Guest Post: Financial Markets and Economic Update-Second Quarter 2025

The second quarter of 2025 has been full of drama and lots of rain in southeastern PA.  We’ve arrived at the start of summer and a 100-degree heat wave after witnessing a stock market meltdown over tariffs and a subsequent recovery.  The bond market saw wild swings in Treasury yields and the return of the bond vigilantes.  We experienced lots of tariff news, wondering about the Federal Reserve, unrest in Los Angeles over ICE in a community already reeling from the Palisades fire in January, and most recently, bold targeted strikes by our military on nuclear sites in Iran.

Why Aren’t You Lowering Rates, Jerome?

We’ve been wondering… You told us repeatedly that you would lower interest rates before inflation gets to your target of 2.0% on PCE (personal consumption expenditures inflation index).  Well, we are inching closer with PCE at 2.3% in May.  You are now targeting tariffs as your reason for not easing.  You just projected real GDP at +1.4% to +1.6% for this year and next, which I guess you don’t see as “weak.”  You continually say you “don’t know” what the effect of tariffs will be, but you happily increased your inflation projection for 2025 to 3.0% and lowered your GDP growth projections to +1.4% in 2025, +1.6% in 2026, and +1.8% in 2027.  Is that slow growth for so long acceptable in any scenario?  You just stated that growth is “solid,” yet the June Beige Book report showed that 9 of your 12 districts show declining or flat growth, including the Philadelphia region with a modest decline.  The Moody’s Beige Book Index fell to a negative number in June for the first time I can remember; it fell to -5.6 from 19.4 in May.  Doesn’t that bother you?

Several analysts recently have questioned why the FOMC always votes 12-0, including your most recent June 18th decision to keep rates and QT (quantitative tightening) unchanged; i.e. you are all doing nothing.  I suppose this FOMC “dozen” will wait and watch as growth gets strangled by your unreasonably high Fed Funds policy rate, which is, by the way, tied for highest in the world!  Everyone else is easing!  At least you are no longer Phillips curvers as you project both inflation and unemployment to rise.  As Powell said: “The current stance of monetary policy (do nothing) leaves us well positioned to respond (do nothing) in a timely way (always very late).”  It’s gratifying that 3 Fed governors have come out since the June meeting saying they will support rate cuts.   

Some Indicator Favorites

Leading Economic Indicators (LEI) continue to be negative month after month, and the duration of these negative readings confounds me and others.  The LEI in May fell -.1% to 99, following April’s decline of -1.4%, and has been negative for 34 of the last 36 months (exceptions were March and November, 2024).  There used to be a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.  Not anymore.

Real GDP was -.5% in 1Q25 and was impacted by a huge amount of imported goods purchases to get ahead of tariffs.  Without the negative impact of imports and inventory offsets, growth probably was about +2.0%.  Growth in 4Q24 was +2.4%.  The Atlanta Fed projects 2Q25 at +2.9% and the Fed’s June projection puts GDP at +1.4% for all of 2025; nominal growth will likely be below +4.0%.

Productivity had a terrible reading in 1Q25 at -1.5%, following +1.7% in 4Q24.  This harms the formula for acceptable wage growth that would not be inflationary: 2.0% inflation target plus +1.5% long-term productivity growth totaling +3.5%.  In May, year-over-year wage growth was +3.9%.

The labor market is showing signs of weakness.  The unemployment rate was 4.2% in May.  Payroll growth was only +139,000 while household growth fell -696,000.  The pool of available workers has risen to 13.228 million and the augmented unemployment rate was 7.5%.  Yikes!  Maestro just perked up!

The M2 money supply is supposed to grow at approximately the same pace as nominal GDP per Milton Friedman.  Nominal GDP was +3.2% in 1Q25 and was +4.8% in 4Q24.  M2 year-over-year growth was +4.5% in May, +4.4% in April, and +3.6% in December.  The Fed is finally catching up, after they allowed M2 growth to turn negative for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.  Is this worse than tariffs?  You bet!

Inflation

Inflation has been on the decline for the past several months, despite tariff fears.  For May (year-over-year), CPI was +2.4%, core CPI was +2.8%, PPI was +2.6%, PCE was +2.3%, and core PCE was +2.7%.  This leaves Fed Funds of 4.50% at a spread of +1.7% to 2.2% (the real rate- more below) above these inflation rates.  It sure looks like PCE of +2.3% is close to the target of +2.0% and CPI is slightly below its implied target of +2.5% (+.5% to PCE).  Still, the Fed will not ease. 

Why not?  PCE fell below +3.0% in October, 2023, when Fed Funds was 5.50%; this rate remained there until September, 2024, when the Fed suddenly eased by .50%.  We want to look at the real Fed Funds rate at equilibrium.  Currently, that real rate is Fed Funds of 4.50% less PCE of 2.3%, or 2.20% and the real rate using CPI of 2.4% is 2.10%.  Since 1970, Fed Funds has exceeded PCE by .60% and CPI by 1.00%, with a differential of .40% between the two inflation measures.  More recent studies put the differential at .50%, which is why I use an implied target for CPI of 2.5%.  Many economic researchers, including Taylor, place the real Fed Funds equilibrium rate at 1.00% to 2.00%.  Studies in 2014 put the equilibrium rate at 0.00% when GDP growth was lagging potential badly.

The Fed’s projected GDP in the next three years is well below potential, especially due to the effects of high government debt-to-GDP at 120.9% in 1Q25.  When this ratio is greater than 90% for an extended period of time, as it has been since 2009, growth will be harmed in relation to potential by one-third.  We can assume potential is +3.0% plus.  So why is the Fed above the real range of 1.00% to 2.00% and not closer to 0.00% to 1.00% when growth is so weak?  Coupled with continuing QT keeping higher yields on mortgage-backed securities, and thus mortgage rates, it’s hard to come up with an answer.  It seems that Powell and his FOMC dozen are late again…just as they were in September, 2024 when Fed Funds of 5.50% produced a real rate of 3.20% compared to PCE then of +2.3%.  A 3.00% real rate?  Given the lag in Fed policy of six to nine months, it makes sense that their tight policies have weakened growth now.

There are many reasons why inflation would fall rather than rise.  Falling energy costs and the shift back to fossil fuels will lower costs compared to expensive “green energy,” although we will see volatility in oil prices as we did last week with the Iran-Israel conflict.  The weaker economy, which could be exacerbated by tariffs affecting consumer and business spending, lower federal spending, restrictive Fed policy, and high government debt-to-GDP levels will all put downward pressure on inflation.

Stocks and Bonds Go Wild

We started the second quarter with President Trump’s “Liberation Day,” where he rolled out extremely high tariff rates for all countries.  These were quickly figured out to be trade deficits to total exports, not actual tariff rates.  But the shock was there on April 3rd and April 4th, which were two of the most horrible trading days in memory, with the DJIA down -9.5%, S&P 500 -10.8%, and Nasdaq -11.8%.  It was a pure-panic market collapse, not a crash, but we didn’t know this until later.  It seems all of Wall Street shorted the market, only to be whipsawed on April 9th by Trump’s announcement of a delay of 90 days in tariffs to allow for deals to be made, although he kept in place a minimum tariff of 10%.  The pause was recommended publicly by Jamie Dimon and Bill Ackman and Trump listened.  Short covering rallies are the most fun to watch, with the DJIA +8.0%, S&P 500 +9.5%, and Nasdaq +12.2%, which were some of the best trading days ever.  Volatility, or the VIX, peaked at 52%!  By May 13th, all of the price meltdown was recovered.  Today, June 27th, the S&P 500 and Nasdaq have recovered to above their all-time highs.

Bonds experienced volatility of their own during April and acted in their traditional role of being a flight-to-quality trade.  The 2-year Treasury hit a low of 3.54% on April 4th, went back up to touch 4.00%, and today is at 3.74%.  The 10-year Treasury hit a low of 4.14%, went back up to 4.57%, and today is at 4.28%.  Bond vigilantes woke up and began looking at the size of deficits, especially after Moody’s downgrade of the US credit rating from Aaa to Aa1 on May 16th; the vigilantes pushed the 10-year yield to 4.57% and the 30-year yield above 5.00% that day.  The problem is that Moody’s action comes 14 years after S&P took the same action on August 5, 2011 from AAA to AA+.  Perhaps the assorted calculations of the “One Big, Beautiful Bill’s” deficit size spooked the bond market.  It was passed by the House on May 22nd and sent onto the Senate. Some of the deficit will be offset by DOGE spending cuts of $160 billion.  Of course, the CBO “scoring” is typically suspect, not allowing for increased revenues.  Nonetheless, the vigilantes are watching, but despite their best efforts, rates are drifting lower.

Tariffs

Suddenly everyone’s a tariff expert.  I’ve seen some outrageous projections which seem skewed toward increased inflation.  But what if the tariffs affect spending enough to slow down growth?

The US has been experiencing large trade deficits, especially with China, for over 20 years.  President Trump pointed out that the US has suffered from unfair trade practices.  We charged tariffs of 2.7% on average in 2024 to other countries and they charged us 6.7% plus VAT taxes plus manipulated their currencies.  His goal is to wipe away the unfairness and increase tariff revenue without increasing inflation.  But clearly the uncertainty has rattled both stock and bond markets, not to mention the Fed.  The meltdown in stocks on April 3rd and 4th caused a decline in market capitalization of an estimated $6.4 trillion, which has since been recovered.  But why the huge reaction when US imports are $3.3 trillion, or only 14% of the economy.  Many trillions of dollars of commitments have been accepted by President Trump for domestic investments in manufacturing plants and equipment from companies all over the world.  Tariffs provide incentives for manufacturers to produce here in the US.

We are in the process of readjusting our economy to increase manufacturing and production here at home, using our natural resources- oil and gas domestically and minerals from the deal with Ukraine.  Tariffs are not generally inflationary as producers absorb some of the tariff costs and consumers can often substitute cheaper domestic goods for imported ones with tariffs.  The shades of the Smoot-Hawley Tariff Act of 1930, which raised tariffs from 13.5% to 20%, loomed over the markets before fading away.  If you want to argue about the 1930s, start with the Fed, who kept rates too high during those years and added to the severe decline in GDP.

Thank You, President Harker

I wanted to give a huge thank you to outgoing Philly Fed president, Pat Harker, who served our region better than any other Fed President, in my opinion.  I wish there was not a term limit.  I thank you for your wisdom, insights, and dedication to all of us who live and work here.  All the best to you!

Happy Events

April wasn’t all crazy.  We witnessed Rory McIlroy achieve the Grand Slam by winning the Masters on April 14th.  The Eagles visited the White House on April 28th as part of the national recognition of their great Super Bowl LIX win on February 9th.  For me, retirement is about happy times and we spent a few days at Hershey Park this month and this summer Paris is calling my name.  I will again climb the 350 steps to the Abbey at the top of Mont Saint Michel in Normandy.  I recommend that you also make plans for happy times!

I appreciate your support!  Thanks for reading!  DLJ 06/27/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

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

Make Your Strategy 12 Strong

I have never been a fan of comparing combat to corporate. That is the attitude I brought to the keynote speaker at a recent banking conference I attended.

His name is Mark Nutsch, a former U.S. Army captain with Green Berets Operational Detachment Alpha (ODA) 595, a unit that was one of the first special forces units to be inserted into Afghanistan after the 9/11 attacks. The exploits of ODA 595 are chronicled in the book Horse Soldiers by Doug Stanton and the movie 12 Strong starring Chris Hemsworth. 

An elite army unit inserted into Northern Afghanistan to work with a warlord to flush out Al-Qaeda militias? Yeah, just like that rough and tumble world of hammering out a strategy over lattes and planning its execution over conference calls. Does anyone die if a deadline is missed?

This is why I resist comparing whatever it is that I do to war.

Then Mark described how their best-laid plans went to hell due to changing situations on the ground, and then I started connecting the dots. In a speech to military planners in 1957, Dwight Eisenhower famously said "Plans are worthless. Planning is everything." As soon as things go wrong, your plan must change. Much of it at least.

This brought me back to another military figure, James Murphy, former Air Force fighter pilot, Bosnian War veteran, and author of Flawless Execution. In that book, Murphy described strategy development and execution using the Plan-Brief-Execute-Debrief method used by fighter pilots to plan missions.

This method emphasizes the debrief mentality when mission participants gather after execution phases (in a fighter pilots parlance, after the mission was completed) to identify what worked, what didn't, new information, changing situations, and course corrections. Murphy's firm, Afterburner Inc., would later adopt the more expansive model below.

Future Picture is a vivid description of what success would look like if the plan was executed flawlessly. In Flawless Execution, Murph used the example of "Taking out 75% of the enemy's surface-to-air missile (SAM) capability" as a Future Picture. This might be considered a Vision in corporate terms. I tend to call it the Aspiration because Vision has gotten a bad rap. Mostly as a result of bad visions that communicate nothing to those responsible for executing the strategy on what success would look like. Murphy's example is pretty clear.

Mark from the Horse Soldiers used Commander's Intent in his speech, which is much like what Murph has as Leader's Intent in the above model. Commander’s intent is a clear and concise expression of the purpose of a military operation and the desired end state, guiding subordinate leaders in decision-making and execution. Recognizing that the original Plan would be altered as situations changed and the execution is modified.

I recently told a bank CEO, about to embark on their strategic planning process, that it is disheartening when we as consultants review the in-force plan that has not been changed since it was adopted years ago. If the plan was used as intended, there would be post-it notes and changes all over it. Ok, maybe not post-it notes and dog ears, but the document would be marked up to the point of near non-recognition than when it was adopted. 

Except for the Commander's Intent, or the Future Picture, the Aspiration, or the Vision. That would not change, or it would change minimally.

So how does your financial institution create the culture to "Win" as Murph's model demonstrates? Here are 3 ideas:

1. Have a clear Commander's Intent/Future Picture/Aspiration/Vision. Whatever you call it, make it clear where your financial institution is going from the Board room to the teller line. "Be number one or number two in every market we serve" is pretty clear. Don't let the ups and downs of the current situation cause you to lose sight of your brass ring.

2. Build an execution culture. Depending on what study you read, strategies fail somewhere between 70%-90% due to poor execution. Identify those hopefully few metrics that define success in strategy execution. Assign the tasks that need to get done in order to lay the bricks that get to your strategic objectives and vision. Name names. If Marsico is Project Leader on the "implement integrated cash management" suite by December 31st, I don't want to show up to the Management strategy update (debrief) meeting with nothing to report. Imagine if I were tasked with taking out a SAM site in the Flawless Execution example above, and I said "I didn't have time because of my day job" in the mission debrief.

3. Use the debrief method to modify the plan. I tell management teams that they should meet regularly about strategy execution and to make plan modifications. If the modifications are immaterial, a term pre-agreed upon between the Board and Management team, then make the changes and inform the Board by including the immaterial plan modification in the next Board meeting package. If it's material, then propose it to the Board and make the changes after Board approval and/or modification to the proposal. Financial institutions already do this with policies. At least quarterly, brief the Board on plan execution. You may find their perspectives extremely useful in getting to "Win." They are from varied backgrounds and professions, want the institution to "Win", and you pay them anyway. What great consiglieres! 

None of these things will lead to death if done poorly or not done at all. So I still resist comparing combat to corporate. But that doesn't mean we can't learn from the military on how they plan and execute when the stakes are so high. 

For us, the stakes are not so high. But death to our institution is a real possibility. 

~ Jeff

P.S. Mark and a few of his comrades started Horse Soldiers distillery and I intend to partake in some soldier-strong bourbon!

  

Is Jamie Dimon the de Facto Banking Spokesperson?

A bank CEO recently asked me how Jamie Dimon came to be the de facto spokesperson for our industry? As if reporters trek up Mt. Dimon to hear sage advice on bond markets, interest rates, the economy, and work from home. I recently posted the question and got the following response:

I fat-fingered Dimon's name which made it perplexing how someone that didn't follow me, even if they searched for Dimon posts, found this post. But did Sam have a point? I have seen people coronated that don't have the receipts to justify the coronation. Did Dimon? I checked, but before I did I received this chart of support from my Minnesota banker friend @AndySchornack. 

As with all images that may be too small, click on it to see a larger version.

Before Andy sent his chart of support for Jamie, I had run the numbers that are in the table below. I compared the largest US banks to JPM in multiple categories that are important to customers and shareholders of each company. There are different business models for sure, such as BNY which is more of a custody bank that would have an awful efficiency ratio and net interest margin, but has superior profitability. Or Capital One that is a credit card bank, lest you get nervous about their net charge-offs.

Sorry for the size of the table. I had a lot of ratios I wanted to compare. As with the last chart, please click on the above table to make larger. Lower numbers are better because I'm adding rankings, so a 1 ranking is better than a 10. I also assumed a higher leverage ratio was better, which is a subjective distinction. 

JPMorgan Chase (JPM) demonstrates strong historical performance, ranking first in seven out of 14 data points I analyzed, including impressive 3-year and 5-year total returns. While BNY Mellon briefly surpassed JPM in 1-year performance, JPM's consistent leadership suggests a higher level of market credibility compared to peers like Citi.

This credibility is a significant advantage. When a bank like JPM makes strategic investments for future growth, or even when an investment doesn't pan out as expected, its established reputation and transparent communication allow it to execute long-term strategies more effectively. Without this inherent trust, short-term investments aimed at long-term benefits might not receive the desired positive reaction from investors. This highlights how credibility can act as a powerful tailwind, enabling a bank to navigate challenges and pursue its strategic vision with greater investor confidence.

In terms of being the industry guru, I don't want to suggest that JPMs experiences are similar to a community financial institution. Or his approach to work-from-home or opinions on politics are correct. But we can't ignore success and if someone wants to tell me what they learned on their road to success, I'm listening. 

~ Jeff

Memorial Day: Remember 1st Lt. John Fox

The biting December air, thick with the acrid scent of gunpowder and the chilling reality of war, clung to the shattered stones of Sommocolonia. In this small Italian village, nestled precariously in the Apuan Alps, a drama of extraordinary courage and selflessness unfolded on December 26, 1944. At the heart of this pivotal moment stood First Lieutenant John Robert Fox, a forward observer attached with the 598th Field Artillery Battalion of the 92nd Infantry Division – the famed Buffalo Soldiers. His actions that day, a testament to unwavering dedication and ultimate sacrifice, would echo through history, culminating in a posthumous Medal of Honor.

The 92nd Infantry Division, a segregated unit of African American soldiers, faced not only the formidable German forces but also the insidious prejudice prevalent from our own nation. Despite these dual battles, Lieutenant Fox and his battalion and the rest of the 92nd Infantry Division fought with remarkable valor and determination throughout the Italian Campaign. Their advance through treacherous terrain and against entrenched enemy positions was a testament to their resilience and commitment to duty.

Lieutenant Fox, born in Cincinnati and a graduate of Wilberforce University in Ohio as a commissioned officer, embodied this spirit. As a forward observer, his role was critical: to position himself strategically, observe enemy activity, and direct artillery fire to support the infantry's advance. On that fateful day in Sommocolonia, Fox found himself on the second floor of a house, providing crucial targeting information as German forces launched a fierce counterattack.

The enemy, intent on reclaiming the village, pressed their assault with relentless intensity. American infantry units, facing overwhelming numbers and withering fire, began to fall back. Lieutenant Fox, with his vantage point, remained steadfast, relaying vital coordinates that allowed Allied artillery to disrupt the German advance and provide cover for the retreating American soldiers.

As the situation grew increasingly bleak, and the enemy closed in on his own position, Lieutenant Fox made a decision that would forever etch his name in the annals of heroism. Recognizing the imminent danger to his comrades and the strategic importance of delaying the German advance, he issued a chillingly courageous order. Speaking over the radio to the artillery battery, he instructed them to direct their fire directly onto his own location, saying "Fire It! There's more of them than there are of us. Give them hell!" He knew what he was doing. He ordered artillery to fire directly at him.

The voice on the other end of the line, undoubtedly filled with disbelief and horror, questioned the order. But Fox, with unwavering resolve, confirmed his request. He understood that his sacrifice, though tragic, was the only way to effectively halt the enemy's momentum and allow his fellow soldiers to withdraw and regroup.

The ensuing artillery barrage rained down on the village, engulfing Lieutenant Fox's position. The devastating firestorm achieved its intended purpose. The German attack was blunted, the enemy forces were forced to withdraw, and the remaining American troops were able to escape the immediate threat.

In the aftermath of the battle, when the smoke cleared and the village fell silent, the grim reality of Lieutenant Fox's sacrifice became apparent. His body was found amidst the rubble, a stark testament to his extraordinary act of courage.

For decades, the full measure of Lieutenant Fox's heroism remained largely unrecognized. The racial prejudices of the time cast a long shadow, obscuring the valor and achievements of many African American soldiers who served with distinction in World War II. However, the stories of their bravery persisted, passed down through generations and meticulously researched by historians and advocates.

In the 1990s, a renewed effort to acknowledge the overlooked heroism of African American soldiers of World War II gained momentum. A thorough review of records and eyewitness accounts brought Lieutenant Fox's selfless act to the forefront. Finally, on January 12, 1997, President Bill Clinton posthumously awarded the Medal of Honor to First Lieutenant John Robert Fox.

The citation for his Medal of Honor eloquently captures the magnitude of his sacrifice: "First Lieutenant John R. Fox distinguished himself by extraordinary heroism at the risk of his own life on 26 December 1944, in the vicinity of Sommocolonia, Italy. During a German counterattack, Lieutenant Fox was serving as a forward observer. As the Germans advanced, Lieutenant Fox directed defensive artillery fire. Although the advancing enemy infantry and artillery shells came within 50 yards of his position, Lieutenant Fox continued to direct fire on the enemy. While doing so, he was wounded. Refusing to be evacuated, Lieutenant Fox continued to direct artillery fire on the advancing enemy. When it became apparent that the enemy had overrun his position, Lieutenant Fox called for artillery fire on his own location in a final act of self-sacrifice to save the lives of his comrades and to slow the enemy advance. First Lieutenant Fox's heroic actions contributed significantly to the ultimate defeat of the enemy."

The story of John Robert Fox is more than just a tale of battlefield bravery. It is a powerful reminder of the courage and patriotism displayed by African American soldiers who fought valiantly for a nation that often denied them their basic rights. His selfless act in Sommocolonia stands as a profound testament to the human capacity for sacrifice and the enduring American spirit to defeat despots. Though his life was tragically cut short, his legacy of courage, duty, and ultimate sacrifice will forever inspire generations to come. His name is now rightfully etched among the pantheon of American heroes, a shining example of valor that transcends race and speaks to the highest ideals of service and selflessness.

And a personal connection: I trained at Fort Devens in Massachusetts, nearly 50 years after Lt. Fox did so.

On this Memorial Day, please remember Lieutenant Fox for his selflessness, bravery, and heroism. And remember all those who gave their last full measure of devotion in defense of the ideal that is the United States of America. We owe it to them to continue, however imperfectly, towards that ideal.

Prior Memorial Day Posts

Jeff For Banks: Memorial Day Post: Honor Those Fallen During Our Afghanistan Withdrawal

Jeff For Banks: Memorial Day: Remember Sergeant (USMC) Rafael Peralta

Jeff For Banks: Memorial Day: Remember Captain Andy Haldane

Jeff For Banks: Memorial Day: Remember Maurice "Maury" Hukill

Jeff For Banks: Memorial Day: Remember Irv Earhart

Jeff For Banks: Memorial Day: Black Hawk Down

Sources:

Medal of Honor citation: John Robert Fox | World War II | U.S. Army | Medal of Honor Recipient

Seven Black WWII Heroes Receive Medal of Honor: https://archive.defense.gov/news/newsarticle.aspx?id=43307

War Heroes: First Lieutenant John R Fox: War Heroes- First Lieutenant John Robert Fox

John R Fox biography: John Robert Fox | World War II | U.S. Army | Medal of Honor Recipient

Google Gemini aided in the drafting of this article.

Is Your Bank Technology Leader a CIO or CTO?

I recently attended a banking conference. Hartman Executive Advisors, a technology leadership and advisory firm designed to bring executive-level IT strategy to financial institutions, presented a session called From Strategy to Success: Unlocking Technology's Potential in Community Banking.

I attended because I recognize this as a challenge for financial institutions. A challenge because community financial institutions want a CIO or CTO who not only focuses internally by creating a stable IT infrastructure that works and protects the bank, but also looks to the bank's strategic plan to determine the solutions, interoperability, and ease of use to create a frictionless experience for internal and external customers. During the session the presenters mentioned the numerous steps it takes to change a bank customer's address. The multiple steps, however, were likely develped to reduce the incidents of fraud, i.e. to "protect the bank" and its customers. This is contrary to the dual mission of creating a frictionless and easy-to-use experience for internal and external users.

I'm not sure we know what we want from our CIO or CTO. 

CIO to CTO

First, let's distinguish between the roles. Consulting firm McKinsey says this about the difference: "Broadly speaking, a chief information officer focuses on internal technology, while a chief technology officer focuses on emerging technologies and product strategy." Based on my experience, we want both from that one seat on our management team, be it a CTO or CIO. We can't afford to have two people!

Bankers are notorious for focusing on the things they need to do. In my opinion the definition of "needs" should be expanded. But first and foremost, I will stipulate that the head of technology "needs" to be that internally focused person. The one that creates a stable, secure and functioning infrastructure. To be more the CIO than the CTO. As the bank grows, the role must grow with it.

Because "needs" is often described by bankers as what is "required" by our regulators. But "needs", as I see it, are what the bank needs to be relevant, even important to its customers and employees.

In my presentation at the conference, I discussed the important role component plans in the bank's strategy are to its success. These include the HR Plan, Capital Plan, Risk Appetite Statement, Marketing Plan, and yes, the IT Plan. When we ask for the bank's IT Plan, we typically get a list of IT projects that have only a loose connection to the bank's strategic plan.

This is indicative of a bank that has a CIO. One that is focused internally. One designed to succeed in their IT audits, either by internal/external audit firms or their bank examiners. These IT Plans include things like "upgrade to Windows 11" or "replace branch redundant communications in the Northern Region." Important projects for sure but bear little resemblance to the strategic priorities identified in their strategic plan. There is a disconnect.

As the role grows and evolves from CIO to CTO, these "business as usual" projects remain. Heck, nearly all projects have a technology component. But the person occupying the CIO to CTO role would have next-level management fully capable of participating, even leading these important projects designed to keep the bank running and keeping information safe and secure.

The CTO, however, would participate in the development and execution of the bank's strategic plan. If the plan calls for a funding strategy that includes multiple facets such as business deposit products that are in demand and technology-driven, or standing up a virtual branch to serve customer segments outside of the bank's geography. Introducing options on how the bank can execute on these strategic priorities and to play a key role in both leading and participating in the success of those projects.

As the presenters from Hartman pointed out, there are no IT projects, only business projects. 

Hiring leadership in technology has been challenging in banking. It's not exactly a high-octane career that top technologists think to join. I'm not sure why since banks were the first to employ technology. Digital general ledgers came around in the 60's and the ATM came around in the early 70's. But it is highly regulated and therefore lacks the sex appeal of other industries.

In Conclusion:

The ideal technology leader for your community bank is not a pure CIO or a pure CTO, but a hybrid – a strategic technologist with a strong operational foundation and a customer-centric vision. They are a guardian of the present and an architect of the future, capable of translating your strategic aspirations into tangible technological realities. The challenge lies in identifying and nurturing this unique blend of skills and potential within a single, indispensable leader. The characteristics outlined above provide a framework for that crucial search and development.

What are the characteristics of the person occupying this most important role at your financial institution?

~ Jeff

The Case for Product Management in Banking

During a recent discussion with a bank CEO and Chief Banking Officer, a fundamental question arose: Why can't we leverage technology to create a smarter business checking account? Instead of the traditional "Analysis Checking" model, which often erodes potential interest earnings through transaction fees, why not design an account that pays interest based on a technology-determined average balance exceeding a certain threshold?

Given that Dodd-Frank permits interest on business checking accounts, this approach seems logical and customer-friendly. For businesses with higher transaction volumes, the average balance required to earn interest would naturally adjust upwards. This is a concept that is both transparent for the customer and operationally straightforward for bank staff. The average balance calculation could even be reset annually or more frequently to reflect actual account activity. Stuck in our historical paradigm, we don't ask ourselves how to create an easier to understand, more efficient, more transparent, and yes, more profitable business checking account.

The primary objection I've encountered? The bank would lose the fee income generated by Analysis Checking. However, a careful analysis might reveal that the lost fee income would be minimal given that we would charge fees if the account was under its interest-bearing threshold. And likely more profitable. 

This conversation sparked another critical challenge: How do banks profitably manage large money market deposit portfolios in a rising interest rate environment?

Consider a scenario with $1 billion in money market deposits. When the Federal Reserve raises rates by 100 basis points, the response isn't uniform. Some depositors are highly price-sensitive and expect their rates to move in lockstep with the Fed or just below. Others are "price-interested," perhaps seeking a beta of 50%, while some simply value the FDIC insurance and branch access for their cash accumulation, exhibiting low price sensitivity.

The core problem is the lack of clarity: We don't know who's who. The current approach often involves waiting for customers to inquire about rate changes. However, with technological advancements and the ease of funds transfer, many customers simply moved their money during the recent Fed tightening without a word.

This situation points to several potential shortcomings:

• Customers in the wrong accounts: Are some customers better suited for savings accounts than money market accounts?
• Subpar onboarding: Are we failing to identify the customer's reasons for opening the account and their sensitivity to rate fluctuations?
• Lack of sophisticated systems: Do we lack the tools to differentiate between price-sensitive, price-interested, and price-disinterested depositors?

The knee-jerk reaction might be to split the difference and proactively raise the money market rate by, say, 75 basis points. While seemingly fair, this could result in a significant $7.5 million reduction in net interest income.

I believe these challenges would be significantly mitigated by fostering a strong product management culture within the bank. This would involve establishing a dedicated head of product management and empowering up-and-coming middle managers with the responsibility for the continuous profit improvement of specific products.

Consider a retail money market product. Imagine assigning the VP or regional manager of the branch network as its product manager, directly accountable for its ongoing profitability. This individual could then actively manage various profit levers:

The product management committee meets quarterly to review trends in their products. They review the drivers to improve the profitability of the personal money market product. Some potential solutions from that meeting:

• Pricing Strategies: Dynamically adjusting rates based on customer segmentation and market conditions.
• Product Features: Introducing tiered interest rates based on balances or relationship status.
• Customer Segmentation: Identifying and targeting specific customer groups with tailored offerings.
• Communication & Marketing: Proactively informing customers of rate changes and highlighting product value.
• Onboarding Process: Implementing robust KYC Q&A to understand customer needs and price sensitivity.
• Process Improvements: To lower the amount of bank resources required to originate and maintain the account and lowering the OpEx per account.

Furthermore, the bank could consider developing new, differentiated money market products – perhaps something like "Money Market-Fort Knox" for price-insensitive customers and "Money Market-Wealth Builder" for those seeking competitive returns. This targeted approach would provide clearer insights into customer preferences and potentially prevent the significant outflow of deposits and decline in average balances experienced during the 2022-23 Fed tightening. Proactive engagement, rather than reactive adjustments based on customer complaints, would foster greater loyalty.

The fundamental hurdle, as I see it, is that many banks don't systematically measure the profitability of individual products. And even when they do, it's uncommon to assign dedicated product managers tasked with driving continuous profit improvement.

Should they? Absolutely.

While my firm offers outsourced product and organizational profitability services to banks, I firmly believe that all banks, particularly those with over $500 million in assets, should embrace this level of reporting, regardless of whether they partner with us. Consider this: a mere one basis point improvement in net interest margin at a $500 million bank translates to an additional $50,000 in net interest income. Scale that up if your financial institution is larger. The potential upside is substantial.

For further discussion on how a product management culture can benefit your institution, please contact Ben Crowley at bcrowley@kafafiangroup.com. 

Banks and Strategic Bets

Be a goldfish. Or a zebra.

In this latest Jeff4Banks.com video blog, I explore strategic bets, a term not embraced by bankers, likely because of the "bets" and the implication that it is gambling. So often we hear bankers object to making what could be franchise transforming "bets" because they are not goldfish. They take a failed bet some time ago in the past and use it as the reason to kill all future bets. Perhaps unlike a goldfish, I suggest using the bad taste of a failed bet as a learning experience to be better at the next one, rather than as a reason for stagnation.

What are your thoughts?

Guest Post: Financial Markets and Economic Update-First Quarter 2025

- By Dorothy Jaworski

We made it through the long, cold winter.  There were days it was so cold I did not want to leave my house.  Even President Trump’s inauguration on January 20^th was moved indoors to the Capitol Rotunda because of wintry temperatures.  We suffered through the cold but had very few snowstorms as they seemed plentiful south of Philadelphia and basically missed us.

The first quarter of 2025 was one of a lot of excitement- a glorious run to a Super Bowl win by the Eagles, a new President and his whirlwind actions, an AI surprise from China, on and off again tariffs, a boring Fed, DOGE and government spending cuts, imaginary inflation fears, and stock market drama.  On the horrible side, Los Angeles experienced its worst wildfires ever in January, which destroyed 16,300 buildings, including 13,000 homes, killed 29 people, and displaced 80,000 in the Pacific Palisades and Eaton fires.

Undoubtedly, the Eagles 40-22 win over the Chiefs in the Super Bowl was the highlight of the quarter.  The excitement built with every playoff game and the Eagles performed at a high level.  Acquiring Saquon Barkley changed this team.  Jalen Hurts, the O-line, and receivers AJ, Devonta, and Dallas outperformed, and we owe much respect to the defense!  An estimated 1.5 million fans turned out for the parade.  As Nick Sirianni said, “You can’t be great without the greatness of others.”  Now, all eyes turn to the Phillies.  A long, hot summer will determine if they can challenge the World Series LA Dodgers for MLB’s crown this fall.

Stocks and Bonds

It feels like we’ve been on a roller coaster when it comes to the markets this quarter.  We rallied for much of January until the 27^th, when we received the DeepSeek AI announcement that a Chinese firm developed their own AI model for $6 million.  What?  Not billion?  It was chaos in the tech sector.  Nvidia and Broadcom, known for their AI chips, each fell -17% for the day, with market cap losses of -$587 billion and -$195 billion, respectively.  It’s estimated the whole AI market lost $1 trillion that day.  If China could develop technology so cheaply, why would our companies spend billions of dollars?  In a wild frenzy, millions of people downloaded DeepSeek AI.  They didn’t learn from TikTok?    Well, it wasn’t long before we discovered the truth; Microsoft reported that DeepSeek was copied from Open AI’s ChatGPT through improper use of an Open AI distillation tool.  The intellectual theft by China continues.  The markets soon recovered a lot of the losses.

Prices at the end of January seemed to hold up pretty well, but volatility and sell-offs took over in February and especially March.  In those two months, the DJIA fell -6.6%, the S&P 500 fell – 7.6%, and the Nasdaq fell -11.7%.  Gone are the new handles I wrote about last quarter: DJIA 45,000, S&P 6,000, and Nasdaq 20,000.  The media narrative turned to trashing tariffs and daily claims of recession and inflation that have rocked the markets.  I will discuss tariffs shortly.

Bonds rallied overall during the quarter with yields on the 2-year to 10-year Treasuries falling by -28 to -33 basis points.  Yields spiked in January, with the 10-year reaching 4.81%, before falling to around 4.25% now.  The yield curve briefly inverted again at the end of February (10-year minus 2-year) at – 8 bps but since has returned to positive at +34 bps.  The 10-year to 3-month spread is generally flat.  By the way, gold has rallied to new highs at $3,085 per ounce, up an astounding +42.6% in the past year, oil prices are at $69 per barrel, down -16.5% from last year, while AAA gas prices are at $3.16 per gallon, down -10.7% from last year.  Let the energy price declines begin.

 

Trump and Policies

Rarely have we seen a Presidency start off with so much action.  President Trump and his Cabinet have worked quickly to enact his policies and campaign promises on stopping illegal immigration, securing the border, and deportations, lowering income taxes for individuals and businesses, reducing prices, examining and cutting government spending and staff in every agency, with DOGE doing the analyses for the departments.  (To date, DOGE has identified $130 billion of savings and cuts, with a goal of many times this amount),  Other policies include enacting tariffs- both as a negotiating tool and to increase revenue to equalize the trading with other countries, using our massive oil and gas reserves to increase energy production, improving economic growth, and working to end the endless wars in Ukraine and Gaza.

So far, he has had success on the border and on the business side- securing almost $2.8 trillion of commitments from large US and foreign corporations to build and manufacture products here in the US over the next few years.  Oil and gas drilling is back and new leases are being sold once again.  Trump feels that lowering energy prices can have a cascading effect to lower prices of almost all goods.  Growing the economy, increasing private sector jobs, not government ones, and increasing real wages are top goals.

Tariffs and Taxes

The media also developed a recession narrative during the first quarter, even though few, if any, corporations mentioned recession during their first quarter earnings calls.  But suddenly it’s a big narrative.  The Fed played into this with their quarterly projections in March and lowered their GDP projections to +1.7% to +1.8% in 2025 and 2026, respectively, from above +2.0% in the prior projections in December.  Yet they are only lowering rates twice this year- the same as their last projection?  The Atlanta Fed GDP Now estimate for the first quarter was -2.8% as of March 28^th, even though they admit the estimate is not incorporating foreign trades of gold properly.  Be careful what you wish for; recessions are often self-fulfilling prophecies.  It’s ridiculous. 

The tariff situation has been very volatile since Trump first started announcing them in February.  He used some as negotiating leverage, some to protect US industry (autos), and some to level the playing field with reciprocal tariffs to just make trade fair.  The media narrative is that tariffs are inflationary.  I disagree.  If spending occurs on products with higher tariffs with higher prices, then less spending will occur on other goods with lower or no tariffs and those other goods’ prices will fall.  Prices tend to adjust throughout the economy.  If high tariffs depress demand, those manufacturers likely will lower prices.  Of consumers’ purchases currently, about 15% is on imported goods.  The Fed and NBER both studied the effect of Trump’s first term tariffs and found no effect on inflation, which continued to run below the Fed’s target of 2.0% then.  Tariffs do not cause inflation; as Milton Friedman taught us, “inflation is always and everywhere a monetary phenomenon.”  Even Chairman Powell knows this and called the effects of tariffs “transitory.”  (oh, no, not that word again!).  Despite knowing the results of studies on tariffs, he said he was “uncertain” of their impact.  Guests on Bloomberg guests on the day of the Powell press conference said “Why are we hanging on every word Powell says, when he keeps saying he doesn’t know?” 

Bur mark my words, once Congress passes the large tax bill making the Trump tax cuts of 2017 permanent, increasing the SALT deduction cap, lowering the corporate tax rate from 21% to 15%, putting in business deductions for accelerated depreciation, lowering individuals’ tax brackets, and including no tax on social security, tips, and overtime, the narrative about recession will quickly disappear. 

What About Other Indicators?

Here are some of my favorite indicators; watch them and you will know what’s happening:

-      Leading economic indicators, or LEI, continue to be weak.  February was -.3%, January was -.2%, and December was -.1%.  Of the past 33 months, only two were positive:  March, 2024 and November, 2024.  The Conference Board restated the index with benchmark revisions and it’s back above 100 (2016 levels) at 101.1 in February.  No surprise here.

-         Real GDP was +2.4% in 4Q24 with nominal GDP at +4.8%.  Real GDI was +4.5%; the average of GDP and GDI was +3.5%.  As mentioned earlier, the Atlanta Fed GDP Now 1Q projection number is -2.8%.  They publish it even though they state they are not including foreign trade in gold correctly.

-   M2 year-over-year growth in both February and January was +3.9% and December was +3.8%.  Friedman taught us that growth in the money supply should approximate nominal GDP growth, which is currently at +4.8%.  They are catching up and this is probably why they are cutting back on QT, their bond selling program.  After a period of decline in y-o-y M2 from December, 2022 to February, 2024, M2 growth has steadily ramped up.

-     Inflation.  Here’s the rundown.  It’s not so terrible.  PCE 4Q24 +2.4%, core PCE 4Q24 +2.6%, PCE February +2.5%. core PCE February +2.8%, CPI February +2.8%, PPI February +3.2%.  The Fed target of +2.0% is on headline PCE; CPI is +.5% higher with +2.5% as an implied target.  The 5-year Treasury Tips spread is 2.67%; the 10-year TIPS spread is 2.38%.  The final March survey of the University of Michigan showed the 5-year inflation expectation was +5.0%, but sorry, they are wrong.

-     Unemployment.  The BLS benchmark revision reduced -589,000 from reported jobs in 2024, not the original -818,000 projected last August.  The unemployment rate was 4.1% in February compared to 4.0% in January.  Unemployed persons are 7,052,000 and the pool of available workers is 12,945,000; both have been on the rise in recent months.

-        The Fed has been boring lately.  We know they are afraid to change rates, even though Powell says they are “meaningfully restrictive.”  The Fed is uncertain what tariffs will do, uncertain what inflation will be (their projections from March are outrageous- they do not hit the 2.0% PCE target until 2027!  What?!), uncertain what GDP will do (of course, they lowered it below +2.0%).  Powell kept saying they are “uncertain.” “it’s hard to tell,” “they just don’t know,” and “we’ll see what happens.”  Wow…where does that leave the rest of us?

I feel like I’ve gone on longer than usual this quarter, so I’ll wrap it up here.  I just got back from a wonderful week with great friends in Palm Beach County, Florida.  Sorry, we had no Trump sightings.  I’m looking forward to more traveling in the second half of this year.  Isn’t that what retirement is all about?  Stay tuned!

I appreciate your support!  Thanks for reading!  DLJ 03/28/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

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

Practical AI Use for Community Banks

Minnesota banker Andy Schornack posted the below memo on X that he was going to send to his staff. It was generated by X Grok AI tool and he had not edited or sent it yet. But I thought it so interesting and practical that I wanted to share it with my readers, with Andy's consent.

I edited minor things for clarity. 

Leveraging Microsoft Copilot for Growth and Excellence at Security Bank & Trust Company

Prepared by: [Your Name], CEO

Date: [Date]

Introduction: A Transformative Opportunity for Security Bank & Trust

"Since our founding in 1935, Security Bank & Trust Company has built a legacy of trust and personalized service across our 21 locations in Minnesota. Our recognition as the #3 community bank in the state by GOBankingRates in 2025 reflects our commitment to “Growing, Together” with the communities we serve. Yet, the banking industry is at a turning point. Customers increasingly demand seamless digital experiences—91% of U.S. consumers now consider digital banking capabilities essential (Latinia, 2024)—while operational pressures require us to do more with less. To stay ahead, we must blend our community roots with cutting-edge innovation.

Enter Microsoft Copilot: an AI-powered assistant integrated into Microsoft 365, the suite of tools our team already uses daily, including Teams, Outlook, Excel, and Power BI. Copilot isn’t just another tech add-on—it’s a game-changer that enhances efficiency, empowers staff, and elevates customer experiences without disrupting our workflows. In this essay, I’ll detail how Copilot can transform our bank, supported by data and examples. I’ll outline a clear implementation plan, highlight measurable benefits, and address potential concerns. My goal is to convince you to approve a pilot program that will cement our position as a leader in community banking.

What is Microsoft Copilot?

Microsoft Copilot is an AI tool embedded within Microsoft 365, designed to assist users by automating tasks, generating insights, and enhancing productivity (Microsoft Copilot). It leverages advanced language models to understand plain English, analyze data, and collaborate in real time across applications.

Key Features:

Natural Language Assistance: Staff can ask Copilot questions like “Summarize last quarter’s loan data” and get instant, accurate responses.

Data Analysis: It transforms raw numbers in Excel or Power BI into actionable insights, such as spotting trends in deposit growth.

Task Automation: Copilot drafts emails in Outlook, summarizes meetings in Teams, and generates reports in Word, cutting down repetitive work.

Collaboration Boost: During Teams meetings, it tracks discussions, assigns tasks, and pulls relevant data on demand.

For Security Bank & Trust, Copilot aligns perfectly with our strengths. It empowers our staff to deliver faster, more personalized service while preserving the human connection that defines us.

The Opportunity: Meeting Modern Challenges

We face two pressing realities:

Customer Expectations: A 2024 Forbes report shows 71% of banking customers prefer AI-driven support for speed and convenience (Forbes, 2024). Our clients want both digital ease and personal care.

Efficiency Demands: With 21 branches, we need streamlined operations to compete. McKinsey predicts AI could unlock $340 billion in banking value through automation (McKinsey, 2024).

Copilot tackles both by enhancing our digital capabilities and optimizing workflows, all within our existing Microsoft 365 ecosystem. It’s not about replacing people—it’s about amplifying what we do best.

How Copilot Transforms Security Bank & Trust

Here are four key use cases, grounded in data and examples:

Elevating Customer Experience Tailored Advice: A loan officer could use Copilot in Excel to analyze a customer’s financials and suggest loan options in minutes, enhancing our personal touch.

Faster Responses: In Teams, Copilot drafts replies to customer inquiries, ensuring quick, consistent service. WiFiTalents projects AI could boost engagement by 300% (WiFiTalents, 2024).

Example: Picture a farmer in McLeod County asking about equipment financing. Copilot could pull their transaction history and propose options during the call, delighting the customer.

Streamlining Operations Automation: Copilot can draft compliance reports in Word or summarize loan applications in Excel, saving hours weekly. Commonwealth Bank of Australia uses AI to process millions of documents daily (VKTR, 2024).

Branch Insights: Managers can use Copilot in Power BI to track performance across our 21 locations, like spotting a deposit surge in Scott County for a targeted campaign.

Impact: AI automation could save banks $1 trillion by 2030 (McKinsey, 2024).

Enhancing Risk Management & Fraud Detection: Copilot can flag suspicious transactions in Excel, enabling quick action. Barclays’ AI fraud system is a benchmark (Forbes, 2024).

Compliance: It drafts regulatory reports in Word, cutting costs that consume 6-10% of bank revenue (Latinia, 2024).

Example: During an audit, Copilot could compile all compliance emails from Outlook in minutes.

Driving Strategic Growth Decision Support: Copilot in Power BI can model scenarios, like how rate hikes affect our mortgage portfolio, aiding planning.

Meeting Efficiency: In Teams, it summarizes board discussions and pulls data instantly. AI could generate $779 billion in new banking revenue by 2030 (ZipDo, 2024).

Example: We could use Copilot to analyze small business lending trends and launch a new product in 2026.

Implementation Plan: A Smart Rollout

Here’s a three-phase plan to integrate Copilot effectively:

Phase 1: Pilot (Q2 2025) Test Copilot in two branches (e.g., Glencoe and Edina) for customer service and operations.

Train staff via Teams and SharePoint.

Cost: $150,000 for licenses, training, and setup.

Phase 2: Expansion (Q3-Q4 2025) Deploy Copilot across all 21 branches, integrating with our systems.

Use Power BI to monitor performance and refine use cases.

Phase 3: Innovation (2026) Explore advanced features, like predictive lending analytics.

Market ourselves as a tech-savvy community bank.

Budget: The $150,000 pilot investment will yield returns through efficiency gains within a year. Deloitte notes declining AI adoption costs, making this timely (Deloitte, 2024).

Why This Matters: Tangible Benefits

Customer Loyalty: Enhanced service drives retention. AI could triple engagement (WiFiTalents, 2024).

Cost Efficiency: Automation slashes operational expenses.

Market Leadership: Early adoption sets us apart as 91% of consumers prioritize digital tools (Latinia, 2024).

Community Good: Savings can fund local initiatives, echoing Northview Bank’s model (Northview Bank, 2024).

Addressing Concerns

Security: Copilot uses Microsoft 365’s robust protections, like Azure Active Directory (EY, 2024).

Staff Impact: It enhances roles, not replaces them, with training to ease adoption (Harvard Business Review, 2024).

Risk: A phased approach mitigates pitfalls—85% of AI projects fail without planning (American Banker, 2024).

Call to Action: Let’s Lead the Way

I urge the board to approve the $150,000 pilot and establish a task force from IT, operations, and customer service to oversee it. Copilot isn’t just a tool—it’s our path to blending tradition with innovation, ensuring Security Bank & Trust thrives for another 90 years. Let’s take this step together.

This essay delivers a compelling, Bezos-style narrative for adopting Microsoft Copilot, tailored to Security Bank & Trust Company’s needs and strengths. It’s ready to persuade the board—let me know if you’d like adjustments!"

So often, we attend conferences and leave with so much to explore and adopt that it is overwhelming, so we get stuck in place, not knowing where to start. I thought Andy's Grok-powered staff memo on adopting Copilot for the benefit of their customers, employees, and bank was a practical example of what readers could do at their bank.

Thank you for sharing Andy!

~ Jeff

Beyond Altruism: Turning Financial Wellness into a Bank Profit Center

Discover how financial institutions can transform financial wellness from a cost center to a profit center. Learn strategies for implementing successful Financial Wellness Centers (FWCs).

Introduction

In an era where financial security is increasingly elusive, many banks tout 'financial literacy' as a core mission. But is it truly making a difference? The stark reality: 78% of Americans live paycheck to paycheck. It's time to move beyond well-intentioned programs and create a sustainable, profitable model for financial wellness. Let's explore how banks can build Financial Wellness Centers (FWCs) that not only empower customers but also drive significant revenue.

1. The Stark Reality: Financial Wellness in Crisis

• The shift from defined benefit pensions has thrust individuals into a complex financial landscape, where many are struggling. Studies reveal alarming statistics: a majority of Americans are financially vulnerable, and retirement savings are inadequate. This isn't just a societal issue; it's an opportunity to differentiate your financial institution.
• Fourteen percent of people who feel their banks help them with financial wellness.
• Financial institutions have a responsibility to address this gap, but altruism alone is not a sustainable solution.

2. The Problem: Financial Literacy as a Cost Center

• Currently, financial wellness initiatives often operate as cost centers, driven by compliance or community relations. This approach fails to align with the core business objectives of profitability and growth.
• Anne Shutt's (Midwestern Securities) insights at a recent conference highlight the disconnect: customers aren't feeling supported by their banks' financial wellness efforts.
• The current model serves some constituencies at the expense of others.

3. The Solution: Transforming Financial Wellness into a Profit Center 

• Introducing the Financial Wellness Center (FWC): A New Model for Success.
  • Treat it like a branch: Dedicated personnel, clear objectives, and measurable results.
  • Staff with financial coaches and support staff, not just traditional bankers.
  • Integrate financial wellness into the customer onboarding process. Use the Know Your Customer process to also understand the customer's financial wellness. Offer a financial wellness opt in program.
  • Implement a small quarterly fee for the FWC program. (Consider waiving initially to build momentum.)
  • Bring current customers into the FWC using observable data, human judgement, and generative AI.
• Revenue Streams and Profitability:
  • Account integration: Incorporate FWC client accounts into its revenue stream.
  • Fee-based services: Offer credit score monitoring, bill negotiation, and other value-added services.
  • Increased customer engagement: Higher engagement leads to increased account activity and profitability.
  • Address the low balance issue by recognizing that this is an investment in the customers' future, and that the FWC is a place for them to grow their financial health.
  • The FWC will have less overhead than a physical branch.

4. Measuring Success and Driving Growth

• Key Performance Indicators (KPIs):
  • Pre-tax profit as a percentage of average deposits (e.g., 50 basis points).
  • Customer adoption of personal financial management tools.
  • Improvements in customer net worth and credit scores.
  • Customer graduation to wealth management services.
• When customers reach the 'Accumulating Wealth' stage of their financial life, seamlessly transition them to your wealth management division. This creates a natural pipeline for high-value clients. Don't wait for high-value clients to grace your door, build them.

5. The Benefits: A Win-Win for Banks and Customers

• Enhanced customer loyalty and retention.
• Increased profitability and revenue diversification.
• Strengthened community impact and brand reputation.
• Empowered customers with improved financial well-being.

Call to Action:

Ready to transform your bank's approach to financial wellness? I would welcome a session with your team in how to implement a successful Financial Wellness Center and drive sustainable growth. Share this article with your colleagues and industry peers to spark a vital conversation.