Has This Recession Seen It's Shadow?

With all due respect to Punxsutawney Phil, that lovable, furry creature charged with predicting the longevity of our winters, it's hard to predict beyond a shadow (pun intended) of a doubt whether seeing this recession's shadow means six weeks, six months or six more years of this mess.  Of course, when Phil is wrong, no one will demand that he live above ground or perform community service.  Not one iota of the vitriol that would be directed at, say, Treasury Secretary Geithner if his forecasts went awry.  Plus, Phil never forgot to pay his income taxes.

There are signs of an early spring in this recession.  While the stock market has been on a bit of a roll, the credit markets, where this whole mess began, is showing signs of a spring awakening:

• Companies with good credit are borrowing more in the bond market.
• Confidence in the banking industry (especially community banks and credit unions) seems to be returning slowly.
• Junk bonds are coming back into vogue (yields are about 16.5 percentage points more than Treasuries, a large premium for risk).
• The market for securities made from bundles of car loans and student loans, a vital source of credit, has started to stabilize.
• Home buyers are seeing some benefits of the credit thaw as interest rates on fixed, 30-year mortgages fell to the lowest levels on record.

I can't see my shadow, can this be over?

 Wait a minute, like they say about the weather in Vermont, if you don't like this economy, wait five minutes.

• Credit markets are still fragile.  Ratings agencies are slashing the credit scores of such bellwether companies as General Electric.
• General Motors bondholders are bracing for a possible bankruptcy filing.
• If unemployment continues to race higher, or the stimulus package fails to take root and the economy enters a deeper period of decline, many of the tentative gains in credit could come undone, analysts say.
• With the idled capacity in the U.S.--workers, factories, retail outlets, freight lines, bank lending--many economists feel that even if the recession miraculously ended tomorrow, it would take at least three years before full employment returned and output rose enough for the economy to operate at peak levels.

Uh-oh, I think I see my shadow.

It is abundantly clear that it is virtually impossible to predict with any degree of certainty what will happen in the stock or credit markets next week.  Forget about predicting next quarter or the quarter after that.  What is clear is that community banks and credit unions need to forget about looking for their shadow and take advantage of the unique opportunity to grow market share as the negative effects of safety and soundness continue to plague the larger financial institutions.

A recent survey of 755 community banks across the U.S. showed that 55% of those banks had dramatically increased deposits, and 40% had increased loan volume since the beginning of the year.  Is your bank or credit union one of them?  Are you still waiting for that definitive answer of when this mess will end so you can then go back to some form of banking normalcy?

No one correctly predicted the breadth and depth of this economic cataclysm.  And if you're waiting for someone to tell you when it's over, you might as well borrow Phil for a few days.  The banks and credit unions that are acting now to make a positive impact with customers, prospects and their communities will be the true winners before, during and after the economic turnaround happens.

Plastic-The Next Crisis?

In the 1967 film, The Graduate, Mr. McGuire is counseling Ben Braddock (played by Dustin Hoffman) on what field to go into now that he has graduated college.  The dialogue went like this:

Mr. McGuire: I want to say one word to you. Just one word.

Benjamin: Yes, sir.

Mr. McGuire: Are you listening?

Benjamin: Yes, I am.

Mr. McGuire: Plastics.

Benjamin: Exactly how do you mean?

Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it?

Not exactly the same plastic that banks ventured into.  But their type of plastic (credit cards) had an equal promise of a great future.  But is this the next financial tsunami?  Are we destined to be swamped by a sea of molten plastic resulting from the next financial meltdown that is now being talked about in hushed tones in the corridors of America's banks, while the media begins to turn up the volume.

A recent story on CNN said, "major banks have been hit hard by bad mortgages. Now, fears are growing that troubled financial institutions are going to have another consumer headache to deal with: credit card defaults."

"There have been no shortage of warnings about the business as the economy continues to sputter."

"Just last month, Bank of America CEO Ken Lewis warned lawmakers at a high-profile Congressional hearing on the government's $700 billion rescue plan that he had no doubts 2009 would be an "awful year" for the credit card industry."

Fearing a wave of credit card-related losses, banks have been aggressively setting aside funds to help cushion the blow. One problem, note analysts, is that banks aren't quite sure just how severe the losses will be.

Industry charge-offs, or loans a bank considers to be uncollectable, climbed to a historic high of 7.73% in December. Most analysts expect that figure to head higher as more and more people find themselves out of work.

Unemployment rates, widely viewed as the most reliable indicator of future credit card losses, climbed to 8.1% in February - its highest level in 25 years.

A widely used rule of thumb is that charge-offs typically climb to 1 percentage point above the unemployment rate. And many expect the unemployment rate to keep rising throughout the year.

Of course, this is not the first time that credit card issuers have had to contend with relatively high unemployment. During the recession in the early 1980s, the jobless level peaked at 10.8% in late 1982. But some experts point out that this is a much different time for the industry.

Not only did a much smaller slice of the American public own a credit or charge card, the amount of credit issued by the industry was just a fraction of what it is today. As of January 2009, the amount of outstanding credit in the industry totaled just under $1 trillion, compared to just $70.5 billion in 1982.

But some analysts point out that the magnitude of any future credit card problems will be mitigated by the fact that most banks' credit card businesses are a fraction of the size of their ailing mortgage portfolios.

"You are not going to have a complete redo of the subprime mortgage mess because it is simply not the same scale," said David Robertson, publisher of the industry trade publication Nilson Report.

What is also encouraging, notes Robertson, is that banks' credit card operations have become much more adept at adjusting to tough economic times after years of practice, including the downturn that followed the dot-com bubble earlier this decade.

Well I hope David Robertson is right.  We had a pretty good day today--the Dow was up 5.8% and Citigroup said they made a profit in the first two months of this year (although we'll wait and see how much of that is left after the charge-offs).

I guess the whole point is that we can't become paralyzed by fear of the next disaster.  We have to continue to take care of our customers as best we can so we can begin to recover and prosper together.

Cheers,

Nick Vaglio, CFMP

Smells Like Teen Spending

I was painting my deck and fence yesterday with some high school students that my wife recruited (one benefit of having a high school teacher as a spouse is that you are never at a loss for good baby sitters and cheap physical labor). As we were painting, one the girls whipped out her cell phone and started to hold a very public conversation with her friend about borrowing $10 so that she can put a Homecoming dress on layaway (“Borrow” $10?!?! I’m about to pay you much more than that in cash!)

That’s my point. Here is a teenage girl, an hour away from cash income, and she’s already working a “loan” to cover her spending. This is worse than a payday loan – it’s a post-payday loan.

In reality, aren’t these teens a fantastic market for us to target?
- Many have ATM/Debit cards
- Too many have credit cards
- They have nothing but DISPOSABLE income

But while targeting teens for checking and credit cards, I feel we have a responsibility to help them become more fiscally sound banking customers too! A few ideas came to mind as I lay in bed last night pondering this subject:
- Why not offer a special low balance, low interest credit card for teens. Too many companies take advantage of teens with 20%+ interest rates. If a card only has a $500-$1,000 limit, where’s the risk vs. the gain of building great relationships at a young age?
- Why not make students pass a written test about saving and credit before credit or debit cards are approved? If nothing else, it would help them to think about money in a new way and would differentiate our efforts in the minds of the student’s parents (and don’t we want to be hero’s in their eyes?)
- Many of us sponsor school activities, but how many of us really leverage them? Why not negotiate to hold a student focus group at the school. Use it to learn:
. - What percentage of students has a checking account?
. - Did they simply choose their parents bank or credit union?
. - Do they understand how interest works on credit cards
. - What features are they looking for (text updates, online banking, etc.)

I’ll have these students back tonight to finish the painting; maybe I’ll hold my own teen focus group and get back a little more for my investment than a beautiful back yard.

Cheers.