Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewcost cutting the right way
Danny Buck, Regional CEO for Sterling Bank of TX, sent the following comment on the last article, "When the Bank next Door gets Acquired...". he says, "It also helps if you can quickly hire some of the acquired bank's key front line employees, especially lenders and lending assistants. A very solid $100+ million bank got acquired by a large bank, which caused disruption in the market. Similar fallouts happen often, and SuperCommunity Banks benefit greatly from them by hiring lenders with portfolios who are eager to work for a relationship organization. We are having the best year we have ever had in this region because these new lenders make a huge contribution by being motivated and capitalizing upon the acquisition fallout opportunities. Success breeds success, and other lenders in our region have taken it up a notch. Thank Goodness for mergers and acquisitions!".
Bob Hutchinson also wrote about the incentive compensation article: "Another tool I found of value is publicly posting incentive standings by geographic area and category. It adds a sense of competition among the best of the best to be number one...and also encourages the bottom of the list to do everything they can to improve. Peer pressure is a great motivator."
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Most banks go through a feast or famine cycle every few years. They focus on revenue growth, build the infrastructure and staff to get there, and then realize that they have become too cost inefficient. In addition to this natural cycle, revenue depressing external factors such as recession or margin pressure bring about the same reaction: we must cut costs.
The typical answer: bringing in consultants who look in every nook and cranny, streamline operations and provide objective advice regarding the bank's optimal cost structure. The problem: in the process, many of these consultants end up cutting through the fat and often into the bone, thereby debilitating the bank's future revenue growth. Too often, the engagement ends up in the bank being sold since it cannot grow income due to cost cuts that went too deep.
There are several alternatives to this approach. One, which is the toughest to implement, is to inculcate a well-reasoned cost cutting culture into the bank. In other words, ensure that all employees run it like they own it, turn off the light at the end of the day, and that staffing levels are well under control as a matter of course. Park National of Newark, OH is such a bank. As a result, they enjoy an efficiency ratio in the low 40s that has been maintained for many years.
Another, less integral approach, is one that has been practiced by Westamerica and other banks, often borne from a financial crisis yet blossoming into a fine company.
Here are the tenants of such an approach:
Create profit-driven vs. product goals. Product pushing goals miss the point in two ways: (a) They focus on volume, not value (b) they focus on what we need, not what the customer needs. Goaling overall unit profitability at all levels is a more effective way to create accountability at all levels and ensure both cost and revenue consciousness that otherwise is hard to find.
Use systems, technology and process to help people do their job. Once the basic infrastructure is set, continue improvement through basic management and technology tools to help your people get even better at what they do.
Compensate on overall performance. Aligning compensation with desired results is tougher than it seems. Too often we believe the incentive program is fool-proof until we get the bottom line results. Building compensation and reward systems to reinforce the strategic focus and overall financial discipline of the organization will lead to a cost-conscious culture rather than a one-time event. Paying for bottom line results or net growth when the former information isn't available vs. volume-driven goals is a good beginning.
Continue scrubbing. As those of us who have engaged in cost cutting (a.k.a reengineering) projects know, the waste grows back in within a couple of years. One way to avoid repeated projects is the expectation of on-going scrubbing. Annual reviews of product lines, vendor contracts, phone services, branch and other distribution etc. is an important discipline to achieve a cost culture that will serve the organization for years to come.
There are many ways to make a buck in our business. However, one thing is universally true: an organization with an efficiency ratio of 60% needs more revenue dollars to make the same bottom line than one with an efficiency ratio of 50%. The expense base is a rock we all carry. The key is to ensure that we have the optimal cost base to generate the most revenues while maintaining our strategic identity for our customers and shareholders alike.