Case study of savings and loans association, International Economics

Argus Savings and Loan Association began in 1956 in Hometown. As is typical of savings and loan associations, Argus accepts the savings of individuals and organisations and uses these funds to make both short and long term loans, mostly within the local community, for the purpose of purchase, construction or repair of homes. In addition, Argus makes mobile-home loans, invests in government securities, and operates a subsidiary corporation engaged in developing mobile-home villages and other property markets. From the interest collected on investments, the association covers its operating expenses, pays earnings to savers for the use of their funds, and sets aside reserves for protecting itself against possible future losses.

Over the years, Argus moved its office several times to accommodate growth and expansion. However, throughout its history the association has remained essentially a suburban organisation. In 2004-5, a branch expansion programme was undertaken. Now seven branches have been opened and four others are contemplated within the next two years.

Argus is a small-to-medium sized organisation with nearly £85 million in assets, 38,000 savings accounts and 4,700 loans on record. Argus employs ninety-two people in the headquarters and seven branches. The main branch, Newgate, is the largest and has twenty-three employees; the other branches are smaller satellite operations. All branch managers report directly to the company chief executive.

Elaine Edwards, manager of the Newgate branch, opened the confidential memorandum from Adam Taylor, chief executive of Argus Savings and Loan Association. The memo explained that the failure to keep expenses in line with income had caused the association to fall far short of its objectives for the first six months of the year. Some controls had been imposed previously. Two months ago a total ban had been imposed on new or temporary hiring and salary increases. Promotions were not to carry any salary increases for the next six months, although the company hoped to make appropriate adjustments as soon as it achieved reasonable profitability.

The memo further explained that, as was typical of most savings and loan associations, Argus had long-term fixed investments at relatively low interest rates and short-term liabilities at higher rates, which could create an imbalance. Over the last three months, customer premiums, prize contests and extensive advertising, all originally designed to attract customers, had been eliminated in a move to rectify the situation. As of the last interest payment date Argus' two highest interest rate accounts had been eliminated. These actions reduced new savings somewhat, but the spread between mortgage yields and savings costs was still narrower than Adam Taylor had anticipated.

As a result of these difficulties, Taylor's memo stated that it would be necessary to impose more stringent controls on expenditure, especially on personnel, during the second half of the year. By next Friday, all department heads in headquarters and all seven branch managers were to reduce by ten percent the number of staff they had at the end of the first half of the year. A list of those to be laid off must be on the chief executive's desk by Friday morning at 10 a.m.
The memorandum was written in the style typical of Adam Taylor: short, terse and dictatorial. Taylor liked to keep tight control over the running of the association and rarely consulted management on issues of company policy and planning. In truth, he was proud of the bureaucracy he had created. Indeed, no one could remember the last time he had visited a branch office. In his fifteen years as chief executive, all of Taylor's decisions had been based solely on detailed examination of the financial balance sheets. Also, whilst other savings and loan associations had taken advantage of changes in the law allowing them to diversify into house surveying, legal aid, and general purpose loans, Taylor steadfastly maintained that Argus should focus all its energy on its traditional areas of home loans and savings. Despite their reservations about this strategy, most branch managers had learned not to question Taylor's authority.

Before she had completed reading the memo, Elaine Edwards was on her way to Adam Taylor's office. "Surely this does not apply to my branch," she said, as she was ushered into his office.
"I'm afraid it does," Taylor replied. "If I exempt you from these economy measures, then every branch will want to make out a special case. That was the problem two months ago when I told everyone to bring spending into line with revenues. It simply didn't work. That is why I decided on prescribing action that is certain to reduce our expenditures."

Elaine could not agree. "I have built the Newgate branch to be the largest and most efficient unit in the organisation. We had many problems when I took over from Dave Allen. Now all our records and reports are up to date and we have established long range plans. I have spent a great deal of time building my team of twenty-three employees into the most efficient unit in the entire organisation. To my mind we are carrying some of the less efficient branches."

Taylor thought for a minute and then responded. "Yes, Elaine, you have done a great job. But you must remember that you have the advantage of being in a high-income suburban area and therefore have substantial savings potential there. The other branches are in less favourable and more competitive areas and have a much tougher time. You must remember that our branches operate within different kinds of environments. We have to face this difficulty together and do our share - that's the Argus culture."

Elaine persisted: "But as long as we meet and exceed our savings and new loan goals and keep within our expenses ratio, which I assure you we can do, we should be exempt from cutbacks. I can see the logic of making the less profitable branches adhere to these cutbacks, but surely it's madness to penalise a prosperous branch to subsidise money-losing ones? It's also important to realise that our main competitor, National and Provisional Savings and Loan Association, is planning to open a branch in Newgate next year. Now is not a good time to weaken our own branch in Newgate. We need to get new customers, not lose staff."

"But if your branch were left untouched, even more drastic cuts would have to be made in other units," Taylor replied. "It is they who most need more money to survive. After all, we are all part of the same organisation. I have to consider the best interests of the entire organisation and not just your branch." Elaine Edwards stood up. "Nevertheless, your cutbacks would wreck the morale and efficiency of my branch. I have worked hard to make it profitable. My people have a real commitment to Argus and I have an obligation to them. So don't expect a list from me on your desk on Friday. I don't intend to fire anybody. If there are to be any redundancies in my branch you will have to start with me," Elaine said and quickly left the room.

Posted Date: 3/19/2013 6:41:07 AM | Location : United States

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