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.

Bottom-Up Capital Calculations

Ten years ago I wrote What's Your Well-Capitalized on these pages. It was in response to regulators persistently asking bankers the same question. Today, we have not done much about it because we have relied on that lazy space using the regulatory definition of well capitalized. Or at least regulatory expectation of it.

I recently spoke at the American Bankers' Association Conference for Community Bankers regarding risk appetite statements in a presentation called Leave Nothing Unspoken. Drop me your e-mail if you would like me to send the presentation. One slide, however, dealt with this very issue of "what's your well-capitalized." Because developing your risk guardrails for executing strategy, which is what a risk appetite statement should be, is far less effective if you don't build the culture and accountabilities throughout the organization to be consistent with your risk appetite.

Exhibit number 1 is a bank whose main incentive for lenders is volume. This creates the incentive to do deals based on size, regardless of structure, duration or rate. What does it matter if the lender does a thinly priced $4 million, 7-year commercial real estate deal with a 25-year amortization and lite covenants or a fairly priced, 5-year deal with standard covenants? If their goal is $20 million of annual production, they are 20% there regardless. Right? 

In comes risk adjusted return on capital, or RAROC. Most loan pricing tools use an ROE hurdle rate to determine what the rate should be. Aside from proper use of these tools and any manipulating that might go on to get deals done, the goal is a good one. Assign capital to a pending loan deal based on risk to the institution. Like the slide I showed to attendees at the ABA conference.

These capital allocation tables should be done in advance, be simple and understandable, and be transparent to all that use them. I imagine a small risk committee that develops these lookup tables and assigns capital to every balance sheet item. And for many categories, such as loans and investment securities, which carry the most risk to a financial institution, have necessary granularity so a 5-rated, 5-year and 20-year amortizing commercial real estate loan gets a lower capital allocation than a 6-rated, 7-year deal. Now the lender has to seek a better yield to get the same RAROC. And perhaps the ROE for the riskier deal is also higher. Further aligning risk versus reward.

Other major asset categories such as "Cash & Due", "buildings", and "BOLI" can be assigned capital at the balance sheet level, such as "buildings" receive a capital buffer of 1%. Naysayers might argue that a building is a 100% risk-weighted, and therefore needs to carry 10% capital (5% well capitalized under the Leverage Ratio, plus a 5% buffer). But that assumes, as prompt corrective action capital requirements must assume, that liabilities do not have risk.

Ask former Silicon Valley Bank executives if that is true.

For sure there is no 5% Leverage Ratio requirement for liabilities, but buffers should also be assigned to them based on the bank's perceived risk of those liabilities. Deposits and borrowings (i.e. the bank's funding) should create greater granularity based on product and product characteristics and the attendant risk of the instrument, much like loans and investments. 

Some may say that the above model is overly simplistic. I'm a simple man. And there is beauty in simplicity. No matter how complex a model you make, it will be some form of wrong as it stands the test of time. Being simply off is far better than building a highly complex black box to be as off, or even a little less off, than a simple one. Because users of the information will be less motivated to adhere to it if they don't understand how it was made.

This, in my opinion, should be done to identify what is your well capitalized. Because you have evaluated risk by balance sheet category and assigned capital based on risk. You can then determine if you have enough capital to support your current balance sheet and your strategically projected balance sheet. You know what buffer you have to withstand stress events.

If your strategic plan calls for a 15% ROE, now you can create a threshold by loan type for lenders to pursue and fairly price to be consistent with your strategy goal and risk appetite. Plus you would create the cultural discipline to manage risk from your first line of defense, the front line.

As I told attendees to my presentation, all banks should do this.

Do you?

~ Jeff

Online Account Opening

Online account opening remains the wild west for most community banks. In so many strategy sessions, I hear from bankers that it is a bust. They get more fraudsters than customers.

This was the background as I attended Bank Director's Acquire or Be Acquired (AOBA) conference. And naturally I was keenly interested in how to solve this problem, or even diagnose what exactly is the problem, for community banks and online deposit account opening, either retail or business. 

Narmi, a key player in this space, had a presentation titled Leveraging Digital to Drive Core Deposits, and had two partner banks, Berkshire Bank and Community Savings on the stage with them. Berkshire Bank, a $12.3 billion in asset bank based in Pittsfield, Massachusetts, launched Berkshire One for online customers. 

It boasts of account opening in less than two minutes. Otherwise, it has features such as a one-time payment of $200 to open a checking account, and an intriguing APY for opening a money market account. The small print disclosures look pretty much like all such disclosures. Oh, and the Boston Celtics Derrick White is a brand ambassador. We measure product profitability for our clients and the average annualized operating cost per retail interest-bearing checking account was $448 in the third quarter 2024. I suppose it would be more for Berkshire having hired Derrick White.

More impressive than Berkshire's two-minute opening claim was Community Savings of Caldwell, Ohio. As a Notre Dame fan it pains me to type Ohio. And I just did it twice. Community Savings impressed me more for their size and therefore resources to execute on online account opening than the much larger Berkshire. The bank, although established in 1885, was only $270 million in total assets at year-end 2024. And their growth did not come linearly. They were only $68 million in 2021. 

According to the AOBA presentation, Community Savings, once they turned on online account opening using the Narmi solution, acquired $2.5 million in new core deposits in the first month, and $22 million in the first 120 days. Average deposit size per account, according to the presentation, was $57,000. Deposits, which stood at $53 million in 2021 now stand at $198 million. Cost of funds did rise from 78 basis points in 2023 to 3.13% in 2024. So it did come at a cost. Community Savings had a >100% loan-to-deposit ratio. Banks that needed the money tended to pay more for the money. Makes sense.

Online deposit account opening is more prominent today than it was yesterday and will be even more so tomorrow as today. First Internet Bank in Indiana was opened in 1998. It now has $5.7 billion in total assets. Grasshopper Bank, a Narmi customer, opens hundreds of business checking accounts per month online. You read that right. Hundreds. Per month. Business accounts. Grasshopper has 96 full-time equivalent (FTE) employees. Community Savings launched its online account opening tool in 49 days. They have 59 FTEs. 

According to Susan Bui Bergen, CEO of Infinite Potentiality and 30+ year bank marketer for banks $1 billion - $30 billion in total assets, "The shift to online account opening represents a significant opportunity for community banks to enhance their reach and operational effectiveness."

Totally agree. Because many banks are struggling today with their funding. Funding strategies should be perpetual and strategic. If your bank is flush with liquidity you should encourage your relationship officers and marketing personnel to keep it rolling. Turning the spigot on and off is an ineffective funding strategy, in my opinion, except for wholesale approaches to fill gaps. When is a good time to deepen depositor relationships and grow core deposits? Always.

I don't believe branching is dead. Neither does Jamie Dimon, so I'm in good company. But I do believe that each location, be it physical or virtual, should deliver profit to the bank. And banks have struggled with their virtual branch. 

According to Mantl, a Narmi competitor, low-performing banks in online account opening experience a 30% submission rate, meaning if 100 people start an online checking application only 30 complete it. And then experience a 30% approval rate of the 30 that completed the application. Meaning, out of 100 people who started an online deposit account application, only 10 get opened and funded. 

High-performing banks in online account opening had a 55% submission rate and a 65% approval rate. Meaning out of our hypothetical 100 people, 36 get opened and funded. I'm not sure "initial funding" is a good stat because it would make sense that new customers would seed a new account with maybe $100 until they moved everything over. Online account balances are notoriously lower than in-branch opened accounts, but becoming less so. 

According to Bergen, "To succeed, it's vital to meet customer expectations by making the process straightforward, intuitive, and secure. By focusing on user-friendly interfaces and strong fraud prevention, banks can achieve continuous improvement and truly benefit from digital advancements. Those who excel will set themselves apart and flourish in the competitive landscape."

The challenge remains core deposit growth at a reasonable cost. Many banks, like Berkshire and Community Savings, tend to offer higher online rates to encourage people to move. The branch or a relationship with a banker likely does not exist, although I wouldn't discount that customers who are in towns where you have branches will open accounts online. So a branch could play a factor although the prospect does not have to enter it.

Here is the profit performance of retail interest-checking for all banks that we measure this for on an outsourced basis.

Let's say that an online account experiences half the average balance of a traditional account. In this case, $7,255. Total income is 4.14% in the 3Q24. So revenue for our hypothetical online account is ($7,255 x 4.14%) just over $300. Not enough to cover the annualized cost per account (for acquisition and maintenance) of $448. Adding to the challenge is that the traditional account represented above is only paying 35 bps interest expense. So if you must juice that number to incentivize that person sitting at home to open an account, the total income of 4.14% will go down. 

Online account opening solutions providers would likely argue that acquisition and maintenance costs are lower for the online account opener. Perhaps true. Then, as your online branch grows and becomes a greater proportion of all accounts opened, that annualized cost per account should also go down. Banks should build this discipline into their accountabilities.

Flipping on the online account opening switch does not end the project. It has only just begun! There must be marketing, internal education, and continuous improvement to make sure you are not blocking legitimate prospects out by having overly conservative triggers in your account opening solution. This happens when a bank's risk appetite for fraud is zero. They tighten the screws so tight that their local minister can't get an account. And the bank becomes low performing as described above based on Mantl's numbers.

Online account opening is here to stay. The tools have evolved to surpass ease of use of our in-branch account opening tools. In fact, I don't know why Fiserv users still use BPM to open accounts. Use the online account opening tool. According to Berkshire Bank, it takes two minutes!

But as you make progress in your online account opening journey, measure the profitability of those products and that virtual branch. Just like you should do with your physical branch. How else would you know if it is successful?

~ Jeff

Bonds Gone Bad

Bank earnings remained below par for 2024 due to continued net interest margin pressures. As a result, many financial institutions amplified their misery by turning unrealized losses in their relatively low-yielding bond portfolios into actual losses by selling their underperforming bonds.

In my book, Squared Away-How Bankers Can Succeed as Economic First Responders, I referred to the phenomenon of further impairing already impaired earnings by making strategic investments in your bank as "pulling into the pits." The difference between what I recommended in the book versus what has transpired is that I was referring to strategic investments in technology, products, lines of business and people to build a financial institution that is relevant, even important to its constituencies. If macroeconomic factors, such as the interest rate environment, led to a suboptimal ROA, why not make it an even less optimal ROA by investing in the bank's future?

Overcoming bad balance sheet decisions in a zero-rate environment was not exactly what I had in mind unless, and I hope my conjecture is correct, some of the increased interest income generated by higher-yielding bonds leads to strategic investments needed to build an enduring financial institution. I suspect, however, it's just to have better earnings in 2025. Not better capital, mind you, but the promise of better earnings. 

Some may take exception to me calling bond-buying decisions made during the pandemic era as bad. And I will admit, I do not sell bonds nor consider myself a bond expert. I leave that to your fixed-income advisors. With a particular shout-out to those who did not advise clients to "go long" in a zero-rate environment or at least hedge if they went long. Special mention to those who admitted to making a bad call if they advised clients to go long.

In hindsight, buying long-term bonds in a historically low interest rate environment doesn't sound like a great strategy though what were the alternatives given such excessive liquidity? One alternative would have been to stay on the shorter end of the curve as short-term yields moved in tandem with rising rates. But according to the below tables and charts, it looks like we didn't do that. The below charts, courtesy of S&P Capital IQ are from all banks between $1B-$10B in total assets where the information is available. I went through the list and eliminated some specialty banks like Charles Schwab Bank, etc. It yielded 600 banks and savings banks. In the table, one column is when rates were zero (pandemic era), and the second column is when the Fed tightened.

During the period when rates plummeted to zero as a result of the pandemic, and liquidity rushed into financial institutions as a result of government stimulus and a flight to safety and liquidity for consumers and businesses, bank securities portfolios grew 83%.

What did they do with the money? Bought long-term bonds, as each maturity/repricing bucket grew more in the over one year and beyond bucket than the 0-12 months buckets. The greatest growth was in the 3-5 year bucket. Over five years grew 192%. This bond buying might result from "present bias", which Gemini AI defined as the tendency to overvalue present rewards without considering future consequences. Such as, I don't know, selling a lot of those bonds at a loss that will take three years to earn back and, in many cases, raising capital causing shareholder dilution. It requires an assumption that current conditions, good or bad, will continue indefinitely.  Present bias is the only rationale I could conjure for Silicon Valley Bank's unhedged bond portfolio. 

In the rate runup from 2Q22 to 3Q23, securities portfolios declined 7.8%. One reason is we thought customers would stick with us through thick and thin. Maybe through thin, but not through thick. FDIC-insured financial institutions hemorrhaged $1 trillion in deposits while money market mutual fund assets grew by the same amount. Now we needed the securities portfolio for liquidity. This time also included the high-profile failures of three banks. One had the signatory of the Dodd-Frank Act on its board. 

That fact is irrelevant to this article but I like to bring it up whenever the opportunity presents itself.

Although the overall securities portfolio declined, bonds with maturities or reprices in less than three years grew. Long-term bonds declined to help us meet liquidity needs. We ran off long-term bonds and bought short-term ones. This makes sense to me because the interest rate environment was so unpredictable. We had an inverted yield curve during this time. It would have been nice, however, if we bought long-term bonds at peak interest rates, not trough. But this is Monday morning quarterbacking.  

My point is that if we are elevating rates over liquidity in our bond portfolio, remember Covid! If we thought we had loyal customers that don't demand competitive deposit rates, remember post-Covid Fed tightening!

In terms of making hypothetical losses into actual losses and prioritizing rate over liquidity in our bond portfolios, this chart visualizes consequences.

In a couple of weeks I will be heading off to Bank Director's Acquire or Be Acquired conference. There will be plenty of presenters with snappy looking charts describing how loss-sales make sense. And in some cases these transactions may make sense. I had a BOLI person extoll the virtues of taking an exit fee hit to trade for higher paying BOLI. I got off the call thinking "let's sell off some BOLI!" Note: I don't have BOLI. Sometimes critical thinking skills take a back seat to the compulsion to act, thinking if everyone else is doing it perhaps we should too.

If we are selling off assets at a loss, we must perform a post-mortem to create long-term institutional knowledge as to what happened to lead to it and how can we learn from it to apply to future situations. Let's not waste an "ahh crap" moment. Let's make us smarter, and our bank better.

~ Jeff

Financial Metrics of Credit Unions vs. Banks

I often hear that credit unions (or mutual banks) don't have to maximize profits because they don't have shareholders.

This is technically correct. Shareholders demand a return in the form of capital appreciation on the stock and the dividends paid per share, also known as total shareholder return (TSR). Credit Unions, however, do have owners that they call members. Members may pay little attention to the increase or decrease in the value of what they own because they are comfortable under the umbrella of NCUA insurance (much like depositors with FDIC insurance). This comfort might not make them salivate in anticipation of their CUs next quarterly Call Report. Members rarely hold CU executives accountable for financial performance.

But financial performance has meaning. Credit Unions primary source of capital is retained earnings. And if they have sub-optimal profits because of a lack of expense or pricing discipline, there is less retained earnings and therefore less capital to support growth or serve as a buffer for hard times. 

In addition, if CUs are inefficient and squander resources deep in the bowels of their infrastructure, there is less for members/depositors, employees, or their communities, i.e., their stakeholders. In this sense, TSR has a different meaning: total stakeholder returns. For example, some credit unions pay special dividends to depositors if they have good earnings and sufficient capital.

This month Robins Financial Credit Union, a $4.6 billion in asset CU in Georgia, paid a $20 million member rebate, representing about $74 per member and 45 basis points of its ROA. The reason they did it: their YTD ROA was 1.31% and their net worth/assets was 16.12%. Combine that with a clean balance sheet (0.41% delinquent loans/total loans) and there were ample resources to return that solid performance to their members. It's their money, right?

But the CUs that don't deliver that performance or have that capital position and strong balance sheet, management teams and trustees are reticent to return that money to members. Or other stakeholders for that matter.

Below is a series of charts that compares and contrasts the financial performance of banks + thrifts and credit unions with between $1 billion and $10 billion in total assets. Banks were controlled for those with less than 20% of their loan portfolio in commercial real estate loans to mitigate the differences in bank vs credit union balance sheets. This yielded only 118 banks because of the commercial loan restriction, versus 319 credit unions. I used medians so a few outsized banks or CUs didn't skew an average. The median-sized bank was $2.1 billion in total assets and the median CU was $2.2 billion. 

Here are the results (courtesy of S&P Capital IQ):

 

Banks had a 41 basis points year-to-date advantage (1.00% vs .59%) in ROAA although banks pay federal taxes. Apply that to the median CU size of our sample ($2.2B in total assets) and that equates to $9 million. Perhaps that disadvantage is precisely because the measured CUs pay a special dividend to members, although banks' cost of interest-bearing liabilities was 1.21% more than CUs. Perhaps the salary and benefits per FTE is greater at CUs than banks, or their community support costs more. This we can't tell from the above charts. 

CUs will have to reflect on if that is true. 

Is it true that the 82 basis points disadvantage to banks in year-to-date non-interest expense to average assets, which equates to $18 million, is because CUs pay their people more, or provide that much more in community support?

Whether you have shareholders or not, running your business for the benefit of stakeholders should be your guiding star. You are doing stakeholders no favors by running it sub-optimally and wasting resources on inefficiencies deep in the bowels of your organization. Wouldn't it be great to have a full end-of-year bonus pool where you reward your most productive and loyal employees, have the pricing discipline to deliver a special dividend to your most loyal core depositors, or be able to meet some social needs in your community?

Profit performance matters, no matter which stakeholder(s) you favor.

Happy New Year to my readers!

~ Jeff

Note: My firm does two things to help create the culture for more optimal profit performance for financial institutions: 1) Profitability Measurement-we measure the profitability of lines of business and products on an outsourced basis so management teams can measure and maintain accountabilities for profit trends at much more granular levels than their Call Report; and 2) Process Improvement- we dispatch a team to analyze processes, resource and technology utilization and make recommendations for greater efficiencies. This is sometimes tough to do internally due to resource constraints and experiences outside of the organization. Follow the links to learn more or reach out to me.