center. Sure there are others doing it for altruistic reasons. Without using profit as your goal posts, you will have an activity that begs for resources and is a drain to the bottom line. Instead, build one that supports itself and is a beacon of hope in your communities. 

My last idea on how to distinguish a community bank from all others is: Adopt a higher purpose. Community financial institutions, in my experience, donate 4%-8% of pre-tax profit to local charities in the communities they serve. They sprinkle their giving here and there and do social media posts talking about it. But what if they focused effort and resources for championing a cause. For example, Bombas Socks donates a pair of socks to a homeless shelter each time you buy a pair from them. As their business model grew, they began donating other clothing items most in need at shelters. What could your higher purpose be?  Perhaps you can marry the Financial Wellness Center idea to your higher purpose: Elevate the financial well-being of every community we are in. And then create measurables to see how you are doing. Wouldn't it be a great selling point to keep your top-performing employees and attract others? Would customers stay with you longer and not demand the best price? Would your community be better off with you in it?  

Make no mistake, I already believe that community banks are critical to the success of their communities and feeding the American Dream of entrepreneurship and home ownership. I offer my suggestions to take that strategic advantage to the next level. Make your institution indispensable and you will be unbreakable.

~ Jeff

   

  

Guest Post: Financial Markets and Economic Update- Third Quarter 2024

Financial Markets Update – Third Quarter 2024

I had a fantastic September traveling to France and Luxembourg with my sisters.  We joined my dear friend, Elisabeth, Thanks GIs Association, and other American families for the dedication ceremony of a new monument to the 11^th Infantry Regiment, who fought in the Dornot-Corny battle along the Moselle River in 1944 for their freedom.  My Uncle, Stephen W. Jaworski, was killed in action during these battles just south of Dornot.  We spent quality time with our French friends/family.  We joined Thanks GIs for lunch with the Mayor of Noveant, who surprised us with a posthumous Medal of Honor award to Stephen from the town.  It was another emotional day, and later we visited Stephen’s gravesite at the Luxembourg American Cemetery to honor him.  These were powerful, emotional events and I will always be proud to represent Stephen, our family hero.

Where is the Recession?

I’ll start this subject again this quarter by saying I believed we would get recession by now; my timing has been horribly early and wrong.  All the signals have been there for two years; the index of leading economic indicators has been down 27 of the last 28 months, consumers are using borrowing to get them through as inflation ravages household budgets, and an inverted yield curve, which is generally a precursor of recession, lasted about two years.  Interestingly, the 10-year to 2-year Treasury spread, which was -37 basis points at June 30^th, turned positive in September after 26 months and is now +23 basis points.  The 10-year to 3-month Treasury spread is still inverted, as short-term rates wait for more Fed action.  The spread was -101 basis points at June 30^th and is still widely negative at -81 points today.  Remember, it is the re-steepening of the yield curve after a prolonged period of inversion that heralds recession and Fed easing.

You wouldn’t know we have recession risk when stocks are rampaging; markets crashed for a day on August 5^th but recovered in mere days.  Year-to-date, the S&P 500 is up +21%, Nasdaq is up +23%, and the DJIA is up +12%.  But unemployment took a turn for the worse with July’s numbers, reported in August and some economists point to the Sahm Rule (recession occurs when the unemployment rate rises +.5% in a short period), with the unemployment rate at 4.2% in August being +.8% over the low in 2023 of 3.4% to say recession could be starting.  I’ve been suspicious of the fictional payroll numbers and equally unreal JOLTS report.  In August, the BLS announced that they would cut 818,000 jobs from the payroll reports of the past 12 months as part of their benchmark revision process.  It’s the largest since 2009!  The pool of available workers is high again at 12.75 million persons and the unemployed now total 7.1 million.  Full-time jobs are down -1,021,000 in the past 12 months while part-time jobs, likely without benefits, are up +1,055,000.  Payroll and household job growth has weakened considerably since July.

Gold is signaling concern as it trades at new highs, currently $2,658 per ounce.  Safe havens are not always bonds.  Anticipated slowdowns in the economies of the US, China, and Europe led to oil prices declining to $68.64 per barrel and gas prices declining to $3.22 per gallon, according to AAA.

GDP

The latest Federal Reserve projections from September for GDP are for +2% growth this year and next year, despite 2Q24 GDP being +3.0% and the Atlanta Fed GDP Now being +2.9% for 3Q24.  By the way, Chairman Powell called 2% GDP growth “solid.”  It’s sad that we have lowered our standards.  The Fed and many others believe (or maybe they hope) that we will have a soft landing.  This is a familiar refrain.  Before every recession since 1980, economists and market participants believed the economy would have a soft landing; in fact, the elusive soft landing was achieved only once since then- in 1996 by Maestro Greenspan.  More than likely, the US will experience a weak recession…if the Fed keeps lowering rates.

The world’s best banker, Chase’s Jamie Dimon, recently warned about a scenario that is worse than recession; he says not to discount the possibility of stagflation like the 1970s, with slow growth, rising inflation, and rising unemployment.  I would add that we should not discount the possibility of inflation falling far below Fed targets if they remain stubbornly tight.

The Fed

I was not surprised at the 50 basis point cut in the Fed Funds rate in September.  I’ve continually complained that the Fed Funds rate was too high.  I think it came down to the Fed regretting that they did not cut rates in July (as all hell broke loose with unemployment right after that), so they are playing catch-up.  But I ask, in what universe does a 5% Fed Funds rate make sense?  Short-term Treasury yields and SOFR rates are all in the 4s, one-year to 10-year Treasuries all have 3 handles, and very long-term Treasuries are in the low 4s.  But a 5 handle on Fed Funds?  Even bankers disagree, as the FF effective is 4.83%, toward the lower end of the 4.75% to 5.00% range.  So yes, we’re happy with the first 50 basis points two weeks ago, but there is a lot more work to do.  I think the Fed will “catch up” again and do 50 basis points in November.  That FOMC meeting occurs after Election Day, so they won’t get any political questions.  And 2025?  The Fed themselves project the rate cutting phase will continue through the year.

Inflation

Everybody hates inflation!  Thankfully, inflation continues to head down toward Fed targets, albeit slowly for some measures.  Fed targets are based on the BEA reported PCE and core PCE numbers, published monthly and quarterly.  The most recent monthly report for August had PCE at +2.2% y-o-y and core PCE at +2.7% y-o-y.  From the GDP report, 2Q24 PCE was +2.5% and core PCE was 2.8%, both y-o-y.

In terms of CPI, August was +2.5% y-o-y and core CPI was +3.2% y-o-y.  Remember that CPI historically is higher than PCE by +.5%, so 2.5% would be a good goal to have on CPI.  Core CPI is stubborn and declining more slowly than expected.  Before we celebrate too much, can you say “supply chain issues?”  We have the threat of dock workers going on strike October 1^st at ports along the east coast of the US and across the Gulf coast to Texas.  What would this disruption mean especially since there is so much need in states like Florida, North Carolina, and Tennessee after Hurricane Helene destroyed so many communities with massive rain and flooding.

Chairman Powell stated that wage growth is not contributing to inflation.  He also called the labor market “solid,” but we will forgive him for that one.  The figure was +3.8% y-o-y for August.  Remember that wages can increase in a 2% inflation target environment and, if productivity is decent (historically +1.5%), can grow +3.5% on average.  2Q24 productivity was +2.5% and 1Q24 was +.4%, making the y-t-d average +1,5%, precipitating Powell’s comments.  The wage growth percentage for August is getting closer to this goal.

The inflation narrative really is broken down into two parts:  the level of the inflation index and the marginal rate of change.  The level of CPI is up +19.7% since the end of 2020, including food +21.8%, shelter +22.7%, and energy +33.8%.  It is the level of CPI, with no decline in sight, that frustrates consumers the most.  Victory in getting the marginal change down to a low level does not reduce their grocery, housing, utility, and energy bills.  High prices have pushed consumers to turn to credit cards to take care of everyday needs; credit card balances outstanding have ballooned to $1.34 trillion with an average rate of 23%, and more telling, a delinquency rate of 9%.

Restrictive Fed

Was Fed Funds at 5.5% restrictive?  Yes!  Let’s have a look:

FF less CPI of 2.5%= 3.0%; FF less core CPI of 3.2%= 2.3%; FF less PCE of 2.5%= 3.0%; FF less core PCE of 2.8%= 2.70%; FF less nominal GDP 2Q23 of 5.5%= 0.0%; 1Q24 of 4.6%= 0.9%; FF less nominal GDP 4Q23 of 4.8%= 0.7%.

Not to be forgotten are two other key elements in this tightening cycle- QT and M2.  QT continues at a pace of $60 billion sales or runoff per month from the Fed’s balance sheet.  To date, the balance sheet is down $1.5 trillion from its peak.  It’s hidden tightening in that $1 trillion of QT is believed to be the equivalent of +100 basis points of tightening.

M2 continues its slight growth, according to the H.6 Money Stock report.  In August, M2 grew by +2.0% y-o-y compared to July +1.3% y-o-y.  Between December, 2022 and March, 2024, M2 declined on a y-o-y basis, which was the first time that has happened since 1931 to 1933.  Don’t go there; I think the Fed was trying to offset wild government spending but decided not to risk it anymore.  Milton Friedman suggested that M2 growth should equate to output, or nominal GDP.  That’s been 4% to 5%, so M2 is restrictive and far away from equilibrium.

Speaking of government spending, the deficits are out of control, at a projected -$1.9 trillion for fiscal 2024 compared to -$1.7 trillion in 2023.  Debt outstanding is $35.3 trillion, or 121.7% of GDP as of 2Q24; when the debt to GDP ratio exceeds 90% for over five years, the negative effect on GDP is about -33% of trend.  Interest expense on debt will now top $1 trillion per year, or $3 billion per day.  Ridiculous!  Given the habit of our government of printing tons of money to hand out like candy, I am afraid of what they’ll do when we have recession.  Maybe Jamie will be right.

What does it all mean?  Recession signals are around but not impacting us yet.  Stocks, bonds, and data can all turn on a dime.  Short-term rates should continue to decline, with the Fed having some catch-up to do.  Inflation is headed down, at least the marginal change part.  Long-term rates have some room to decline, which includes mortgage rates, which are about to drop below 6%- finally!  No one will move out of their home when they have a low-rate mortgage.  The average mortgage rate in the US is 3.78%, so don’t expect too much from housing.  Unemployment is the wild card.  If it keeps getting worse, the Fed will respond more aggressively.  Those affected in many states by Hurricane Helene will have a huge task in front of them to rebuild their homes, roads, bridges, and communities after last week’s flooding and devastation.  Give them the strength to do so.

I appreciate all of your support!  Thanks for reading!  DLJ 09/30/24

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 recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, 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.

Disclaimer:  This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes all comments.