How Did Your ALCO Model Hold Up?

My firm did a sample data run for a client that included all commercial banks in NY, NJ, PA, and MD between $500 million and $1.5 billion in total assets to see how various banks did in balance sheet and income statement ratios during the course of the Fed tightening run from year end 2021 until the third quarter 2023. Some interesting insights relating to their 1-year cumulative repricing gap that the banks reported on their call reports:

• At 12/31/21, of the 68 banks that met the criteria, only 10, or 15% had a 1-year cumulative negative gap. This is defined as rate sensitive assets (assets that are expected to mature or reprice within 1 year) less rate sensitive liabilities (liabilities that are expected to mature or reprice within 1 year). If rates went up, so the theory goes, the 85% of banks with a positive 1-yr cumulative gap, should see net interest margin go up as assets reprice faster than liabilities. This made sense because the Fed Funds Rate at this time was 0-25 bps and bankers positioned their balance sheets accordingly.

 

• At 12/31/22, after 450 bps of Fed rate hikes, 48 of the 68 banks, or 71%, had a better net interest margin for the quarter ended 12/31/22 than the quarter ending 12/31/21. Since 85% of them had positive one-year cumulative gaps, their ALCO assumptions mostly worked.

 

• At 9/30/22, only 13 banks, or 19% showed a negative one-year cumulative gap. Meaning 81% thought their net interest margin would increase in a rising rate environment. Between 9/30/22 and 9/30/23, 53 banks, or 78%, had a lower net interest margin. How could their ALCO assumptions be so wrong?

• By 9/30/23, the 1-year negative cumulative gap had nearly tripled to 30, or 44%. Interesting because the Fed Funds Rate was zero-25bps at 12/31/21 and almost everyone knew rates would inevitably go up. It makes sense that so few considered themselves liability sensitive at 12/31/21. I'm actually surprised so few (44%) consider themselves negatively gapped right now. Declining rates are far more likely than rising rates. The most recent Fed dot plot predicts Fed Funds declining in 2024.

When I asked my colleagues what they thought, here is what a couple of them had to say:

If I recall from my ALCO committee days… ALCO models largely did not rate shock 450-500 points and if they did, that type of move seemed quite far out of the realm of possibilities.  In a 200-300 model, spreads would have mostly held up. My guess is that the duration of money market accounts in most ALCO models were in the 3-6 year time frame but when rates went up 500 points in the real world, these longer duration "core deposits" actually left the bank or repriced much faster than anticipated as banks worked to retain these accounts.  Also, many banks were using CDs to retain these accounts and shifting deposits out of these longer duration products into 6-12 month CDs shortened the liability duration averages (in models) and increased the liability sensitive nature of most banks.

Deposit duration assumptions in ALCO models built for 'normal' markets simply did not hold up in recent quarters.

~ Ben Crowley, Managing Director, The Kafafian Group, Inc.

I think bankers overestimated the loyalty of their depositors following the pandemic & PPP, coupled with a sustained low rate/high liquidity environment. These factors led to a false sense of security that low-cost deposits were there to stay. When the national and super regional banks began raising rates they were reluctant to follow – until it was too late. They quickly learned that customers were not loyal and deposit attrition happened so fast that they had to raise rates more aggressively than anticipated to retain remaining deposits and attract funds to replace what they had lost.  

Service is important. But you still have to price competitively.

~ Chris Jacobsen, Managing Director, The Kafafian Group, Inc.

~ Jeff

Banking's Top 5 Total Return to Shareholders: 2023 Edition

What a difference a year makes! Although the 2022 Top 5 are holding their own and two of them remain in today's Top 5, the 2021 edition included one bank that failed (SVB Financial Group) and one that is voluntarily liquidating (Silvergate). So as with all lists, and especially banking lists where risks don't rear their ugly head until calamity, readers should evaluate each financial institution on their own. I am here to count numbers, and if they have the best five-year total return to shareholders within the criteria mentioned below, they are on the list.

For the past twelve 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 eleven 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 29th overall. Although one might argue that First Citizens BancShares of Raleigh is a SIFI as it climbed to the 19th largest in the country with its Silicon Valley Bridge Bank acquisition from the FDIC, and that 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, and penny stocks. 

As a point of reference, the S&P US BMI Bank Total Return Index for the five years ended December 7, 2023 was 23.32%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2022:

#1.  Communities First Financial Corporation (Now FFB Bancorp) (OTCQX: FFBB)

#2.  Coastal Financial Corporation (Nasdaq: CCB)

#3.  OFG Bancorp (NYSE: OFG)

#4.  First BanCorp (NYSE: FBP)

#5.  The Bancorp, Inc. (Nasdaq: TBBK)

Here is this year's list:

#1. M&F Bancorp, Inc. (OTCPK: MFBP)  

M&F Bancorp, Inc. is the bank holding company for M&F Bank, headquarted in Durham, NC. The bank was founded in 1907 and has operated continuously since 1908 with branches in Durham, Raleigh, Charlotte, Greensboro, and Winston-Salem. It is a Minority Depository Institution (MDI) and is one of only a few North Carolina banks designated by the U.S. Treasury as a Community Development Financial Institution (CDFI). As both an MDI and CDFI, it applied for and received $80 million from the Emergency Capital Investment Program (ECIP) distributed by the U.S. Treasury to be used to help underserved communities bounce back from the Covid-19 pandemic. Prior to the ECIP investment the bank had $370 million in total assets and $40 million of equity. It had $447 million of assets and $121 million of equity at September 30, 2023. So the relative size of the ECIP investment was very significant. The additional capital, according to the bank, will be used to support businesses in low-income communities that have been disproportionately impacted by the pandemic and further its mission to provide capital, resources, and support communities that continue to be affected by systemic neglect. Prospective shareholders must believe in them, resulting in a 601% 5-year total return to shareholders. Well done and best of luck leveraging the ECIP capital for good!

#2. The Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, this $7.5 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. Bankers considering becoming a BaaS provider to such third parties should read this order. They posted a 2.53% ROA and 26.12% 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 334% five-year total return to their shareholders and their second straight Top 5 accolade! 

#3 Citizens Bancshares Corporation (OTCPK: CZBS)

In 1921, Citizens Trust Bank opened its doors on Auburn Avenue in Atlanta. Its founder, Heman Perry, served as the first chairman of the board. The bank was the brainchild of Perry because he was denied being served in a white-owned store. So that Black businessmen could own and operate businesses independently of white-owned financial institution, Perry and four other partners, collectively known as the "Fervent Five", formed Citizens Trust Bank. Like M&F Bank above, CTB received over $95 million of ECIP, in addition to a $5 million investment from TD Bank as a result of its MDI and CDFI status. As a result of these investments, the bank has grown over 65% since 2019. Although deposits declined 20% since year end 2022, the bank has delivered a 2.01% year to date ROA and a 23.10% ROE. This growth and performance resulted in a 303% five-year total return. Well done Citizens Bancshares and Citizens Trust. You are doing well by doing good!

#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. For the third quarter 2023, net interest margin was 4.10%, ROA was 1.42%, and ROE was 14.95%. All this accretive deal making and prudent management has resulted in a brass ring for shareholders in the form of a 261% five-year total return. Congratulations!

#5 FFB Bancorp (OTCQX: FFBB) 

FFB Bancorp is the bank holding company for FFB Bank. You might recognize it from being number 1 in in last year's Top 5 as Communities First Financial Corporation and Fresno First Bank. No merger. They changed their name. The Bank opened in 2005 dedicated to meeting the banking needs of Central California businesses and individuals through their sole location in Fresno and online. At the end of 2021, prior to the Fed starting to raise interest rates, the Bank's yield on loans was 4.99%. For the YTD ended September 30, 2023, after the Fed raised rates 525-550 basis points, the yield on loans was 6.30%, or a 1.31% increase. For deposits, the Bank's cost of funds increased 34 basis points for that same period, from 7 basis points to 41. How you ask? Sixty five percent of their deposits are non-interest bearing. Takes pressure off in a rising rate environment. Net interest margin went from 4.22% to 5.09%. Looks like their interest rate risk model was spot-on. This performance led to a five-year total return to shareholders of 204% and a second straight year on the JFB Top 5. Congratulations! 

There they are. Interesting that two of the top 5 were MDIs and CDFIs that received ECIP capital. I am rooting that they will continue to deliver to shareholders as they serve their higher purpose improving the economic mobility of their customers. 

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.

Describe the Future of Banking in Buzzwords

I asked Google Bard, a large language model tool, the following: "Describe the future of banking in the United States in buzzwords." Here is what it came up with...

∞

Sure, here is a description of the future of banking in the United States in buzzwords:

• Hyperpersonalization: Banking services will be tailored to the individual needs and preferences of each customer, using data analytics and artificial intelligence.

• Embedded finance: Banking services will be integrated into everyday activities, such as shopping, paying bills, and managing finances.

• Decentralized finance (DeFi): DeFi technologies, such as blockchain and cryptocurrencies, will disrupt traditional banking models and create new opportunities for financial inclusion.

• Open banking: Open banking APIs will allow third-party providers to access and share customer financial data with their consent, enabling new and innovative banking products and services.

• Banking as a service (BaaS): Banks will provide their core banking infrastructure and services to other companies, such as retailers and telecommunications providers, to expand their reach and offer new products and services.

• Voice banking: Voice assistants will become a primary way for customers to interact with their banks, providing convenient and hands-free access to banking services.

• Data-driven decision-making: Banks will use data analytics to make better decisions about product development, marketing, and risk management.

• Artificial intelligence (AI) and machine learning (ML): AI and ML will be used to automate tasks, improve customer service, and detect fraud.

• Cybersecurity: Banks will continue to invest in cybersecurity measures to protect customer data from cyberattacks.

These buzzwords represent some of the key trends that are shaping the future of banking in the United States. Banks that are able to adapt to these trends will be well-positioned for success in the years to come.

∞

Should I start to worry?

~ Jeff

How Will We Fund That Low Rate, Low Covenant Loan?

Emily McCormick's (Bank Director Magazine) most recent Common Threads newsletter post on LinkedIn got me thinking. How did that 5.5%-6% loan, described by Jeff Rose, CEO of Ambank Holdings, get to committee or even make it past the lender?

Banking is one of those businesses that requires bankers to be less stupid than their competitors. And when competitors start funding 6% loans with 5% money, they start pulling those in their competitive eco-system with them. Or they'll lose the loan. At closing, we don't know how well that loan will perform during an economic downturn. But we priced no credit spread into it. Heck, we didn't price cost into it, or interest rate risk, or liquidity risk, or risk-adjusted return on capital. 

So how can such a loan make it past the lender on that sales call?

Culture. As one bank CEO once told me, "you can't believe the improvement in lenders' negotiating ability when you tell them it's ok to lose the loan."

I recently spoke at the ABA Bank Marketing Conference on why product management is greater than product (a chapter in my book, Squared Away). In such a culture, you would have a director of product management, likely the CMO. But the product managers themselves would be sprinkled throughout the bank as close to the product as feasible. So the product manager for, say, the commercial real estate product would be an up-and-coming middle manager in that department. And he/she would be tasked with the continuous profit improvement of the commercial real estate product.

In comes Lender Hotshot wanting to do that 6% deal. If transfer priced at the FHLB blended 4-year borrowing then Hotshot would be assessed a 4.9% cost of funds, generating only 1.1% spread. If the prior quarter's CRE product spread was 3%, then Hotshot's loan would reduce the profitability of the product. If Hotshot went further out on the yield curve and was assessed, say, a 5.3% cost of funds, now he/she would only get a 0.7% spread on that loan. Multiply that by all the hotshots you have out there trying to produce volume.

But if Hotshot is only held accountable for volume, he/she is all good, right? Hotshot sits high on the lender production board.

But if the culture is continuous improvement, and the yardstick is profit, would this be so? If Hotshot was held accountable for the continuous profit improvement of his or her loan portfolio, credit quality, spread growth, would they even consider doing that six percent deal let alone bring it to their boss or a loan committee where committee members would ask "why so thinly priced" or "why the seven-year deal." The unspoken answer: "I have a $25 million production goal and this is what needs to be done to get the deal done." We created this culture.

In the product management culture, it would matter. That sharp SVP of CRE would have an interest in appropriately priced deals. He/she would interact with Hotshot to determine if there are product features that could help get deals done that don't reduce the profitability of the CRE product.

And Hotshot would get their quarterly profitability report, that not only measures their book of business, but also highlights those lenders that are top quartile in terms of profitability, spread growth, profit improvement. Maybe Hotshot will want to be on those lists. Maybe Hotshot is incented to be on those lists. Maybe Hotshot has been given permission to walk away from that six percent deal. Armed with that leverage, maybe they can get a better deal from that borrower. Or at least not hurt the profitability of his/her portfolio, the CRE product, or the bank's net interest margin.

But to get that culture. You have to measure it.

~ Jeff

Guest Post: Financial Markets & Economic Update 4Q23 by Dorothy Jaworski

Financial Markets & Economic Update - Fourth Quarter 2023

  

Summer Update

On this warm October day, I am staring at my Bloomberg screen, still heartbroken over the Phillies Phailure.  Now, all of our hopes ride with the Eagles.  Interest rates are all elevated, with the 2-year Treasury yield at 5.01% and the 10-year at 4.85%, which is up by over 100 basis points since June 30, 2023.  Most of the inversion between these two yields is gone.  The 3-month T-Bill is at 5.45%, so there remains some inversion to the 10-year yield.  Stocks are down again today and have been down all week.  Gold has reclaimed $2,000 per ounce and its status as a safe haven, with all that is going on with war in the Middle East.  Too bad Treasuries are not as much of a safe haven.  Markets sent Treasury yields higher in reaction to huge deficit spending and a Federal Reserve intent on pushing rates higher, keeping them “higher for longer” with large price risk as everyone has learned for the past three years.

Some argue that, because we saw real GDP rise by +4.9% in 3Q23, that the economy is robust and strong.”  Yes, it was for that quarter, but, if you read my last newsletter, the summer of fun meant that quarter would be stronger, as the last stages of pandemic pent-up demand saw excess savings spent with abandon.  YOLO- You Only Live Once!  People traveled on vacations with their newly renewed passports, enjoyed entertainment (can you say Taylor Swift and Barbie?), and ate out at their favorite restaurants.  Now the harsh reality will sink in and El Nino is sure to give us a cold winter.  Inflation is still elevated, even while it slowly declines from 2022’s peaks.  We will continue to fall toward the Fed target of 2.0% but it takes time and patience.

 

Index of Leading Economic Indicators

I just finished studying a chart of the year-over-year changes in the index of leading economic indicators, or “LEI,” going back to 1960.  For every period of sustained y-o-y declines in LEI, recession has either begun or followed quickly.  The LEI fell again in September, 2023 by -.7% and is down y-o-y by -7.8%.  The index began to decline in March, 2022 (no surprise that the Fed started tightening that month), and has been down for 18 months in a row; the LEI is down -11.1% since March, 2022 to 104.6.  In July, 2022, the LEI began to decline y-o-y, yet we have not been in recession or see one imminently.

The chart showed eerily similar patterns of declines in 1990 and 2000-2001.  Unsurprisingly, the largest declines occurred starting monthly in March, 2006 and on a y-o-y basis in September, 2006 and continued to November, 2009.  The largest monthly decline took place in May, 2009 at -27.2% y-o-y with the index reaching a low of 75.7.  We all remember the Great Recession, which began in 2007, but the LEI knew it as early as March, 2006.  This time will be no different and patience is required.

By the way, there are sister indices to the LEI, the coincident for current conditions and the lagging index for 6 to 9 months ago.  Both are relatively stable, indicating the economy has been and currently is okay.

  

Are Rates Restrictive?

Do you remember what it means for Fed policy to be “restrictive?”  It means getting the Fed Funds rate above inflation so that a positive number, or real rate, would result after subtracting inflation from the Fed Funds rate.  Every inflation measure that I track closely is below current Fed Funds of 5.50%, resulting in restrictive rates of varying degrees.

Fed Funds is 1.40% over September’s annual core CPI of 4.1% and 1.80% over annual headline CPI of 3.7%.  Fed Funds is 3.10% over 3Q23 core PCE of 2.40% and 2.60% over the PCE deflator of 2.9%.  Fed Funds is 1.10% over the annualized 3Q23 employment cost index of 1.1% and is 1.30% over the most recent data for wage growth of 4.2%.  So, yes, rates are restrictive.  And the FIBER leading inflation index and M2 money supply are both falling year-over-year, by -1.2% and -3.6% respectively, so inflation will continue to trend downward.  Fed Chairman Powell stated “You know restrictive only when you see it.”  Well, you be the judge… I believe that the Fed is done raising rates; they just don’t know it yet.  And looking ahead to the 2024 Presidential Election, they clearly would want to be on the sidelines.

 

Risks to the Economy

We were growing real GDP 2.1% to 2.7% for the four quarters ended 2Q23 and then experienced an outlier of +4.9% in 3Q23.  Yeah, the summer of fun.  Consumer spending accounted for one-half of GDP.  Businesses built inventories adding 1.30% to GDP.  Housing made a small positive contribution after a string of negative quarters.  Much of the data was weak, so it’s doubtful that we can keep repeating this pace.

The risks are many.  We have an aggressive Fed threatening more rate hikes.  Long-term interest rates just increased by 100 basis points in the past few months, in a time when inflation is falling.  Government spending and huge budget deficits are upsetting investors.  Mortgage rates are now close to 8.00%; affordability is at its lowest point since 1989, according to the National Association of Realtors.  Low inventories of homes has hurt sales.  No one will give up their 3.00% mortgage for an 8.00% one.  Usually high interest rates would put a damper on home price increases and we might expect prices to outright decline.  But not in this market.  Prices are stubbornly high and rising, with August y-o-y increases of +2.2% for the Case Shiller 20, +2.6% for Core Logic, and +5.6% for the FHFA. 

China is having its own economic troubles and supply chains could suffer again.  And what a time for the UAW to go on strike- demanding outsized pay raises and slowing production at the Big Three automakers and hurting their suppliers.  Thankfully, they appear to be close to agreement.  According to Cox, one-half of Americans cannot afford a new car.  Sales will be affected by both the strike and affordability.

Some banks have tightened credit and there is also weakening demand for bank credit as small businesses are hurting from higher costs and higher interest rates.  Huge amounts of government debt and business debt, including commercial real estate, are repricing over the next two years at higher rates.  Real bank credit (excluding inflation) has been falling for the past 12 to 24 months.  Generally, GDP would be falling in this situation.

Finally, one more thought about the Fed.  They have raised interest rates by 5.25% since March, 2022, let almost $1 trillion of their bond portfolio mature without replacement and allowed M2 money supply to decline y-o-y starting in December, 2022 for the first time since the 1940s and at the fastest pace since the 1930s.  September was -3.6% and July and August were both -3.9%.  Leads and lags for M2 changes are thought to be 12 to 18 months.  The Fed has been pushing inflation lower, but, if they really believed in policy lags and looked at the LEI and M2 y-o-y declines, they would ease right now.  I wonder what Maestro would do.

 

Where is Recession?

Be patient.  It will come.  High interest rates- both short-term and long-term- an aggressive Fed, the LEI, and an inverted yield curve are all precursors of a recession.  The yield curve is less inverted than it was earlier this year, due to large increases in longer-term rates.  This actually plays into the recession forecasts.  The inverted curve is the precursor of recession, but it is the re-steepening of the yield curve that is the sign of imminent recession.

I mentioned the LEI earlier.  It has been falling on a monthly and y-o-y pace that is always associated with recessions- big ones and small ones.  Do not ignore this and other indicators as they always teach us something.

M2 is falling.  Inflation is responding by falling.  It was the massive increase in M2 in 2020 and 2021 (and beyond!) along with pandemic-related supply chain disasters that led to inflation.  It will be the decline in M2 that reduces it.  The FIBER leading inflation index is still falling on a y-o-y basis, and is currently -9.2% from its high in March, 2022.

The major surveys, including ISM, S&P, and the local Philly Fed, continue to show weakness in terms of current conditions and outlook.  Inflation has tamed down in most of them.  Stock markets have been very volatile and are mostly down since the summer months.  Are they all sensing that the summer of fun is over?  Profits have been mostly positive for the 3Q23, but probably not enough to make the past 12 months positive.  We shall see.

 

I was in Switzerland in July and I regret that I did not have the time to visit CERN, the home of the Large Hadron Collider.  The LHC has been running heavy ions through the system for the past five weeks, ending on October 30th.  What will we learn from this?  Maybe the LHC really is changing our world, turning economics upside down, and leading to outcomes that are unexpected given our knowledge of the past.  As always, thanks for reading!

 

D. Jaworski 10/28/23

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 has been with Penn Community Bank and its predecessor since November, 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.

3 Ideas for Your Deposit Strategy

The 2022-23 Fed monetary tightening caused disruption to our depositor base. We either lost deposits to Treasuries, money market mutual funds, or disintermediated into higher cost deposits within our bank. In this video short, I suggest three ideas to improve your deposit strategy as follows:

1. Identify "dead money" in your depositor base and pro-actively deepen your relationship with them.

2. Create "companion accounts", as described by our friend Neil Stanley from The CorePoint, to lure the money we've lost back into our bank.

3. Manage the mix. Determine which accounts are "accumulation" versus "store of value."

Listen to the three-and-a-half-minute video for greater context. Or contact me at jmarsico@kafafiangroup.com or 717.468.3208. 

What are your ideas for a deposit strategy? 

A Banker's Dream Dashboard

We talk about what we would like our bank to be, to our customers, employees, community and shareholders (if we have them). We build a strategy that is more often than not preaching differentiation versus cost advantage. We analyze our customers, markets, and our personnel to devise a plan that has the potential to deliver to our stakeholders.

Then we go back to our day-to-day and do none of the things we talked about. We go back to managing support functions on their budget, delaying strategic investments that could make them more scalable, efficient, and not people-dependent to mitigate the threat of the availability of talent. Because the investment wouldn't yield results until the end of year two, and we got a budget to keep.

We go back to incenting lenders on volume, even though we have a strategic aspiration of being in the top quartile of net interest margin. Our brand, according to our latest Net Promoter Score, should allow us to succeed at not having to be "best price." But we incent on volume because, hey, lenders are accustomed to volume goals, and we can't measure spreads per lender. 

We measure branch managers on deposit growth or open-close ratios. Again, it's easy to pull those numbers. And branch managers don't have the sophistication to understand a branch profit and loss statement, right? And we can't measure that anyway.

So our accountabilities fall on the same old things that are not particularly in alignment with our strategy and likely have unintended consequences that hold us back. 

You manage what you measure. And we are selling ourselves, our people, our customers and shareholders short by only measuring what our systems can do. Imagine if a branch manager owned their P&L, and therefore were empowered to make rate exceptions, fee decisions, and budget decisions that are balanced to continuously improve the profitability of their branch. It would certainly bring customers closer to decision makers, which can be a competitive advantage for the community financial institution if only it benefitted from strategic execution.

As I see it, holding employees accountable for their actions, all the way down the line, consistent with strategy, will build that execution culture so many institutions crave. Yet it remains elusive. It doesn't have to be.

I've constructed a branch dashboard that I think will motivate branch people to work every day at improving the financial performance of their branch, and therefore the bank, while giving them ownership of decision-making to benefit all stakeholders.

Imagine that conversation with the regional manager or retail executive about how to improve the numbers that they see everyday on the dashboard. They would know those customers with the highest deposit balances yet not the highest cost of deposits. Keeping those customers satisfied would do much more to help branch profitability than the rate shopper that wants top of market. That would drive up the branches cost of deposits, decrease its spread, and profitability. But the high balance customer that doesn't demand top rate, but competitive rate, is worth knowing and increasing deposit costs to maintain that relationship.

Now, we wait until that customer calls to complain. That's our strategy. Wait for our high balance yet profitable customer to call and complain about the terribly low rate we are paying them. It's an unsustainable strategy. Empower our relationship managers to make decisions that balance the needs of stakeholders. 

But to do that, we must measure consistent with our strategy. And reward those top quartile performers we know are at our bank. If we only measured to be consistent with what we believe we know. If we don't measure it, we can't manage to it. 

We can measure it, and should.

~ Jeff