An Unlikely Path To Profitability

Common wisdom tells us that the more efficient a bank is, the better are their results. Consequently, those who have figured out how to operate with the least amount of costs, flattest organizations and minimal overhead should do the best.

But look at highly profitable, consistent super-performers such as Synovus, Capitol Bancorp, Bancorpsouth and Cullen/Frost. All are mid-sized SuperCommunity Banks who maintain what many would consider 'unnecessary' layers of management and costs. Three of out these four banks still have individual charters to their banks (Synovus has 40!). Some do not operate on identical systems. Some do not even same the same names in the holding company family. Yes, all are outstanding performers, with consistently above-average ROA and ROE, and their efficiency ratios, while nothing to crow about, are respectable.

How would such a counter-intuitive paradigm be successful? It’s a revenue-driven strategy, built on long-term customer relationships, lower attrition rates, predictable annual income streams from loyal customers, and revenue growth.

The model that these banks practice is certainly not a low cost producer paradigm, but it is a very powerful revenue growth model. It has several benefits:

1. Preservation of entrepreneurial spirit. These banks preserve the sense of ownership among their managers by giving them true bottom line responsibility and authority. They are not only held accountable to profitability, they can also control it and measure it. This, in turn, attracts entrepreneurs to the bank, people who are willing to rise to the opportunity and own the entire unit’s performance. They run it like they own it in earnest.

2. Preservations of earning power. When the holding company needs additional earnings, it now has a large number of profit centers who can help achieve that goal. Instead of fragmenting the task by separating cost savings from revenue growth, the enterprise benefits from P&K ownership at a relatively small level. This means that each CEO can find opportunities within their own domain or line of business to contribute to the enterprise’s need. This structure has much earning power embedded in it, because the number of profit centers is great, and each one can figure out on their own how they can contribute to the enterprise’s success.

3. Preservation of speed and nimbleness. The technology industry discovered that once a business unit reaches a certain level, it loses flexibility and starts building bureaucracies. One company established a rule to guard against such hardening of the arteries by spinning off every business that reached $20 million in revenues to preserve their flexibility and not encumber it with the entire company’s structure. The banks above and others like them have achieved the same effect by allowing each bank to operate as a separate entity within the structure.

4. Continued leverage of the enterprise. The whole is still greater than the sum of the parts in these companies, because they enjoy the benefits of the entire asset size of the enterprise in elements such as purchasing power, marketing acumen, treasury expertise, internal audit controls and others. Being entrepreneurial does not mean chaos; it means out-of-the-box thinking and running it like you own it, but it doesn’t necessarily mean that each bank runs like a standalone unit. All banks, for example, share the same product shelf. But each one can select which products it will take off that shelf and stock its own branches with. It allows each business unit to customize its product offering and delivery, marketing and business support, to local market conditions, without necessarily creating major inefficiencies.

In other words, the banks that preserved their revenue growth and earnings power by truly empowering their business units to compete in the marketplace within the holding company parameters have a competitive advantage that is parlayed into faster revenue growth and slower customer attrition than others in the same markets.

There are many different ways to be successful in our industry. The one described above is one among many. It is, though, a counter-intuitive way to generate consistent earnings, because it follows the philosophy that says it’s OK to spend a dollar if you make $1.50 on it. These banks do not neglect the cost management side, but their unique power is on the revenue side. Since cost containment is a finite activity, but revenue generation has no boundaries, this is a particularly attractive strategy.