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!