Make Your Strategy 12 Strong

I have never been a fan of comparing combat to corporate. That is the attitude I brought to the keynote speaker at a recent banking conference I attended.

His name is Mark Nutsch, a former U.S. Army captain with Green Berets Operational Detachment Alpha (ODA) 595, a unit that was one of the first special forces units to be inserted into Afghanistan after the 9/11 attacks. The exploits of ODA 595 are chronicled in the book Horse Soldiers by Doug Stanton and the movie 12 Strong starring Chris Hemsworth. 

An elite army unit inserted into Northern Afghanistan to work with a warlord to flush out Al-Qaeda militias? Yeah, just like that rough and tumble world of hammering out a strategy over lattes and planning its execution over conference calls. Does anyone die if a deadline is missed?

This is why I resist comparing whatever it is that I do to war.

Then Mark described how their best-laid plans went to hell due to changing situations on the ground, and then I started connecting the dots. In a speech to military planners in 1957, Dwight Eisenhower famously said "Plans are worthless. Planning is everything." As soon as things go wrong, your plan must change. Much of it at least.

This brought me back to another military figure, James Murphy, former Air Force fighter pilot, Bosnian War veteran, and author of Flawless Execution. In that book, Murphy described strategy development and execution using the Plan-Brief-Execute-Debrief method used by fighter pilots to plan missions.

This method emphasizes the debrief mentality when mission participants gather after execution phases (in a fighter pilots parlance, after the mission was completed) to identify what worked, what didn't, new information, changing situations, and course corrections. Murphy's firm, Afterburner Inc., would later adopt the more expansive model below.

Future Picture is a vivid description of what success would look like if the plan was executed flawlessly. In Flawless Execution, Murph used the example of "Taking out 75% of the enemy's surface-to-air missile (SAM) capability" as a Future Picture. This might be considered a Vision in corporate terms. I tend to call it the Aspiration because Vision has gotten a bad rap. Mostly as a result of bad visions that communicate nothing to those responsible for executing the strategy on what success would look like. Murphy's example is pretty clear.

Mark from the Horse Soldiers used Commander's Intent in his speech, which is much like what Murph has as Leader's Intent in the above model. Commander’s intent is a clear and concise expression of the purpose of a military operation and the desired end state, guiding subordinate leaders in decision-making and execution. Recognizing that the original Plan would be altered as situations changed and the execution is modified.

I recently told a bank CEO, about to embark on their strategic planning process, that it is disheartening when we as consultants review the in-force plan that has not been changed since it was adopted years ago. If the plan was used as intended, there would be post-it notes and changes all over it. Ok, maybe not post-it notes and dog ears, but the document would be marked up to the point of near non-recognition than when it was adopted. 

Except for the Commander's Intent, or the Future Picture, the Aspiration, or the Vision. That would not change, or it would change minimally.

So how does your financial institution create the culture to "Win" as Murph's model demonstrates? Here are 3 ideas:

1. Have a clear Commander's Intent/Future Picture/Aspiration/Vision. Whatever you call it, make it clear where your financial institution is going from the Board room to the teller line. "Be number one or number two in every market we serve" is pretty clear. Don't let the ups and downs of the current situation cause you to lose sight of your brass ring.

2. Build an execution culture. Depending on what study you read, strategies fail somewhere between 70%-90% due to poor execution. Identify those hopefully few metrics that define success in strategy execution. Assign the tasks that need to get done in order to lay the bricks that get to your strategic objectives and vision. Name names. If Marsico is Project Leader on the "implement integrated cash management" suite by December 31st, I don't want to show up to the Management strategy update (debrief) meeting with nothing to report. Imagine if I were tasked with taking out a SAM site in the Flawless Execution example above, and I said "I didn't have time because of my day job" in the mission debrief.

3. Use the debrief method to modify the plan. I tell management teams that they should meet regularly about strategy execution and to make plan modifications. If the modifications are immaterial, a term pre-agreed upon between the Board and Management team, then make the changes and inform the Board by including the immaterial plan modification in the next Board meeting package. If it's material, then propose it to the Board and make the changes after Board approval and/or modification to the proposal. Financial institutions already do this with policies. At least quarterly, brief the Board on plan execution. You may find their perspectives extremely useful in getting to "Win." They are from varied backgrounds and professions, want the institution to "Win", and you pay them anyway. What great consiglieres! 

None of these things will lead to death if done poorly or not done at all. So I still resist comparing combat to corporate. But that doesn't mean we can't learn from the military on how they plan and execute when the stakes are so high. 

For us, the stakes are not so high. But death to our institution is a real possibility. 

~ Jeff

P.S. Mark and a few of his comrades started Horse Soldiers distillery and I intend to partake in some soldier-strong bourbon!

  

Is Jamie Dimon the de Facto Banking Spokesperson?

A bank CEO recently asked me how Jamie Dimon came to be the de facto spokesperson for our industry? As if reporters trek up Mt. Dimon to hear sage advice on bond markets, interest rates, the economy, and work from home. I recently posted the question and got the following response:

I fat-fingered Dimon's name which made it perplexing how someone that didn't follow me, even if they searched for Dimon posts, found this post. But did Sam have a point? I have seen people coronated that don't have the receipts to justify the coronation. Did Dimon? I checked, but before I did I received this chart of support from my Minnesota banker friend @AndySchornack. 

As with all images that may be too small, click on it to see a larger version.

Before Andy sent his chart of support for Jamie, I had run the numbers that are in the table below. I compared the largest US banks to JPM in multiple categories that are important to customers and shareholders of each company. There are different business models for sure, such as BNY which is more of a custody bank that would have an awful efficiency ratio and net interest margin, but has superior profitability. Or Capital One that is a credit card bank, lest you get nervous about their net charge-offs.

Sorry for the size of the table. I had a lot of ratios I wanted to compare. As with the last chart, please click on the above table to make larger. Lower numbers are better because I'm adding rankings, so a 1 ranking is better than a 10. I also assumed a higher leverage ratio was better, which is a subjective distinction. 

JPMorgan Chase (JPM) demonstrates strong historical performance, ranking first in seven out of 14 data points I analyzed, including impressive 3-year and 5-year total returns. While BNY Mellon briefly surpassed JPM in 1-year performance, JPM's consistent leadership suggests a higher level of market credibility compared to peers like Citi.

This credibility is a significant advantage. When a bank like JPM makes strategic investments for future growth, or even when an investment doesn't pan out as expected, its established reputation and transparent communication allow it to execute long-term strategies more effectively. Without this inherent trust, short-term investments aimed at long-term benefits might not receive the desired positive reaction from investors. This highlights how credibility can act as a powerful tailwind, enabling a bank to navigate challenges and pursue its strategic vision with greater investor confidence.

In terms of being the industry guru, I don't want to suggest that JPMs experiences are similar to a community financial institution. Or his approach to work-from-home or opinions on politics are correct. But we can't ignore success and if someone wants to tell me what they learned on their road to success, I'm listening. 

~ Jeff

Is Your Bank Technology Leader a CIO or CTO?

I recently attended a banking conference. Hartman Executive Advisors, a technology leadership and advisory firm designed to bring executive-level IT strategy to financial institutions, presented a session called From Strategy to Success: Unlocking Technology's Potential in Community Banking.

I attended because I recognize this as a challenge for financial institutions. A challenge because community financial institutions want a CIO or CTO who not only focuses internally by creating a stable IT infrastructure that works and protects the bank, but also looks to the bank's strategic plan to determine the solutions, interoperability, and ease of use to create a frictionless experience for internal and external customers. During the session the presenters mentioned the numerous steps it takes to change a bank customer's address. The multiple steps, however, were likely develped to reduce the incidents of fraud, i.e. to "protect the bank" and its customers. This is contrary to the dual mission of creating a frictionless and easy-to-use experience for internal and external users.

I'm not sure we know what we want from our CIO or CTO. 

CIO to CTO

First, let's distinguish between the roles. Consulting firm McKinsey says this about the difference: "Broadly speaking, a chief information officer focuses on internal technology, while a chief technology officer focuses on emerging technologies and product strategy." Based on my experience, we want both from that one seat on our management team, be it a CTO or CIO. We can't afford to have two people!

Bankers are notorious for focusing on the things they need to do. In my opinion the definition of "needs" should be expanded. But first and foremost, I will stipulate that the head of technology "needs" to be that internally focused person. The one that creates a stable, secure and functioning infrastructure. To be more the CIO than the CTO. As the bank grows, the role must grow with it.

Because "needs" is often described by bankers as what is "required" by our regulators. But "needs", as I see it, are what the bank needs to be relevant, even important to its customers and employees.

In my presentation at the conference, I discussed the important role component plans in the bank's strategy are to its success. These include the HR Plan, Capital Plan, Risk Appetite Statement, Marketing Plan, and yes, the IT Plan. When we ask for the bank's IT Plan, we typically get a list of IT projects that have only a loose connection to the bank's strategic plan.

This is indicative of a bank that has a CIO. One that is focused internally. One designed to succeed in their IT audits, either by internal/external audit firms or their bank examiners. These IT Plans include things like "upgrade to Windows 11" or "replace branch redundant communications in the Northern Region." Important projects for sure but bear little resemblance to the strategic priorities identified in their strategic plan. There is a disconnect.

As the role grows and evolves from CIO to CTO, these "business as usual" projects remain. Heck, nearly all projects have a technology component. But the person occupying the CIO to CTO role would have next-level management fully capable of participating, even leading these important projects designed to keep the bank running and keeping information safe and secure.

The CTO, however, would participate in the development and execution of the bank's strategic plan. If the plan calls for a funding strategy that includes multiple facets such as business deposit products that are in demand and technology-driven, or standing up a virtual branch to serve customer segments outside of the bank's geography. Introducing options on how the bank can execute on these strategic priorities and to play a key role in both leading and participating in the success of those projects.

As the presenters from Hartman pointed out, there are no IT projects, only business projects. 

Hiring leadership in technology has been challenging in banking. It's not exactly a high-octane career that top technologists think to join. I'm not sure why since banks were the first to employ technology. Digital general ledgers came around in the 60's and the ATM came around in the early 70's. But it is highly regulated and therefore lacks the sex appeal of other industries.

In Conclusion:

The ideal technology leader for your community bank is not a pure CIO or a pure CTO, but a hybrid – a strategic technologist with a strong operational foundation and a customer-centric vision. They are a guardian of the present and an architect of the future, capable of translating your strategic aspirations into tangible technological realities. The challenge lies in identifying and nurturing this unique blend of skills and potential within a single, indispensable leader. The characteristics outlined above provide a framework for that crucial search and development.

What are the characteristics of the person occupying this most important role at your financial institution?

~ Jeff

The Case for Product Management in Banking

During a recent discussion with a bank CEO and Chief Banking Officer, a fundamental question arose: Why can't we leverage technology to create a smarter business checking account? Instead of the traditional "Analysis Checking" model, which often erodes potential interest earnings through transaction fees, why not design an account that pays interest based on a technology-determined average balance exceeding a certain threshold?

Given that Dodd-Frank permits interest on business checking accounts, this approach seems logical and customer-friendly. For businesses with higher transaction volumes, the average balance required to earn interest would naturally adjust upwards. This is a concept that is both transparent for the customer and operationally straightforward for bank staff. The average balance calculation could even be reset annually or more frequently to reflect actual account activity. Stuck in our historical paradigm, we don't ask ourselves how to create an easier to understand, more efficient, more transparent, and yes, more profitable business checking account.

The primary objection I've encountered? The bank would lose the fee income generated by Analysis Checking. However, a careful analysis might reveal that the lost fee income would be minimal given that we would charge fees if the account was under its interest-bearing threshold. And likely more profitable. 

This conversation sparked another critical challenge: How do banks profitably manage large money market deposit portfolios in a rising interest rate environment?

Consider a scenario with $1 billion in money market deposits. When the Federal Reserve raises rates by 100 basis points, the response isn't uniform. Some depositors are highly price-sensitive and expect their rates to move in lockstep with the Fed or just below. Others are "price-interested," perhaps seeking a beta of 50%, while some simply value the FDIC insurance and branch access for their cash accumulation, exhibiting low price sensitivity.

The core problem is the lack of clarity: We don't know who's who. The current approach often involves waiting for customers to inquire about rate changes. However, with technological advancements and the ease of funds transfer, many customers simply moved their money during the recent Fed tightening without a word.

This situation points to several potential shortcomings:

• Customers in the wrong accounts: Are some customers better suited for savings accounts than money market accounts?
• Subpar onboarding: Are we failing to identify the customer's reasons for opening the account and their sensitivity to rate fluctuations?
• Lack of sophisticated systems: Do we lack the tools to differentiate between price-sensitive, price-interested, and price-disinterested depositors?

The knee-jerk reaction might be to split the difference and proactively raise the money market rate by, say, 75 basis points. While seemingly fair, this could result in a significant $7.5 million reduction in net interest income.

I believe these challenges would be significantly mitigated by fostering a strong product management culture within the bank. This would involve establishing a dedicated head of product management and empowering up-and-coming middle managers with the responsibility for the continuous profit improvement of specific products.

Consider a retail money market product. Imagine assigning the VP or regional manager of the branch network as its product manager, directly accountable for its ongoing profitability. This individual could then actively manage various profit levers:

The product management committee meets quarterly to review trends in their products. They review the drivers to improve the profitability of the personal money market product. Some potential solutions from that meeting:

• Pricing Strategies: Dynamically adjusting rates based on customer segmentation and market conditions.
• Product Features: Introducing tiered interest rates based on balances or relationship status.
• Customer Segmentation: Identifying and targeting specific customer groups with tailored offerings.
• Communication & Marketing: Proactively informing customers of rate changes and highlighting product value.
• Onboarding Process: Implementing robust KYC Q&A to understand customer needs and price sensitivity.
• Process Improvements: To lower the amount of bank resources required to originate and maintain the account and lowering the OpEx per account.

Furthermore, the bank could consider developing new, differentiated money market products – perhaps something like "Money Market-Fort Knox" for price-insensitive customers and "Money Market-Wealth Builder" for those seeking competitive returns. This targeted approach would provide clearer insights into customer preferences and potentially prevent the significant outflow of deposits and decline in average balances experienced during the 2022-23 Fed tightening. Proactive engagement, rather than reactive adjustments based on customer complaints, would foster greater loyalty.

The fundamental hurdle, as I see it, is that many banks don't systematically measure the profitability of individual products. And even when they do, it's uncommon to assign dedicated product managers tasked with driving continuous profit improvement.

Should they? Absolutely.

While my firm offers outsourced product and organizational profitability services to banks, I firmly believe that all banks, particularly those with over $500 million in assets, should embrace this level of reporting, regardless of whether they partner with us. Consider this: a mere one basis point improvement in net interest margin at a $500 million bank translates to an additional $50,000 in net interest income. Scale that up if your financial institution is larger. The potential upside is substantial.

For further discussion on how a product management culture can benefit your institution, please contact Ben Crowley at bcrowley@kafafiangroup.com. 

Banks and Strategic Bets

Be a goldfish. Or a zebra.

In this latest Jeff4Banks.com video blog, I explore strategic bets, a term not embraced by bankers, likely because of the "bets" and the implication that it is gambling. So often we hear bankers object to making what could be franchise transforming "bets" because they are not goldfish. They take a failed bet some time ago in the past and use it as the reason to kill all future bets. Perhaps unlike a goldfish, I suggest using the bad taste of a failed bet as a learning experience to be better at the next one, rather than as a reason for stagnation.

What are your thoughts?

Guest Post: Financial Markets and Economic Update-First Quarter 2025

- By Dorothy Jaworski

We made it through the long, cold winter.  There were days it was so cold I did not want to leave my house.  Even President Trump’s inauguration on January 20^th was moved indoors to the Capitol Rotunda because of wintry temperatures.  We suffered through the cold but had very few snowstorms as they seemed plentiful south of Philadelphia and basically missed us.

The first quarter of 2025 was one of a lot of excitement- a glorious run to a Super Bowl win by the Eagles, a new President and his whirlwind actions, an AI surprise from China, on and off again tariffs, a boring Fed, DOGE and government spending cuts, imaginary inflation fears, and stock market drama.  On the horrible side, Los Angeles experienced its worst wildfires ever in January, which destroyed 16,300 buildings, including 13,000 homes, killed 29 people, and displaced 80,000 in the Pacific Palisades and Eaton fires.

Undoubtedly, the Eagles 40-22 win over the Chiefs in the Super Bowl was the highlight of the quarter.  The excitement built with every playoff game and the Eagles performed at a high level.  Acquiring Saquon Barkley changed this team.  Jalen Hurts, the O-line, and receivers AJ, Devonta, and Dallas outperformed, and we owe much respect to the defense!  An estimated 1.5 million fans turned out for the parade.  As Nick Sirianni said, “You can’t be great without the greatness of others.”  Now, all eyes turn to the Phillies.  A long, hot summer will determine if they can challenge the World Series LA Dodgers for MLB’s crown this fall.

Stocks and Bonds

It feels like we’ve been on a roller coaster when it comes to the markets this quarter.  We rallied for much of January until the 27^th, when we received the DeepSeek AI announcement that a Chinese firm developed their own AI model for $6 million.  What?  Not billion?  It was chaos in the tech sector.  Nvidia and Broadcom, known for their AI chips, each fell -17% for the day, with market cap losses of -$587 billion and -$195 billion, respectively.  It’s estimated the whole AI market lost $1 trillion that day.  If China could develop technology so cheaply, why would our companies spend billions of dollars?  In a wild frenzy, millions of people downloaded DeepSeek AI.  They didn’t learn from TikTok?    Well, it wasn’t long before we discovered the truth; Microsoft reported that DeepSeek was copied from Open AI’s ChatGPT through improper use of an Open AI distillation tool.  The intellectual theft by China continues.  The markets soon recovered a lot of the losses.

Prices at the end of January seemed to hold up pretty well, but volatility and sell-offs took over in February and especially March.  In those two months, the DJIA fell -6.6%, the S&P 500 fell – 7.6%, and the Nasdaq fell -11.7%.  Gone are the new handles I wrote about last quarter: DJIA 45,000, S&P 6,000, and Nasdaq 20,000.  The media narrative turned to trashing tariffs and daily claims of recession and inflation that have rocked the markets.  I will discuss tariffs shortly.

Bonds rallied overall during the quarter with yields on the 2-year to 10-year Treasuries falling by -28 to -33 basis points.  Yields spiked in January, with the 10-year reaching 4.81%, before falling to around 4.25% now.  The yield curve briefly inverted again at the end of February (10-year minus 2-year) at – 8 bps but since has returned to positive at +34 bps.  The 10-year to 3-month spread is generally flat.  By the way, gold has rallied to new highs at $3,085 per ounce, up an astounding +42.6% in the past year, oil prices are at $69 per barrel, down -16.5% from last year, while AAA gas prices are at $3.16 per gallon, down -10.7% from last year.  Let the energy price declines begin.

 

Trump and Policies

Rarely have we seen a Presidency start off with so much action.  President Trump and his Cabinet have worked quickly to enact his policies and campaign promises on stopping illegal immigration, securing the border, and deportations, lowering income taxes for individuals and businesses, reducing prices, examining and cutting government spending and staff in every agency, with DOGE doing the analyses for the departments.  (To date, DOGE has identified $130 billion of savings and cuts, with a goal of many times this amount),  Other policies include enacting tariffs- both as a negotiating tool and to increase revenue to equalize the trading with other countries, using our massive oil and gas reserves to increase energy production, improving economic growth, and working to end the endless wars in Ukraine and Gaza.

So far, he has had success on the border and on the business side- securing almost $2.8 trillion of commitments from large US and foreign corporations to build and manufacture products here in the US over the next few years.  Oil and gas drilling is back and new leases are being sold once again.  Trump feels that lowering energy prices can have a cascading effect to lower prices of almost all goods.  Growing the economy, increasing private sector jobs, not government ones, and increasing real wages are top goals.

Tariffs and Taxes

The media also developed a recession narrative during the first quarter, even though few, if any, corporations mentioned recession during their first quarter earnings calls.  But suddenly it’s a big narrative.  The Fed played into this with their quarterly projections in March and lowered their GDP projections to +1.7% to +1.8% in 2025 and 2026, respectively, from above +2.0% in the prior projections in December.  Yet they are only lowering rates twice this year- the same as their last projection?  The Atlanta Fed GDP Now estimate for the first quarter was -2.8% as of March 28^th, even though they admit the estimate is not incorporating foreign trades of gold properly.  Be careful what you wish for; recessions are often self-fulfilling prophecies.  It’s ridiculous. 

The tariff situation has been very volatile since Trump first started announcing them in February.  He used some as negotiating leverage, some to protect US industry (autos), and some to level the playing field with reciprocal tariffs to just make trade fair.  The media narrative is that tariffs are inflationary.  I disagree.  If spending occurs on products with higher tariffs with higher prices, then less spending will occur on other goods with lower or no tariffs and those other goods’ prices will fall.  Prices tend to adjust throughout the economy.  If high tariffs depress demand, those manufacturers likely will lower prices.  Of consumers’ purchases currently, about 15% is on imported goods.  The Fed and NBER both studied the effect of Trump’s first term tariffs and found no effect on inflation, which continued to run below the Fed’s target of 2.0% then.  Tariffs do not cause inflation; as Milton Friedman taught us, “inflation is always and everywhere a monetary phenomenon.”  Even Chairman Powell knows this and called the effects of tariffs “transitory.”  (oh, no, not that word again!).  Despite knowing the results of studies on tariffs, he said he was “uncertain” of their impact.  Guests on Bloomberg guests on the day of the Powell press conference said “Why are we hanging on every word Powell says, when he keeps saying he doesn’t know?” 

Bur mark my words, once Congress passes the large tax bill making the Trump tax cuts of 2017 permanent, increasing the SALT deduction cap, lowering the corporate tax rate from 21% to 15%, putting in business deductions for accelerated depreciation, lowering individuals’ tax brackets, and including no tax on social security, tips, and overtime, the narrative about recession will quickly disappear. 

What About Other Indicators?

Here are some of my favorite indicators; watch them and you will know what’s happening:

-      Leading economic indicators, or LEI, continue to be weak.  February was -.3%, January was -.2%, and December was -.1%.  Of the past 33 months, only two were positive:  March, 2024 and November, 2024.  The Conference Board restated the index with benchmark revisions and it’s back above 100 (2016 levels) at 101.1 in February.  No surprise here.

-         Real GDP was +2.4% in 4Q24 with nominal GDP at +4.8%.  Real GDI was +4.5%; the average of GDP and GDI was +3.5%.  As mentioned earlier, the Atlanta Fed GDP Now 1Q projection number is -2.8%.  They publish it even though they state they are not including foreign trade in gold correctly.

-   M2 year-over-year growth in both February and January was +3.9% and December was +3.8%.  Friedman taught us that growth in the money supply should approximate nominal GDP growth, which is currently at +4.8%.  They are catching up and this is probably why they are cutting back on QT, their bond selling program.  After a period of decline in y-o-y M2 from December, 2022 to February, 2024, M2 growth has steadily ramped up.

-     Inflation.  Here’s the rundown.  It’s not so terrible.  PCE 4Q24 +2.4%, core PCE 4Q24 +2.6%, PCE February +2.5%. core PCE February +2.8%, CPI February +2.8%, PPI February +3.2%.  The Fed target of +2.0% is on headline PCE; CPI is +.5% higher with +2.5% as an implied target.  The 5-year Treasury Tips spread is 2.67%; the 10-year TIPS spread is 2.38%.  The final March survey of the University of Michigan showed the 5-year inflation expectation was +5.0%, but sorry, they are wrong.

-     Unemployment.  The BLS benchmark revision reduced -589,000 from reported jobs in 2024, not the original -818,000 projected last August.  The unemployment rate was 4.1% in February compared to 4.0% in January.  Unemployed persons are 7,052,000 and the pool of available workers is 12,945,000; both have been on the rise in recent months.

-        The Fed has been boring lately.  We know they are afraid to change rates, even though Powell says they are “meaningfully restrictive.”  The Fed is uncertain what tariffs will do, uncertain what inflation will be (their projections from March are outrageous- they do not hit the 2.0% PCE target until 2027!  What?!), uncertain what GDP will do (of course, they lowered it below +2.0%).  Powell kept saying they are “uncertain.” “it’s hard to tell,” “they just don’t know,” and “we’ll see what happens.”  Wow…where does that leave the rest of us?

I feel like I’ve gone on longer than usual this quarter, so I’ll wrap it up here.  I just got back from a wonderful week with great friends in Palm Beach County, Florida.  Sorry, we had no Trump sightings.  I’m looking forward to more traveling in the second half of this year.  Isn’t that what retirement is all about?  Stay tuned!

I appreciate your support!  Thanks for reading!  DLJ 03/28/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes all of your comments.

Practical AI Use for Community Banks

Minnesota banker Andy Schornack posted the below memo on X that he was going to send to his staff. It was generated by X Grok AI tool and he had not edited or sent it yet. But I thought it so interesting and practical that I wanted to share it with my readers, with Andy's consent.

I edited minor things for clarity. 

Leveraging Microsoft Copilot for Growth and Excellence at Security Bank & Trust Company

Prepared by: [Your Name], CEO

Date: [Date]

Introduction: A Transformative Opportunity for Security Bank & Trust

"Since our founding in 1935, Security Bank & Trust Company has built a legacy of trust and personalized service across our 21 locations in Minnesota. Our recognition as the #3 community bank in the state by GOBankingRates in 2025 reflects our commitment to “Growing, Together” with the communities we serve. Yet, the banking industry is at a turning point. Customers increasingly demand seamless digital experiences—91% of U.S. consumers now consider digital banking capabilities essential (Latinia, 2024)—while operational pressures require us to do more with less. To stay ahead, we must blend our community roots with cutting-edge innovation.

Enter Microsoft Copilot: an AI-powered assistant integrated into Microsoft 365, the suite of tools our team already uses daily, including Teams, Outlook, Excel, and Power BI. Copilot isn’t just another tech add-on—it’s a game-changer that enhances efficiency, empowers staff, and elevates customer experiences without disrupting our workflows. In this essay, I’ll detail how Copilot can transform our bank, supported by data and examples. I’ll outline a clear implementation plan, highlight measurable benefits, and address potential concerns. My goal is to convince you to approve a pilot program that will cement our position as a leader in community banking.

What is Microsoft Copilot?

Microsoft Copilot is an AI tool embedded within Microsoft 365, designed to assist users by automating tasks, generating insights, and enhancing productivity (Microsoft Copilot). It leverages advanced language models to understand plain English, analyze data, and collaborate in real time across applications.

Key Features:

Natural Language Assistance: Staff can ask Copilot questions like “Summarize last quarter’s loan data” and get instant, accurate responses.

Data Analysis: It transforms raw numbers in Excel or Power BI into actionable insights, such as spotting trends in deposit growth.

Task Automation: Copilot drafts emails in Outlook, summarizes meetings in Teams, and generates reports in Word, cutting down repetitive work.

Collaboration Boost: During Teams meetings, it tracks discussions, assigns tasks, and pulls relevant data on demand.

For Security Bank & Trust, Copilot aligns perfectly with our strengths. It empowers our staff to deliver faster, more personalized service while preserving the human connection that defines us.

The Opportunity: Meeting Modern Challenges

We face two pressing realities:

Customer Expectations: A 2024 Forbes report shows 71% of banking customers prefer AI-driven support for speed and convenience (Forbes, 2024). Our clients want both digital ease and personal care.

Efficiency Demands: With 21 branches, we need streamlined operations to compete. McKinsey predicts AI could unlock $340 billion in banking value through automation (McKinsey, 2024).

Copilot tackles both by enhancing our digital capabilities and optimizing workflows, all within our existing Microsoft 365 ecosystem. It’s not about replacing people—it’s about amplifying what we do best.

How Copilot Transforms Security Bank & Trust

Here are four key use cases, grounded in data and examples:

Elevating Customer Experience Tailored Advice: A loan officer could use Copilot in Excel to analyze a customer’s financials and suggest loan options in minutes, enhancing our personal touch.

Faster Responses: In Teams, Copilot drafts replies to customer inquiries, ensuring quick, consistent service. WiFiTalents projects AI could boost engagement by 300% (WiFiTalents, 2024).

Example: Picture a farmer in McLeod County asking about equipment financing. Copilot could pull their transaction history and propose options during the call, delighting the customer.

Streamlining Operations Automation: Copilot can draft compliance reports in Word or summarize loan applications in Excel, saving hours weekly. Commonwealth Bank of Australia uses AI to process millions of documents daily (VKTR, 2024).

Branch Insights: Managers can use Copilot in Power BI to track performance across our 21 locations, like spotting a deposit surge in Scott County for a targeted campaign.

Impact: AI automation could save banks $1 trillion by 2030 (McKinsey, 2024).

Enhancing Risk Management & Fraud Detection: Copilot can flag suspicious transactions in Excel, enabling quick action. Barclays’ AI fraud system is a benchmark (Forbes, 2024).

Compliance: It drafts regulatory reports in Word, cutting costs that consume 6-10% of bank revenue (Latinia, 2024).

Example: During an audit, Copilot could compile all compliance emails from Outlook in minutes.

Driving Strategic Growth Decision Support: Copilot in Power BI can model scenarios, like how rate hikes affect our mortgage portfolio, aiding planning.

Meeting Efficiency: In Teams, it summarizes board discussions and pulls data instantly. AI could generate $779 billion in new banking revenue by 2030 (ZipDo, 2024).

Example: We could use Copilot to analyze small business lending trends and launch a new product in 2026.

Implementation Plan: A Smart Rollout

Here’s a three-phase plan to integrate Copilot effectively:

Phase 1: Pilot (Q2 2025) Test Copilot in two branches (e.g., Glencoe and Edina) for customer service and operations.

Train staff via Teams and SharePoint.

Cost: $150,000 for licenses, training, and setup.

Phase 2: Expansion (Q3-Q4 2025) Deploy Copilot across all 21 branches, integrating with our systems.

Use Power BI to monitor performance and refine use cases.

Phase 3: Innovation (2026) Explore advanced features, like predictive lending analytics.

Market ourselves as a tech-savvy community bank.

Budget: The $150,000 pilot investment will yield returns through efficiency gains within a year. Deloitte notes declining AI adoption costs, making this timely (Deloitte, 2024).

Why This Matters: Tangible Benefits

Customer Loyalty: Enhanced service drives retention. AI could triple engagement (WiFiTalents, 2024).

Cost Efficiency: Automation slashes operational expenses.

Market Leadership: Early adoption sets us apart as 91% of consumers prioritize digital tools (Latinia, 2024).

Community Good: Savings can fund local initiatives, echoing Northview Bank’s model (Northview Bank, 2024).

Addressing Concerns

Security: Copilot uses Microsoft 365’s robust protections, like Azure Active Directory (EY, 2024).

Staff Impact: It enhances roles, not replaces them, with training to ease adoption (Harvard Business Review, 2024).

Risk: A phased approach mitigates pitfalls—85% of AI projects fail without planning (American Banker, 2024).

Call to Action: Let’s Lead the Way

I urge the board to approve the $150,000 pilot and establish a task force from IT, operations, and customer service to oversee it. Copilot isn’t just a tool—it’s our path to blending tradition with innovation, ensuring Security Bank & Trust thrives for another 90 years. Let’s take this step together.

This essay delivers a compelling, Bezos-style narrative for adopting Microsoft Copilot, tailored to Security Bank & Trust Company’s needs and strengths. It’s ready to persuade the board—let me know if you’d like adjustments!"

So often, we attend conferences and leave with so much to explore and adopt that it is overwhelming, so we get stuck in place, not knowing where to start. I thought Andy's Grok-powered staff memo on adopting Copilot for the benefit of their customers, employees, and bank was a practical example of what readers could do at their bank.

Thank you for sharing Andy!

~ Jeff

Bottom-Up Capital Calculations

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

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

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

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

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

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

Ask former Silicon Valley Bank executives if that is true.

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

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

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

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

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

Do you?

~ Jeff

Financial Metrics of Credit Unions vs. Banks

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

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

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

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

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

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

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

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

 

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

CUs will have to reflect on if that is true. 

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

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

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

Happy New Year to my readers!

~ Jeff

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

Banking's Top 5 Total Return to Shareholders: 2024 Edition

There have been some humbling moments in Top 5 recognitions, with some award recipients failing and one voluntarily liquidating. Although we seek long-term performance in our 5-year lookback to mitigate the risk of banks that stoke performance with risky bets, we are reminded that banking is a long game. Business models built to endure do so over different economic cycles. And in today's world, economic cycles tend to last more than five years. Having said that, I am here to count numbers with minimal subjectivity (although there is some), and if they have the best five-year total return to shareholders within the criteria mentioned below, they are most likely on the list.

For the past thirteen years, I searched for the Top 5 financial institutions in five-year total return to shareholders because I support long-term strategic decision-making that may not benefit next quarter's or even next year's earnings. And I am weary of the persistent "get big or get out" mentality of many industry pundits. If their platitudes about scale are correct, then the largest FIs should logically demonstrate better shareholder returns, right?

Not so over the thirteen years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so in 2020. As a reference, the best SIFI bank in five-year total return this year was JPMorgan Chase at 46th overall. Although one might argue that First Citizens BancShares of Raleigh is a SIFI as it had $220 billion of total assets, roughly the size of Silicon Valley Bank when it failed. The  FDIC designated SVB as systemically important.

My method was to search for the best banks based on total return to shareholders over the past five years. I chose five years because banks that focus on year-over-year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance more than those that make those investments. I call this "pulling into the pits" in my book: Squared Away-How Can Bankers Succeed as Economic First Responders. Short-term focus is a common trait of banks that focus on shareholder primacy over stakeholder primacy.

Total return includes two components: capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered out those FIs that trade less than 1,000 shares per day. I changed this from 2,000 shares as it was pruning too many fine institutions. But the 1,000 shares/day minimum naturally eliminates many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements as a seller, turnaround situations (losses suffered from 2018 forward), mutual-to-stock conversions, large ECIP recipients, and penny stocks. 

As a point of reference, the S&P US BMI Bank Total Return Index for the five years ended December 6, 2024 was 34.55%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2023:

#1.  M&F Bancorp, Inc. (OTCPK: MFBP)

#2.  The Bancorp, Inc. (Nasdaq: TBBK)

#3.  Citizens Bancorp Corporation (OTCPK: CZBS)

#4.  First Citizens BancShares, Inc. (Nasdaq.GS: FCNC.A)

#5.  FFB Bancorp (OTCQX: FFBB)

Here is this year's list:

#1. The Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, this $8.1 billion financial institution remains one of the few banks in the U.S. that specializes in providing private-label banking and technology solutions for non-bank companies ranging from entrepreneurial start-ups to those in the Fortune 500.  They provide white-label payments and depository services (think Paypal, Chime) and deploy that funding into specialized lending programs such as lending to wealth management firms, commercial fleet leasing, and real estate bridge lending. Note their asset size, because their value as the BaaS bank for Chime is that they are under $10 billion in total assets and not subject to the Durbin Amendment portion of the Dodd-Frank Act that fixes interchange income pricing. It has not been all sunshine and rainbows for TBBK. They were under an FDIC consent order from 2014 through 2020 relating to their BSA and OFAC compliance and their relationship with third parties seeking access to the banking system. So in 2019, when our 5-year measurement period began, they were under that cloud. Bankers considering becoming a BaaS provider to such third parties should read their order. Having said that, they posted a 2.75% ROA and 26.56% ROE year-to-date and that surpassed their aspirational goal (which they disclosed) of having a >2% ROA and >20% ROE. They put it out there and got it done! And have delivered a 397% five-year total return to their shareholders and third straight Top 5 accolade and topping our list this year! 

#2 Northeast Bank (NasdaqGM: NBN)

Northeast Bank is a full-service bank headquartered in Portland, Maine that had $3.9 billion in total assets and seven branches at September 30, 2024. It offers personal and business services to the Maine market, and sports a national lending platform which purchases and originates commercial loans, mostly secured by real estate, and SBA loans, on a nationwide basis. It has a nationwide digital bank, ableBanking, that offers online savings products to consumers nationwide to assist in funding its nationwide lending program. The Bank is currently offering shares for sale at-the-market to support future growth. Its national lending program represents all but a small percentage of its entire loan portfolio. Two thirds of its deposits are time deposits, resulting in an LTM (their fiscal year ends September 30th) cost of funds of 4.16%. By way of comparison, we do a quarterly flip book for Massachusetts that shows all MA banks cost of funds was 2.48%. New England financial institutions generally have higher cost of funds. But not that much higher. This is because there are a lot of loans to fund! And the bank's yield on loans was 9.30%. I know what you're thinking, but so far their NPLs/Loans was 1.31% at September 30th. With a net interest margin of 5.06%, having relatively higher NPLs than those with NIMs with a 2-handle makes sense.  This resulted in a 1.97% LTM ROA and 17.09% ROE and a 370% 5-year total return to shareholders. Well done!

#3. Coastal Financial Corporation (Nasdaq: CCB)

Since 1997, Coastal Community Bank, the wholly owned bank subsidiary of Coastal Financial Corporation, has delivered a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound (Washington) area through a traditional community bank branch network in its three-county market. The bank consists of two segments: 1) the traditional community bank, and 2) CCBX, which is its Banking as a Service (BaaS) division started in 2018. Prior to starting CCBX and for the year ended 2017, the Company had $806 million in total assets and $5.4 million in net income for an ROA of 0.73%. As of or for the latest twelve months ended September 30, 2024, the Company had $4.1 billion of total assets, $40.9 million net income and a 1.10% ROA. Their CCBX segment continues to evolve, particularly with enhanced regulatory scrutiny of BaaS banks. CCBX is focused on expanding products with existing partners rather than partner growth. What has this bifurcated business model delivered? A 351% five-year total return and place on the JFB Top 5 in two of the last three years! Well done!

#4 First Citizens BancShares, Inc. (NasdaqGS: FCNC.A)

First Citizens Bank was founded in North Carolina in 1898 as the Bank of Smithfield. In 1935, R.P. Holding was elected Chairman and President of First-Citizens Bank & Trust, a family legacy of leadership that lasts to this day.   First Citizens includes a network of more than 500 branches and offices in 30 states spanning coast to coast, and a nationwide direct banking business. In January 2022, First Citizens did a tangible book value accretive merger of equals with CIT Group. And followed that savvy deal with another tangible book accretive deal by completing the failed Silicon Valley Bridge Bank acquisition in the first quarter 2023. Concern about maintaining SVB accounts has dissipated as the bank has more loans and more deposits now than in the first quarter 2023. For the LTM ended September 30, 2024, net interest margin was 3.68%, ROA was 1.19%, and ROE was 12.74%. Its efficiency ratio pre-SVB was 61% and now it is 55%. Economies of scale were realized. All this accretive deal making and prudent management has resulted in a brass ring for shareholders in the form of a 327% five-year total return. Congratulations!

#5 GBank Financial Holdings, Inc. (OTCQX: GBFH)

New to the JFB Top 5 is Las Vegas based GBank Financial Holdings, Inc. Like most things Vegas, this is a unique financial institution. Founded in 2007, GBank operates two full-service commercial branches in Las Vegas. It conducts business nationally through its SBA lending business that is a top 10 national 7(a) lender by volume. Through its partnership with BankCard Services (BCS), it has established relationships with gaming companies, skills gaming companies, and payments and wallet provider companies. This likely explains why the CEO of MGM and general counsel of Great Canadian Gaming Corporation are on the company's board. It has also struck an agreement with MasterCard to provide pre-paid card services. At and for the LTM ended September 30, 2024 it had a mere $1.0 billion in total assets but had net income of $13.4 million leading to an ROA of 1.82% and ROE of 16.54%. This is the smallest bank in our Top 5, yet it enjoys an average daily trading volume of over 15,000 shares. Only in Vegas! Congratulations for your Top 5 recognition and huzzah to your shareholders who enjoyed a 294% 5-year total return! 

There they are. Interesting there is no bank that I would deem a traditional community bank. Be it BaaS, nationwide lending, focus on a niche such as v/c and p/e ecosystems, or gaming. All 5 have a unique path to delivering to their shareholders. And 4 of 5 are less than $10 billion in total assets. GBank is 1/10th that size.   

The evolution of this august list tells me that having something other than "plain vanilla" is driving performance and shareholder returns. 

~ Jeff

Note: I make no investment recommendations in this article or this blog.