My firm has set out to test conventional wisdom that says midsize banks are not here to stay and their only salvation is to grow bigger and bigger - to become a megabank or be absorbed by one.
Specifically, we wanted to identify the most viable positioning strategies, the new paradigms for success, as well as to understand the "best practices" in all key lines of business and functional areas.
The results from a first-phase study of 24 midsize banks clearly showed they can indeed survive and prosper, and based on factors not related to size. The theme of this article is to illustrate how one of the participating banks - the $4 billion-asset Old National Bancorp in Evansville, Ind. - executes one of the best practices: a successful merger strategy, while maintaining an enviable earnings record.
Why Midsize Banks Can Survive
Before going into the specifics, allow me a few comments on the reasons that midsize banks can survive.
First, they have the resources to devote to the new products and services in their selected niches, or they can provide them successfully via third parties when these offerings are not their forte.
Second, midsize banks are small enough to become highly versatile, flexible, and quick to respond to the needs of the communities they serve.
Third, by identifying and involving themselves with the communities they can offer a full range of value-added financial services in a one-on-one customer-focused manner.
Furthermore, they can serve with a staff with know-how and experience in the community, with less turnover of calling officers and offering consistency of services. Because of this consitency, they can be more responsive than either megabanks or mass-marketing nonbanks.
Fourth, midsize banks are becoming better managers of change, by motivating, training and providing strong incentives to employees with broader skills in account management, responsiveness, adaptability, and crativity.
Fifth, with today's state-of-the-art, cost-effective technology, they can compete effectively with megabanks in technology as well. Megabanks, on the other hand, tend to become natural victims of the arrogance of power because of their size, and hence attempt to do everything, as Citibank once did.
We know, however, that no one can do everything well. It appears that Banc One, which once took pride in community orientation and decentralization, has reached that point lately.
Megabanks, to become successful for the long haul, will need to become truly bigger versions of midsize banks, unless they choose to become investment banks like J.P. Morgan, nonregulated financial firms, or break themselves into autonomous stand-alone pieces by market/product sectors.
Old National Bancorp was founded in 1983, with Old National Bank at its nucleus, which is itself over 150 years old.
After nine years and 26 mergers, Old National is the largest bank-holding company with headquarters in Indiana. It has 19 affiliates serving customers in Indiana, Illinois, and Kentucky.
In addition to the affiliate banks, Old National has subsidiaries which offer data processing, operations, real estate, and insurance services, and is in the process of forming an investment services subsidiary and a trust company.
In variation on the super community banking theme, the affiliate banks are organized around a "cluster concept." This means that larger, centrally located anchor banks serve the smaller affiliates tha surround them in such as human resources, audit, and credit administration, and this structure covers day-to-day reporting.
In the words of John D. Rockefeller, the secret of the bank's success is that they "do the common things uncommonly well," pretty basic and not too flashy. Dan Mitchell, the chairman of the company, often quotes the old Chinese proverb: "Make haste slowly."
Old National practices this principle when executing the merger strategy, particularly when it pertains to people. Old National's employees can be described as conservative, traditional, hard working people who take pride in traditional values like people and community commitment and service quality.
The bank is also not so quick to follow the financial fashion trends of the moment. But that does not imply resistance to change. For example, it is comverting affiliate banks to a common DP system, consolidating backroom functions in selected areas to achieve economies of scale. And it is offering nontraditional products and services like insurance and investment products.
Since its nonmetropolitan, midwestern market is not a high-growth area, Old National grows primarily through acquisitions. It has intentionally stayed out of larger metropolitan areas, because it is reluctant to have the No. 5 or No. 6 market share. It prefers to go in as No. 1 in an area, or at least No. 2.
And it eschews earnings dilution. What it is looking for is sustained and consistent earnings in its merger partners - not just last year's earnings or this year's.
What is remarkable and noteworthy about the merger approach is that it does not follow the prevailing slash-and-burn merger practices that result in drastic employment cuts and downsizing. Yet Old National maintains enviable performance records. The most important difference is in the people issue.
In each merger partner, they first look for good cultural and philosophical fit - conservative management, high credit quality, and a strong sense of business ethics. The reason is that they desire to keep local management and employees in place.
Because they believe that continuity of employees is of utmost importance in a community bank, the last thing they want is a new CEO or management team moving in right after the merger.
As a rule, Old National does not change the acquired bank's name.
Old National also keeps fully functioning boards of directors in place, not advisory boards. However, they place greater emphasis on the board's responsibilities in business development. The track records of the local boards show that the directors indeed play a crucial role in the success of the affiliate banks.
The authority levels within the bank also remain the same after the merger. Each bank has autonomy in product development, pricing, lending (all credit decisions are made at the bank level), staffing levels and hiring, promotions, and employee titles.
Changes are limited to areas where specialized expertise is required, such as investment portfolio management, data processing, deposit operations, and salary and employee benefit administration.
Because they consider that the most important component in the merger process is the employees themselves, they begin by recognizing them on the day the merger is announced. They make sure that the employees are informed of the merger before any public announcement is made.
On the very evening of the announcement, they meet with all employees and their spouses or guests to welcome them to the Old National family.
At this point, let us reflect a moment on the reaction of what a merger can mean to employees:
A. Isn't this great for the shareholders!
B. Gee, I wonder if our directors will remain on our board?
C. What about me?
If the answer is A or B, perhaps we need to revisit with some of the employees. We all know that the real answer is C. Therefore, Old National makes it a point to address the employees' concerns out-front -- job security and employee benefits are always major issues.
Employees are informed right away of their commitment to no merger-related layoffs. They also assure them of no overall loss of benefits. They review all the human resources policies and benefit programs of Old National including salary administration, pension plan, profit sharing, insurance, etc., and answer any questions the employees may have.
The meetings are very well received by new employees, planting the seeds from which a continuing relationship can grow. Old National officials convey the message that the merger is not just a business transaction. It is the germination of a new relationship among the employees who are the most important ingredient of success.
The human element of consolidation is by far the most sensitive and important part of the process. The bank's philosophy and practice in this area has been a major contributing factor in any new merger negotiation and in the continuing positive relationships between the corporation and the affiliate banks.
Old National has never initiated a merger-related reduction in staff. And this principle is equally applied in the consolidation of operational functions. All such consolidations are viewed from the perspective of multibank centralization as opposed to the perspective of one bank.
It is to be noted, however, that Old National recognized its merger policy will not achieve the financial benefits of consolidation as rapidly as would be realized through forced staff reductions.
The bank leaders believe that the short-term financial considerations will be outweighed by the increased morale and loyalty of the entire staff, and an enhancement of the positive image of Old National Bancorp in their affiliate communities.
Because consolidation will eliminate certain jobs at affiliate banks, thus creating jobs an "excess" number of employees, certain personnel policies have been enacted that deal with it - but alwyays with a human touch. These might include a hiring freeze, early retirement incentives, or transfers of individuals to consolidated sites.
This, combined with normal employee turnover and development of individuals for other positions, significantly reduces the staff surplus in a reasonable time.
Old National also communicates that this commitment is a two-way street. They ask for an employee commitment to be more receptive to change, to be willing to undertake new training opportunities, to consider internal job vacancies that are posted so all employees have an awareness of opportunities as they arise.
This approach seems to serve them well with very few exceptions. Since they are not a "fat" organization to start with, the problem is not usually insurmountable.
Furthermore, with the expansion fo new services, with continuing emphasis on credit documentation and quality, and with increased regulatory burden, the excess people are usually absorbed very quickly.
Old National is fully aware of the fact that the commitment to people may cost more in the short term, but the continuing strong and consistent earnings performance indicates earnings performance indicates that this investment in people comes back many times over through customer satisfaction and a superior return to their shareholders.
Can Old National continue to be successful and retain that human touch? I believe it can. The overriding emphasis on people has nurtured a culture that embodies a loyal, well trained, knowledgeable staff offering high levels of service to customers.
This will lead to more satisfied customers desiring more services, and that means more relationship customers. This in turn will lead to the long-term success of all affiliate banks.