January 2017

The community banking industry has a performance metric, a ratio that is an indicator of operating leverage and performance. The ratio is simply called the Efficiency Ratio. The “ER” is a measure of how much it costs the bank to raise one dollar of revenue. As long time successful Florida banking CEO and friend Lamar Roberts puts it, “It’s also how much of the dollar the bank gets to keep!” Lamar tells me that the basic target toward which to aim is an ER of 50%, or 50 cents of each dollar. He quickly points out that “50% is pretty lean”. Not at all easy to achieve. Lamar also shared that the FDIC overall average bank ER as of 6/30/16 is 57.74% (and there are 200 banks in the U.S. with ERs exceeding 100%).

As it turns out, virtually all of my community bank clients tell me that they have ERs that could use a little improvement. There must be a community bank out there somewhere with a 50% ER but I have yet to meet them. My clients tend to have Efficiency Ratios averaging in the 65% – 70% range. For every dollar of revenue earned, it costs them 65 – 70 cents. By the way, these are outstanding and successful community banks. They are leaders in their respective communities possessing enviable leadership talent and giftedness. It’s been an honor to serve and partner with them.

Discussions with my community banking CEO clients over the years have caused me to wonder about something. If the community bank is not quite where they want to be with their ER, what are they getting in the mean time? In other words, what is their inefficiency buying them? There must be some kind of trade-off. I am suggesting that as odd as it might sound, there should be a Return on Inefficiency.

I thought I’d share with you some actual “inefficiency returns” from some of my actual community bank clients who possess supposedly less-than-stellar ERs. I’ll start us off with some verbiage here; Though their Efficiency Rating is a little high, yet …

they have an excellent succession management & executive development strategy
they were voted (again) as a “Top 10 Bank” for which to work
they leverage a well-utilized technology platform that has elevated customer experience
their leadership has embraced Emotional Intelligence as a winning differentiation strategy
they have recruited and acquired top individual talent as well as entire Teams
their investment in leadership development raises up agile, ready now leaders
their brand is considered “best of breed” (by far) in the market
their clients/customers stay and stay and stay, producing impeccable core deposit quality
So the question is, if your efficiency isn’t quite where you would like it to be… then what about your “yet”? Put another way… Don’t waste your inefficiency!


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