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Would your bank buy this jet?

The ax is not always the answer

A corporate jet might not be right for your bank--as it was for blogger Ed O'Leary's past employer. But are you missing essential investments for the future in the zeal to cut costs? A corporate jet might not be right for your bank--as it was for blogger Ed O'Leary's past employer. But are you missing essential investments for the future in the zeal to cut costs?

Everyone understands the need for expense control these days. It’s hard to make the profit plan quarter to quarter with the net interest margin as squeezed as everyone’s is these days. Then there are all of the external requirements being imposed by Dodd-Frank. And a regulatory obsession with Enterprise Risk Management.

I have one bit of overriding advice for those of you who are struggling with whether or not to eliminate another few dollars of non-interest expense.

Consider that you probably only have one shot at doing it right over the next couple of years.

You must evaluate potential cuts against a hard-edged backdrop of whether it will harm the business by being too “tight.” 

Consider the plight of J. C. Penney, the retailer much in the news these days. Penney  rolled the dice on a major marketing revamp of its business last year. The plan failed and the company’s new management (actually the old management coming back for an encore) is undoing some things. A major concern is that the company had already eliminated a healthy chunk of its workforce--something in excess of 20%.

That may be smart if the new paradigm calls for a smaller company with fewer outlets or narrower product lines for sale. But what if it’s not? Can you simply reset the clock?  Are there enough trained, knowledgeable workers coming to work every day to accomplish the turnaround in a credible way for the shopping public?  What if the answer is no?  Then maybe the company is doomed and should be sold as quickly as possible to preserve whatever value remains in the existing franchise.

This nonbank’s quandary should have you asking: How do I know when I am starting to cut bone and muscle, rather than fat?

The little plane that could

A number of years ago I took a hiatus from the banking business and went into a corporate finance job for a large gas utility in Florida. One of the company’s major initiatives, taken in response to concerns about limited natural gas supplies, was to explore for gas along the route of its pipeline that gathered gas in South Texas and moved it through its interstate pipeline to markets in Florida.

The company opened an exploration office in Jackson, Miss., in the heart of an active “oil and gas play.”  Results were merely average in terms of oil and gas discoveries. After all, Jackson was a long way from the corporate headquarters in Winter Park and it was hard to be hands-on through phone and fax at the distance of almost a thousand miles.

The CEO decided that the company needed a corporate jet. Now, we had lots of business in Houston and New Orleans and commercial airline schedules between Orlando and the oil centers along the pipeline right of way were excellent for our sort of business travel. But getting to Jackson made for a long and tedious trip. You simply couldn’t be there and back in one day no matter how early or late your departure or arrival times.

Many in the company--including a few influential directors--were skeptical about the jet. But the CEO prevailed and we acquired a used six-passenger jet and put it into regular service between strategic points on our pipeline and Winter Park.

Within a year, the much closer attention of the top brass to the remote office in Jackson made a huge difference. Exploration successes increased and business boomed as our gas supply expanded.

We paid for that plane very quickly.

Ask the harder questions

Has your organization got the ax out? Ask yourself these questions before it’s swung:

• How often are we scared to spend money for what promises to be a major productivity enhancement? 

• How many community and perhaps larger banks in the depths of the Great Recession stinted in providing resources to those charged with working out credit deals that had gone sour? 

• Were individual bank recoveries inhibited by timid reactions, including abject failures to see the forest for the trees? 

• How does the attitude of “we can’t afford that” trump the necessities of saving the business?

Has the compliance pendulum swung too far?

We can also overdo things, in this industry.

Look at the way the compliance mindset is permeating our executive suites. The old-fashioned way of describing this is “paralysis by analysis.” But there’s more than that at risk.

Clearly, we need to be creative in banking today. And we need to be responsive to our communities and to the individual customer-entrepreneurs that bank with us.

Are we seeking ways to say yes?

Or are we instead saying the equivalent of “We just don’t know--and until we have it figured out, the answer is no?” 

Compliance routines and discipline are essential. But they shouldn’t drive the strategic plan.

Yet sadly, in many cases, they seem to be taking control. And if “control” is too strong a term, then “caution” might be an appropriate synonym.

Don’t waste a broad lesson

Belt-tightening times can also be important opportunities to send a culture message to the important stakeholders, our customers, and employees.

How so? In thinking back over the working relationships I’ve experienced between bank holding companies and their banking affiliates (I’ve held positions with each), I recall that there was always someone at headquarters who seemed to be exempt from the current expense control strictures. Often, but not necessarily, it was the marketing people.

John Wanamaker famously quipped that half of his department store’s marketing expenses were wasted. But he didn’t know which half.

In my final regional bank experience, I was with a multi-state holding company. Nothing infuriated me more was seeing some functional manager with a high sounding title at the holding company spending money--big bucks in some cases--on things that seemed ephemeral.

We at the affiliate banks were busting our humps on expense control--more work for less rice so to speak--while some department or other was spending on campaigns that had small utility to us.

It was crazy and each one of the state executives had a problem to at least some degree with the way the resources were allocated.

These are times to fix things like that. We did, eventually, but would we have maintained our independence if we’d acted more decisively or perhaps smarter?

Cost-cutting with reason, please

The point of all this is that we have to act strategically and not with a knee-jerk reaction to expense. We cannot save our way to prosperity.

Banking, overall, suffers from an income problem:

• Our net interest margins are too narrow.

• We are experiencing shrinking fee-based opportunities--or at a minimum a pronounced capping of what we are allowed charge.

• And the burdens of compliance--which are at their heart almost always non-revenue-generating--contribute nothing to growth.

There are signs of improvement. We all know that margins will ultimately reset, even if the pathway is circuitous and painful. We know that ultimately we’ll size our business models to a reasonable expectation of fee income and services provided. And we know too that the compliance mentality will eventually have the burrs smoothed off.

Meanwhile, we need to be smart about our overhead and make sure it all counts in our relentless pursuit of a consistent and reasonable ROE. We need to be able to reach the definitive turning point in our collective fortunes with some shred of a viable business model intact.

Come to think of it, what are you doing about staff training? 

I suppose the cost-cutting shears are out in that area too--though this ought to be the time to increase your staff’s skill levels.

We are acting in contradictory ways and in the process sending some really garbled messages to our customers and staff.

We only have one real shot at getting it all right.

And that means starting today.

Ed O’Leary

Veteran lender and workout expert Ed O'Leary spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and has been a frequent speaker in ABA's Bank Director Telephone Briefing series. You can e-mail him at etoleary@att.net. O'Leary's website can be found at www.etoleary.com.

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