Can a $150 million-asset mutual savings bank do its own processing, pay people well, and be extremely profitable?

First Federal Savings and Loan of Middletown, N.Y., with 1.75% ROA, 17.5% capital, and 12% ROE has certainly demonstrated this is possible. Furthermore, with an efficiency ratio of 36%, it is outrunning the biggest banks.

First Federal is a case study for teamwork and management efficiency. The company has few layers of management. Not only that, but its employees have been with First Federal for many years and are fluent in many tasks. They can fill in for each other, and it's easy for all of them to move in the same direction.

"Individually, each of us believes we have to be prepared and capable to do whatever it is that we need to do," says Ken Abt, the company's president. "Though collectively we do things well because we can provide such synergy."

First Federal's team is relatively young. Ken himself is in his early 50s and the rest of his management team is 10 years younger or more. Interestingly, and uniquely, the top six people other than Abt are women.

"My secret ingredient is that all my key people are women. They have unique capabilities to balance so many projects, cares and concerns in their own life, and they are used to doing that. Crises do not throw the organization into turmoil because of that."

Another hallmark of Abt's management style is his reliance on improvisation and flexibility within a framework of clear value. The rules aren't be-all and end-all.

The goals and results are. While certain rules such as asset quality are nonnegotiable, improvisation within the framework is encouraged. This produces a lot less overhead and fewer layers of communication, and it works.

Tied in with this is the opportunity for individuals to attain personal satisfaction and accomplish both financial and personal goals.

Compensation is highly bonus oriented - again, an unusual feature in any mutual company, particularly a small one. As a result, achievers can realize a high compensation level relative to their peers.

The company's success in the past relied on its early introduction of home equity loans and perfection of the product before major competitors came in. The company plans to continue to be flexible in its product introduction and is bent on identifying the next winner.

Its culture is based on an ability to serve the community while staying mutual and independent, yet without sacrificing profitability. Unlike many other mutuals, profit is a key value at First Federal.

"We have a profitability-oriented decision-making process. We will not introduce products which are not highly profitable. Barely profitable products won't do. We believe that this is a rule that does not exist in our industry today. Many banks believe that if the product does not make money today, it will tomorrow. We believe that if it does not, we do not offer the program. We believe the continued existence of First Federal over the next decade depends on its financial strength.

"We can only be strong if we're highly profitable. Our industry is saddled with layers of cost because we believe that our customers would be there forever. You only need to look at the mutual funds to see that is not so. Therefore, investing in customers when they are young and unprofitable may not be an effective solution to future profitability."

First Federal is aware of the challenge ahead. "We see a basic decline in every product and service we're offering. We believe, however, that as long as we keep our focus on remaining a profitable institution, we will find the niches and opportunities as they come into existence."

That statement is truer than ever for First Federal. While extremely profitable and heavily capitalized, the company depends on identifying the next winner. Its track record indicates it can do so. Part of what increases the likelihood finding future winners is the company's commitment planning. Ken is fond of quoting Dartmouth Professor Brian Quinn.

"A good deal of corporate planning is like a ritual rain dance. It has no effect on the weather that follows, but much of the advice related to corporate planning is directed to improving the dancing, not the weather."

This article will not be complete if we do not describe First Federal's outstanding cost performance. The company has its own data processing capabilities, which is counterintuitive to me and everyone else I know.

How can a $150 million bank process effectively? True to form, First Federal has done so in an unconservative, innovative, and effective manner. Ten years ago they hired a 15-year-old whiz kid to program their system.

Since then, the staff claims, their technology has yielded a low-cost, high-capability system that has provided the company with a competitive advantage. The whiz kid, now 26, continues to maintain and upgrade the system, and efficiency prevails.

First Federal's major challenge is to retain and expand its customer base with its current limited product line, as well as identifying the next highly successful product.

Given management's commitment to survival and prosperity, and its track record, both appear quite likely.

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