Monday, January 28, 2013

Can and should banks help the children?

It's for our children. I love it when politicians give some variant of this argument. I suppose if they really cared about our children, they would stop running up the national credit card on them. But doing so would not allow us to "protect our children". Protect them while saddling them with our bills. Real good parenting.

Politics aside, I received a school of hard knocks lesson in how poorly our young adults are prepared for personal financial management. Prior to sending our daughter off into the hard, cruel world, I sat her down and went over budgeting and the importance of saving. We developed a spreadsheet together to go over her expenses, and her after tax income from her paycheck. We allocated a certain amount to auto-deduct into a savings account. We used Excel, but there are plenty of nifty apps such as Koku (pictured) so they can use their indispensable phone.

Then she left. And ignored everything we discussed. We could have let her work her way out of her money mistakes. I'm a firm believer in letting kids touch the stove. But no. Most of her financial misdeeds fell to me and my wife to clean up. I often ask other parents about their situation. Most either continue to provide financial support to their young adult children or let them struggle. Problem: when digging yourself a hole, the first order of business is to stop digging. These kids, I suspect, keep plugging away at it.

Not to play up my generation. But when I left the house, there were no checks coming my way from Mom. No paying auto insurance, cell phone bill, etc. It was.... good luck son! Today, there is a greater sense of dependency and entitlement, as if reducing our retirement to support our adult children's lifestyles is something to aspire to.

Isn't this an area begging for help from financial intermediaries such as banks and credit unions? Parents don't want to support their kids ad infinitum. I doubt brokers or insurance agents want to fill the role, because they still get compensated on production. And there will be no big dollars in the near term for becoming the kids' money mentor.

But kids and parents need help here. There is an emotional aspect regarding dealing with money issues between them. Having an intermediary makes sense. Compensation can be in the form of a fee, or for "premium" customers, no fee (minimum balances). FI customers are extremely sticky, so not only will you win the loyalty of the parents, but have a great chance of banking the kid for life as they move from broke, to borrower, to saver. I think, with training, the emerging "universal associate", assistant manager, or in some cases, branch manager will be able to fill the role. Imagine once per month, ten minute Skype sessions with the college student checking in on their money management practices. It could set them on sound footings for life.

There may also be profitable opportunities for college financing, as this is an area that begs for conservatism. Money has been seemingly so free to kids in college, they burn through it faster than a pro athlete at a strip club. They go overseas for study or vacation, take spring breaks, stay in college for six years, all because that first payment isn't due yet. But when it comes, they'll either have to default or live with the parents because the monthly nut is so huge they can't make it on their own.

Can't we create a financial package and service and price it so we grow revenues, leverage our infrastructure and expertise, and win the loyalty of parents and their young adult children? I think we can.

What are your thoughts on the subject or do you know of FIs that are doing it?

~ Jeff

Saturday, January 19, 2013

Guest Post: 2012 Economic Year in Review by Dorothy Jaworski

Looking Back at 2012

Every year, I usually write about the past year with mixed feelings, at times nostalgic for those events and at times, glad that the year is over. 2012 brought us highs, lows, and surprises. As to the latter, the Federal Reserve is always good for a couple of surprises. They continued to run their easing campaign, now going on six years strong and counting, pushing down on Treasury yields, spreads, mortgage rates, and pushing up on money supply. The result has been high bond prices, historically low rates, with the 10 year Treasury ending the year at 1.73% (below most inflation measures!), more “promises,” and a constant flow of new money into the markets.

The biggest beneficiary of all this Fed activity has been the stock market—which ended the year at some pretty good “handles,” with the Dow above 13,000, S&P 500 above 1,400, and the Nasdaq above 3,000. Price gains for the year ranged from just over 7% for the Dow to almost 16% for the Nasdaq. Stocks remain an attractive asset class with the dividend yield of 2.2% on the S&P 500 exceeding the yield on 10 year Treasuries of 1.73%. 

Housing markets have begun to improve with the national indices showing year-over-year growth of 3% to 4% recently. We have a long way to go before recapturing the home price highs of 2006 and 2007, but it is a start. Auto makers continue to enjoy their rebound, with the Big 3 US Automakers enjoying their best month in December, 2012 since the Great Recession took hold. Gas prices are finally coming down, making people able to drive their brand new cars more; I am glad to be testing the $3.00 per gallon price level rather than the $4.00 one.

The dominant theme of 2012 was the Presidential election. Over $2 billion was spent by both campaigns and nothing changed. I don’t know about you, but I want my money back! That $2 billion pales in comparison to JP Morgan’s losses of $6.2 billion so far from trading of credit derivatives by the London Whale. Boy, wasn’t Jamie Dimon humiliated when he found out it was more than a “tempest in a teapot!” 

Superstorm Sandy battered the coasts of New Jersey and New York with devastating results. Another of the year’s lows was watching our lawmakers and politicians argue until midnight on New Year’s Eve over the “fiscal cliff” and vote in the wee hours of the morning to “save” us. A new low, indeed, but more on that later.

The Fed—At It Again

The Federal Reserve keeps experimenting with their monetary policy moves, continually trying something new without waiting to see how the past moves are working out. In December, they announced that they would change their “promise” from keeping rates super low through the arbitrary date of mid-2015 to a “promise” to keep rates super low as long as unemployment exceeds 6.5% and core inflation between one and two years out is less than 2.5%, with inflationary expectations well anchored. So in effect, they have changed to a performance based measurement system that may not manipulate the yield curve as violently; this is clearly an improvement over the “pick-a-date” strategy. They could have included GDP growth as a benchmark; they will figure that out later and add it, I’m sure.

The Fed continues to buy bonds and more bonds. They announced another quantitative easing program—this time, QE3—part 2, in which they will buy $45 billion a month in Treasury bonds in addition to the $40 billion per month of mortgage backed securities that they are buying for QE3. Yes, folks, that would be $1 trillion per year! Since QE3 is open-ended, we have no idea how large it will grow. My thoughts are that, someday, they will want to sell the $2 to $3 trillion of bonds that they have accumulated in all of their QE programs. Nobody can buy that many bonds. Ben Bernanke probably does not have to worry about it; he has telegraphed his intention not to serve another term when his current one expires early in 2014. Who will bring Happiness then?

The “Fiscal Cliff”

Who in their right minds would have so many critical tax codes and laws expiring all on  the same year-end date? Oh, wait, our Congress! Once again, we saw the mad scramble to prevent a “crisis” and the secret meetings to get a deal done at the midnight hour. In the early morning of New Year’s Day, the Senate voted to pass legislation to make permanent most of the lower Bush tax rates, adjust deductions, extend unemployment benefits, continue tax credits and tax breaks, and, for some, just plain raise taxes. 

The stock markets rejoiced and rallied 2% to 3% on January 2nd, because the fiscal cliff was now manageable, not an apocalypse. Higher wage earners will see an increase in the top tax bracket, from 35% to 39.6%, and an increase in their capital gains and investment income levels from 15% to 20%. All workers will be impacted by the expiration of the payroll tax “holiday,” which means the Social Security tax goes from the temporary level of 4.2% to its original 6.2%, translating to an extra 2% tax to be paid in 2013 for 77% of households, costing them about $110 billion more in 2013 than 2012.

Aside from the secret negotiations and last minute crisis atmosphere that surrounds Washington DC, overall, it is a good thing that the cliff is resolved for now. The tax bracket changes become permanent and that will allow planning to resume. The estate tax exemption was raised to $5 million per individual. A permanent fix was placed into the tax code to index the AMT tax and save tens of millions of taxpayers from one of the more evil tax code provisions. 

The original estimates of the economic damage from the cliff were over $600 billion for the year in higher taxes. With the deal and the passage of the American Taxpayer Relief Act of 2012 on New Year’s day, the damage will “only” amount to about $160 billion (from the 2% rise in Social Security tax and higher taxes and capital gains/investment income on higher income taxpayers- $400,000 for individuals and $450,000 for couples). The estimated reduction to GDP would be -.3% to -.4% in 2013, rather than -1.2% for the whole cliff.

Spending cuts were not addressed in this latest deal. In fact, the sequestration cuts of $1.2 trillion over 10 years that were mandated to start on January 1st were postponed by two months. Isn’t that always the way? Spending will someday have its day of reckoning. We are currently at the debt ceiling limit of $16.4 trillion and the US deficits keep running at over $1 trillion per year, or about 8% of GDP. The debt of $16.4 trillion is well over 100% of our GDP, which should bring on more concern, especially as we watch our European friends deal with the same issues of too much spending and too much debt.

Finally, the IRS is warning that they may not be ready with the revised forms to address the new law in January. If forms are delayed until February at the earliest, there will be delays in filing and receiving tax refunds—you know, those interest free loans so many people grant the government each year. The average refund last year was $3,000, so spending early in the year may be weaker than we would normally expect.

Wrapping It Up

So, every year I talk about a Santa Claus rally. Did we have one? Yes, indeed; the S&P 500 was up 2.3% for the last five trading days of December plus the first two of January and the Dow was up 1.7%. Average Santa Claus rallies typically range from 1.5% to 1.7%. Happiness over the fiscal cliff deal made it happen, I’m sure, because all of the gain came on January 2nd. While there are still tax increases occurring in 2013, at least the deal made the impact a little more manageable. Stay tuned! 

Thanks for reading. DJ 01/04/13

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004.

Sunday, January 13, 2013

Should Banks Jettison Unprofitable Customers?


I will tell you why in a moment, but first why I thought of this question.

Alan Weiss of Summit Consulting penned a book called The Consulting Bible (see my bookshelf if interested in the book). In it, Weiss suggests you jettison the lower end of your client list when you win new clients. His reasons:

  • The client is no longer profitable.
  • You are bored with the work.
  • The client is troublesome.
  • The work is unpleasant.
Financial institutions rarely go through such an exercise. In fact, I am currently preparing for a meeting with a client to discuss what to do about unprofitable branches. It has always been challenging to advise clients to reduce rather than to add. But to add value to customer interactions in banking, we have to dedicate time to making our customers situation better, in some way. Continuing to rely on having a nearby branch or a mobile app to add value will solidify our position as a commodity, in my opinion.

Instead, what we can offer customers is hassle free banking, improved financial condition, and peace of mind. To do that, we need talented employees with time. Time cannot be expanded. Giving 110% of your time only makes sense on a t-shirt.

But unlike consulting, financial institutions make most of their revenue on the spread. If an unprofitable customer keeps $10,000 in deposit balances with you and you can re-deploy that money at a 3% spread, then you generate $300 in revenue on very little marginal cost. Letting that customer go to a competitor will not reduce employee or occupancy expense. In fact, you would experience very little cost reduction (FDIC insurance and possibly a small data processing savings). 

But what you can do is push customer service to the appropriate level based on the value of the customer to you. Keep your most talented employees reserved for your most profitable and strategically important customers. Because those customers have the greatest potential to appreciate the value your FI brings to their situation. Growing high value customers while properly serving commodity customers is critical to improving your FI's relevance and breaking the commodity cycle.

Any stories out there about identifying and serving high value customers appropriately?

~ Jeff

Sunday, January 06, 2013

Bankers: Circle the Wagons Around Your Strategy

Whether you are a bank, thrift, or credit union, I hope you have a strategy for 2013 and at least three to five years into your future. If not, you better assemble the troops and determine the bank you want to be, or you run the risk that your customers don't see you as anything but just another bank (or thrift, or credit union, what have you).

So often, though, FIs develop specific objectives, like mentioned below, and limit the input on how exactly to accomplish the objective to a few people. I propose something different this year. Run a New Year's Resolution Contest for your employees to use the collective brain power of everyone on your payroll to achieve your objectives.  Here is how it can work...

Once your strategy team (typically senior management and the entire board or committee of the board) determines your FIs course and identifies what success would look like in terms of goals, the next step is to lay out the tasks necessary to achieve those goals.

To kickoff the contest, the CEO, or other strategic leader, can draft a companywide e-mail as follows:


Dear Colleague,

Schmidlap National Bank has proven to be an excellent resource for professional practice firms (lawyers, accounts, doctors, dentists, etc.) within our markets. Your hard work has given us a premier reputation and a 12% market share.

Your board of directors has adopted a strategic plan that includes the following strategic objective and goal:

Strategic Objective: Be recognized as the best FI to professional practice firms in our markets.

Goal/What success looks like: Achieve a 15% market share for operating accounts in the professional/technical NAICS category in our markets by year-end 2014.

We are seeking your valuable input on how to achieve this goal. Specifically:

Identify what you believe to be the one task that would have the greatest impact in achieving our goal. For example:

Sample proposed task to achieve goal: Develop a once per year professional practice forum at the Ritz/Carlton that includes a program designed to help professional practices run better and position Schmidlap as an expert in professional practice cash flow management.

Send your best idea directly to me no later than January 30th. Your idea will be presented anonymously to senior management, who will select the best ideas to achieve our strategy.

Those whose ideas are selected will receive: Recognition at our annual employee awards event. A position on the team formulated to execute on the Strategic Objective. And two additional paid time off days.

Although we cannot execute on all tasks presented, we thank you in advance for your thoughtful ideas and your continued support in Schmidlap National Bank's success.


Joe Buck

What are your thoughts on this idea or do you have another idea to engage your employee base in executing your strategy?

~ Jeff