Wednesday, July 28, 2021

A Banking Nerd Book Tour

As many of my readers know, I wrote a book, Squared Away-How Can Bankers Succeed as Economic First Responders. If you don't know, it's because I'm not particularly good at getting the word out to the book's target audience: bankers and the professionals that serve them.

Pretty niche group, so you think my targeting would be spot-on. Not so for a spreadsheet wonk!

But I have been out and about letting as many people know and engaging with industry friends and their audiences to get the word out. Not that I went on the late-night circuit like Matthew McConaughey promoting his book. Because my face was made for radio, except for one video (Ned Talks, linked below). Otherwise I kept my face behind the microphone in podcasts.

Here is the list of appearances with the appropriate links in case you want to listen or watch. I tried to bring something different to each one, as each of the podcasts' listeners are somewhat different and the podcasts' subjects varied. Try out one or more. Let me know what you think.

~ Jeff

The Squared Away book tour appearances:

Banking With Interest podcast hosted by Rob Blackwell (formerly managing editor at American Banker) and Interfi: ‎Banking With Interest: Why Banks Should Be Focusing on Building Core Deposits on Apple Podcasts


A live book review session with CULytics, a Credit Union focused consulting firm: Book Review Session - Squared Away: How Can Bankers Succeed as Economic First Responders | Jun 18 (


Financial Experience podcast hosted by Hunter Young of the HiFi Agency that serves banks and fintechs: The Keys To Staying Independent | Podcast | HIFI Agency


Street Talk podcast hosted by Nathan Stovall of S&P Global Market Intelligence: Stream Ep. 78 - The case to grow deposits when the world is flush with cash by Street Talk | Listen online for free on SoundCloud


This Month in Banking podcast (my own company did one featuring me and the book): Squared Away – How Can Bankers Succeed as Economic First Responders - The Kafafian Group, Inc.


Ned Talks: A video blog discussion between Ned Miller of 3rd Act Consulting, a bank sales consulting firm:


Banking Transformed podcast with Jim Marous of The Financial Brand: Is The Future of Community Banks at Risk? - The Financial Brand

And please consider reading the book: Squared Away-How Can Bankers Succeed as Economic First Responders

Ten percent of author royalties go to, who work to bring down the suicide rate among our veterans. 




Thank you!


Wednesday, July 14, 2021

Bankers: Seven Questions to Determine If You Have a Strategic CFO?

Ajit Kambil of the consulting firm Deloitte, in one of their Perspectives articles, asked seven essential questions to determine if the reader was or has a strategic CFO. I thought it provided great insights for Jeff4Banks readers, and I've accompanied the description of the seven questions with how it pertains to banking.

Seven Essential Questions for Strategic CFO's

1. How does your company plan to grow: M&A, organically (that is, by driving new or existing products to new or existing markets), or both? "The first and most straightforward question involves knowing the current strategy: What combination of these growth choices is your company currently committed to? The CFO's role then is to make sure that capital is available at the right cost for these choices to be profitable, and that the company has processes and decision making rules for capital allocation to support that growth." 

J4B Take: Many financial institutions that are large enough to be a buyer include organic growth and M&A in their strategic plans. It is natural to do so in a consolidating industry. And the true strategic CFO will bring ideas to the executive table that efficiently leverages capital to deliver the greatest risk-adjusted return on capital (RAROC).  At this writing, many bank balance sheets are flush with cash. Which could provide an opportunity to put significantly more cash in M&A transactions to stoke earnings accretion. But does your institution have enough capital to put another bank's assets on its books with issuing only 50% of the consideration in stock? The CFO could critically look at the balance sheet of both their institution and likely targets to recommend moves that could lead to a compelling offer to the target while maintaining a strong capital position. That would be extremely beneficial to the executive team trying to grow their balance sheet without having to turn away from acquisition opportunities. 

2. What are the dominant constraints that hold back your company's growth, and how might you overcome them? "The dominant constraints are the issues that prevent a company from reaching its potential. Consider a company with a heavy debt burden that was paying an interest rate more than twice the rates available to its competitors. Here the cost of debt capital was a critical constraint, given that competitors could finance growth through M&A and other strategies much more cheaply. In response, the CFO enabled a sale of a large stake in the company to a strategic investor, rasing capital and relaxing the 'finance constraint.' Other types of constraints include the lack of a needed or key product in the pipeline or simply the mind-set and culture of the company. Of course, some constraints are virtually impossible to overcome. For example, regulations in financial services impose new constraints on banks. Other than finding the efficient ways to comply, CFOs can do virtually nothing to change the regulatory constraint. Still, determining the dominant constraints is the first step for a CFO to take in order to relax or overcome them."

J4B Take: In this low interest rate environment with low loan demand, so many financial institutions issued subordinated debt at their holding companies to either downstream into their banks to support the next leg of growth or leave in the holding company to buy back stock trading at a depressed price. Or both. This debt is usually five years fixed rate, with attractive rates because of the interest rate environment, that flip to floating after the fixed period. How many bank CFOs created a plan to be in a position to redeem this debt once the five year period expires? Because it could serve as a constraint if interest rates rise, which they are likely to do, and we've used up the capital either for buybacks or to support growth. Did we keep the dividend steady so we can accumulate ever more retained earnings? Did we undertake a bankwide process improvement to ensure as we grew the bank achieved positive operating leverage that accelerated earnings and therefore capital? The strategic CFO, as captain of the capital planning ship, should have had a plan in place with multiple options to redeem this debt before it was ever issued.

3. What is the greatest uncertainty facing your company, and what can you do to resolve or navigate it? "Say the company has potential asbestos liability because the chemical was formerly used in some products, and the uncertainty around that liability is constraining the company's share price and keeping it from making aggressive growth plays. That doesn't sound like something a CFO can fix. But what if you were to go to the legal counsel and say, 'Let's figure out what it would cost to settle this potential litigation, and see, given our current cash flows and the low-rate environment, whether it's worth that price to get rid of that uncertainty.' Alternatively, CFOs can ask their finance, planning, and analysis (FP&A organizations to model the consequences of different outcomes, and then decide if they want to insure against risks arising from the uncertainty. Uncertainty can 'freeze' decision-making; CFOs can 'unfreeze' those decisions by gathering information to resolve the uncertainty, instituting a structure to navigate the uncertainty while managing risk through insurance, or developing a step-by-step approach to real-option investment as uncertainty is resolved."

J4B Take: The greatest uncertainty facing community banking is relevance. Change is happening faster than any other time in our careers, requiring quicker action, change implementation, failure recognition, and strategic investment. Yet we fall back on old habits such as submitting budgets that include the strategic investments to drive business model change, and the CFO, after aggregating departmental budgets during "budget season", pushes them back to department managers because they suspect "wish listing." Instead, the strategic CFO evaluates areas of the financial institution that consume operating expense and capital that are not central to strategy or profit generation, and recommends cutting them in order to invest for a long-term future. Don't send the budget back asking managers to sharpen their pencils and cut their wish list. Find the lowest return and least strategically significant areas and make recommendations to "stop doing this, so we can invest in that."

4. What is your greatest area of spend where there is a lot of uncertainty about return? "For example, a CFO of a consumer packaged goods company with a big chunk of spend going to advertising and promotion should ask, 'how can I get greater bang for my buck in my advertising and promotion spend, and how do I make headway on measuring returns from promotions to guide future spending?' Creating clarity and better disciplines on spend are often a source of quick strategic wins." 

J4B Take: I have written on these pages about building discipline and accountabilities around achieving the hoped-for economies of scale from mergers here, and building metrics and trends around achieving pricing advantage for what should result from that brand building budget your marketing executive says you need (read this). The CFO can be critical in taking hard to measure strategic initiatives and boiling them down to "what success would look like" so the management team can track and be accountable to themselves in making those investments pay off.

5. Are your company's financial and growth goals ambitious enough? What would we do differently if the company were an order of magnitude bigger? "Say your company's goal is to double its revenues, from $2 billion to $4 billion, and you're looking at a variety of projects to achieve that growth, but some entail a lot of risk because of the dollars involved. The CFO might look at this challenge and say, 'A $400 million project blowing up is going to do some serious damage to a $2 billion company, but not so much to a $20 billion company. So maybe our ability to invest in future growth is enhanced by increasing our scale not by two times but by 10 times through a series of rollups or acquisitions.' If you bring that option to your CEO and board, you've started a conversation that could be truly game-changing for the company. It is easy to get trapped in the present. But thinking substantively beyond existing constraints and limits can sometimes help identify plays that create dramatically new strategic options." 

J4B Take: I actually have two takes on this. 1) A strategic CFO should calculate and know a bank's "strategy value gap", which is the difference between the present value of the bank's strategic plan and what the bank can reasonably achieve in a sale. Aside from the straight math I just described, you have to add an "option to sell" on top of the present value of your plan because if the management team does not achieve plan objectives then the board still has the option to sell and that option has value. But the difference between that should be relatively small and within a board tolerance level. Calculating and communicating this number will keep a management team aspirational in strategy development, and focused in plan execution. Because a large strategy value gap may cause the board to hand over the keys to a more capable management team (i.e. sell the bank). So the financial and growth goals should be ambitious enough because the CFO knows what "ambitious enough" means. 2) What size must the bank be to make the human, technology, and other infrastructure investments to bridge a strategy value gap and remain relevant to bank stakeholders? That depends on the needed investments. The strategic CFO should be the arbiter of that conversation. Because if it's your investment banker, the size you have to be would be double what you are. No matter what you are. :) 


6. What could disrupt your company, and what can finance do about it? "This is about envisioning a competitor's move, such as a merger or a new industry entrant that changes the nature of competition or a new technology that dramatically changes product offerings. Again, CFOs can ask if they themselves could use the likely playbook of a competitor to disrupt the industry and also leverage FP&A capabilities to model out disruptive scenarios and help frame responses." 

JFB Take: The market leader in mortgage origination in my home state of Pennsylvania is Quicken. Imagine if in the late 1990s bank CFOs projected a twenty year decline in mortgage market share driven by a piece of technology? Would we have made the investment to have a similar piece of technology and deliver an end-to-end paperless experience if the CFO made the right call or alerted us into making at least some call? We didn't. And we still may not have. We are not good at long-term strategic bets and we may not want to lay this at the feet of the CFO. But strategic CFOs should be running capital plans with "what if" scenarios such as "if we project multi-year declines in mortgage originations, how will we replace that activity, balances, and profit?" Much like they should be asking, and therefore running scenarios, "what if disruptors spark a multi-year decline in retail deposits?" I'd love to hear the head of retail refute or describe how you would replace that funding. But the conversation should start with your strategic CFO what-if testing.

7. What would you like your company to stop doing? "Finally, are there underperforming business units or a part of the company that does not generate required returns, or customers who are not profitable? If there isn't a way to scale the business to increase returns, it may be best to dispose of it and free capital and management resources to grow more high-potential businesses. Similarly, choosing not to serve unprofitable customers or to increase prices to them may increase long-term returns." 

J4B Take:  Many financial institutions evaluate the size they must be to make the investments discussed in "5" above to be relevant to their stakeholders. But what are they doing now that they can stop doing to pay for strategic investments? And when evaluating where to invest, what has the greatest potential to generate profit? Perhaps it's something you are doing now that you want to do 4x more of that is generating excellent ROEs. The where to invest and how to fund it are key questions that the CFO should take the lead in answering.

After reading the seven essential questions for strategic CFOs, and my take as it relates to banking, does your bank have a strategic CFO?


~ Jeff

Note: If bankers do not have the management reporting to answer "7" and know which lines of business, products, or customers are delivering the best profit, they should give me a call. My firm does that for you.

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders

Ten percent of author royalties go to, who work to bring down the suicide rate among our veterans. 




Thank you!



Saturday, July 03, 2021

Bank Customer Lifetime Value

Who are your target customers? Answer: XYZ
Why are they your target customers? Answer: They are our most profitable customers.

May I see your profitability reports that show this? Answer: *crickets*

Is "most profitable" the right answer? Aside from my skepticism that the financial institution actually calculates who their most profitable customers are. But in doing profitability reporting for decades, I feel comfortable saying that most commercial-focused financial institutions' most profitable customers are commercial real estate investors. Not small mom-and-pop real estate investors. The ones with the big balances.

Targeting them would likely yield a very profitable bank. But would it be a valuable bank? It is highly competitive in the large commercial real estate space. Not only are there community financial institutions chasing that business, but large banks, conduits, insurance companies, loan brokers, etc. The competition is, well, not very "blue ocean" like (compete where the competition isn't). 

I'm not down on commercial real estate. Any balanced balance sheet should have its fair share of investor CRE to boost profits. But to boost value, I ask again, who are your target customers?

In comes what experts deem "lifetime value" (LTV). Can we categorize, and generalize, customer segments to predict what segment delivers the greatest LTV? Because if we consider spot profitability, we should target CRE. It is likely the reason why so many bank balance sheets have concentrations in this product. 

Let's take a doppelganger customer segment: Recent college graduates with high earnings potential. We're not talking philosophy majors here. I already have enough of them fumbling my coffee order. I'm talking the docs, engineers, accountants, cyber security, et al. The customers that SoFi targeted out of the gate.

See the table below for our recent engineering major grad, who is working as a junior engineer for an environmental engineering firm. Four years after becoming our bank's customer, he/she breaks out on his/her own. 

As you can see, the Total LTV in the top table shows a pretty profitable customer, and likely customer segment. But if you look at the spot profitability in Year 1 of the bottom table, our doppelganger customer doesn't look so attractive. Profits actually decrease in years two and three. THIS is why estimating LTV of identifiable customer segments is so important to strategic decision making in financial institutions. Not only must we calculate LTV by segment, but we must also compare to external data to ensure there are enough of these "households" in our markets so we can build critical mass.

There are business models that span the country for their targeted customer segments. In addition to the already mentioned SoFi, Live Oak Bank comes to mind. They started as an SBA shop focused on business segments that were recession proof, like dentists and veterinarians. And searched the entire country for them.

Most of us are geographic focused. But that doesn't mean we shouldn't build our infrastructure: the people, technology, and physical locations, to differentiate ourselves with those customer segments that deliver superior LTV and are in abundant supply in the markets we choose to serve.

Do you calculate LTV?

~ Jeff

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders

Ten percent of author royalties go to, who work to bring down the suicide rate among our veterans. 




Thank you!

Saturday, June 19, 2021

Banking's Execution Imperative

Announcer: Spain had 85% possession against Sweden and did not score.

The strategy drawn up by the Spanish side played out... mostly. What Spain didn't do is execute in their attacking third to put one in the net. It doesn't matter if you had 85% possession. The scoreboard matters.

So it goes with banking. So often management teams put in the work to design a winning strategy. They march out of that planning retreat energized. And when their strategy consultant re-engages next year to see where they are on execution, there is disappointment. The economy, interest rate environment, or their "day job" held them back. And the institution didn't move forward. They didn't execute in the attacking third.

I realize the irony about me writing on execution when one segment of my book, Squared Away-How Can Bankers Succeed as Economic First Responders was "No amount of good execution will help a bad strategy." But if we don't get serious about executing on the well thought out strategies we worked so hard to develop, the scoreboard will reflect it. And we can't expect our competition to put up a zero so we stay level at nil-nil. 

I'm working this soccer analogy to the fullest.

Here is what I mean. Schmidlap National Bank, our hypothetical community bank, researches their markets, customers, competitors, strengths and weaknesses and determine that they can distinguish themselves as the best business bank for businesses between $1 million - $10 million in their markets. So they set out to make it so.

They debate what success would look like. To be the best business bank, they must baseline what their current business customers think of their bank, its products, and its service. So a strategic initiative is to baseline through survey, and repeat at least semi-annually. To align strategy with culture, they make executive and mid-level performance reviews within the departments that serve businesses dependent on continuous improvement in how your business customers view the bank.

Additionally, the strategy team thinks they should be paid for being the "best" in terms of pricing. As such, they identify top-quartile (among market peers) yield on loans to be their aspirational goal. And again, executive performance reviews and/or bonuses are linked to achieving top quartile yield on loans while achieving market average credit quality metrics. In other words, they can't deliver yield by chasing poor credits. 

But there's more. In order to align the organization with this strategic aspiration, lender bonus criteria is changed from volume to continuous improvement in the individual lenders' spread. So now, lenders' incentives are closely linked with strategy. They demonstrate continuous improvement in customer satisfaction scores, and continuous improvement in their portfolio spreads, and they have a good year. 

Each strategic initiative, inextricably tied to strategy, serves to set the table (i.e. culture) for successful strategy execution. And the initiatives are strategic. Not "replace the departing loan assistant" or "upgrade phone system." These are business as usual "to-do's". They are someone's day job.

But for bank executives, strategy execution is your day job.

Don't be Spain.

~ Jeff

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders

Ten percent of author royalties go to, who work to bring down the suicide rate among our veterans. 

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders




Thank you!

Sunday, May 23, 2021

Memorial Day: Remember Maurice "Maury" Hukill

In 1975, a bloody civil war erupted in the country of Lebanon between Palestinian and other Muslim guerrillas and Christian groups. During the ensuing years, Syrian, Israeli and United Nations interventions failed to resolve the factional fighting and the resulting instability and bloodshed. 

In August, 1982, a multinational force, including 800 U.S. Marines, were ordered to Beirut to help coordinate a Palestinian withdrawal. They left in early September, but the vacuum that resulted from their departure culminated in a massacre of Palestinians by a Christian militia. So the international peacekeepers returned in force at the request of Lebanon by the end of September at the objection of Syria and Iran. For the next year the peacekeeping force was peppered by snipers, improvised explosive devices, and suicide bombers.

Maurice "Maury" Hukill was born and raised in Elizabethtown, Pennsylvania. A hamlet in the Scots-Irish settled area of western Lancaster County and epicenter for the Mars Chocolate Company's North American production of Dove Chocolate bars. 

Maury attended Virginia Tech, and in 1981 received his degree in forestry and wildlife management at VT's College of Natural Resources and Environment. Although he did not go on to make use of the degree. Instead, he followed his father, Hank Hukill Jr. into military service. Hank was a U.S. Naval Academy graduate, a nuclear engineer and a submariner. After his naval career, Hank went on to serve at the Three Mile Island nuclear power plant, and was part of the team to restart the plant after the 1979 mishap. TMI was near Elizabethtown.

Maury chose the Marines, and went to officer candidate school to earn his commission. A regular suburban kid from my hometown volunteering to serve his country.

He was a 2nd lieutenant in the 24th Marine Amphibious Unit from Camp Lejeune, North Carolina, that was dispatched at the request of Lebanon to Beirut to keep the peace in the midst of factional fighting, religious zealotry, and regional strife.

At 0622, Sunday morning, on October 23, 1983, a non-Lebanese, terrorist driven stake bed truck loaded with explosives equivalent to 21,000 pounds of TNT turned onto an access road leading to the Marine airport compound. It crashed through a barbed-wire fence. The truck passed the sentry post and since the sentries were operating under strict rules of engagement, did not have their firearms magazines loaded, and therefore could not fire upon the truck until it barreled past them. 

The truck, driven by an Iranian national, did not stop until it drove through the front entrance of the BLT building, which was housing 2LT Hukill's unit. Most were still asleep. The blast occurred almost immediately. One survivor said "I don't think there are words in the English language to describe the magnitude of the blast." It was the largest non-nuclear explosion in history. The building collapsed.

The explosion killed 220 Marines including the 25 year-old Hukill, 18 sailors and three soldiers, making it the deadliest single-day death toll the US Marine Corps had seen since the Battle of Iwo Jima during WWII, and the deadliest single-day death toll the Armed Forces had seen since the first day of the Tet Offensive during the Vietnam War. It was also the deadliest terrorist attack on Americans prior to 9-11.

Minutes later, a second suicide bomber drove another truck bomb into the nearby Drakkar building, where French troops were stationed, resulting in the deaths of 58 paratroopers and six civilians. 

A Beirut Monument dedicated to the U.S. service members who lost their lives is located in Jacksonville, North Carolina, where Camp Lejeune is located. 

"Our first duty is to remember..."

While you are enjoying Memorial Day Weekend finally getting together with family and friends, I ask you to remember Maury Hukill and all of his comrades that gave their last full measure of devotion on that terrible day in 1983 in Beirut, Lebanon.

~ Jeff


Beirut Memorial:

8A894694CA09D74F48E5AF790B15DA11.beirut-memorial-program-new-.pdf (

Marines of Beirut video from the Marine Corp Reserve:

Virginia Tech honors 2nd Lt Maurice Hukill:

University to honor U.S. Marine 2nd Lt. Maurice Hukill at Pylon Dedication Ceremony | Virginia Tech Daily | Virginia Tech (

History "This Day in History":

Beirut barracks blown up - HISTORY

Patriot Connections:

1983 Beirut Bombings – Deadliest day for Marines since Iwo Jima | Patriot Connections

Defense archives listing the fallen: - Special Report - Beirut Barracks Bombing

Beirut Remembered video:

Thursday, May 13, 2021

Excess Liquidity, Low Rates, and Branching. My Answers to Jeff Davis' Questions

S&P Global Market Intelligence Principal Analyst Nathan Stovall recently interviewed Mercer Capital's Jeff Davis on the Street Talk podcast regarding the thorny banking issues of the liquidity glut, persistently (or perpetually?) low rates, and the branch costs millstone. I highlight Jeff's comments, and offer some solutions in this video blog.


~ Jeff

Here is the YouTube link to my comments in case the video does not play on your device:

Street Talk podcast link: 

Excess liquidity, low rates leave banks between a rock and M&A | S&P Global Market Intelligence (

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders




Thursday, April 29, 2021

Squared Away- How It Happened

March 11, 2020: The World Health Organization declared a global pandemic. I attended the Pennsylvania Bankers' Association Women in Banking Conference the next day. And I wouldn't attend another for a year and three months. I will be attending the Financial Managers Society FMS Forum this upcoming June.  

The first few months were a haze of helping clients navigate the uncertainties in their business, and the uncertainty in our own.

And then we began settling into a routine. When the U.S. tried to open up in the summer, we actually embarked on a 10-day business trip to Texas to work on a project. And then the second wave hit. Back in the work-from-home (WFH) saddle again.

Do you know how much time a traveling consultant recaptures when they no longer travel? Sure, road warriors try to be productive on phone calls and in hotel rooms. But when all travel is paused, you suddenly have much more time to get things done and be productive.

It was with this newfound time that got me thinking in the summer of 2020.... write a book! 

Annually I would review my most read blog posts for the past year and all time. I've been writing since 2010. Some made sense to me. Others surprised me, such as the amount of views expended on board composition, or on deploying bank capital. And I thought, well, readers know what they want. And viola! Idea! Write a book curated by readers of Jeff For Banks. 

So in the summer I drafted a summary, and an introduction chapter, and solicited the usual publishing suspects for business books. The challenge was that it was a book designed for community financial institutions. Very niche. Not a large audience. No worries though, I could build my own publishing house. So I did, building off what I learned when my then 10 year old daughter published a pre-teen book.

Editors Rule

My first hire was an editor. Here I leaned into my connections. I have written many articles for multiple publications. My best editor, as it turned out, was the editor, Kate Young. She tore up my articles to sometimes unrecognizable levels. Yet they were better, much better, than what I submitted. Could I keep my ego in check by submitting myself to so much red ink again? You betcha.

If you want to write a book, have a great editor. Kate was great, and I think the product shows her skills.

While writing we quickly realized we needed permissions to include references and graphics. Since the book includes blog posts in their original form, I had to ensure every graphic was royalty free or I had to substitute with royalty free graphics. Also, if I included slides from conferences and presentations that I attended, I asked the firm if it was ok to use their material. The last permission was a cartoon on page 57 of the paperback and hardcover, the work of a commercial cartoonist. That one required a royalty payment. Most of the tables and graphs in the book were done by me. I gave myself permission.

My theory behind the book is that serving all stakeholders can be the next best version of my readers' financial institutions. While seventy-five percent done with writing, I read Conscious Capitalism by John Mackey of Whole Foods Market and Raj Sisodia. They put hard numbers behind it in their appendix that shows "Firms of Endearment", i.e. those that serve a higher purpose than solely delivering to shareholders, outperform the general market. That was my theory. Stakeholder primacy is not a zero-sum game. You can deliver value to all stakeholders at the detriment to none. It was good to have confirmation in the form of analysis. I do favor spreadsheets. Oftentimes success is measured by them. 

What's In A Name?

I naturally had a few book names knocking around in my head. And I bounced a few off of Kate, my editor. But for this exercise, I leaned on my family. It was January, and my college daughter was home. It was the pandemic, and my LA daughter's family (fiancée and child) were riding the pandemic out with us. Boom! Naming team.

We sat around the kitchen table and knocked out possible titles. We started with banking specific possibilities, until my daughter's fiancée suggested we link other aspects of my life into the title.  That ended up being the last three titles in the accompanying picture (third from the top offered by my daughter because it's what might have come out of my mouth as a result of teenager hijinks). Obviously we started out less serious. But my wife actually came up with the last one and the winner-Squared Away. It's a typical military term that has widespread civilian adoption. If you're squared away, you got your sh*t together. 

The subtitle came from a virtual conference where Jelena McWilliams, the FDIC Chair, said those words. Actually, I did not attend the virtual conference. You know how I heard of what she said? Several tweets from my Twitter friends. My subtitle came from a tweet. You read it here.

Graphic Artists Drool

Once written and edited, now is the time to bring more professionals onboard. First, a typesetter. Publishing houses and international book standards require certain formats. You'll hear more on this below, but do you know there is not supposed to be any blank pages? That is why some books have This Page Intentionally Left Blank. So it's not blank. Publishers do this to manage where the Table of Contents rest, and each chapter starts on the right side of the book, etc. 

Did you also know that the book title with author and publisher must appear immediately prior to the copyright page. Who knew? At any rate, I hired an experienced typesetter that knew all of these things and promptly formatted the interior of the book for Kindle, Paperback, and Hardcover. She was great, and quick. I had minimal changes.

The cover artist was a bit different. And the cover, as it turns out, is very important to book sales. More important for fiction, but still important. So I researched the most experienced in design and found my Nigerian artist via Fiverr. His design was great, in my opinion (see picture). He gave me a couple mock-ups to choose from but I liked the symbolism of the squares. Each different book format required a different cover (Kindle, Paperback, Hardcover). And for paperback and hardcover, I had different publishers (Amazon and Lulu). Amazon does not do hardcovers. 

As great as the graphic artist was in art, he was a bit challenged in delivering book cover formats correctly. The Kindle version went off without a hitch. The paperback had a couple revisions. The hardcover was a challenge, including putting the wrong barcode on the back. Did you know that each format has a different ISBN number and therefore barcode? Also, did you know, that the barcode on the back of printed books needs to have a white background and be in the exact same spot on every book? 

My graphic artist struggled with this. And ultimately my daughter's fiancée finished the last five yards of the hardcover design. 


I'm now in the book marketing business.

Before release, I noticed that two of my social media contacts that served financial institutions and financial technology companies penned their own tomb: Beyond Good. And I worried that much of their thesis was similar to my own. It is similar in that they encourage capitalism's evolution to be more balanced in serving stakeholders. But it is not as targeted towards micro issues facing community financial institutions, as was mine. Phew! I encourage you to read both!

No matter if you use a publisher or create your own, you are ultimately responsible for book sales. My first move was to order author's copies and send pre-release versions to industry insiders. I did so, but only two weeks prior to release. It wasn't like I gave them tremendous time to read, opine, and help promote. But hey, I'm a newbie. 

This led to me being on the Banking Transformed podcast, and be scheduled for a few more. It was a great conversation with Jim Marous. And I look forward to others.

Before going public I e-mailed all of my banking contacts, letting them know before others that I wrote a book specifically designed to bring value to them. And that really started the ball rolling. That was only two weeks ago, so we'll see how it goes. So far the feedback has been positive. But who calls out the author and says "this is crap!" I worked hard to make it valuable, so I'm hoping nobody feels that way. But ya never know.

My LA daughter is helping me with marketing. She works for a marketing agency that specializes in health care and has been in the marketing agency biz her whole professional career. Knows more than me. But don't tell her I said so. If you see an ad on LinkedIn or Amazon, likely done by her. She also guides me in content and pushing out to the world. 

I wonder if she'll like this blog post?

At any rate, that's how my book came to be. I hope you enjoy it. Order by clicking on the below links or go to wherever you get your books:




Thank you for your consideration!

~ Jeff

Tuesday, April 06, 2021

Unintended Consequences of Aggressive Regulation

"In case you're looking for some light reading this weekend, FRB-Philadelphia working paper 21-08, Does CFPB Oversight Crimp Credit?" 

~ Robert Morro (@bmorro44)

So went a tweet from one of my Twitter connections. So I listened to him, and dialed up the FRB-Philadelphia WP 21-08. Forty three pages later, with formulas like:

CFPBLoanSharelt = αl + β · Postt + εlt

And a 27 page appendix with subtitles like:

Alternative difference-in-differences model

I got my answer.

Note that the study was limited to Federal Housing Administration (FHA) loans. For the uninitiated, an FHA loan is government-backed mortgage insured by the FHA. It is popular with first-time homebuyers, low to moderate income (LMI) homebuyers, and those with relatively low credit scores... as low as 500. It normally has a low down payment requirement, as low as 3.5%. You can see how it accelerates home ownership, which many economists and policy makers feel is critical to improving net worth.

The study analyzed FHA lenders that were subject to CFPB oversight, which were non-bank FHA lenders and bank FHA lenders with greater than $10 billion in total assets. The period analyzed was immediately prior to the commencement of CFPB oversight in 2011, and afterward. The study also analyzed the impact of the change in oversight intensity brought about by the 2016 election. 


The study revealed intended and unintended consequences. First, the intended consequence was that CFPB oversight is associated with improvement in mortgage servicing practices, leading FHA mortgages from CFPB-supervised banks to become less likely to transition from moderate to serious delinquency. Poor servicing practices were an important driver of the foreclosure crisis during the Great Recession; the study results suggest that tighter regulatory oversight may help reduce inefficient foreclosures during economic downturns. This is good.

There were two unintended consequences. The first was regulator arbitrage, where a bank decides to have an activity regulated by one entity rather than another because of the perception that the chosen regulator will be less risky to them. In this case, bank holding companies (BHC) with mortgage subsidiaries in the holding company had a tendency to put the mortgage sub under the bank where it would be regulated by the bank's primary regulator and not the CFPB so long as the bank was less than $10 billion in assets. If it was in the BHC, it would be a non-bank mortgage lender, and therefore subject to CFPB oversight, even if the bank was under the $10 billion threshold. Meaning: banks chose to avoid CFPB oversight.

The second, and presumably more actionable unintended consequence: Banks subject to CFPB oversight decreased FHA lending and replaced that activity with jumbo mortgage lending. To avoid the reputation and regulatory risk of doing FHA lending, banks chose to do less of it, and therefore reduced the amount of credit advanced to first-time homebuyers and LMI families. Jumbo mortgages are typically for larger homes for wealthier and more credit-established families. There was no conclusive evidence that non-bank FHA lenders and under $10 billion FHA bank lenders increased FHA lending to make up for the shortfall.

Let that sink in a bit.

Further, after the 2016 election, banks subject to CFPB oversight began anew with FHA mortgage lending. They must have perceived lower reputation and regulatory risk in doing so, and therefore came back into the market. 

This is actionable information for both lawmakers and regulators. Particularly given the aggressive rhetoric coming out of the new-teeth CFPB.

Maybe they should read the study. And modify their approach. One can hope. But as Red from Shawshank Redemption said:

"Let me tell you something my friend. Hope is a dangerous thing. Hope can drive a man insane."

Add FRB-Philadelphia WP 21-08 to your night time reading list!

~ Jeff

Tuesday, March 23, 2021

Fintech Buys Bank. Keeps Stratospheric Valuation.

Imagine a fintech, with off-the-chart valuations such as 2.6x book value and 51x EBITDA, buying a bank. For 1.85x book. 

In today's M&A valuations, 1.85x is pretty lofty. Especially for a community bank. But you don't have to imagine it. Because that was what LendingClub paid for Radius Bank. Since the deal closed, LendingClub has kept its valuations. In fact, since February 17, 2020, one day prior to the Radius Bank deal announcement, LC's share price has risen 58% versus the S&P BMI Software & Services Index increase of 20% (see chart). 

LendingClub bought a bank and didn't trade down to traditional bank valuations. Their valuation grew loftier. Making for even better currency to buy even more banks. And putting them at a strategic advantage over other would-be financial institution buyers mired in the lowly yet more rational bank stock valuations. Truth be told, LC paid mostly cash in the deal. What's cash worth these days? And there are plenty of examples of investors throwing barrelfuls of cash to technology firms.

This is a clear threat to financial institutions. How can we overcome such a hurdle? I wrote that one primary reason banks need scale is to enjoy greater trading multiples. It was one of my most read posts and is a chapter in my upcoming book, Squared Away (soon to be available in your favorite bookstore). 

But we can't pay 2x book for a target when our stock is trading at 1.2x book. Even if we enjoy higher bank-like trading multiples because of scale we may get to 1.5x. Green Dot Corporation is currently trading at 2.6x book and over 6x tangible book. They can easily afford 2x book with that valuation. With more experience acquiring banks in the rearview mirror, fintech's who might have once been worried about bank valuations weighing them down, will be more confident to bid on for-sale banks, to be aggressive, to get deals done. 

Having said that, net interest income is a very small part of  LendingClub's revenue mix, at 22% for 2020, which was prior to the close of the Radius Bank transaction. And they're in the business of lending! Green Dot Corporation showed less than 2% revenue attributed to net interest income. So the continued lofty valuation might be relating to the relative size of the bank within the fintech. 

We were worried that credit unions would be buying banks. Using their ample cash positions, which aren't earning much in the investment portfolio or at other financial institutions, and turning taxable earnings from target banks into non-taxable earnings at credit unions.

What about fintechs that may not be too concerned about profit? I reviewed LendingClub's last five years and see nothing but red ink. Radius Bank had net income of $6.7 million in 2020. On a consolidated basis with the currently bleeding LendingClub, that might revert to tax-free money. Just what we feared with credit unions. 

Should we be worried about more fintechs stepping up to buy banks? (Ref: SoFi and Golden Pacific Bancorp) 

Will these precedents be part of a trend?

~ Jeff

Friday, March 05, 2021

CFPB: Are They Coming to Get You?

A bank trade association CEO asked me a couple of questions while he was researching an op-ed piece. The edited Q&A is below.

Q. Shouldn't the CFPB work to address the impediments to starting a bank in LMI markets rather than punish community banks who scrambled to serve their customers when the economy shut down?

Author's note: This was probably relating to the late January released statement about the acting director of the CFPB's promise to take aggressive action in response to perceived Covid-19 relief violations, including the policy of some banks to only take PPP applications from pre-existing customers, which may have a disproportionate negative impact on minority-owned businesses.


A. The problem stems from the spreadsheet, in my opinion. With deposit spreads so low, branch deposit sizes need to be very large for a branch to be profitable. According to my firm's profitability peer group, a branch with $74 million in average deposits made a mere pre-tax profit of three basis points. That is a fully absorbed number, with support center expenses allocated to it. On a direct cost basis, the branch must be at least $38 million in deposits. Knowing this, very large financial institutions operate branches where they can have greater scale to drive greater profitability, which frequently excludes LMI neighborhoods, creating what is termed "bank deserts."

Another challenge is imposed by the very government that tries to assist LMI households: regulation. The average operating cost to originate and maintain an unsecured personal loan is $287 (again, according to my firm's profitability outsourcing service peer group). And the average balance per account is $3,800. The spread needed to cover the cost alone would be 7.5%. That's not the yield... it's the spread. So if the bank's cost of funds was 1% the yield would have to be 8.5%.

But there's more! The provision for loan loss is 1.25% of that balance. A bank would have to charge a 9.75% yield on an unsecured personal loan just to break even. The operating cost is largely attributable to the distribution through the branch network and regulation. Since a bank can't cut regulation, they trim their branch network to lower those costs. And the obvious bullseyes are on branches that lose money.

Similarly, the annual operating cost per account for a retail checking account is $398. With a 1.89% spread and with 0.91% average fees as a percent of balances, the average balance of a retail checking account would have to be over $14,000 to be profitable. A very high hurdle in an LMI neighborhood. Again, much of the cost per account is driven by branch distribution and regulation. Retail banking is heavily regulated. And it's difficult for financial institutions to operate in neighborhoods that have low average balance loans and deposits. Plus, if an institution charges the high yields on loans to be profitable, or assess the high fees it would need to make the retail checking account profitable, think of the reputation risk they would assume. That is why very few of our clients consider retail banking as the driver of future profitability in strategy sessions. 

Q. Should communities today be concerned by the M&A activity taking place? What advantages or disadvantages do they face when institutions consolidate?

A. If we lose 4% of FDIC-insured institutions per year, which was pre-pandemic pace, we will have ~ 3,300 institutions in 10 years. There are people that believe we are over banked, and look to Canada and Europe as case studies for having fewer, larger banks. There are benefits to scale. The most efficient banks in the U.S. tend to be between $5 billion - $10 billion in total assets.

But there are myriads of examples of very efficient $500 million banks, and technology should make it easier for smaller community banks to deliver relevance-sustaining profitability that enables the bank to invest in its future by remaining relevant to its stakeholders. The really small institutions, however, should consider merging, even if one or two engage in a merger of equals to have the resources to remain relevant. Smaller institutions run the risk of nobody wanting to buy them.

As institutions get larger, and their HQ's get farther away, decisions are made that can be sub optimal to the local area, town, and/or borrower. For example, think of the Credit Analyst in Charlotte evaluating a rural Indiana ag loan to an Amish borrower. What does that write-up look like? We will lose that local flavor to allocating capital by centralizing banking. That is what I fear we will lose by continuing the trend that took us from 15,000 banks in 1990 to less than 5,000 today.

~ Jeff

Tuesday, February 23, 2021

Twitter Reacts to M&T / Peoples United Bank Deal

The headlines for subject deal, which dealmakers hope beyond all hope starts a robust bank M&A frenzy, were like the following:

(you can click on articles and tweets to enlarge)

Conversely, here are what some Twitter users thought of the deal, which starts with a factual tweet from yours truly. Keep in mind most tweets were from investors, not other stakeholders.

Any other reactions?

~ Jeff

Wednesday, February 17, 2021

Is Your Contemplated Bank Merger Anti-Competitive?

Yesterday at the ABA's virtual Conference for Community Bankers (CCB), Federal Reserve Governor Michelle Bowman gave a speech, My Perspective on Bank Regulation and Supervision. In that speech, she briefly commented on the FRB's review of merger applications from an anti-trust standpoint. She said:

"Technological developments and financial market evolution are quickly escalating competition in the banking industry, and our approach to analyzing the competitive effects of mergers and acquisitions needs to keep pace. The Board's framework for banking antitrust analysis hasn't changed substantially over the past couple of decades. I believe we should consider revisions to that framework that would better reflect the competition that smaller banks face in an industry quickly being transformed by technology and non-bank financial companies. As part of this effort, we have engaged in conversations and received feedback from community banks about the Board's competitive analysis framework and its impact on their business strategies and long-term growth plans. We are in the process of reviewing our approach, and we are specifically considering the unique market dynamics faced by small community banks in rural and underserved areas." 

The Fed's FAQs on their approach in analyzing the competitive effects of a merger say the following:

On the initial evaluation of the competitive effects of a combination: 

The competitive analysis of banking acquisitions begins with an initial screen based on market shares and market concentration for the local banking markets in which the parties to a transaction have overlapping operations. Market shares for a local banking market are based on the deposits of depository institutions in the market. The Herfindahl-Hirschman Index (HHI) is the usual measure of market concentration and is calculated as the sum of squared market shares in a local banking market. For these initial calculations, the deposits of all institutions with a commercial bank charter receive 100 percent weight and the deposits of all institutions with a thrift charter (i.e. savings banks and savings and loan institutions) receive 50 percent weight in computing market shares. This weighting indicates that the Fed doesn't think thrifts offer a full retail banking suite of products and/or they are concerned about the anti-competitive effects for in-market commercial banking. Although readers know that many thrifts pursue business banking strategies. And to a lesser degree, credit unions. Which are not part of the HHI calculation.

The Board delegates merger approval to individual Reserve Banks unless, among other reasons (i) the merger or acquisition would raise the HHI by 200 points or more to a level of 1,800 or higher in any local banking market in which the parties to a transaction have overlapping operations, or (ii) the merger or acquisition would increase the post-transaction market share for the acquiring firm to more than 35%. If these are triggered, off to Washington the merger application goes.

On how the Fed defines geographic markets:

No hard and fast rule. Many geographic markets follow Metropolitan Statistical Area (MSA) definitions or rural county lines, but some markets comprise multiple MSAs/counties or parts of MSAs/ counties, reflecting that economic activity does not always track political boundaries. Up-to-date geographic market definitions are available at the St. Louis' Fed CASSIDI database or from the relevant Reserve Bank. Banks can dispute the definition of a geographic market relevant to their application by proposing an alternative market definition and providing evidence supporting the alternative. Such evidence should focus on retail banking customers' substitution behavior (emphasis mine) or on the economic integration of the relevant economic areas for the proposed geographic market definition. 

This runs contrary to the deposit weighting of 100% for commercial banks and 50% for thrifts. Why discount thrifts, and not even count credit unions if the true concern is retail customers' ability to substitute?

And what about branchless banks? This gets to the crux of Governor Bowman's comments, in my opinion. Why do we not count virtual banks such as USAA, Discover, and Ally, or neo banks such as Chime (Stride Bank or The Bancorp Bank)? 

What I would suggest to regulators in contemplating change is to have FDIC and NCUA insured financial institutions report deposits by geography, such as Zip code, and break it down further between business and consumer. Let that be the new Summary of Deposits from which the anti-competitive effects of a merger is calculated. If you continue to weight deposits by institution type, determine first what anti-competitive risk we are trying to mitigate. Are we concerned more about business banking than retail banking? Then perhaps business deposits get 100% weighted in the HHI calculation and retail deposits get something less than that. Or, alternatively, perhaps Americans value a bank with a physical presence in the market, and therefore financial institutions with a physical presence get 100% weighted versus something less for institutions with no in-market presence. But the bank/thrift weighting scheme currently in effect does not reflect reality.

So in terms of how competitive analysis is now performed, I agree with Governor Bowman's comments. Change is coming. And welcome.

~ Jeff

Saturday, January 30, 2021

How Can Community Financial Institutions Improve? Project Management.

In this video blog, I discuss my thoughts on community financial institutions upping their project management game. In summary:

There are two types of projects: support function projects where you try to improve the gears within the bank, and customer experience projects (CX) where you meet the demands or emerging demands of your most valuable customer cohorts.

First, be selective in the projects you undertake. The ones that create the greatest value in terms of reducing resources needed to run the bank, or improve your most valuable customers' experiences.

Here are the high level steps:

1. If a CX project, determine your most valuable customer cohorts by lifetime value. Why undertake a project for customer segments that are unprofitable?

2.  Select a project team that includes executive sponsorship, mid-level leadership, do'ers (after selection), and vendors (after selection). Use a "many hands make light work" approach. Because it's true. And many hands make quick work.

3.  Evaluate and select the vendor based on their solution, support, and potential longevity. Don't be saddled by your rigid vendor management practices to eliminate promising vendors.

4.  Set deadlines. Not six months out. Think PPP fast. We did it then, we can build on that. Make sure you keep the vendor fully engaged in the process, like they promised in your contract.

5.  Maintain accountabilities. Even after flipping the "on" switch. 

The Jimmy McHugh's tour is a bonus!

Here is the actual link in case you can't click on the video:

Thursday, January 14, 2021

The Death of the Community Bank

In June of 2008 I gave a speech titled "The Death of the Community Bank" and in that speech I made predictions. Recently I was cleaning out my files and I ran into the hard copy slide deck that accompanied the speech. 

If I ignore where I was wrong then I am as guilty of willy-nilly prognostications that I sometimes think industry pundits engage in. So, below is a list of predictions I made and if I was right or wrong, or somewhere in between.

Prediction: The General Bank will become extinct. Much like the General Store fell victim to the supermarket and the lumber yard fell victim to Home Depot, I predicted the community bank that did not pick targeted customer niches or develop product expertise will meet it's doom. The anecdote I used was how the Stephen's Island Wren was rendered extinct by a lightkeeper's house cat. That might be an exaggeration, as many feral cats feasted on the flightless bird as well. Much like competitors nip at community banks' customers. 

Result: Mixed. A mid-2020 survey performed by Cornerstone Advisors showed that 51% of retail customers that opened a new bank account within the last three months did so at a large, national bank. Eighteen percent of that group opened an account at a digital bank. Two percent opened an account at a community bank. When I made that speech in 2008, there were approximately 8,500 FDIC-insured financial institutions and today that is around 5,000, a 40% decline. However, last year's top 5 total return to shareholders post had two traditional community banks on that august list. So there are community banks that bring discernable value to their shareholders and other constituencies. They can have the operating discipline and service to their constituencies to earn their right to remain independent. And I had ING Direct as an example of who might be the lightkeeper's cat to the community bank. A bank that was purchased and is now, well, extinct.

Prediction: Community Banks with < $10 billion in total assets will continue to lose market share. Here was my chart to support the prediction...

It was a pretty alarming slide. 

Result: I was right. I ran the numbers again. Banks and savings banks with greater than $10 billion in total assets control 86% of all FDIC-insured assets and 85% of deposits for the most recent quarter. The days of getting in the ring and slugging it out for market share with other community banks are done. Strategies cannot ignore big banks any longer.

Prediction: Banks with < $500 million in total assets must have superior net interest margins (NIMs) to deliver financial performance. Here is the slide that accompanied the prediction...

Result: Mixed. Banks with less than $500 million in total assets delivered a 3.82% NIM at the median for 2019, while banks above that size was 3.67%. So smaller institutions continue to enjoy a NIM advantage, but not to the extent they did in 2007. And the ROA for <$500MM banks was 1.08% versus 1.22% for the rest in 2019. I used 2019 because of the NIM compression caused by PPP loans and the outsized impact that had on smaller institutions. And I did not filter for Sub S banks, so the ROA difference was probably greater. Having said that, the ROA difference was only 14 basis points. With a narrow advantage on NIM, size is a factor to drive down costs to elevate the performance of smaller banks to that of larger banks.

Prediction: Community banks must solve for the profitability of fee-based lines of business to generate superior results. Here is the slide I used to support the contention...

Result: Mixed. If I put a column in the above chart for third quarter 2019 fee based products profit contribution was -6%. This is from my firm's profitability outsourcing service, which is mostly community banks. In a low rate environment, deposits are less valuable and therefore less profitable. In terms of fees, community banks have not solved for making this a contributing element to their profit picture, yet they remain profitable. Imagine if they did operate fee-based lines of business profitably. That would be an ROA/ROE accelerator. 

Prediction: Senior management will migrate to being strategists, coaches, and leaders rather than tacticians. Here is the slide I used on how leadership should spend their time courtesy of The Breakthrough Company by Keith McFarland.

Result: I was wrong. Although I do not have statistics, only observation. I often hear the "day job" comment regarding strategy execution. In my view, senior managers spend their time more like the first line supervisors in the slide above rather than how the then CEO of Chico's suggest they should spend their time. Could this be a factor in how slow we've moved in adapting to customer needs? Are we spending more time solving for tactical issues rather than moving us closer to our aspirational future?

How do you spend your time?

But the big mea culpa is in the title of this post. As I write, community bankers across the country are helping struggling small businesses with PPP loans, much like they did in the spring to quickly distribute this critically needed funding jolt. In the words of FDIC Chair Jelena McWilliams, community banks were the economic first responders during the pandemic. So in terms of the Death of the Community Bank, I WAS WRONG.

And thankfully so. Let's work together to keep me wrong.

~ Jeff