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In the Headlines-May 15th, 2015

In The Headlines

USAA: An Old Bank that Grows by Learning New Tricks

In 1922, 25 Army officers met in San Antonio and agreed to insure one another’s vehicles because nobody else would. Since its founding, the company has been transformed into a group of diversified financial services companies with subsidiaries offering banking, investing, and insurance to people and families that serve, or served, in the United States military. At the end of 2014, it had 10.7 million members.

Today the company, United Services Automobile Association, or USAA, is also one of the largest banks in the country by assets, as well as one of the top mortgage brokers and auto insurers. That is all the more remarkable since just a small fraction of the population is allowed to sign up. The bank is open only to military members and their families, and it serves them with what Celent analyst Dan Latimore calls a “laser focus.”

The company was one of the pioneers of direct marketing and most of its business is conducted over the Internet or telephone using employees instead of agents. It was in reaching service members stationed abroad that led USAA to be among the first to offer real mobile banking services. And its member-owned model (it paid $1.6 billion in dividends to members last year) and devotion to its client base insulated it from the temptations that ruined many other financial services companies. The result: Since it loosened membership in 2009 to include anyone who had honorably served, membership has shot up 45%.

With only one full-service brick-and-mortar branch, USAA was an early leader in mobile banking, but it didn’t stop there. In the past five years alone, the company has filed 493 patents. It offers facial and voice-recognition logins, customer-service video chat, and mobile insurance-claim filing. In the works: a drone program, developed with the Federal Aviation Administration, that will allow USAA to assess damages after major catastrophic events, like last summer’s Colorado wildfires.

Serving service members is “baked into the core of who they are,” says Forrester analyst Megan Burns. That means sending some employees to mock boot camps, more mobile options, and exploring unusual products by popular demand, like ride-sharing insurance for former military members turned Uber drivers.

USAA is a regular on Fortune’s Best Companies to Work For ranking (No. 33), as well as the magazine’s Most Admired Companies list (No. 28). “We know that the member experience can’t be any better than our employee experience is internally,” says COO Carl Liebert. To wit, the company offers stress-relieving rooms, more than 20 hours a year in leadership training, and a gold-plated benefits plan. Plus, it is hiring 1,600 work-from-home employees, making staff as mobile as members.


Private Investors Aim to Become the New Bank for Small Businesses

Investor Leon Black, like many of his peers, has urged caution given high market valuations. But the Apollo Global Management CEO said his $163 billion firm is rapidly expanding one of its business lines: lending money. “Credit in general is a huge, huge opportunity today,” Black said recently at the Milken Institute Global Conference in Los Angeles, noting the diminished role of banks in providing loans. Black’s Apollo is one of many investors to see the opportunity.

A new paper from the Alternative Investment Management Association (AIMA), a London-based hedge fund lobbyist, estimates that private debt funds—including hedge and private equity funds, among others—now manage about $440 billion globally, with $64 billion of new capital allocated to the sector last year alone.

The surge in activity from private lenders, according to the AIMA, is a boon for smaller companies. “Many small and medium sized businesses would miss out on growth opportunities or fail altogether if it were not for the absolutely vital support of hedge funds and other alternative asset managers,” AIMA CEO Jack Inglis said in a statement.

Hedge funds and others in this space usually provide loans of between $25 million and $100 million, often for periods of one to three years, according to AIMA’s survey. About 65% of companies taking the loans typically have earnings before interest, tax, depreciation and amortization of between $5 million and $75 million.

The report notes that the companies lent to are typically too small to raise capital through the public bond market and banks have been more reluctant to lend to them because of stricter standards following the 2008 financial crisis.

The most popular sectors for lending are consumer goods and services, healthcare, industrial, and real estate, according to AIMA’s survey of private fund managers. Examples of recent loans from U.S. firms given by AIMA include private equity shop KKR & Co giving an approximate $12 million loan to help grow a Scottish wind farm; a $26 million loan from hedge fund firm Pine River Capital to an American aircraft parts dealer for purchasing a target company; and Avenue Capital, another hedge fund manager, lending money to investment firm H.I.G. Europe to help it buy consumer loan broker Freedom Finance Nordic.

Another benefit of the private lending, according to AIMA, is systemic: instead of a few big banks, there are lots of funds to share the risk, and the funds use relatively little borrowed money to leverage their bets.

Citations
1. http://for.tn/19yV9i2 – Fortune
2. http://cnb.cx/1JtQaeQ – CNBC


The Good News Is . . .

• Total nonfarm payroll employment increased by 223,000 in April according to the U.S. Bureau of Labor Statistics. Job gains occurred in professional and business services, health care, and construction. In April, the employment rate was 5.4% and the number of unemployed persons was 8.5 million. Over the year, the unemployment rate and the number of unemployed persons were down by 0.8% and 1.1 million, respectively.

• Walt Disney Co., a global entertainment company, reported earnings of $1.23 per share, an increase of 10.8% over year-ago earnings of $1.11. The firm’s earnings topped the consensus estimate of analysts by $0.13. The company reported revenues of $12.5 billion, an increase of 7.0%. Management attributed the company’s results to the worldwide success of its key brands, such as Marvel’s Avengers: Age of Ultron.

• Document and data storage services company, Iron Mountain Inc. announced that the company would be acquiring Georgia-based data protection services provider, Recall Holdings Ltd., for a hefty $2.2 billion in a part cash, part equity deal. Once the acquisition is finalized, shareholders of Recall Holdings will have the option to receive 0.1722 Iron Mountain shares or $8.50 cash for every share they own.

Citations
1. http://1.usa.gov/IOsIPK – Bureau of Labor Statistics
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1KVKKu5 – Walt Disney Co.
4. http://bit.ly/1KyQedy – FinancialBuzz.com


Planning Tips

Tips for Managing Your Credit Cards

According to new Gallup research, more Americans are relying less on their credit cards. In fact, credit card ownership is at an all-time low, with 64% of those surveyed paying off their balances in full each month, the highest percentage Gallup has recorded. Below are some tips to help you use credit even more cleverly, especially since there is power in wielding plastic as long as you do it the right way.

Ask for a lower interest rate – First, the good news: Two out of three credit card holders who ask for a lower interest rate have their request honored. A bank will not lower your interest unless you ask, so consider calling if you have had an account for a long time and show a good payment history. Now the uncertain part: Sometimes, a bank may consider this new deal as a request for new credit, which activates a new credit check that can take a toll on your credit score. Make an anonymous inquiry to your credit card company first to find out their policy on altering interest rates. If they do it with ease, then it is time to bank on the savings.

Consider a limit increase – Do you find that your balance is moving too close to your credit limit — even if you pay it off in full each month? Many use their credit card for just about everything to earn rewards. However, you may be hurting your credit score. Request a higher credit limit to protect your credit rating. By boosting the gap between your balance and your credit limit, your credit utilization (the amount of credit you are using versus the credit available) will stay lower as you reap reward points. Use this strategy when you have the hard cash to pay off those bills monthly. You need to be a disciplined credit card user to pull this off.

Move your due date – You do not need to settle for the payment due date your credit card company gave you. Make payments foolproof by calling your creditor to change the date to one that works best for your paycheck cycle. It can be as easy as a toll-free call to your creditor—and the request is almost always approved.

Pay mid-cycle – Even when you move your payment due date, it is often better to pay credit card bills mid-cycle (if you are carrying over a balance) than at your due date. The balances that appear on your credit reports are usually based on your balance at the end of your billing cycle, not after you have made your payment and paid it off. One strategy is to go online to make a payment early—a few days before the end of the billing cycle—so that the balance that gets reported to the credit bureaus is lower. When you are seeking to pay down a debt or boost your credit rating, this plan can help.

Leverage the grace period - Thanks to the consumer protections of the CARD Act of 2009, credit card users who do not carry balances month-to-month and have signed up with a credit card that offers a “grace period,” have at least 21 days from the time of purchase to pay off the charge in full without accruing interest. Note that grace periods do not include balance transfers or cash advances.

Citations
1. http://bit.ly/P8rO3H – Bankrate.com
2. http://1.usa.gov/1cFKioL – Federal Reserve
3. http://ti.me/1H0UJzN – Money
4. http://abt.cm/1KyQnxv – About.com
5. http://bit.ly/1CSITQy – MoneyCrashers.com

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

In the Headlines-May 22nd, 2015
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