Banks Versus Credit Unions: Much Ado About Nothing

Credit Unions don't pay taxes! They're trying to steal our business customers!

I often quote Sun Tzu from his over 2,000 year old book, The Art of War. One of my favorites: "If you know the enemy and know yourself, you need not fear the result of a hundred battles." The frequent and resource sapping waling about credit unions tells me that banks don't know their enemies, umm, competition.

Last year I attended the CUNA Government Affairs Conference (GAC). By the way, it was the trade show beyond all trade shows. Clearly credit unions put heavy resources into lobbying. So I will give banks that point. We had a booth, and my company's tagline is "helping banks perform better". We like the alliteration, and use the word "banks" in a generic way, like Kleenex.

But one would think we would hear about it from CU executives and trustees. And we did hear some quips. But one CEO opined that the rift between banks and CUs was greatly exaggerated by trade associations to keep the masses engaged. I believe her.

Why? Take my home state, Pennsylvania, for example. We do business with both banks and CUs in the state. Admittedly, mostly banks. And we hear plenty about credit unions in strategy sessions. But I pulled deposit market share data for the state, and the results are telling (see table).

Credit Unions boast a 9.5% deposit market share in the state, or $33 billion out of $345 billion total. There are 497 credit unions headquartered in PA, but 447 of them are less than $100 million in deposits (ok, shares for you CU technocrats). All PA CUs combined have the same in-state deposits as Wells Fargo, and half that of PNC. There are only two CUs in the state's top 20 in deposit market share.

Does the banking industry dedicate disproportionate strategic decision-making, marketing and lobbying resources fending off CU competition? Because when I look at the above table, it's clear where a community bank's strategic focus should be. And it shouldn't be on the Locomotive & Control Employees FCU in Erie.

What is this table telling you?

~ Jeff

Sweat the big stuff: Interest Rate Risk

I have been thinking about interest rate increases for some time now. The Fed lowered the Fed Funds rate to a target of 0 – 25 bps in December 2008. Since that time we all knew that the next move would be up, and pundits have been predicting the “when” like sportscasters predict the next champion.

Once the Fed senses economic recovery and inflation indicators start blinking red, they will move. And if past is prologue, they will move relatively quickly. Take the last time the Fed raised rates as an example. On June 29, 2004 the Fed Funds rate stood at 1%. Two years later, the rate was 5.25%. Four hundred twenty five basis points in 24 months. See the recent history of Fed Funds and Discount Rate moves here.

This should give FIs pause as they manage their balance sheet. Some banks, by strategic design, are weighed heavily in 1-4 family mortgages funded by certificates of deposit. In asset liability management (ALCO) parlance, they are funding short and lending long. This means as rates increase, their funding will become more expensive and a significant part of their assets will remain mired in historically low yields.

One such bank, a west coast financial institution with between $10-20 billion in total assets, had greater than 60% of their deposits in CD’s and over 70% of their loans in residential mortgages. Although if you had the time to dig you can figure out the bank because all information I give is public, I will keep them nameless.

In a note in their annual report, the bank reported the following structure to their balance sheet;

According to the same note, the Bank is estimated to experience the following net income impact given rate increases of 100 bps, 200 bps, and 300 bps respectively.

In other words, if the Fed raised rates 300 basis points (3%), the Bank would have $37 million less in net income. A large number, but it only represents 33% of their actual net income. But that number includes many assumptions. For example, in the bank’s 10k, they disclosed that their loan prepayment assumptions incorporate their recent portfolio experience.

Now, I’m no ALCO genius, but I have to believe that residential mortgage loan pre-payments have been up recently due to people refinancing to lower rates. When rates rise, I doubt borrowers will be knocking at the bank’s doors to trade their low rate mortgage for a new, higher rate one. By my calculation, if the Fed raised rates in Year 1 by 300 bps, and the bank had to follow suit basis point for basis point, this bank’s net income would decrease by $43 million, or 39% of their net income. Years two through six would see an additional $58 million decline. If I ran this bank, I would be concerned.

Bank risk is so compartmentalized, and asset-liability management has numerous assumptions that impact results significantly. But at the end of the day, FI senior managers need to use common sense to estimate the collective behavior of their customer base in a rising rate environment. Making strategic decisions regarding the structure of the balance sheet may result in decreased profits today but position your FI to continue serving clients needs, hedge against rising rates, and protect against declining profitability in a changing environment.

Is your balance sheet protected against rising rates? Really?

~ Jeff

Banking School: The ivory tower could be yours.

I am sitting at Gate 124 in Orlando waiting for my ride home from a long journey. Prior to Orlando, it was Dallas. In Dallas, I taught bank profitability and strategic planning at the ABA School of Bank Marketing Management. The school is a two year program designed to transform up-and-coming marketing professionals into well rounded bank leaders.

I have written a post on these pages regarding training programs (see Are your employees ESWS qualified?). My firm asked Are you training for the gold? in one of our quarterly newsletters. Clearly this topic remains on my mind.

Much like the Kansas City Athletics was the training ground for the New York Yankees, large banks served as the training ground for community bankers. Those big bank training programs are long gone. In strategy sessions today, senior leaders are wondering how to replace aging bankers that benefitted from those programs.

I have a few suggestions.

1.  Get your own training program. Lack of resources is the most often cited reason for community FIs not training their own. Their are several resources outside of your FI with outstanding and targeted curriculum taught by qualified instructors. National trade associations are a great resource for training your employees to be the leaders of your FI. See the ABA, ICBA, CUNA, and other trade associations to review what they offer and the relevance to your institution.

2.  Develop a curriculum by functional position. In my experience, many if not most FIs develop ad hoc training programs that reward high performing employees for a job well done by sending them to a school or conference in a nice location. But if execution of your strategy is largely in the hands of your employees, perhaps you should be serious about giving them the tools to execute that strategy. What skills do they need? How much can be accomplished in-house or via on-the-job training (OJT)? Are we teaching them to supervise, coach, communicate, and/or build a book of business. I perceive a training curriculum to be a focused mix of OJT, in-house classroom, coaching, and outside training (either industry training or academic training).

3.  Recognize high potential employees. One way to do this is to send them to a conference or school in a nice location. But another clear recognition is to prepare them to be leaders at your FI. Train them for the next level, or for another functional area. One risk we have in banking is keeping high potential employees in one functional area, developing a myopic view of your institution and our industry. Perhaps a controller or CFO should go to marketing school because they speak such a different language. In fact, there was a CFO at the ABA marketing school. Imagine that!

4. Recognize that training goes beyond the curriculum. Bankers that don't directly compete with one another openly share best practices with their colleagues. I saw it in action at the marketing school. Another benefit is developing lifelong industry contacts that you can call on for different perspectives. See the photo for a visual of the camaraderie that goes on at these schools. This not only builds morale, it can help your FI by expanding the knowledge base outside of your walls.

This may be the fourth or fifth time I have written or spoken about industry training. I intend to keep working the subject because there is not any other initiative you can undertake, in my opinion, to build a competitive advantage and to sustain your institution for future generations.

~ Jeff

Risk Adjusted Return on Capital (RAROC) for Financial Institutions

How do you measure the profitability of lines of business, products, or customers? The simplest form is in dollars. But does that measure the profits against the investment required to generate those profits? For example, the riskiest banking products most likely deliver the greatest dollar profits, all other things being equal. At least until the risk comes to roost.

Another means to measure profits is the ratio of profits to the size of the portfolio being measured. In banking, we call it the Return on Assets (ROA). For example, a $500 million commercial loan portfolio will have a greater dollar profit than a $100 million consumer loan portfolio, all things being equal. But the ROA of the consumer loan portfolio could be greater. But ROA does not measure the risk of what is being measured, just the relative profit contribution regardless of size.

Banking is a risk business, and has many internal and external factors that impact the amount of risk per activity. This is one reason that financial institutions are getting serious about viewing risk across the entire franchise instead of in the organizational silos where they most exist. See my post on Enterprise Wide Risk Management on this subject here.

But through it all, risk requires capital. Look at the capital needed through the recent recessionary period for credit losses provided by either private investors or the US Treasury. Regulators assign risk weightings as a proxy for how much capital is needed based on the perceived risk of the asset. For example, a security in the investment portfolio may be 20% risk weighted, versus a loan that is 100% risk weighted. The total risk based capital ratio required by regulators to maintain "well capitalized" status formally remains 10%. So $100 million of 20% risk-weighted bonds requires $2 million of capital ($100 x 20% x 10%) versus $100 million of 100% risk-weighted loans requiring $10 million of capital.

If the amount of capital needed for a line of business, a product, or a customer varies based on risk, then it makes sense to measure the profitability of what is measured based on capital required. In industry parlance, we call that Risk Adjusted Return on Capital, or RAROC.

Financial institutions should assess on their own the amount of capital needed per product based on past experience, perceived risk, and potential loss. The table below shows how capital is allocated to each loan category based on a limited risk spectrum (credit, interest rate, and liquidity). Although for loans, these are probably the greatest risks, the financial institution may quantify other risks, such as operational (could it lose money due to fraud, hacking, etc.) or pricing (does the value of the asset fluctuate in the market, causing volatility and therefore risk).

I perform such an analysis for an ABA School of Bank Marketing Management course that I teach every May.  For my efforts I have been criticized that the topic was too complicated and I should remove it. But the course is on product profitability. How should I measure the relative profitability of business checking versus a home equity loan? Risk and the capital to support that risk should be the denominator in that equation. Agree? I say the topic stays. I'll take my lumps in the course evaluations.

What does your FI use as the profitability denominator?

~ Jeff

Banker Quotes: As Told to Me v3

I learn a lot from bankers as I visit their offices, speak to them on the phone or at industry events. Occasionally they will offer an insight that I think my Twitter followers would find interesting. Since I estimate my Twitter community only reads about 10% of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted so far this year.

Note that if the quotes exceeded 140 characters, I would have abbreviated or substituted some words to make them fit. So if you are a CPA and want to count, a few of the quotes may exceed the 140 here, but not on Twitter. I quote bankers anonymously to protect the innocent.

@JeffMarsico Bank head of branches: "All I need is time to sell, new shoes, and business cards."

jfb note: There are a lot of vendors out there selling the newest sales widget. But when it gets down to it, this banker gets to the heart of the matter. While typing this post, my bank called me from the local branch to tell me about their home equity lines! Third time my bank has called me in 16 years. Progress! But read the next quote.

@JeffMarsico Bank CEO: "People work at banks because they don't like to sell. It's how it has always been and still is."

jfb note: I think it is changing, though.



@JeffMarsico Bank Chief Risk Officer: "Not sure if ERM (enterprise-wide risk mgt) is theory or theology."

jfb note: Surprised that this came from the Chief Risk Officer because they are usually preaching the virtues of checking on the checkers that are checking on revenue generating bank activity. See my comments on ERM here.

@JeffMarsico Gas station attendant on free windshield inspection: "Sir your windshield looks great. To keep it that way, avoid highways."

jfb note: Ok, this has nothing to do with banking. But, seriously, this was his advice.

@JeffMarsico Bank analyst: "If there are such great returns to scale, then where are the Citigroup Inc. shareholders' yachts?"

jfb note: This was in a research note and not told to me directly. The economies of scale gang still can't answer this one. But a colleague of mine dubbed it "diseconomies of scale due to organizational complexity". I say I could have wiped out just as much shareholder value as Citigroup's Charles Prince for far less money.

@JeffMarsico Credit Union CEO: "The differences between CUs & community banks are inflated by trade groups. We should focus on big banks."

jfb note: This was told to me at a conference that was designed specifically to lobby the Federal government with the key issue being expanding CUs business lending. But, with the sum total of assets in CUs being less than JPMorgan Chase, it should make us wonder where community FIs should spend their energy. And don't count on your trade association to help you to target their largest contributors.

@JeffMarsico Bank exec: "If our regulator walked by our water cooler & saw that it was half full, they would write us up for it."

jfb note: Symbolic of the relationship between examiners and examined.

@JeffMarsico Branch banking exec: "We need to figure out how to give good service to rate sensitive customers & Nordstrom service to those that value it."

jfb note: Banks still struggle with the squeaky wheel philosophy of customer service... give the greatest service to those that make the most noise or are the most visible, versus those that are the most profitable.

@JeffMarsico Retiring Bank CEO: "I've been around (50 years) to see a few things. I've never seen an environment as difficult as this was for banks."

jfb note: Enough said.

@JeffMarsico Bank CEO: "If I don't know within 30 minutes of meeting w the borrower if the loan is a good one, I'm in the wrong business."

jfb note: I hope he meant in the context of the next quote.

@JeffMarsico Bank director on strategy: "I would like to make loans to borrowers that can pay us back."

jfb note: I agree with this strategy.

@JeffMarsico Bank director: "A great leader has empathy, sympathy, integrity, and consistency."

jfb note: I was impressed that a bank experiencing difficulties would speak about leadership instead of regulators, borrowers, lenders, etc. It inspired this blog post.

@JeffMarsico Mortgage banking specialist to me: "FNMA has $25B of pending repurchase requests outstanding."

jfb note: Well that's not comforting. One of my clients received a significant repurchase request from Fannie. If we sell them, but have to retain the risk, pricing and terms are going to have to change on residential mortgages.

@JeffMarsico Bank CEO: "In my 40 year career, it's never been easier to book loans." 

This is one of those counter-quotes... quotes that go against conventional wisdom. This bank is feeding off the castaways from large banks. I hope the castaways can pay the loans back.

@JeffMarsico Community bank CEO: "I'm fm a big bank and I was surprised I had to make holiday decoration decisions."

jfb note: Welcome to community banking.

@JeffMarsico Bank institutional investor: "Great banks have 1. Great asset qual, 2. Good IRR position, 3. Great efficiency ratio, and 4. Great sales/service."

jfb note: Always great to know because institutional investors own a significantly greater portion of community banks now than pre-2008, which leads to the next quote.

@JeffMarsico Bank analyst: "Attractive banks: have a lending niche and/or in strong economy; managed credit problems well; & have excess capital."

jfb note: I suppose if you asked 10 analysts and institutional investors you would get 10 different answers.

@JeffMarsico Bank CEO: "In a perfect financial year, you have done well if you don't have to think about your bank more than 10 minutes."

jfb note: The context was that banks should make it easy for businesses to perform banking chores.

Bank CEO: "We would have to be much bigger than we are to be a technology leader."

jfb note: Some still believe they can be a technology leader.

Bank CEO: "Ally Bank did an excellent job convincing the public that the opposite of the truth is true."

jfb note: This was in response to me citing a survey that showed Ally Bank one of the top recognized bank brands. Advertising saturation can work for those with the wallets.


Bank CEO: "We were surprised at quick adoption rate of our mobile banking app."

jfb note: Because bank customers used to be notoriously slow at adopting new delivery channels. Needless to say the turtle is making gains on the hare.


Bank CFO to me: "You were able to pronounce that branch correctly when you didn't have that beard."

jfb note: Wise guy CFO.


What have bankers been telling you?

~ Jeff

Guest Post: First Quarter Economic Update by Dorothy Jaworski

The Fed Goes Too Far

First, let me say, we owe the Federal Reserve our gratitude. Their actions to ease in many ways during and after the financial crisis averted financial meltdown and produced results in an economy that is regaining its footing, albeit at a “frustratingly slow” pace.

The Fed lowered the Fed Funds rate to 0%, where it has stood for over three years. They purchased securities during the crisis and stepped up where they could as a lender of last resort. They embarked on quantitative easing, or “QE,” programs twice in 2009 and 2010, buying up $2.3 trillion of securities. Last summer, they went where no Fed has gone before and “promised” to keep rates low until 2013, then earlier this year extended the “promise” until the end of 2014. Last Fall, they embarked on “Operation Twist,” to sell shorter dated securities and buy longer dated ones in an effort to push long term rates down, especially to get mortgage rates lower to help the still struggling housing market. Ben Bernanke has been holding press conferences and the Fed recently published their first-ever rate forecasts—even though it was published on a scatterplot—that shows Fed members’ thoughts on where short term rates will go.

But we know that only three things in life are certain—death, taxes, and a Fed that goes too far. Despite the trillions of dollars used to buy securities and zero cost money, economic growth is struggling at 1.7% over the past year, which is one of the weakest recovery rates since the early 1980s. Of course, coming out of one of the worst recessions since the 1930s, any pace of growth has been nothing short of miraculous.

So what do we make of the latest idea that the Fed is floating? They want to go into a third round of QE, but they would purchase securities and borrow the money back short term. This latest idea would be a form of “sterilized” easing—allowing the Fed to buy long term securities (to push down long term rates) and borrow the money short term to keep the money supply from growing, and thus keep inflationary expectations under control.

So what will “sterilized” easing accomplish? In my opinion, nothing. It is not about money anymore, it is about psychology and a belief that we can do better as an economy without government interference and being flooded all over by money that will someday be difficult to pull out of the economy when the time to tighten policy arrives. Philly Fed president Plosser has stated recently that the Fed should only use its balance sheet as a crisis tool, not as a regular tool for monetary policy. For once, I agree with him.

Goodbye, Yield Curve

At this point, I believe this new idea would prove that they are clearly going too far. The sole purpose of such a move is to artificially push long term rates even lower than the unbelievable lows we have currently attained in an effort to manipulate the yield curve. This manipulation adds to their “promise” and “Operation Twist” and distorts the yield curve even further. The problem is that the yield curve has been one of our most reliable market indicators over the past several decades.

Generally, we use a yield curve to deduce whether inflation is an issue or the economy is expected to grow—through an upward sloping yield curve—or whether there is a poor economic outlook or recession coming—through a negatively sloping yield curve. Flat yield curves have typically resulted from Fed tightening and the creation of one from Fed easing will be highly unusual, but, alas, I think that is their plan.

From yield curves, we can calculate market expectations of rates in the future. Without such a reliable indicator, what objective signals will we get that the recovery is strong or weak? Fed “promises?” Scatterplots? I think we all know how this experiment is going to turn out.

A Fed That is Mad at Us

Chairman Bernanke has been on the warpath for the past several days. Apparently, he is not thrilled about the recent selloff in the bond market, that took interest rates up by .40% to .50% from the end of January into the third week of March; there was an especially nasty stretch of nine days from March 8th through March 20th, where rates rose continually each day before finally tempering their advance and falling back since the peak. Historically, the nine day streak is only the second of its kind since a similar streak in 1974—the other being during June, 2006.

Bernanke has been talking down recent economic good news and chastising the bond markets for allowing rates to rise, which could hamper growth. He must be angry that so many of us opposed his “sterilized” money scheme and are a little skeptical of his extended “promise” to keep rates low until the end of 2014. Maybe he was mad that investors were reallocating money from bonds into stocks. He didn’t mention the real villain—rising gasoline prices, which today stand at $3.90 per gallon, according to AAA, for the highest level ever recorded this early in the year.

The Tipping Point

Just when economic growth started looking better, with new job growth of 200,000 per month in four of the past six months, we run into the same old nemesis—rising gas prices. It is no surprise that growth slowed in 2011 as gas prices reached a “tipping point” of $4.00 per gallon in May that caused consumers to dramatically slow other spending.

The media keeps speculating that gas prices will reach $5.00 per gallon by Memorial Day. This doesn’t help with consumer psychology and, if gas does reach $4.00 or more, we can expect the same psychological reaction from consumers—reduced spending—just as they would react to higher taxes. Let’s hope that the rise in oil and gas prices this year will again prove to be “transitory,” as Ben Bernanke has been claiming once again. Every one cent rise in gas prices leads to $1 billion annually in extra consumer spending on this volatile liquid and $1 billion less spending on other goods and services.

Slow growth, slow improvement. That is what is happening in the economy. The recovery is at its most vulnerable. High oil and gas prices could push us to slow growth, no improvement, which could once again cause job losses. We do not want to see consumer psychology in this scenario.

Stocks Rock On

It is no surprise that stocks began to do much better as the economic data began to strengthen late in 2011 and into this year. Stocks were virtually flat in 2011 as the markets improved early, sold off in a horrible third quarter, and quickly regained the flat line. Year-to-date in 2012, the S&P 500 and Nasdaq indices are up 12.6% and 20%, respectively. The price-earnings multiple on the S&P is 13.4 times and the dividend yield of 2.1% is approximately equal to the ten year Treasury yield.

Stronger growth, with real GDP at record dollar levels, has been translating into stronger corporate profits. The S&P now tops 1,400 for the first time since late 2007 and Nasdaq now tops 3,000 for the first time since 2000. Momentum is clearly driving the markets, as well as Bernanke’s campaign to keep returns on bonds artificially low for a long time. But remember that the markets do not usually go up in a single straight line—especially during a presidential election year. Stay tuned.

Thanks for reading! DJ 03/27/12

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 First Federal of Bucks County since November, 2004.

Job Description: Branch Manager

I frequently hear lamentations about the gap between the performance expectations of community financial institution (FI) personnel and performance results. A frequent challenge is that performance expectations are not documented in the form of job descriptions. Instead, expectations are often trapped between the ears of the supervisor or senior management.

This post is geared toward drafting a job description of the FI branch manager. Although I am not an HR expert, I am often engaged in discussions with FI senior management teams on what they expect from the person occupying this position. The job description does not include qualifications or compensation, as each FI can assess what is needed based on their own expectations.

Branch Manager

Summary of Responsibilities:  Relationship management... Develop relationships with the branch's most profitable customers. Relationships should include knowledge of the customers' banking needs and their service expectations from their FI, evaluation of customer product use to determine optimal product utilization, and routine customer contact. The objective is a level of customer satisfaction that increases customer loyalty based on service and relationship, not price/rate.

Product knowledge and expertise... Develop and maintain significant knowledge of FI product offerings, with an emphasis on products most needed by the branch's target customers as per the demographic profile of the area surrounding the branch and the FI's strategic focus. Develop and maintain financial acumen in customer balance sheet and cash flow management to assist customers achieve financial success. The objective is to establish the branch manager as the subject matter expert of bank products within the branch market.

Community relations... Become the primary community representative by joining a minimum of two community organizations with an emphasis on those where the FI's target customers are likely to participate. Volunteer for a leadership position in at least one. The objective is to promote community involvement consistent with the FI's strategy and to expand the branch manager's relationships for future business development activities.

Business development... Grow branch customers at a pace faster than general market growth that is consistent with the FI's strategy. Manage branch business development efforts that include, but is not limited to, in-branch sales, outbound calling, prospect visitations, direct mail, branch-specific social media activities, etc.

Supervision... Supervise branch staff. Set performance expectations based on job descriptions and capabilities. Coach staff to exceed expectations. Manage staff training to include compliance, operations, and sales/product knowledge. Perform routine performance evaluations. Position subordinates to succeed within the FI. Coordinate with HR for developing optimal staffing levels, modifying job descriptions based on changing expectations, and filling open positions. Address performance deficiencies of subordinates.

Branch operations... Manage branch operations activities such as efficient and compliant transaction processing, correct and compliant account opening and closing, branch/teller cash, etc. Branch manager is not expected to perform these duties. Rather, the branch manager will supervise staff that performs duties and receives regular assessment on the operations of the branch from the branch operations manager and outside sources such as Audit and Compliance departments. Branch manager is responsible for the overall appearance of the branch, ensuring it is consistent with the image the FI wishes to present based on its strategy. Responsibilities include the branch physical plant. Again, the branch manager is not expected to perform these duties, but supervise personnel to ensure that they are satisfactorily discharged. The objective is for the branch to operate smoothly so branch staff has greater availability to deliver service that is noticeably better than the competition, and for sales activities.

Branch profitability... Branch manager is responsible for the overall profitability of the branch, and to establish a positive profit trend that is consistent with the FI's overall strategy.

Other duties as assigned.

What did I miss?

~ Jeff

Common Misperceptions: Community Banks are Beating the Behemoths

My firm constantly evaluates industry trends and happenings to formulate what we term our Industry Overview. Although a constant process involving hypothesis, research, and re-evaluation, we center our thinking annually to ensure we properly debate, debunk, and determine where our industry is moving.

As part of the process, our staff does a lot of research. Some of the research focuses on themes we hear multiple times over in client strategic planning sessions. One such theme was the right sizing of community banks' funding sources.

Since the dawn of the financial crisis in 2007, loan demand has fallen off of the cliff, and therefore community banks did not need their historically high amount of CD funding. As a result, we dropped rates to such a level that it wasn't attractive to traditional CD customers and they began parking money in liquid savings vehicles, such as the money market account.

Our deposit coffers swelled like a puffer fish. In many strategy sessions, senior management teams began to feel pretty good about their efforts in attracting core deposits, and how they are beating the big banks in deposit gathering.

Not so fast. As the chart below shows, although community FI deposit growth has been quite robust, with an emphasis on core deposit growth, the big banks (defined as top 25 US banks) are outpacing us. This is exemplified by Bank of New York/Mellon charging their largest depositors negative interest for the convenience of parking their cash in BNY's vaults.

Another theme we hear in community FI strategic planning sessions is how much better we are at serving small businesses. We provide access to decision makers, custom loan structures, and better service than our larger brethren, so the discussion goes.

But the chart below from recent Small Business Administration research, although using 2009 data, demonstrates a trend worth noting. In 2005, banks with greater than $50B in total assets accounted for 32% of small business loans, defined as loans less than $1 million. In 2009, that percent rose to 37%, although that is off 1% from the prior year.

All other asset sized FIs either held their market share or slightly declined. Does access to decision makers, custom loan structures, and better service result in more business? Intuitively it should. So why hasn't it?

How do we, as an industry, turn the competitive advantages we have over behemoth banks into real wins in the marketplace? I'd like to hear from you.

~ Jeff

Best Book Ever on Word of Mouth and Direct Mail Marketing

I hope the title of this post compelled you to read its contents. If so, I suppose you are expecting me to offer my opinion on the most recent thought leadership on word-of-mouth and direct mail marketing. But I will not.

Instead, I will offer you my opinion on a book whose author is not 100% known, but thought to be a Syrian from Antioch named Luke. Recent? No. But would you be interested in a book that describes how to grow raving fans that span the globe from one poor person from a small town? Would you be interested in a book that doesn't only stand the test of decades, or even centuries, but millenia? How about a book that boasts adherents from about one-third of the world's population (see chart)?

Source: http://www.religioustolerance.org/



I'm not talking about Facebook, whose founders are plotting as you read to turn their paper into big money. I'm talking about the biblical book Acts of the Apostles.

Now before you browse away because you may not be religious or not be a Christian, hold on. This is not a post about religion. It has been suggested to not discuss religion or politics in a business blog. But it's my blog! And ignoring how a tiny sect of Judaism, whose apostles feared for their lives and locked themselves in an upper room, grew to a religion followed by 33% of the earth's population is worth discussing.

How did the Apostles do it? The book of Acts tells the tale with a specific focus on two: Peter and Paul. Peter, as many of you know (perhaps a third of you), was appointed by Jesus to build his church after Jesus' death. Indeed, Peter is considered the very first pope.

After Jesus' death, the apostles weren't out canvassing the countryside preaching the faith. As I mentioned, they hid from possible persecution. Jesus had to appear to them several times after death to get them out of the room. Have you ever heard of a doubting Thomas? Biblically based. Jesus had to guide Thomas' hands into his wounds to convince him.

But convince him, and the rest of the apostles he did. They immediately began their ministry, teaching to mostly Jews, healing them, converting them. There was no Internet. No newspaper to take out ads. No postal service to send a direct-mail postcard. No PowerPoint deck. They only had each other and their words, that were inspired by the Holy Spirit, according to the Bible.

They also had a solid foundation of a legend, although it typically takes decades, sometimes longer, for legends to achieve legendary status. In a word-of-mouth world, legends were slow to come. But Jesus' ministry resulted, in part, for the making of a legend that was to attract followers like no other legend before, or since.

The apostles were selected by Jesus not because of their stellar standing within the community. Most were poor and some were in positions not well admired, such as tax collector (not sure their social status has improved much). Nobody knows what Jesus was thinking when he chose such a humble lot. But I surmise he knew what he was doing... such as selecting good men, with good presence, that he could teach/were teachable, and who could preach to the world.

Paul was a different story. Not an original apostle, he enters the picture in Acts as a persecutor of Christians... until his fateful ride to Damascus. According to Acts, he was struck down and blinded by Jesus, and sent off to seek counsel in the faith before his sight was restored. Lesson learned: to knock the cover off the ball in word-of-mouth marketing, convert your biggest critic, and make him/her your raving fan.

Acts ends with Paul's first imprisonment, as it was typical for Christians to be persecuted. Paul's ministry focused on the Gentiles from Asia Minor to Rome. When not spreading the word in person, Paul wrote many letters to various Christian leaders. Much like a political campaign, the lesson learned here is to appoint leadership in key geographies and communicate, teach, and encourage them often.

Lastly, Acts shows the beginnings of the organization of the Christian church (present day Catholic church, as Protestant faiths took root as a result of the Reformation in the 1500's). This organization lives to this day, 2,000 years after its first seeds were planted by a poor carpenter from Nazareth and a few followers that included fishermen and tax collectors.

In summary, my take on the lessons learned from the book of Acts of the Apostles for word-of-mouth and direct mail marketing:

1. Choose your first WOM marketers carefully, make them passionate followers, develop and train them, set them loose;

2.  Lay the building blocks to achieve legendary status;

3.  Develop an organization that is built to last with leaders in key geographies;

4.  Turn your greatest critic into your greatest apostle.

Wouldn't it be shortsighted to ignore these timeless and proven word-of-mouth marketing techniques because they are found in the Bible?

~ Jeff

Note: My fascination with Acts of the Apostles as a quintessential word-of-mouth marketing guide does not make me a Biblical scholar. As one of my favorite comedians, Kathleen Madigan quips, "I'm a Catholic, I don't read the Bible." :)

Let's retake the mortgage market!

Community financial institutions are grappling with the recent and pending mortgage rules. We fear the Consumer Finance Protection Bureau (CFPB) and government's tendency to fire a bazooka at an ant, causing tremendous collateral damage.

New rules aside, we were not that significant in the mortgage market anyway. Aggressive mortgage brokers hawking products and programs from money center and category killer banks, and government or quasi government agencies such as Fannie and Freddie, were killing us in terms of competition. Lastly and perhaps more importantly, because we collateralize and sell a significant percentage of mortgages into bonds and off of bank balance sheets, the 30-year mortgage became the most prominent. The 30-year carries too much interest rate risk for us.

So we opened the door, let the competition through, and we ceded the mortgage market to brokers, specialists, and the government.

As most FIs are hungry for assets, they are looking for loan volume wherever they can get it. I encourage you to rethink the residential mortgage loan. Two of our clients recently did so, and are finding ways to profitably offer this staple loan product to their customers and communities. With many brokers now out of business, and the government looking for ways to reduce their participation, can we find opportunities to retake what we have previously ceded? I think so.

I recently ran an analysis of all of my firm's product profitability clients to determine exactly how profitable residential mortgages are in the industry. The results were surprising to the client and helped them to peel back the onion further to uncover opportunities to increase production and reduce per-unit costs in their residential lending unit. See the table below for a portion of this analysis.

A note on the data. The profitability of the residential mortgage product is based on fully absorbed costs. So the per-unit cost not only contains direct origination and maintenance costs such as the mortgage originator and the loan servicing department, but also the indirect costs such as a portion of the FIs senior lender, and overhead expenses such as portions of the Finance Department.

What the data shows is that, in an era of needing loans on our books or revenue through our income statement, mortgage loans are doing relatively well. Why shouldn't we do more of it?

One reason may be the variability of volumes. For example, volumes were down in my home state of Pennsylvania from 2009 through 2010, the latest year HMDA data is available. In 2009, there were 374 thousand loans funded for $62 billion. In 2010, 334 thousand loans were funded for $55 billion. This variability is common, and FIs must build their capability with a greater percentage of variable expenses than other lines of business so they can decrease expenses as volumes decrease. But come on people, although down, $55 billion of loans are being funded per year in Pennsylvania alone!

Residential mortgages are critical components of being a community FI. Most of our customers either have them, will need them, or have had them. A fair amount of small business funding can be achieved through residential lending, either through straight mortgages or home equity loans. Big government and aggressive loan brokers made us small players in the market.

I say we should take it back! What do you say?

~ Jeff

Guest Post: 4th Quarter Economic Update by Dorothy Jaworski

Before looking ahead to 2012, I can’t resist the traditional temptation to look back at the past year. The markets in 2011 were dominated by earthquakes and the tsunami in Japan, spikes in gas and oil prices, historic Federal Reserve actions where they “promised” to keep rates at their current low levels until mid-2013 and “Operation Twist,” where they are selling their shorter maturity holdings and buying longer term ones in an effort to drive down long term interest rates, and a debt ceiling and deficit debacle where our leaders in Washington cost our nation its precious AAA rating.

These events led to the stock market taking a beating of -12% to -14% in the third quarter, but a fourth quarter recovery of +8% to +12% and a Santa Claus rally of close to +1% saved the day. Volatility, anyone?

Actually, the Dow Jones Industrial Average was the only major stock market index in the world to increase in 2011. The S&P 500 index came in a close second at a change of zero. Europe suffered losses on average of -6% to -17% while Japan, China, and other Asian nations saw declines of -15% to -25% on average. Returns in the bond market were much greater.

Our weak economic growth of about 1.5% in 2011, Federal Reserve actions, and constant worry and fear about the European sovereign debt crisis caused our “beyond crazy low” rates to fall further, with the 10 year Treasury yield ending 2011 at 1.88%, after falling 144 basis points during the year, and returning about 10% to investors.

These rate declines may seem incredible, except when you consider that the Federal Reserve has their foot on the gas with quantitative easing programs I and II, their “promise,” and their $400 billion “twist” operations. Their ultimate goal seems to be a reduction in mortgage rates to help spark a housing market recovery; mortgage rates lagged the change in Treasuries in 2011 by falling 105 basis points. As they say, “don’t fight the Fed,” especially when they are “over-easing.”

Businesses fared okay in 2011. They survived tight credit, lack of confidence, and over regulation to take GDP to record levels, to take corporate profits to record levels, and to make lots of cash so that they can hoard it on their balance sheets to the tune of $2.1 trillion at the end of the third quarter. They are not alone as hoarders; banks hold an equal amount in excess reserves at the Federal Reserve.

Collectively, in May of 2011, we came to the realization that we have spent $3 trillion in the past fifteen years fighting his brand of terrorism, but we finally got Osama bin Laden. For him, terror came in the dark of night in the form of our Navy Seals. Geronimo EKIA.

Consumers fared okay in 2011, too. Unemployment fell to 8.6% in November, 2011 from 9.8% in November, 2010, although we are still seeing people exit the labor force, or go “MIA,” which is highly unusual during a recovery. Consumer spending rose, albeit slowly at times, in every month except one (June) during 2011.

Shoppers came out in force on Black Friday to set new spending records for that day at $11.4 billion, up 6.6% year-over-year. Auto sales have returned to annualized levels above 13 million. Just don’t mention the value of their homes and they will be okay. And who can forget getting up in the middle of the night in April to watch live as Prince William married Kate Middleton—a boost indeed to economies everywhere!

Looking Ahead to 2012

The sheep followed their annual ritual of falling all over each other to get their GDP forecasts out for 2012. They can be a pessimistic bunch, especially the group from AP. Here are their forecasts:

- Federal Reserve 2.5% to 2.9%

- Blue Chip Economic Indicators 2.0%

- National Association of Business Economics 2.4%

- Associated Press Survey of Economists 1.3%

- Wall Street Journal Survey of Economists 2.3%

We remain in the midst of a recovery that is fragile and susceptible to shocks. But I will emphasize that slow growth is not recession. Don’t let the pundits make you think it is. GDP is at a record level of $15.2 trillion (current dollars, seasonally adjusted). Corporate profits are at a record 13% of GDP, compared to the average since 1947 of 9.5%. Job creation has been slow, but steady. In the first six months of 2011, payroll employment grew on average by 131,200 each month, while household employment grew on average by 21,300 each month.

For the period of July to November, the pace for payrolls remained about the same on average at 132,200 and household employment increased dramatically to average 249,200 monthly. The employment picture is slowly improving.

Consumers spent freely for the holidays and it remains to be seen whether they remain in a festive mood or return to their dour deleveraging habits. The Federal Reserve is determined to keep interest rates low so consumers can borrow or refinance cheaply, and just maybe people will buy houses to get the excess inventory off the markets.

As far as the bond markets go, rates, while they can still go lower, probably will not because they are already less than the most recent core rate of inflation of 2%. Mortgage rates may not fall further as investors seem averse to such low rates that bring with them greater duration risks.

As far as the stock markets go, prices, while they can go lower, probably will not because the price earnings ratio of the S&P 500 is already below average at 12 times and the dividend yield of 2.1% is greater than the ten year Treasury yield of 1.88%. GDP is at a record dollar level and corporate profits are at a record when compared to GDP.

There are always wild cards such as the “next” crisis, reduced government spending, and the Presidential election this year. Don’t give up on the economy—there are enough positive signs of future growth and a Fed with their foot on the gas pedal. Stay tuned!

And, in case you have not noticed, she has been quietly moving into mainstream America, with a primetime Thanksgiving night special and a performance on TV on New Year’s Eve wearing what appeared to be a giant birdcage. Lady Gaga is about to announce and embark on a 2012 tour and I am there!

Thanks for reading! DJ 01/03/12

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 First Federal of Bucks County since November, 2004.

Customer Service... blah, blah, blah

My family recently shopped around our homeowners and auto insurance to ensure we were getting a fair shake. We used to use an insurance agent for life, auto, and homeowners. I place value in having an agent because they have access to a number of insurance companies (if an independent agent) and should have our best interests in mind. The owner of the agency is a director at a bank, which is a bonus.

But a past "shop" for auto after a dramatic rate increase led me to go to a "direct" insurer. And now, after our most recent shop, we are leaving to a direct insurer for homeowners. When I notified my agent, he asks me if he could have a chance to look around for me, and to try to win back our homeowners and auto.

My e-mail back to him: "I would have appreciated that service prior to me searching on my own." I was irritated. I expect three things from our insurance agent:

1. An analysis of our needs and recommendations to fit those needs;

2. Periodic reviews of our policies versus what is offered by similarly rated insurance companies in the agent's markets; and

3. Good service when I call with questions and problems.

I received one and three from the agent. But I was pretty disappointed when my shopping resulted in a 20% reduction in my homeowners insurance. I am willing to pay a slight premium above discount insurance companies for the service of an agent. But not 20%. This happened with our auto insurance too.

Our agent clearly dropped the ball on two, and scrambled to make up for it after I notified him I had done it on my own. As Donald Trump would say, "you're fired". When I sounded off to my wife about it, she said "I think you have a blog post." Boom!

I suspect financial institutions think they have great customer service too. But in my experience, what FIs mean by great service is "3" above. After my wife planted the seed of this post in my mind, I asked the marketing director of a multi billion FI if they had "service level agreements" (SLAs). She said that they are required to respond to customer inquiries within a certain amount of time, etc. In other words, "3".

But what of one and two? I know it is an insurance list, but don't we have similar demands from our FI? Don't FIs want to be considered for more than a deposit counter or a money machine? Based on my experience, I think they do. In fact, a competitor of my firm did a survey of FI customers that concluded that both businesses and individuals wanted advice from their FI.

Are we giving them what they want? Are we really good at customer service?

What do you think customer service is?

~ Jeff

In Pursuit of Return on Equity

When performing ratio analysis to determine a company's profitability we should remember that a ratio has at least two data points: a numerator and a denominator. It doesn't matter if it is banking, retailing, or widget making.

In banking, the standard profitability ratio has long been return on equity (ROE). That is... until the financial crisis of 2007-08. It was in the aftermath that capital, the denominator in the return on equity calculation, resumed its place as king.

Where has the pursuit of ROE led us? Yes, it made us focus on profitability, the numerator in the equation. But it also resulted in us looking at bank equity. The smaller the E, the better the ROE, right?

Bond salesman loved the concept. They encouraged their bank clients to borrow from their respective Federal Home Loan Banks (FHLB) or chase high cost deposits to fund the bonds they sold for minuscule spreads. The logic: blow up the balance sheet, eek out incremental profits, and reduce the E. Genius! And equity analysts, who coincidentally worked for the same firms as the bond salesman, loved it too.

During the period 2002-07, when loan growth outpaced the ability to fund it, FIs took on more FHLB borrowings and high cost deposits. This was a higher spread concept, because loans typically had greater yields than bonds. Loans also typically had greater credit risk. FIs did provision for such losses, but accounting rules and how the SEC enforced them did not allow FIs to "over-reserve", whatever that means. This was determined by the high profile case the SEC brought against SunTrust in the Fall of 1998 for managing earnings through the loan loss provision. Read a summary of it from the Atlanta Fed here. The Fed research piece on the subject, written in 2000, is almost comical to read given what has happened.

So, in pursuit of ROE, banks leveraged up their balance sheet. They thinned their capital leaving them more susceptible to distress during economic hard times. This distress was clearly evident when I recently performed some "where are they now" research on the highest performing ROE FIs in 2006, the last normal year prior to the crisis (see table).

A note on the data. I searched all publicly traded banks and thrifts that existed in 2006 and sorted them by the highest ROE. But I also ensured that their prior year ROE was similarly high, in order to weed out one-time gainers. In other words, I wanted consistent, high ROE FIs.

The results are telling. Of the top 10 ROE FIs of 2006, only three are currently profitable. Two are under a regulatory agreement. The remaining five failed. Yes, failed.

How does an FI, sitting atop the ROE chain, fall so far so fast?  As mostly always the case, it was bad loans. But many if not most FIs have had loan troubles. What made so many in this group take the perp walk to the FDIC? I already mentioned their inability to put extra away for a rainy day via the loan loss provision. But the pursuit of ROE encouraged levering up the balance sheet to leave little in excess equity to absorb the losses. Inadequate loan loss allowance, relatively low equity. The recipe for disaster in bad times.

I think ROE will re-emerge as ONE important indicator of profitability. But I don't think we will make the same mistake twice. Having the past three years as history in our loan loss allowance calculations, our regulators and the SEC will probably permit us to be more aggressive in provisioning. Needing the federal government to chip in capital because we did not have enough to withstand the storm is resulting in higher capital requirements, and lower ROE expectations. Analysts take note.

What do you think should be the primary measure of FI profitability?

~ Jeff

It's a Wonderful Life

This 1946 Christmas classic is a story about the impact one man made on his family, his business, and his community. It goes beyond the fate of the Bailey Building and Loan. It teaches us to take stock of our lives, to be helpful instead of hurtful, and be thankful for what we have instead of stressed over what we don't.

But It's a Wonderful Life is also a testament to the importance of community financial institutions (FIs). The classic scene of the run on the Bailey Building and Loan after the 1929 stock market crash depicts the basic principals of community banking, how FIs work, and how important character plays in bank lending and community development.

What you don't see here is the villainous Mr. Potter's diatribe on how the Bailey Building and Loan advanced loans to "riff-raff", and was unwilling to foreclose when the "rabble" ran into difficulty making payments. Instead, the Bailey's modified the terms to help borrowers make it through tough patches.

What you also don't see is the bank examiner showing up to review the bank's books. Note the examiner wasn't plowing through the loan portfolio and criticizing this underwriting anomaly or that. He was there to ensure what the bank reported in its footings was accurate. In the end, Uncle Billy Bailey loses $8,000 when depositing the funds in the correspondent bank; Mr. Potter's bank. It was the mismatch in footings that landed George Bailey in hot water with the examiners. It wasn't lax underwriting, or troubled debt restructurings.

When the Bedford Falls community pulls together to raise the missing $8,000, they toast George as the "richest man in town". The bank examiner actually contributed to the pot of money. My how times have changed.

It's a Wonderful Life portrays the significance a financial institution plays in elevating the socio-economic status of local residents. The working poor increase their wealth by owning cars so they can get to work, to go to college or technical school, and/or to achieve home ownership. The middle class can improve their wealth by upsizing their home, going to grad school, and/or starting a business. Many of these loans don't fit the one-size fits all underwriting criteria of government bureaucrats whose sole objective is to cover their butts should asset quality falter in an institution they examine. "Rabble" need not apply.

In this sense, regulators that examine our financial institutions are the modern day Mr. Potter. But in order to help businesses work through difficult economic times, to help families stay afloat during periods of unemployment, and to help communities re-adjust to remain economically vibrant during changing times, we need more Bailey Building and Loans, not less.

Is anybody listening?

~ Jeff

Note: Since this post, the NY Times wrote an article about a modern day Bailey Building & Loan: Bank of Cattaraugus. Cattaraugus, coincidentally, is in upstate NY, near Buffalo. Perhaps not too far from the fictional Bedford Falls. Although I salute the Bank for its success in helping local people, I do believe community FIs can achieve long-term success through the profit motive, which is consistent with operating in vibrant communities.

http://www.nytimes.com/2011/12/25/nyregion/the-bank-of-cattaraugus-new-york-states-smallest-bank-plays-an-outsize-role.html?_r=1&adxnnl=1&ref=nyregion&pagewanted=all&adxnnlx=1325347237-Q5F/vRUqZwymOgvBcu0zFg

The 17 Fundamental Traits of Organizational Effectiveness

I recently read Harvard Business Review's 10 Must Reads on Strategy and reviewed it in this blog. One of the "must reads" was The Secrets to Successful Strategy Execution by Gary Neilson, Karla Martin, and Elizabeth Powers from Booz & Co. I dedicated one blog post: naming it Common Sense to Successful Strategy Execution because I didn't think it was a secret. In this post I would like to write further on the subject, focusing on the 17 fundamental traits uncovered during Neilson, Martin, and Powers' research. 

The below table was drawn from research from more than 26,000 people in 31 companies. The Booz consultants distilled them in the following order of importance...

A note about the study: The Booz consultants tested organizational effectiveness by having participants fill out online diagnostic that contained 19 questions... 17 traits and two outcomes. The traits were ranked and indexed to a 100-point scale to determine their relative importance to organizational effectiveness.

In the study, 61% of respondents in strong-execution organizations agree that field and line employees understand the bottom-line impact of their decisions. This figure plummets to 28% in weak-execution organizations. For community FIs, this is terrible news, as so many rely on top-level profit reporting to determine success or failure. Does the deposit operations manager know the implications on product costs for adding a software component? Doubtful. Does the lender understand the profit implications to his or her line of business by authorizing the waiving of a fee? Unlikely.

A similar analysis can be performed on your organization as a whole, focusing first on the top traits and working your way down, ensuring your FI moves toward affirmative responses to each trait. Once completed, FIs can then incorporate the 17 traits into executive performance reviews.

Imagine an FIs board of directors using the above table to evaluate the effectiveness of its CEO. Or a CEO to evaluate the effectiveness of his or her direct reports. Simply putting the 17 traits in a spreadsheet, and responding on a five-point scale of "strongly agree" to "strongly disagree" would certainly motivate the person evaluated to create a strong execution culture in his or her organization. For proponents of the 360 review process, subordinates can also respond, giving the Board or CEO insights beyond their own perceptions and bias.

This blog has dedicated countless posts to strategy. If an FI is to promote an execution culture, it begs the question "execute what"? It reminds me of legendary Tampa Bay Buccaneers coach John McKay's response when asked about his team's execution after a lackluster performance: "I'm all in favor of it." My point is, and I do have one, when evaluating the organization and its executives on execution, it should be executing long-term strategy. That implies the FI has a long-term strategy to chart the course to compete and succeed in a rapidly changing industry.

What are your thoughts on developing an execution culture?

~ Jeff

Note: I tried to make the table as large as I could. If you would like a larger version, e-mail me.

Power to the People

I asked the head of commercial lending how best to turn the tide in business loan growth. His response: people. I asked the head of branches how to elevate the results from low performing branches. Response: people. I asked the head of an insurance subsidiary how he intends to improve margins. Again, it's the people.

My firm moderated a brainstorming session with a client on improving profitability in certain areas. We came up with several credible ideas. But a senior executive spoke up and said something to the effect that the responses that revolved around people were so far ahead of the others, that if the bank got the people issues right then performance will surely improve.

I have opined that bankers come in two general categories: balance sheet managers and customer managers. Since that post over a year and a half ago, financial institutions continue their migration toward the customer aspect. A strategy heavily focused on balance sheet management does not do much to differentiate one FI from another, and therefore does little to improve franchise value.

But strategies that focus on customers require people that are better than the people at the FI across the street. From this perspective, our assets do go up and down the elevator every day. So what are we doing to have the right people in the right positions?

We first attacked this challenge over 10 years ago when we aggressively pursued lenders. The hot pursuit led to wage inflation. The challenge was that we wanted lenders that went after the total client relationship and were surprised when what we got were loans. They were deal people, selling loan transactions usually at attractive pricing and loose covenants. We found it difficult to get the old salts to change their perspective, to build a strong relationship, to achieve trusted advisor status with their clients. They simply wanted to do deals.

Perhaps we can learn from this experience. If FIs seek to supplement their staff with more customer managers, maybe we should focus on attracting motivated, less experienced, but more malleable talent. Or perhaps such talent exists within our franchise.

To succeed at such a strategy, the FI would need a performance measurement process that identifies top performers and hot prospects, develops a training program to teach them the skills to meet performance expectations, and to ingrain your FIs Way (manner in which your FI would ideally like to do business).

If you bring onboard new, yet under-developed talent, perhaps you implement a mentor program with more senior people that have bought into your Way and are performing well. Additionally, ensure your compensation system is consistent with your Way. If you compensate for loan volume, don't be surprised if you get the aforementioned aggressively priced loan transactions and few loyal relationships.

As you populate your employee base with higher quality people your FI will perform better. If you keep in place employees that are millstones around your neck, your FI will struggle to perform better. Your objective should be to maximize the former, and minimize the latter. That's the simplest business strategy ever, don't you think?

~ Jeff

Book Report: HBR's 10 Must Reads on Strategy

A Written on the cover is a definitive statement made by an entity that has supreme confidence in itself: "If you read nothing else on strategy, read these definitive articles from Harvard Business Review." Wow. And while we're at it, if you read no other blogs on banks, read Jeff For Banks. As much as I would like to believe it's true, I would also have to believe that a higher authority is leading the Denver Broncos on their improbable run. You and I both know that's not true... ???

But if a compendium of essays on vision, strategy, and execution written by luminaries such as Michael Porter, Jim Collins, and Michael Mankins interests you, then this book is for you. I'm pretty much a strategy junkie, and this book gave me fix after fix, every time I powered up the Kindle.

What I liked about the book:

1. Covers, in good detail, disciplines such as strategy development, strategy execution, decision rights, balanced scorecards, and vision;

2. Many essays were in "how to" format, such as how to develop your strategic principle;

3. Summarized key points in Idea in Practice segments.

What I didn't like about the book:

1. Not much. But if I had to pick something, it would be that the essays were penned by academics and/or consultants. It is instructive to hear from practitioners too, although the book is chock full of real world examples of idea implementation.

Do I trust Harvard Business Review to select the appropriate compendium on strategy? Well, no. I'm sure they have their bias and it flows through not only to the essays selected, but also the authors, as many are associated in some way with HBR. But I can't argue with any of their selections, and I am better for having read the book. I think you will be too.

~ Jeff

Book Report note: I will occasionally read books that I believe are relevant to the banking industry. To help you determine if the book is a worthwhile read for your purposes, I will review them here. My mother said if I did not have something nice to say about someone, then don’t say it. In that vein, I will only review books that I perceive to be a “B” grade or better. Disclosure: I will typically have the reviewed book on my Amazon.com bookshelf on the right margin of this blog. If you click on any book on the shelf and buy it, I receive a small commission; typically not enough to buy a Starbucks skinny decaf latte with a sugar-free caramel shot, but perhaps enough to buy a small coffee at Wawa.