Rearranging the Org Chart

Laurie Stewart (seated), president and CEO of the $355 million-asset Seattle-based Sound Community Bank, is surrounded by members of her leadership team: Matt Moran (left), executive vice president and chief credit officer; Kelli Nielsen (center), senior vice president, retail and marketing; and Matt Deines (right), executive vice president and CFO.

Hard headcount lessons from downsizing, right-sizing or restructuring staff for the future

By Elizabeth Judd

In December, Citigroup announced plans to eliminate 11,000 jobs in an effort to save $1 billion. Community banks may not be meting out anywhere near this magnitude of pain, but many are nonetheless taking the difficult step of reducing headcount in response to harder economic and increasingly competitive times.

Because community banks operate on a completely different scale than megabanks, they often can trim jobs through attrition or reconfigure jobs according to customer traffic patterns. Take Brattleboro Savings & Loan Association: This $180 million-asset Vermont community bank recently converted a few positions from full- to part-time to trim expenses while making sure the teller lines were amply staffed at peak hours, says President and CEO Dan Yates. The adjustments came on the heels of a 10 percent staff reduction in 2009.

Whether it’s hundreds getting pink slips or just a handful of employees receiving severance packages, decisions like these are never easy. “It’s tough because we’re a small bank and the employees are not just faces. I interact with them all on a daily basis,” Yates says of Brattleboro Savings’ staff reductions. “It’s one of the most painful things I’ve ever had to do.”

Job reductions

Seattle-based Sound Community Bank, which has $355 million in assets, reduced its workforce by roughly 10 percent in 2010. “Washington state came into the downturn a little late, and we thought we could escape—but we couldn’t,” explains President and CEO Laurie Stewart. The bank eliminated seven positions out of 77 in order to maintain capital levels. “We had more staffing than we had things to do,” she says.

During the downsizing process, Stewart rethought roles completely. For instance, Sound Community Bank had several lenders specializing in residential, consumer or business loans. In 2010, these positions shifted to processors capable of issuing any type of loan necessary.

When it came to deciding which positions to eliminate, Stewart asked every branch manager for advice and found that many decisions could be made with little or no pain. For instance, she spoke with one branch manager in the midst of recruiting a part-time teller who said that the position really didn’t need to be filled. In addition, some employees were converted from full- to part-time, and other reductions were accomplished through attrition.

Staff restructuring isn’t easy, says Stewart, but Sound Community Bank managed to slash salary expenses 10 percent while maintaining strong ties with those employees who lost their jobs. “The biggest lesson I learned,” she says, “is that too often we just merrily roll along and think we’re staffed right. It’s important to question.”

Stewart didn’t hire a consultant for help with downsizing decisions because she felt that this wasn’t the time to spend additional money. Charlie N. Funk, president and CEO of MidWestOne Financial Group Inc., offers a different take, arguing that the presence of a disinterested outsider added credibility to the process of eliminating roughly 33 positions (a 7 to 8 percent overall reduction) at the Iowa City, Iowa, community bank. He emphasizes that the bank didn’t “blindly” accept all the consultant’s recommendations, but found most worthwhile.

Funk also stresses the importance of using a consultant whose views are consistent with the community bank’s overall culture. In MidWestOne’s case, the consultant had worked with the bank at least three times in the past 15 years.

Changes at MidWestOne were precipitated by a “merger of equals” that occurred in 2008: A year after the merger was complete, it became clear that there was excess staff in many offices. Before eliminating positions, the bank looked at transaction counts and how employees in the retail offices were spending their time.

A year before the consultant began studying the situation, Funk signaled to employees that changes lie ahead. “When I’d assess how our company was doing, I’d say, ‘We have a lot of people.’ And I shared peer studies so anybody who was listening … knew this was something management was going to address.”

Today, the $1.8 billion-asset community bank has 385 full-time employees in 25 offices in 19 communities. In 2011 MidWestOne had a record year in terms of earnings per share and is on track for another record year in 2012. Most importantly, says Funk, the bank’s efficiency ratio is now below 60 percent—a very good sign for a company of its size.

Rethinking roles

Community National Bank, which is based in Waterloo, Iowa, and has $280 million in assets under management, eliminated 15 percent of its employees in 2009 in response to the economic downturn.

To make these tough decisions, Community National looked at which departments were profitable and which cuts would least affect customers. Stacey Bentley, the bank’s Cedar Valley market president, advises against entering into any downsizing with a specific percentage decrease in mind; some cuts aren’t worthwhile from a business standpoint. “Once you compromise your customer service—your ability to wait on customers—you’ve made the wrong decision,” she says.

Not all restructurings are spurred by economic forces. Some are prompted by retirements and other changes in employee circumstances.

Fred Brashear has led Hyden Citizens Bank, which has $130 million in assets, for more than 30 years. As CEO, he and colleagues from his original team “grew up together” and are now reaching “the stage of thinking about retirement.” At the same time, the community bank, based in a city of 385 in southeastern Kentucky, is contending with external factors that make a re-evaluation of staff positions and responsibilities timely.

“We have regulatory pressures, costs, and we’re a very dominant coal-driven economy here,” he says, noting that coal jobs are disappearing as other forms of energy gain ground.

In the fall of 2012, Brashear hired a consultant to perform a personality profile and skills inventory for the bank’s 35 full-time equivalent employees so he can develop an effective succession plan. When someone retires, he notes, Hyden Citizens Bank typically has to identify and retrain existing talent because few outsiders are flocking to the area.

Brashear recommends annual personality testing to identify talent and remedy any weaknesses through training. “The challenges of community banking are increasing. We have to get smarter and better,” he says.

John Bothof, president of Northwest Bank in Omaha, Neb., recently had two senior employees retire. Although the $135 million-asset community bank was sorry to see these veterans go, Bothof viewed their departures as an opportunity to broaden the skills of another employee by training that individual in construction lending.

For Bothof, preparing well in advance for employees to retire is critical. “We have not lost one customer because of the retirements,” he says. “And that’s because we had people who were qualified and anxious to take on the functions when these individuals retired.”

Going forward

The silver lining to any restructuring is that it can allow a community bank to rethink its business and structure in a fundamental way.

Stewart points out that the painful downsizing at Sound Community Bank “really changed the bank’s culture.” She continues: “We’re not counting status by how many employees a branch has. Now people are proud of how many transactions they can accomplish with less staff.”

Many community bankers find that culture change is easier if the restructuring isn’t formulated exclusively at the top. When Brattleboro Savings & Loan made cuts, Yates left many of the decisions to his senior staff. Including them in the restructuring process served as a catalyst to change some longstanding practices within the bank.

“For a long time, we’d been too lax in our hiring,” says Yates. “If someone said, ‘We need another body,’ we’d say, ‘OK.’ But then we found that there were too many employees here—and the over-staffing was costing us too much money.

“The restructurings taught us we need to be careful about our personnel and not allow this laxness to creep back in,” he concludes. “I know I really don’t want to ever have to cut jobs again.” endmark

Elizabeth Judd is a financial writer in Washington, D.C.