By: Mike Lehr, HR Consultant

Clients of Young & Associates, Inc. have been receiving demand letters from plaintiffs’ law firms, alleging that their websites aren’t accessible to individuals with disabilities. In effect, these letters claim that they are violating
Title III of the Americans with Disabilities Act (ADA). More press and training have surfaced on this issue too.
If your bank has received such a letter, don’t ignore it. Attorneys we know have had to defend their clients in court over these letters. If your bank has not received one, it’s best to begin working with your legal counsel and reviewing
your website before you do. Proactivity can help here. In our audits to date, the main problem has been clients relying too heavily on assurances from their website vendors and on results from compliance software. Auditing software is a tool, not a judge. As a result, individuals with disabilities might be able to access the website, but they have unreasonable difficulty doing so. The website still isn’t in the clear.

That’s why Young & Associates audits employ four tests:

1.  Compliance software tests
2. Manual audit of home pages, main navigation pages, and high problematic pages
3. Screen reader test by Young & Associates consultant
4. Screen reader test by a sight-impaired person observed by Young & Associates consultant

Young & Associates audits use the Web Content Accessibility Guidelines (WCAG) 2.0 and the Section 508 Standards for federal agencies as their baselines. To meet our clients’ many different needs, we have three different audits to select from:

1. ADA Developmental Website Audit: The purpose of this audit is to assist the bank in the development of a new website or to provide a cost-effective first look at a current website that has never been audited or tested in any manner. It employs the compliance software test, the manual audit, and a modified screen reading test.
2. ADA Compliance Website Audit: The purpose of this audit is to perform a formal compliance audit of the website. It employs the full complement of tests.
3. ADA Follow-Up Website Audit: The purpose of this audit is to review the changes made to the website in response to the findings of other audits. It usually employs just the compliance software test or a modified application of the full complement of tests.

For more information on ADA Website Accessibility Compliance or how Young & Associates, Inc. can assist your bank in this area, download our “Better Understanding ADA Website Compliance & Young Associates Audit,” or contact Mike Lehr, Human Resources Consultant at 1.330.777.0094 or mlehr@younginc.com.

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update – The Trump Effect
The election of President Donald Trump was followed by a strong upward movement in the market. Hopes related to lower taxes, less regulation, and economic stimulus led the market to new highs. Since the election, the Dow Jones Industrial Average moved up 14.22% through April 30th. Banks moved upward even more, increasing 21.29% (as measured by the Nasdaq Bank Index). Much has been made of the first 100 days of the new administration, with many Executive Orders being issued but no real legislative actions accomplished. The March failure to pass legislation to repeal the Affordable Care Act was a stark reminder that enacting legislation is a difficult process. However, the market appears to remain optimistic that President Trump’s initiatives will be delivered.

Economic Developments of Note ƒƒ

•  April marks the 94th month for the current economic expansion, the third longest in U.S. history (1960’s and 1990’s were the two longest).
• The U.S. economy grew at its weakest pace in three years in the first quarter as consumer spending barely increased and businesses invested less on inventories. Gross domestic product increased at a 0.7% annual rate, the weakest performance since the first quarter of 2014. The economy grew at a 2.1% pace in the fourth quarter of 2016.
• The latest annual inflation rate for the United States is 2.1%, exceeding the Fed’s target of 2% for the first time in nearly five years. The increase in inflation may provide support for the Fed to continue its plans to move interest rates up in 2017.
• In March, it was reported that employers slowed their pace of hiring. However, unemployment was reported at 4.5%. The March unemployment rate was the lowest in almost a decade. It was also reported that private-sector workers saw average earnings rise 2.7% in March compared to the previous year. This is a sign that we are nearing “full employment” and competition is heating up to attract and retain employees.
• Activity in the manufacturing sector remained solid in April marking the eighth consecutive month of industrial expansion. One concern for the future, however, is the auto industry. After seven straight years of sales gains, including two consecutive record performances, auto demand has cooled in 2017 despite soaring discounts. Overall, auto makers sold 1.43 million vehicles in the U.S. in April, down 4.7% from a year earlier. A record 17.55 million vehicles were sold in 2016.
• Exports were reported to be higher by 7.2% this year. This is a positive sign to future economic growth.
• Home prices have continued their impressive climb upward. The S&P/Case-Shiller Home Price Index, covering the entire nation, rose 7% in the 12 months ending in February. We anticipate that these gains will continue, perhaps at a slower rate, due to high demand, low inventories, as well as the overall positive financial condition of home buyers.

We expect that the economy will remain on a positive trend this year. We project GNP to be at 2% for the year as a whole. Job growth should remain positive this year. We expect home building and home sales to be positive. We think that the Fed will increase rates, but anticipate them to be cautious in how quickly they raise rates and reduce their holdings of securities.

Interesting Tid Bits ƒƒ

• It has been reported that several large auto lenders have decreased their emphasis on auto lending due to concerns about credit quality issues and auto resale values. A portion of this concern is related to the length of new car loans being made. Loans with original terms of between 73 and 84 months accounted for 18.2% of the market. It was further reported that 31% of consumers who traded in a car in 2016 did so in a negative equity position.
• China’s banking system was reported as the largest by assets, reaching $33 trillion at the end of 2016. This compares to $16 trillion for the U.S. banking market.
• U.S. household net worth was reported at a record $92.8 trillion at year-end 2016. U.S. households lost approximately $13 trillion during the 2007-2009 recession. The eight-year rally since has added $38 trillion in net worth principally from rising stock prices and climbing real estate values.
• The Farm Credit System (a government sponsored enterprise) has over $314 billion in assets which would place it as one of the country’s ten largest banks.
• A bankruptcy judge recently issued a $45 million fine against Bank of America. The action was in connection with a $590,000 residential mortgage loan and servicing issues related to its delinquency.
• We have been led to believe that small businesses employ the majority of Americans. This is no longer the case. Large companies (10,000 employees or more) employ over 25% of the workforce. Employers with more than 2,500 workers employ 65% of total employees.
• Nonbank lenders (i.e., Quicken Loans) were responsible for 51.4% of the consumer mortgage loans originated in the third quarter of 2016. This is up from 9% in 2009.
• People in the United States ages 65 to 74 hold more than five times the debt Americans held two decades ago.

Short-term interest rates ended April 30 up 29 b.p. from year-end with the 3-Month T-Bill at 0.80%. The 10-Year T-Note ended April at 2.29%. This is lower than December 31, 2016, when they were at 2.45%. This reflects a flattening of the yield curve.

The general stock market continued to climb to record levels in the first four months of 2017. The Dow Jones Industrial Index ended April up 5.96% for the year. Banks, after their spectacular rise after the election, retreated somewhat in the first four months of 2017. The broad Nasdaq Bank Index fell 4.05%. Larger banks were more fortunate (as measured by the KBW Bank Index) falling only 0.60%. Banks appear to have been more impacted by the uncertainty surrounding proposed tax cuts and less regulation than other companies.

Merger and Acquisition Activity
For the first four months of 2017, there were 77 bank and thrift announced merger transactions. This compares to 83 deals in the same period of 2016. The median price to tangible book for transactions involving bank sellers was 159% compared to the 133% median value for all of 2016.

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update
The current expansion began in June 2009 and has now continued for 88 months, making it the fourth longest period of growth since the data has been recorded. The third quarter growth in the U.S. economy was 2.9%. A tight job market, increasing wages, and low oil prices are aiding the economic growth. Additionally, stronger export growth added to the GNP. Corporate profits are expected to grow and businesses are showing interest in business expansion after sitting on the sidelines for some time.

The following summarize certain issues we think are worth watching:

• Retail sales in September were up 2.7% from the prior year. Consumer spending, the primary driver for the U.S. economy, accounts for two-thirds of GDP.ƒƒ
• The number of Americans applying for first-time unemployment benefits was reported at a four-decade low in early October. Initial jobless claims have now remained below 300,000 for seven years, the longest streak since 1970. Job growth has been spurred by a hiring streak that surpassed its previous record in March and is now at 70 straight months. Unemployment is now at 5%.
• Median household incomes have risen, increasing 5% in the last year. This has led to the consumer confidence reading hitting its highest point in nine years.
• The Fed continues to remain cautious. Despite fueling expectations for rising interest rates, the Fed has boosted rates only once since the last recession.
• Home-price growth accelerated in August, as a lack of inventory and low interest rates helped push prices to near record levels. The S&P CoreLogic Case-Shiller Indices covering the entire nation rose 5.3% in the 12 months ending in August.
• Inflation has remained below the Fed’s 2% annual target for more than four years, but has shown signs of firming recently. Now expectations are building that inflation may move above the Fed’s target.
• Mr. Trump’s November election will usher in a new President who will have party majorities in both the House and Senate. This should help the new Administration enact programs and policies more readily.

Short-term interest rates remain historically low with the 3-month T-Bill ending September at 0.26%. The 10-year T-Note ended September at 1.56%, down 71 basis points from year-end 2015. This has led to a significant reduction in the slope of the yield curve.

The stock market performance in 2016 has been positive. The Dow Jones Industrial Index closed September up 5.07% for the year. The Nasdaq Index closed up 6.08%. The Nasdaq Bank index ended September up 5.15%. Larger U.S. bank pricing struggled, ending the first three quarters of 2016 down 3.05%.

The dichotomy between big bank pricing and smaller bank pricing can be seen by comparing pricing multiples for each. Since 1995, banks in the S&P Bank Index averaged a price-to-earnings multiple of 14.1. Currently they average 12.0. Conversely, smaller banks had a historical average of 15.9 and are now trading at a multiple of 17.8.

Interesting Tid Bitsƒƒ

• New Competition. Goldman Sachs, the Wall Street giant, recently began offering consumer loans. An online consumer lending platform was rolled out offering personal loans up to $30,000.
• CFPB. Thanks to a lawsuit brought by nonbank mortgage lender PHH Mortgage, a three-judge panel recently ruled that the single director structure of the CFPB was unconstitutional and limited the CFPB’s ability to ignore statute of limitations governing administrative enforcement actions.
• The Big Get Bigger. It was recently reported that since Dodd-Frank was passed in 2010, large banks have grown by 30%. The six largest U.S. banks now hold assets of approximately $10 trillion. There are now at least 1,500 fewer banks with assets under $1 billion than prior to the financial crisis.
• ƒBoom in Global Trade. The S&P 500 is up nearly nine-fold since October 1986. Among factors cited to explain this dramatic growth is the acceleration of global trade spurred by various trade agreements.
• ƒƒMerger and Acquisition Activity. In the first nine months of the year, there were 185 bank and thrift announced merger transactions. This compares to 195 deals in the first three quarters of 2015. The median price to tangible book for transactions involving bank sellers was 129% which is down from the 141% median recorded in 2015.

By: Sharon Jeffries, Human Resources Manager

The Employee Retirement Income Security Act (ERISA) requires plan administrators (employers) to give plan participants in writing the most important facts they need to know about their health benefit plans.

One of the most important documents participants are entitled to receive automatically when becoming a participant of an ERISA-covered health benefit plan is a summary of the plan, called the Summary Plan Description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when and in what form benefits are paid, and how to file a claim for benefits. If a plan is changed, participants must be informed, either through a revised summary plan description, or in a separate document, called a Summary of Material Modifications, which also must be given to participants free of charge.

A Wrap Plan Document is designed to meet plan documentation requirements under ERISA and other federal laws and to incorporate all other welfare plans, insurance contracts, and other relevant documents into a single plan. These materials can be kept together for administrative ease. The Wrap Plan Document provides additional legal protection for the employer and plan fiduciaries and can simplify plan administration.

What Does That Mean?
In the past, much of the regulatory focus was on the retirement side of the ERISA legislation. However, with the implementation of the Patient Protection and Affordable Care Act (PPACA), that has changed. Much of the current government monitoring, oversight, and auditing relates to the health and welfare side of the ERISA regulation.

ERISA now requires employers who are plan administrators of their group health plans to comply with two (2) critical requirements or they will risk potential penalties and possible government audits.

Those requirements are:

• Maintain and distribute SPDs to plan participants which accurately reflect the contents of the plan and which include specific information as required under federal law.
• Group health plans must be administered in accordance with a written Plan Document which must be made available to plan participants and beneficiaries upon request.

Are You at Risk?
Yes, and the reason is this: Many banks will mistakenly assume that insurance contracts, certificates of insurance, and benefit summaries fulfill the ERISA requirements for an SPD and Plan Document, but they do not. And, the primary reason is that they do not include the required or recommended provisions that protect the plan and the employer.

What Should You Do?
Recognize that:

• Failure to provide an SPD or Plan Document within 30 days of receiving a request from a plan participant or beneficiary will result in a penalty of up to $110/day for each violation.
• ƒƒLack of an SPD could trigger a plan audit by the United States Department of Labor (DOL).
• The United States DOL has increased its audit staff and national enforcement initiatives to investigate employers’ compliance with Health Care Reform, resulting in companies of all sizes being audited and being required to provide an SPD and Plan Document.

The Solution
Do not try to create these documents in house. Allow experts in the areas of benefits and benefits regulations assist you with this monumental effort. Young & Associates, Inc. has partnered with The Alpha Group Agency, Inc. to offer our clients this unique service. The Alpha Group Agency, Inc. is a highly skilled, reputable organization involved in the management of health insurance services as well as other related subjects.

The Alpha Group Agency, Inc. has been an advisor to Young & Associates, Inc. for almost fifteen (15) years in the management of its group health insurance plans. For additional information on how you can become compliant with these critical ERISA regulations and also lower the risk of a DOL audit, contact Sean Nehlsen, The Alpha Group Agency, at 1.800.886.3315 or snehlsen@thealphaga.com.

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update

The economy continued to move forward into the seventh year of post-recession recovery. The first quarter growth in the U.S. economy was 1.1%. The following summarizes certain issues we think are worth watching:

• Brexit shook the markets in June. Britain’s vote to leave the European Union has caused the market additional concern about world-wide economic growth prospects.
• This adds to the existing concerns about growth potential in the world’s second largest economy, China.
• ƒThe Federal Reserve is in a holding pattern as we approach its late September policy meeting. Most believe that the Fed wants to continue to move interest rates upward, but they are being cautious.
• ƒJune’s job growth report indicated a renewed momentum in the labor market. After a dismal report in May, the job growth in June exceeded most analysts’ expectations. Unemployment was reported at 4.9%. This falls within the Fed’s normal long-run employment target of between 4.5% and 5%.
• ƒThe tightening job market has put upward pressure on wages as employers are in competition to find workers. The average hourly earnings for private-sector employees was estimated to have increased 2.6% in the last year. This is the highest growth in wages since 2009. Since 2000, median household income (adjusted for inflation) has dropped 7%. Thus rising wages is a positive sign for future consumer spending.
• The global issues have caused the U.S. dollar to gain value. The dollar has increased in value almost 10% over the last year. This increase makes U.S. exports more expensive.
• ƒƒBusiness investment has been slowing. Companies have been hesitant to invest in machines, technology, and inventory. The level of business investment in capital goods has declined nearly 12% since 2014.
• ƒOil prices continue to remain well below historical levels. This has impacted the market in a variety of ways. Consumers and businesses have benefited from lower gasoline prices. However, the oil production firms have been hard hit and banks are being forced to strengthen their loan loss reserves for struggling oil related
  firms.
• After years of volatility, home prices have grown at an annual rate of approximately 5% since early 2015. Increasing home prices and low mortgage rates have made the housing market one of the strongest sectors in the U.S. economy in recent months.
• We are now approximately three months from electing a new President. The differences between the two candidates appear to be dramatic. The uncertainty surrounding the election will impact the markets until after the election.

Short-term interest rates remain historically low with the 3-month T-Bill ending June at 0.26%. The 10-Year T-Note ended June at 1.49%, down 78 basis points from year-end 2015. This has led to a significant reduction in the slope of the yield curve.

The stock market performance in 2016 has been mixed. The Dow Jones Industrial Index closed June up 2.90% for the year. The Nasdaq Index closed down 3.29%. The Nasdaq Bank index ended June down 4.18%. Larger U.S. banks fared even worse, ending the first half of 2016 down 11.25%.

Interesting Tid-bits ƒƒ

• Lost value. Since the start of 2016, 20 of the world’s largest banks have lost a quarter of their combined market value. In total, approximately $465 billion has been lost.
• ƒƒPrinting money? The Fed owns approximately $2.4 trillion in U.S. Treasury debt at the end of June. This represents approximately 20% of the total U.S. Treasury Debt.
• ƒƒThe wealthy get richer. It was recently reported that the top 20% of American families account for 48.9% of total U.S. income compared to 44.3% in 1990.

Merger and Acquisition Activity
In the first half of the year, there were 114 bank and thrift announced merger transactions. This compares to 139 deals in the first half of 2015. The median price to tangible book for transactions involving bank sellers was 131% which is down from the 141% median recorded in 2015.

By: Gary J. Young, President and CEO

For 30 years, I have had the pleasure of working with community banks across the country in developing a strategic plan. Yes, my first strategic planning engagement was in 1986. I recently completed a strategic plan for a great bank in Alaska, the first one in that state. There are two banks in Ohio that I have been facilitating strategic plans for since the mid-1980s. And there is another bank in New Mexico in which I am approaching 20 years. Many others are new clients. I certainly feel that I have helped those banks succeed in the way they define success. I also have learned from
all of my strategic planning clients. Those main items are the subject of this article. Regardless of how you approach strategic planning, I believe these concepts will help make your plan meaningful to the management team and the board of directors.

The following are the 8 lessons learned from the facilitator:

1. There is no value in a strategic plan. I know this is a strange thought coming from a strategic plan facilitator. But, I have learned that value is achieved only when the plan is implemented to the benefit of the bank. It is absolutely critical to build consensus and buy-in. If participants believe the plan is from the facilitator, you have lost. The facilitator is there to achieve consensus on the bank’s plan, then write that management and the board want to implement for success.

2. A strategic plan is not about predicting the future, but making the future. Nobody can predict the future. But, that’s not what strategic planning is about. An effective strategic plan is about making the future not predicting it. That’s why I often ask plan participants, “If you could envision the perfect future for your bank, what would it look like, or be like in five years?” The goal is to then build strategies and tactics to deliver the consensus of that perfect future. Of course, there will be deviations from which a change-in-course will be made. We call that good management.

3. There is no one best plan. I have seen successful banks run in an extremely conservative manner and successful banks run in an extremely aggressive manner. There is never one best way. Whatever the strategy, I can give you an example of a successful bank that took a different position. The key is to have a consensus in strategy that exists between the board of directors and senior management. I don’t mean there needs to always be agreement on issues, but agreement on the basic core values that lead to direction.

4. Every good community bank needs to fill in the blank. However you might define this statement, it is wrong.  Community banks are incredibly unique. While Bank A may have 80% of things in common with Bank B, they are still incredibly different. To the facilitator, keep your EYES WIDE OPEN. Only in that way, will you see the nuances that make the job of facilitating a strategic plan rewarding and down-right fun.

5. Banking is about risk. Without risk there is no bank. This relates to 3 and 4 above. But, it is critical that the facilitator help define the risk appetite of the directors. This will then help define capital adequacy which ultimately is at the heart of every strategic plan. Management and the board of directors need to understand there is no right answer. Your risk appetite is all that matters. But, I will tell you one thing that is absolutely wrong: taking risk that is beyond your appetite and that you don’t fully understand. Please, never do that.

6. Define your target or goal for capital. This is a part of 5 above, but it is critical. Let’s assume that capital adequacy based on risk is 7.5%, but the board wants to maintain 9.5%. This is certainly OK, but understand there is a cost to the excess capital. Excess capital could be viewed as an insurance policy against potential losses. Many banks that had excess capital during the Great Recession were certainly happy they did. Excess capital could also be used as pportunity capital in case it is needed for a branch purchase, bank purchase, etc. But also remember, as the tier-1 leverage ratio increases, the return on equity decreases, all other things being equal. A decrease in return on equity is a drag on shareholder value.

7. Asset quality can kill you. Discussing asset quality is not as exciting as many other issues. But, nothing will derail a bank’s plans quicker and more completely than problems in asset quality. Even though loan growth drives asset growth, which is a key component of bank success, we must remember to aggressively seek and conservatively underwrite, and thoroughly understand the risk associated with the loan growth.

8. A facilitator will never know your bank or your market like you do. I am like most other facilitators. I have had the experience of working with hundreds of community banks and seeing how things work positively and negatively. That is my perspective and it is good to have that voice at the retreat. But, I always remind new clients that while I have an experienced perspective, just because I share an opinion does not make it right for your bank in your market. It might be right for 95% of other banks, but that doesn’t mean that it is right for your bank.

I hope that you will consider these concepts as you complete your next strategic plan. And, if you are considering a facilitator, I hope you consider Young & Associates, Inc. If you would like to discuss this article or strategic planning, please call me at 330.283.4121 or click here to send an email.

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update – Slow Liftoff
Following its first rate increase in almost a decade in December, the Fed has decided to proceed cautiously on future rate increases. At the Fed’s meeting in March, the Fed held rates unchanged. The minutes of the March meeting indicated that there were various opinions as to how quickly interest rates should be increased. It appears that two increases is the most likely scenario this year.

In other economic developments:

• U.S. GDP expanded at a 1.4 percent seasonally adjusted annual rate in the fourth quarter of 2015. This continues the economic recovery that began seven years ago.
• The latest inflation rate for the United States is 1.0 percent for the 12 months ending February 2016. This is well below the Fed’s target of 2 percent and gives the Fed latitude to slowly increase interest rates.
• Job creation has been at the forefront of the economic recovery. The Labor Department reported that more Americans were hired to start a new job in February than in any month since before the recession began in 2007. The unemployment rate edged up to 5 percent in March, but that was largely due to more Americans joining the labor force.
• Manufacturing activity remains soft. Weak global growth, low oil prices, and financial volatility were cited as reasons for a decline in orders for durable goods. A bright spot, however, was the U.S. auto industry that recorded its best month of sales in over ten years in March.
• Another indicator of the impact foreign economic growth has had on the U.S. economy was revealed in the decline in U.S. exports. In February, the export activity was 4.2 percent below the level of the prior year. The strong dollar also has impacted exports in that the stronger dollar makes U.S. products more expensive.
• The non-manufacturing sector of the U.S. economy continues to show strength. According to the Institute for Supply Management, non-manufacturing activity rose to 54.5 in March. (A reading above 50 signals expansion.)
• U.S. consumers barely increased their spending in February and spent less in January than the government had estimated earlier. Consumer spending edged up 0.1 percent in February. The government also revised downward its estimate of spending growth in January from a solid 0.5 percent gain to a much weaker 0.1 percent, which matched December’s lackluster figure. With consumer spending, which fuels about 70 percent of the economy, off to a weak start in 2016, economic growth in the first quarter is anticipated to be weak. Impacting consumer spending is the slow growth in incomes which moved up just 0.2 percent in February.
• Home prices continued rising at a steady clip in January, another sign that 2016 will offer more of the same in the housing market: tight inventory leading to rising prices and sales volatility. The S&P/Case-Shiller Home Price Index, covering the entire nation, rose 5.4 percent in the 12 months ending in January.
• Oil prices have moved up recently. Oil prices remain down more than 20 percent from last year. Most analysts still see the market as over-supplied but some expect that falling U.S. output and rising demand will alleviate some of the glut later this year.

We do expect the economy to strengthen later this year. We anticipate GNP reaching 2 percent for the year as a whole. Job growth remains positive and the dollar’s strength has weakened somewhat perhaps aiding export growth. We think home building and home sales will be a positive to the economy and expect the limited supply to cause home prices to continue their upward trend. We agree with the forecast of two rate increases this year, as we expect the Fed to move cautiously.

Interesting Tid Bits

• The GSEs continue to be a source of funding for US government spending. In all, Fannie and Freddie received $187.5 billion from the Treasury but have paid $245.8 billion back in the form of dividends.
• Baby boomers are re-writing the old adage that as you get older you seek to get out of debt. The Federal Reserve reported that the average 65 year old borrower today was reported to have 47 percent more mortgage debt than in 2003. They also have 29 percent more auto debt. Both figures were adjusted for inflation.
• It is projected that this year Americans will use prepaid cards (including gift cards) to a total of $651 billion, an increase of 57 percent from six years ago.
• During the first six weeks of 2016, the KBW Bank Index dropped nearly 23 percent to a three-year low. Over the same period, the Dow Jones Industrial Average fell slightly more than 10 percent over the same period.

Short-term interest rates remain low, with the 3-month T-Bill ending March at 0.21 percent. The 10-year T-Note ended March at 1.78 percent. The yield curve has flattened with the 10-year T-Note falling 49 basis points since December 31, while the three-month T-Bill increased 5 basis points.

The general stock market struggled out of the gate in 2016. As noted above, the market recorded a significant correction in the first six weeks of the year. The market has recovered with the Dow Jones Industrial Index ending March 31 up 1.49 percent for the quarter. This marks a new high for the Dow. The KBW Bank Index ended the March quarter down 12.11 percent. The poor performance of the banking sector is attributable to a variety of concerns, including problem loans surfacing related to the oil industry, continued margin compression issues as interest rates are not rising as quickly as anticipated, and limited growth prospects due to the slow growth of the U.S. economy.

Merger and Acquisition Activity
For the first quarter of 2016, there were 64 bank and thrift announced merger transactions. This compares to 66 deals in the first quarter of 2015. The median price to tangible book for transactions involving bank sellers was 129 percent which is down slightly from 2015’s median value.

Young & Associates, Inc. has been a resource for banks for over 37 years. Through our affiliate, Capital Market Securities, Inc., we have assisted clients in a variety of capital market transactions. For more information on our capital market services, please contact Stephen Clinton at 1.800.376.8662 or click here to send an email.

By: Mike Lehr, Human Resources Consultant

When clients see adverse impacts in their Affirmative Action Plans (AAP), it is not unusual for them to say, “So Mike, does this mean I have to hire more females and minorities?” This is the wrong question. It should be, “How do we look into this more?”

AAPs are similar to insurance policies. They help us identify risk in our recruiting, hiring, compensation, promotion, and termination policies and practices. If the Equal Employment Opportunity Commission or the Civil Rights Commission investigate a complaint, they will very likely want to see our AAPs. As with insurance, good plans afford us more protection than bad ones do.

When adverse impacts arise with clients, I automatically look at two areas first:

1. Employment practices and activities
2. The plan’s statistics

Employment Practices and Activities
I review employment practices and activities in affected areas first for two reasons. First, too often what should happen differs from what actually happens. There might not be anything wrong with the policy or practice. It just isn’t being followed well. Why change it? This often happens with policies regarding the acceptance of applications and completion of self-identification disclosures.

The second reason why I look at employment practices and activities first is that they give me ideas on where better recordkeeping might help produce better statistics. This makes revisiting the statistics easier and more directed.

This happens often when we dive into the specifics of a job. Since community bankers often wear many hats, weighting the job against several census codes rather than just one is better. Also, since many community banks serve rural communities, the census sample for a job might be too small to be representative. A next best code can come into play then.

Plan Statistics
When it comes to the plan’s statistics, too often they are based on what is easy to track and figure. This shows up most in the job groups used to categorize jobs, the availability of candidates for openings (promoting from within versus hiring from outside), and the census codes used to compare banks’ jobs with the outside world.

I’m not a fan of redoing calculations after the results. I am a fan of saying, “In order to understand this and our options better, how can we improve our data collection for next year?” It’s similar to analyzing a credit. If there are questionable items, we ask for more information.

As an example, I often recommend dividing up the Professional job group (2) into Lending Professionals (2.1) and Administrative Professionals (2.2). Lending and credit jobs can be in the first group, and accounting, finance, marketing, trust, and other non-lending related jobs can be in the second.

Since lending is a specialized skill to banking and is often sales-related, it frequently creates adverse impacts and compensation disparities for the Professional job group. This can happen if census data is small but not enough so to justify alternative census codes.

Granted, the adverse impact might not disappear. Knowing it’s focused on lending or administrative professionals does help though. Rather than carefully monitoring practices in the entire Professional Job Group, we might only need to focus on a sub-set of it.

Additionally, for the same reasons, I often recommend splitting up the Administrative Support Group (5.0) into three groups such as Ancillary (or Executive) Administrative Support (5.1), Operational Support (5.2), and Retail Administrative Support (5.3).

Often, 75 percent of the jobs in Retail Administrative Support are tellers. They are introductory jobs often filled from outside. More promotions-from-within occur with the other administrative support groups. This pattern affects availability and compensation calculations.

Compensation
From a statistical perspective, I also focus on compensation because it’s grayer than clients often think it is. Even The Code of Federal Regulations (see § 1620.13 through § 1620.19) admits that what is equal pay for equal work “cannot be precisely defined.”

Furthermore, “‘equal’ does not mean ‘identical.’” It is defined by the job’s requirements in terms of skill, effort, and responsibility, not the qualifications of the person unless they specifically impact those requirements. That means two jobs with different titles could be “equal.” That means having better qualifications does not matter unless those qualifications are important to the job.

That is why it helps to begin compensation analyses with job groups, not jobs with the same title. The latter could easily give a false sense of security. Starting at the global level and working down forces us to really look at what makes jobs unequal. AAPs with workable job groups and census codes can help prioritize the jobs and the job descriptions we need to rework or revisit with legal counsel.

Conclusion
Returning to the original question, AAPs have many ways for us to look into adverse impacts and compensation disparities more. A good plan not only provides us good insurance against adverse actions, it guides and prioritizes us. This saves our time and money.

For more information on Affirmative Action Plans, contact Mike Lehr at 1.800.525.9775 or click here to send an email.

By: Steve Clinton, President, Capital Market Securities, Inc.

We are now approaching seven years since the Great Recession. While the economic recovery has been slow, it has lasted much longer than a typical recovery. The average recovery, since the end of World War II, had been 58 months. The longest recovery on record was the 10-year period that spanned the 1990s. The length of the current recovery has been aided by the Fed’s maintenance of historically low interest rates. The Fed ended its “zero” rate posture and raised a key interest rate in December. This was the first increase in interest rates in almost a decade. How quickly the Fed is able to move interest rates higher will depend upon the continued strength of the economy.

Job creation continues to occur and unemployment has trended downward. Inflation remains in check. Business profitability may have reached a near-term plateau. Fourth-quarter earnings for the S&P 500 are expected to slide 5.3 percent, according to data provider FactSet. That would represent the third straight quarterly drop in profits, and the first time the S&P 500 has experienced such a decline since the first three quarters of 2009. Steady consumer spending has enabled the U.S. economy to continue to grow despite broad economic weakness globally.

As we enter 2016, there are a number of items worth monitoring:

• Presidential Election – The Obama era enters its final year. The presidential campaigns have already begun in earnest. The primaries began February 1st. The future direction of the country will be decided in the next election.
• Economic Growth – Last year, we predicted that “U.S. economic growth in 2015 will be hard-pressed to continue its strong pace.” Our prediction was correct in that the economy likely expanded 2 percent last year. The results reflect weak global trade and severe cutbacks by energy companies due to the slide in oil markets. Also, business investment has been limited. Our prediction for 2016 – a 2 percent growth comparable to 2015.
• Housing – Home price values steadily accelerated throughout 2015, underscoring that the housing market is returning to normal as the economy improves. The S&P/Case-Shiller Home Price Index rose 5.2 percent in the 12 months ending in October. The index is up 36 percent from its low recorded in March 2012, and is only 11.5 percent below the high recorded in July 2006. We anticipate that real estate values will continue to increase at a moderate pace in 2016.
• Oil Prices – In early 2015, we noted that oil prices had declined to $50 a barrel. Oil prices continued to decline in 2015 as supply outstripped demand. In early 2016, oil prices fell below $30 a barrel reaching a 12-year low. The prospect of up to 500,000 barrels a day of Iranian crude flooding an already oversupplied market is the main reason for oil price declines. We expect oil prices to fall to a level of around $25 a barrel and that will force major suppliers to restrict oil production which will drive oil prices higher in the second half of 2016.
• Industrial Production – The industrial sector remains soft. Capacity utilization fell to 76.5 percent in December. Before the recession, capacity use typically hovered above 80 percent. U.S. car sales were a bright spot in 2015. Auto sales were a record, passing a total last reached 15 years ago as cheap gasoline, employment gains, and low interest rates spurred Americans to snap up new vehicles. In all, auto makers sold 17.5 million cars and light trucks in the U.S. last year, a 5.7 percent increase. We anticipate slowing auto sales in 2016. Rising rates will make auto financing more expensive.
• Imports/Exports – Europe and Japan, the U.S.’s major trading partners are at risk economically. China’s problems have been well discussed in the press. However, U.S. exports account for only about 13 percent of gross domestic product. If the rest of the world falters, a relatively small share of U.S. production will be exporting into the weakness. We do expect the strong dollar and continued economic struggles of our trading partners to cause exports to trail 2015 levels.
• Consumers – Consumer confidence is being tested as we enter 2016. For the six-year period beginning January 2009 until the end of 2014, the S&P 500 more than doubled. This increased wealth added to consumer confidence and consumer spending. In 2015, the S&P 500 was essentially flat for the year. 2016 has begun with a market correction of nearly 10 percent. It is likely the recent stock market results will weigh on household finances. Offsetting the negative of lowered net worth will be lower gas prices that will serve to increase consumers’ incomes. Overall, we anticipate consumer spending to hold steady.
• Fed – We mentioned last year that we expected modest rising rates in the second half of 2015. We also predicted that the Fed would be patient. We only got one rate increase in 2015. With the state of the economy, we would expect the Fed to continue to move slowly in 2016 in its effort to move interest rates upward.

Market Update
The overall stock market ended lower in 2015. The U.S. stock market encountered its first correction (a drop of at least 10 percent) in four years in August. The Dow declined 2.23 percent in 2015 while the S&P 500 Index was down 0.73 percent. Short-term interest rates ended 2015 with the 3-month T-Bill at 0.16 percent. Longer-term interest rates increased modestly in 2015. The 10-year T-Note ended the year at 2.27 percent, compared to 2.17 percent at December 31, 2014.

Bank pricing followed the overall market decline in 2015. The KBW Bank Index declined 1.59 percent for the year. Bank prices, as measured by the KBW Bank Index, remain nearly 40 percent below the highs recorded in 2006.

Merger and Acquisition Activity
Merger activity in 2015 was comparable to the level of activity in 2014. Pricing on 2015 bank sales was comparable to 2014’s pricing, recording a median price to book multiple of 141 percent and a price to earnings multiple of 22.4 times.

Interesting Tidbits
As has been our custom from time to time, we like to pass along various items that we have seen that you might enjoy reading:

• The number of Americans seeking first-time jobless benefits is lower this year than any since 1973. (Note: The labor force has nearly doubled since 1973.) This indicates that the number of workers involuntarily losing their jobs is trending near historical lows.
• The U.S. bull market is now more than 6½ years old, the fourth longest on record.
• JPMorgan Chase expects to spend about $500 million on cybersecurity in 2016. Bank of America Chairman Brian Moynihan has said that the bank’s cybersecurity budget is unlimited. John Stumpf, Chairman of Wells Fargo, said the bank spends “an ocean of money” on cybersecurity. Says Stumpf, “it’s the only expense where I ask if it’s enough.”
• U.S. merchants are said to have paid $61 billion in interchange fees last year.
• High-yield bond assets held by U.S. mutual funds total over $300 billion, triple their level in 2009.

Young & Associates, Inc. has a successful track record of working with our bank clients in the development and implementation of capital strategies. Through our affiliate, Capital Market Securities, Inc., we have assisted clients in a variety of capital market transactions. For more information on our capital market services, please contact Stephen Clinton at 1.800.376.8662 or click here to send an email.

By: Mike Lehr, Human Resources Consultant

The digital age has hit branches hard. Lines out the door no longer exist. Patterns of activity flatten with each passing day. Activity spikes can occur anytime. How should banks staff their branches in the digital age?

In the past, banks relied on transaction-based staffing models to answer these questions. In the digital age, these models show staff reductions year after year. Transactions are going down. From our studies and experience, community banks staff to peak demand for the week. That means for rest of the week excess capacity exists. Staff is idle. Now, the busiest time of day is when employees open and close branches. It is not when customers transact.

Still, customers need help. It is a different kind of help. It is not about transactions. It is about sales. The digital age has blown the doors off product and service offerings. It is no longer just accounts and loans. It is no longer about what kind of accounts and loans. It is about the many ways to access them. The ways to do business with banks have spread like weeds.

Customers still need help from a person. It is not help with transactions though. It is help with understanding what banks can do for them. It is advising. It is consulting. It is selling. Traditional transaction models do not deal with selling. They are about transactions. Reducing staff can reduce selling. The question becomes, “What are your people really doing?”

The digital age is turning branches into sales offices. Staffing models need to account for sales. It is about new accounts. It is about referrals. It is about cross selling. How much time does it take to do these things? How much time does it take to do them well?

Selling is more complicated than transacting. It is a team effort. Tellers could act as assistants for sales personnel. They could research customer data. They could identify customers who might need additional help. They could make up the call lists for customer service representatives, loan officers, and branch managers. Still, it boils down to what your people are doing. How much time is it taking? How much downtime is there? How much time are they selling? The answers will most likely surprise.

If you would like to learn more how Young & Associates, Inc. can help you answer these questions for your bank and your people, contact Mike Lehr at 1.800.525.9775 or click here to send an email.

By: Gary J. Young, President & CEO

The Mantra
As community bankers, we have all heard the mantra to increase capital. This is heard by the banker who has an 8% leverage ratio and needs to increase capital to 9%, by the banker who has a 9% leverage ratio and needs to increase capital to 10%, and by the banker who has a 10% leverage ratio and needs to increase capital to 11%. Based on this view regarding capital, more is always better. I disagree.

Capital Adequacy
I agree with the OCC. Capital adequacy at each bank is uniquely based on the current and planned risk within the bank. And, it is the responsibility of the bank board to determine capital adequacy with the input from executive management. Capital adequacy is the point at which a capital contingency plan is implemented if actual capital falls below that point. In other words, let’s assume capital adequacy has been defined as a 7.5% leverage ratio, or a 11.25% total risk-based ratio. If actual capital falls below either measure, the bank should implement the methodology for improving capital as described in the capital contingency plan.

Capital Target
A bank’s target or goal for capital is higher than capital adequacy. It is an estimate of the amount the board of directors has decided is desired to take advantage of opportunities such as additional organic growth, branch expansion, purchase of a bank or branch, stock repurchase, etc.; or to use as additional insurance or protection against negative events that could hurt profitability and capital. As an example, a 7.5% leverage ratio could be defined as capital adequacy, but the target level of capital is 9.0%.

Cost
Excess capital has a cost. Let’s assume you had to eliminate $1 million of excess capital. To balance that transaction, you would also eliminate $1 million in assets which would be investments. Let’s assume that the investments had an average yield of 1.5%. After taxes, that would be approximately 1.0%. Based on this example, the return on equity of the $1 million of excess capital is 1.0%. We must agree that 1.0% is unacceptable. Well, it is unacceptable unless that is your return for opportunity capital or insurance capital as described above.

Another example of the cost of excess capital can be seen here. There are four banks with a 1% ROA. However, the equity/asset ratio at each is different, ranging from an 8.0% leverage ratio to a 12.0% leverage ratio. By dividing the ROA by the leverage ratio, you get the ROE. By multiplying the ROE by an assumed PE, you get the multiple of book. In this example, the bank with an 8.0% leverage ratio has a value of $30 million while the bank with a 12.0% leverage ratio has a value of $20 million. This is a simplified example that provides information on the cost of excess capital.

The Right Amount
There is no right amount. The average less than $1 billion bank has a 10.8% leverage ratio and a 16.6% total risk-based capital ratio. Most everyone would agree that banks do not need that level of capital. But, every bank is unique with different levels of risk and different levels of risk appetite. The important thing is that executive management and the board of directors understand that there is a shareholder cost to holding excess capital.
That doesn’t make it wrong. The board of directors has multiple responsibilities and at times they can be conflicting. From the shareholder perspective, you want to maximize the return on equity and shareholder value which assumes leveraging capital, but you must also oversee the operation of a safe and sound bank. And, at the heart of safety is capital adequacy. It takes balance and awareness of both to determine the right level of capital for the bank. My concern is that through the Great Recession and after, the capital mantra has been “more is better.” Well frankly, more is not necessarily better. I am suggesting that it is time to balance the capital need for risk management with the capital need for improving shareholder value.

Best Practices
The question for executive management is what should I do? It is my opinion that best practices would indicate that every bank develop a definition of capital adequacy based on inherent risk. Furthermore, a capital contingency plan should be part of that plan that indicates the steps the bank might take if capital falls below or is projected to fall below your definition of capital adequacy. You should then have a frank discussion at the board level on the amount of capital that is your goal or comfort level. If you then find that your capital is above that, consider the following:

• Focus on additional organic growth, if possible.
• Expansion opportunities. I would suggest looking for opportunities that begin turning a profit in two years or less.
• A stock repurchase plan. This is a win for the shareholders that want to sell and the shareholders that want to hold. Everyone wins and shareholder value should increase.
• A slow, steady increase in dividends to shareholders.

Consider how all of these items might impact your capital adequacy, return on equity, and shareholder value over a 3-5 year period. Remember, the goal of executive management is to maximize profitability and shareholder value within capital guidelines approved by your board of directors.

For More Information
If you would like to discuss this article with me, you can contact me 1.800.525.9775 or click here to send an email.