Publications & Resources

November/December 2008
Focus: Directors Issues

The Real Performance Metric…It Takes a Balance of Profitability and Growth to be Successful

By John M. Floyd

As financial institutions continue to struggle with the current economic situation – losses on mortgage loans, shrinking net interest margin and low consumer confidence – many banks are looking for the perfect metric for success to get them to the other side of this challenging period.

Bank management in both large and small institutions needs to take a hard look at their operations to understand where they are now and determine the best plan for achieving long-term strength. In a normal economic environment, a bank should be focusing on both profitability and growth. But we all know that the field we’re playing on now is unlike anything we’ve seen since the downturn of the 1980s.

Establish a position of strength during the current downturn

In today’s market, most banks would be wise to focus on enhancing revenue. If your bank is strong while others around you are mired by mounting loan losses, you will avoid negative scrutiny by regulators and be in a better position to acquire struggling institutions when the right opportunity comes along. In addition, you will be able to retain and reward quality employees, and instill confidence in existing and potential customers.

While the specific elements of maintaining profitability will vary, based on every bank’s current situation, the following actions should be considered:

Manage your net interest margin to the best of your abilities, avoiding the temptation to take credit and/or interest rate risks to increase margin.
Stick with basic conservative lending policies; the industry is in its current state because banks got away from these policies.
Control non-interest expenses; an outside professional can provide an objective review of these expenses.
Maintain the right loan portfolio diversification to minimize over-exposure to any one class or industry.
Use well-established methods for attracting DDA accounts; avoid “smoke and mirror” tactics that may promise unachievable results.
Utilize technology, such as remote capture, to provide convenience to your customers and increase your market area without having to add facilities.

Develop a strategic plan for growth when the time is right

The answer to the question of whether or not to expand is simple. If your bank is not growing, it’s dying. A stagnate business can’t provide its employees with salary increases or growth opportunities, and it can’t remain competitive in today’s ever-changing marketplace.

However, it is important to use a strategic eye when planning to increase your organization’s capacity. Leadership should carefully examine the bank’s current focus and determine how it plays into growth plans. Do you want to be a broad-based commercial bank or a niche institution? Are there specific markets where you would like to focus all or part of your resources? It is important to make this distinction and realize that trying to be all things for all customers can dilute your ability to handle large projects and adversely affect your capital.

Once you have decided your service parameters, take time to self-examine and review your organizational structure, as well as your strengths and weaknesses. As you look at growth opportunities, make sure you have implemented best practices and streamlined your operation to optimize your resources. If adding specialized expertise is required, this is a great market in which to do so when failing institutions are dismissing talented staff.

It is also imperative to develop a sales and service culture within your organization to retain and expand existing business relationships, while adding new customers. Keep in mind that your basic day-to-day operation must be able to support this culture and may need to be re-engineered.

Sound leadership drives profitability and growth

By providing sound leadership regarding prudent loan policies and continued support through new business introductions, bank directors are strategic partners who help their financial institutions remain profitable during difficult times and champion strategic growth opportunities for the long-term success of the bank. It is important to realize that it isn’t a matter of being profitable or growing…both are essential for long-term survival.

John M. Floyd is chairman & CEO of John M. Floyd & Associates (JMFA) in Baytown, Texas. He can be reached at 800-809-2307 or www.JMFA.com.