Job Grades . . . For You?

By: Mike Lehr, Human Resources Consultant

Are job grades for you? “Yes,” is the short answer. The challenge is coming up with ones that fit your bank and don’t break the bank.

First, as a Federal contractor, banks must abide by the Pay Transparency Nondiscrimination Provision. This means employees can discuss their pay with other employees. Moreover, banks must post notifications stating as such. Employees will compare and assess positions accordingly.

Second, what to pay an employee is a tough question. Competitive pressures and meeting managers’ needs make this very subjective and inconsistent when hiring and promoting. Is the pay increase in line with the increase in responsibility? Are managers seeing this the same way? How well do officer titles relate to positions?

Third, what are the career paths in your bank? How do different jobs rank? Is the move upward, lateral, or downward? When is a finance officer on par with a commercial lender? Should an increase in title come with a different job? In all banks, positions come with different statuses. Employees’ and managements’ views don’t always sync on this.

Finally, community banks differ from regional and national ones. They differ from other federal contractors who are typically much larger. At those places, jobs have very specific descriptions. At community banks, a job could contain the responsibilities of three different jobs as those places. Moreover, they change. It’s not unusual for employees to trade job duties.

Yes, job grades can solve these problems and answer these questions. The problem is that the job grading industry is armed with fancy calculations and formulas to create them. Here, think cost. They follow a recipe, the same one no matter the size of the project.

Of course, they “customize” in the end after they burn hours running through the numbers. It’s like applying a six-sigma process to a two-sigma project, using that preverbal sledge hammer to kill a flea, or buying a Ferrari to arrive quicker when the road is rough and breaking fifty safely isn’t possible.

Also, speaking of rough roads, finely tuned calculations and formulas work best on clearly defined jobs. When it comes to community banking, defining jobs is like driving an all-terrain vehicle. It depends on the needs and talent on hand. It’s highly variable compared to the big guys.

So, that brings us to the point about job grades. You can do it. Yes, training helps. You might even have it now. Remember, the process they teach is a recipe, not a concept. Following it blindly will waste time and yield bad results. Do the parts that only make sense and return high value. Improvise, too – it’s all right.

Lastly, these guides apply too if you hire out for part or all of the effort. Pay for value. People modify recipes all the time. That’s why the phrase “to taste” is in them.

Regardless, think all-terrain vehicle. Job grades can solve a variety of compensation, career-pathing, employee engagement, and officer-titling problems. It’s also insurance against pay discrimination.

For more insights and guidance on how to get your employees to make better decisions, you can reach Mike Lehr at mlehr@younginc.com.

IRR and Liquidity Risk Review – Model Back-Testing / Validation of Measurements

Effective risk control requires conducting periodic independent reviews of the risk management process and validation of the risk measurement systems to ensure their integrity, accuracy, and reasonableness. To meet the requirements of the Joint Policy Statement on Interest Rate Risk (IRR), as well as the Interagency Guidance on Funding and Liquidity Risk Management and the subsequent regulatory guidance, Young & Associates, Inc. can assist you in assessing the following:

  • The adequacy of the bank’s internal control system
  • Personnel’s compliance with the bank’s internal control system
  • The appropriateness of the bank’s risk measurement system
  • The accuracy and completeness of the data inputs
  • The reasonableness and validity of scenarios used in the risk measurement system
  • The reasonableness and validity of assumptions
  • The validity of the risk measurement calculations within the risk measurement system, including back-testing of the actual results versus forecasted results and an analysis of various variance sources

Our detailed interest rate risk review reports and liquidity risk review reports assess each of the above, describe the findings, provide suggestions for any corrective actions, and include recommendations for improving the quality of the bank’s risk management systems, and their compliance with the regulatory guidance. We are happy to customize the review scope to your bank’s specific needs.

For more information, contact Martina Dowidchuk at mdowidchuk@younginc.com or 330-422-3449.

Liquidity Risk Management

By: Martina Dowidchuk, Director of Management Services and Senior Consultant

Does your liquidity management meet the standards of increased regulatory scrutiny?
What was once deemed acceptable is gradually coming under a more rigid review, and financial institutions need to be prepared to show that their liquidity risk oversight complies with both supervisory guidance and sound industry practices.

The liquidity risk may not be among the areas of community banks’ immediate concern given the abundance of liquidity in the banking industry today. However, the history shows that liquidity reserves can change quickly and the changes may occur outside of management’s control. A bank’s liquidity position may be adequate under certain operating environments, yet be insufficient under adverse environments. Adequate liquidity governance is considered as important as the bank’s liquidity position. While the sophistication of the liquidity measurement tools varies with the bank’s complexity and risk profiles, all institutions are expected to have a formal liquidity policy and contingency funding plan that are supported by liquidity cash flow forecast, projected liquidity position analysis, stress testing, and dynamic liquidity metrics customized to match the bank’s balance sheets.

Some of the common liquidity risk management pitfalls found during annual independent reviews include:

Cash Flow Plan:

  • Lack of projected cash flow analysis
  • Inconsistencies between liquidity cash flow assumptions and the strategic plan/budget
  • Lack of documentation supporting liquidity plan assumptions
  • Overdependence on outdated, static liquidity ratios and lack of forward-looking metrics
  • Lack of back-testing of the model

Stress Scenarios:

  • Stress-testing of projected cash flows not performed
  • Stress tests focusing on a single stress event rather than a combination of stress factors
  • Stress tests lacking the assessment of a liquidity crisis impact on contingent funding sources
  • Insufficient severity of stress tests

Contingency Funding Plan Document:

  • Contingency funding plan failing to address certain key components, such as the identification of early warning indicators, alternative funding sources, crisis management team, and action plan details
  • Lack of metrics defined to assess the adequacy of primary and contingent funding sources in the baseline and stressed scenarios

Liquidity Policy:

  • Inadequate risk limits or lack of acceptable levels of funding concentrations defined in the liquidity policy
  • Liquidity policy failing to address responsibilities for maintenance of the cash flow model, model documentation, periodic assumption review, and model validation

Management Oversight:

  • ALCO discussions related to liquidity management not containing sufficient detail and not reflected appropriately in the ALCO meeting minutes
  • Lack of periodic testing of the stand-by funding lines
  • Lack of liquidity model assumption review or documentation of such review
  • Lack of periodic independent reviews of the liquidity risk management process

If you are interested in an independent review of your existing liquidity program and a model validation, or are looking for an assistance with developing a contingency funding plan, liquidity cash flow plan, and liquidity stress testing, please contact me at 330.422.3449 or mdowidchuk@younginc.com. Young & Associates, Inc. offers an array of liquidity products and services that can help you to ensure compliance with the latest regulatory expectations.

CRE Portfolio Stress Testing

CRE Stress Testing is widely viewed by bankers and bank regulators as a valuable risk management tool that will assist management and the board of directors with its efforts to effectively identify, measure, monitor, and control risk. The information provided by this exercise should be considered in the bank’s strategic and capital planning efforts, concentration risk monitoring and limit setting, and in decisions about the bank’s loan product design and underwriting standards.

Young & Associates, Inc. offers CRE Portfolio Stress Testing that provides an insightful and efficient stress testing solution that doesn’t just simply arrive at an estimate of potential credit losses under stressed scenarios, but provides a multiple page report with a discussion and summary of the bank’s level and direction of credit risk, to be used for strategic and capital planning exercises and credit risk management activities.
Our CRE Stress Testing service is performed remotely with your data, allowing for management to remain free to work on the many other initiatives that require attention, while we make use of our existing systems and expertise.

For more information, contact Kyle Curtis, Director of Lending Services, at kcurtis@younginc.com or 330.422.3445.

Banks as Federal Contractors, A Brief History

By: Mike Lehr, HR Consultant

Unless legal counsel says otherwise, if FDIC covers a bank’s deposits, it’s best to assume it’s a federal contractor. That not only means the bank likely needs an affirmative action plan if it issues fifty or more different W2s in a year, but the federal government holds the bank to higher employment standards.

Still, as human resources professionals know, bank CEOs, presidents, and other senior executives often want to know, “What law says so?” After all, when we think of a “federal contractor,” we often think huge employers with thousands of employees.

For banks with only a few hundred (if that) employees, this all seems very unnecessary. Yet, the short answer is that a reinterpretation of existing law after the 2008 financial crisis made most banks federal contractors if they obtained federal deposit insurance.

Reviewing the way our government works and the history of banks as federal contractors can clarify this answer. After all, the law is not clear. It hasn’t changed much in over twenty years.

This review begins by reminding others that federal laws change in three main ways:

    1. Congress passes or revises laws.
    2. Executive branch reinterprets existing laws.
    3. Courts rule on and clarify regulations causing disagreements among parties.

While Congress neither passed nor revised any law specifically stating banks are federal contractors, the Department of Labor (DOL) reinterpreted the law. Until the 2008 financial crisis, the Office of Federal Contract Compliance Programs (OFCCP), an agency of the DOL, mainly interpreted the law to say FDIC made banks contractors. The DOL, its boss so to speak, never accepted this however.

So, until 2008, unless a bank clearly acted as “an issuing and paying agent for U.S. savings bonds and notes” or “a federal fund depository,” in a substantial manner, the DOL likely didn’t consider it a federal contractor.

Until 2008, FDIC payouts to banks were rare, almost non-existent. This crisis though saw many sizeable payouts. As a result, the DOL accepted OFCCP’s interpretation of the law. The crisis forced the DOL to see FDIC coverage as doing business with the federal government. So now, by its “boss” agreeing, the OFCCP has more authority to enforce its regulations such as affirmative action plans on banks.

Again, a reinterpretation of existing law after the 2008 financial crisis increased dramatically the likelihood that a bank is a federal contractor. This brief history has helped human resources professionals answer questions related to “what law says so?”

For more guidance and support on complying as a federal contractor, you can reach Mike Lehr at mlehr@younginc.com. Mike Lehr is not an attorney. As such, the content in this article should not be construed as providing legal advice. For specific decisions on compliance with OFCCP regulations, readers should consult with their legal counsel.

Interest Rate Risk Reporting

By: Bryan Fetty, Senior Consultant

There are a few common findings that we note when conducting Interest Rate Risk Reviews for clients that are easily remedied and require very little work on the part of the financial institution. One supervisory requirement is to provide a sufficiently detailed reporting process to inform senior management and the board of the level of IRR exposure. Financial institutions are providing the reports to the board, but in the world of regulators, if it isn’t documented in the minutes, you didn’t do it.
Financial institutions should ensure that their committee and board minutes are detailed enough to show the level of discussion about their reports that takes place at the meeting. There doesn’t need to be extensive narrative on the issues, but the minutes should reflect:

      Whether or not the board reviewed the quarterly IRR reports
      Whether or not the monitored risk measures were in compliance with the policy limits
      If any measurements fell outside of the policy limits or the reports show presence of warning indicators, include a short explanation and management’s recommendations/action items (if applicable)
      If there were any material changes in the risk measurement results compared with the previous period, include a short explanation (for example, changes made to the assumptions used in the model, material changes in the mix of assets or liabilities, any unique circumstances)
      On an annual basis, note when the board reviewed the policy, any independent review reports, the key model assumptions, and any stress or assumption tests
      Whether or not any other ALCO-related topics were discussed during the meeting.

For more information on how Young &Associates, Inc. can assist your financial institution with the annual IRR review and model back-testing process, please email Bryan Fetty at bfetty@younginc.com or give him a call at 330.422.3452.

When a Stock Valuation Can Add Value

By: Martina Dowidchuk, Senior Consultant

The stock market continues to remind us of its inefficiencies. Most banks saw their stock values decline last year despite the industry’s record levels of earnings, continuing growth, and strong asset quality levels. In fact, the month of December 2018 recorded the greatest monthly stock decline since 1931. The broad market index, the Nasdaq Composite Index, was down 9.5% for the month of December and the banks were impacted even more than the overall market with the Nasdaq Bank Index falling 14.1%. For the year 2018, bank prices declined by 17.9% as measured by the Nasdaq Bank Index. This market correction was caused by a combination of economic and political factors, as well as the market’s perception of their impact on the industry. The Nasdaq Bank Index has showed a considerable improvement since the end of 2018, but as of July 30, 2019, it continues to be more than 9% below the level it reached 12 months ago.

While there will always be external factors outside of any bank’s control affecting the market pricing, the intuitive fundamental relationships tend to remain true among broadly-traded stocks. Regardless of the overall market’s ups and downs, the market values of banks with a higher profitability, stronger growth prospects, and other positive fundamentals are typically higher when compared to banks with weaker performance. However, this is not always true for banks with a limited stock trading activity. To ensure that the improvements in the bank’s performance translate into the shareholder value, the earnings prospects and financial strength need to be proactively communicated to the proper audience so that investors realize the value of a community bank stock and the bank gets a proper credit for its performance.

One of the easiest and fastest proactive measures available is to obtain an independent third-party valuation of the bank’s stock. Professional appraisers use multiple valuation techniques that encompass both sound financial theory and the latest market realities. Different considerations are made depending on the type and purpose of the valuation. Some valuations may require a minority interest value (i.e., a trading value), while others may call for a controlling interest value (i.e., change of control value). A valuation report evaluates the bank’s performance from different perspectives and provides an immediate stock value estimate that can then be communicated to shareholders and potential investors, providing a base point for future trades, stock repurchases, employee stock ownership programs, etc. Furthermore, if the bank has not previously had a valuation of its stock completed, the result in many cases could be a significant, immediate increase in shareholder value as the bank and its shareholders realize the true value and potential of the stock.

For community banks, understanding and proactively managing the shareholder value can be vital for many reasons. Young & Associates, Inc. has been providing valuation services and advice encompassing a variety of transactions and valuation purposes for over 40 years. Our experience in merger and acquisition activities, bank formations, and other capital market transactions gives us the expertise to help our clients understand their market value and make informed decisions as they implement their strategic initiatives. For more information on how Young & Associates, Inc. can assist your bank in this area, give me a call at 330.422.3449 or send an email to mdowidchuk@younginc.com.

Succession Planning – The Key to Remaining Independent

By: Bob Viering, Senior Consultant and Manager of Lending Services

For many community banks today, remaining independent is the number one strategic priority. There are many reasons boards believe remaining independent is important: the board believes that the shareholders’ investment will be maximized over a longer time horizon; that the bank as an independent local bank can best serve the needs of the community; that the employees as a whole will be far better served (and have jobs) by remaining independent. These are all reasonable and sincere reasons.

So, if staying independent is important, why are an increasing number of banks selling today? One of the biggest reasons that banks sell is that the board is not confident that there is anyone ready to take over management of the bank. Developing a successor internally is a multi-year process to groom a talented individual to learn enough about the day-to-day responsibilities and skills needed to manage a bank successfully. Hiring a new CEO externally sounds easy, but to find that right person that not only has the skills and background to succeed and also can fit in the community and, most importantly, the bank’s culture can be a very challenging process, especially if you are in a rural community. If something happens that the CEO role is suddenly open, or the CEO decides to retire in a year or less, all too often there is not enough time to find that right person, and the easier decision is to sell while the bank is still running smoothly.

It sounds like having a plan on how the CEO position will be filled is the answer. We’ve seen very simple plans that are a few short paragraphs that basically say, “Joe and Mary can run the bank in the interim. If one of them is not the right person, we’ll just hire someone.” Even for a very small bank, it’s almost never this easy. Even if you believe one of the top managers has the “right stuff” to be the next leader, have you thought about what skills they may need to develop to be ready? Have they had any real experience leading a group or an important project that gives you confidence they can run the place? Can you picture that person standing up in front of your shareholders? Or representing your bank to regulators? Or allowing your other key employees to operate successfully? Can they run the bank when times get tough (and they always do)? If you answered positively to these questions, do you have a plan, with timeframes, to provide the types of training and experience so that they will be ready to take over?

Even if you are confident you have the right person to take over, or you start early enough to recruit your next leader, what about the next level of management? Are they ready to step up when Joe or Mary ascends to the top spot? Do you have a plan to develop that next level of management? As you step through the layers of your organization, it often becomes clear that there are other key employees that would impact your ability to run the bank smoothly if they leave. What do you do if your head of IT leaves? Is there a replacement? Can the functions be outsourced? Every organization has those key people; they may not even be mangers that are critical to the operation. What’s your plan if they are gone one day?

If you may be facing the expected change at the CEO level and you have other key people that are in sight of retirement, selling can seem like a simple, expedient solution. The key to not being backed into a corner when retirements occur, or when a key person leaving is a threat to the successful operation of the organization, is having a well thought out succession plan. A successful plan has the following elements: it identifies those key individuals in the bank needed to run the organization successfully; it identifies the skills and training needs for those individuals that have the ability to be promoted to more responsible positons, even the CEO role; it has a written plan with timelines for preparing the individual for that next step; and it is updated at least annually to verify that the plan is still the best plan for the bank and that the individuals are progressing as expected.

If you truly want to remain independent, then you must take the time, and it will take time, to develop a meaningful succession plan. Well done, it will take months to develop and time to groom and coach that next level of talent, to review and update your plan as required.

At Young & Associates, Inc. we are committed to the idea that we are all best served by having strong, well-run community banks. If you would like help in developing your succession plan or would like a critical eye to review your existing plan, reach out to us: we’ve got community banking’s back. To contact me, give me a call at 330.422.3476 or send an email to bviering@younginc.com.

Improving the Interview of Job Applicants

By: Mike Lehr, Human Resources Consultant

Never have businesses had to do so much recruiting. Never have they spent so much money on it. Yet, they have never been worse at it. The interviewing of applicants highlights this demise.

Imagine going to a team meeting. It has no agenda. It has no planning. It has no pre-work. People just “wing it.” That’s today’s job interviews. More puzzling, these “meetings” play a key role in the buying of a $20,000 to $200,000 asset annually. In contrast, how much thought and planning went into the last technology purchase for only a one-time cost of $15,000?

Research shows these interviews are a waste. It shows that most times the winner is the applicant most like the interviewers, not the most talented, skilled, or experienced. Yes, some argue that this determines cultural fit. What is that culture though? What is fit? Ask a dozen senior employees. It’s highly likely the responses will lead one to conclude that a unifying culture does not exist.

How to Improve Interviews

To improve interviews, they require more thought, planning, and analysis. That includes asking applicants the same set of questions. Ugh! Most likely, if you’re like I am, my eyes rolled when I first heard this. Much of my thinking had to do with feedback from interviewees. They described straight-jacket interviews where interviewees couldn’t ask or say anything but what was on their prep sheet. Moreover, the questions appeared very similar from one interview to another in the same company.It’s only later after digging into the original design of this approach that I found that it was structured interviews gone awry. It’s not how we should apply them.

How Structured Interviews Work

Here’s how it should work. First, think about the job and the skills it needs. Don’t make a laundry list. Start out with the half-dozen key ones. Then, come up with scenarios that can actually happen in your bank in which the applicant will need those skills. Now, devise “what if” questions around them that would require the use of those skills.

Examples of Questions in Structured Interviews

For example, take the job of branch manager. Take the skill of customer service. Let’s say the scenario is a very upset customer at the platform over fees charged to her account. She is getting loud and stressing the teller or customer service rep. The question now becomes, “How would you handle this?”

As another example, take a customer service rep or teller. The aptitude you want is conscientiousness or integrity. The scenario here could easily be that he/she is out with coworkers in a public place. One of the coworkers starts talking about a customer. Yet, it doesn’t seem he/she is talking loud enough for anyone outside the group to hear. The question could become then, “What would you do if this happened?”

The Grading of Answers to Interview Questions

Once you have these questions, come up with your own answers and grade them. This is key because you’ve thought about the answers before any bias could set in. As the research shows, if we like the person, we are more apt to look at a response favorably even if it’s one we were lukewarm about beforehand.

Now, this doesn’t mean that answers falling outside of those are wrong. It just means you’ve established a guide for determining good answers. After all, if you’re looking for creative problem solving skills, answers that aren’t like yours are important.

Practically Applying Structured Interviews

As I described in my early experiences with this, it’s easy to go over the edge. The entire interviewing team doesn’t have to ask the same questions. In fact, it’s better if they don’t. You can decide who might be best at asking a question. The circumstances, scenario, and importance of that question to the interviewer will often make the decision for us.

This also doesn’t mean that interviewers can’t ask other questions. Some might work to make the interview more conversational as in the case of exchanging pleasantries. In this case though, the answers don’t matter or they count less. After all, if the question was that important, we should have thought of it before any interviews began.

Better Interviews Yield Better Employees

According to Bureau of Labor statistics, 95% of hiring activity aims at filling existing positions. Turnover is at record highs. While many factors contribute to this, such as more employers preferring to hire from outside rather than to promote from within, some are myths, such as increased mobility. According to the same statistics, people are just as likely to move out of state for a better job as they were in the late 1960’s.

So, we can’t use outside factors as excuses. Hiring outside candidates is risky. The data shows promoting from within is better, less costly, and yields better outcomes. Therefore, to remove the risk of hiring outside applicants, improving the interview is low-hanging fruit to lowering drastically that risk.

Yet, even with this it’s easy to bypass the interviews and not take them seriously. Just think of the outside candidate that the president or other employees know. Think of employee referrals. It’s a myth that they automatically produce better employees. Research doesn’t support it. They, too, need to go through the same rigorous interviewing process as lesser known applicants.

In the end, there’s an easy way to determine if your interviewing process is in good shape. Ask this question: Does it have the same or better planning, analysis, and research that went into the bank’s last major technology outlay?

For more insights and guidance on how to improve interviewing of job applicants, including advice on questions, you can reach Mike Lehr at mlehr@younginc.com.

The Value of Internal Audit Through a Fresh Set of Eyes

By: Jeanette McKeever, CCBIA, Consultant & Internal Audit Operations Manager

There is risk in every aspect of the banking industry and the regulatory environment seems to continually change. As to the governance and control functions of the banking industry, it may be refreshing to the board of directors, audit committee, and executive management to have their internal audit function re-assessed and validated though a fresh set of eyes to assure that the controls in place are functioning as intended.

A strong internal control system, including an independent and effective internal audit function, is part of sound corporate governance. The board of directors, audit committee, senior management, and supervisors must be satisfied with the effectiveness of the bank’s internal audit function, that policies and practices are followed, and that management takes appropriate and timely corrective action in response to internal control weaknesses identified by internal auditors. An internal audit function provides vital assurance to a bank’s board of directors (which ultimately remains responsible for the internal audit function, whether in-house or outsourced) as to the quality of the bank’s internal control system. In doing so, the function helps reduce the risk of loss and reputational damage to the bank.

All internal auditors (whether in-house or outsourced) must have integrity and professional competence, including the knowledge and experience of each internal auditor and of team members collectively. This is essential to the effectiveness of the internal audit function.

We encourage bank internal auditors to comply with national professional standards, such as those issued by the Institute of Internal Auditors, and to promote due consideration of prudent issues in the development of internal audit standards and practices.

The scope of the internal audit function’s activities should ensure adequate coverage of matters of regulatory interest within the bank’s audit plan.  Regular communication by the audit committee, management, and affected personnel is crucial to identify the weaknesses and risk associated to assure that timely remedial actions are taken.

Young & Associates, Inc. can independently assess the effectiveness and efficiency of the bank’s internal controls and processes to provide value and assurance that the internal control structure in place operates according to sound principles and standards.

For more information on how we might provide internal audit services specific to your bank’s needs, whether it is outsourced or co-sourced, please contact me at 1.800.525.9775 or e-mail jmckeever@younginc.com.