Banks can't cost cut their way to prosperity, though it is certainly a step in the right direction.
A recent Fiserv study found that lower expenses were one of the most-significant factors behind sustained profits at top-performing banks. To achieve greater efficiency, community banks must evaluate everything from branch networks and staffing to smaller items like moving clients to electronic account statements, industry experts say.
"If you've got a lower expense foundation then you don't have to take a lot of risk on the asset side of the balance sheet," says Kevin Tweddle, Fiserv's president of bank intelligence solutions. "Revenue per employee and revenue per branch is where these top performers excel."
Fiserv (FISV) identified 234 top performers — all but two had less than $10 billion of assets — based on risk management, profitability and growth from 2008 to 2012. More than 80% of the banks were in the Midwest or Southwest, reflecting the relative health of those economies, which are buoyed by agriculture and energy sectors.
High-performing banks had a lower cost foundation — calculated by dividing interest and overhead expenses by average earning assets — than other banks. The average five-year efficiency ratio at successful institutions was about a third lower than the median bank, Fiserv found.
Ensuring cost cutting happens requires building a "culture of accountability," says Brad Smith, president of Abound Resources. This requires providing meaningful data on costs and revenues to branch managers, then empowering them to make decisions, he says.
"One of the best practices is delegating ownership to someone beyond the CFO," Smith says. "If the CFO is the only one who really cares about costs, then that's an awful lot that the CFO has to micromanage."
Foot traffic at branches has declined in recent years as more transactions are completed remotely. Several banks, including Hancock Holding (HBHC) in Gulfport, Miss., and Old National Bancorp (ONB) in Evansville, Ind., have unveiled plans to close large numbers of branches to improve efficiency.
Employee compensation and benefits and branches total about two-thirds of noninterest expenses, Tweddle says. Top-performing banks in Fiserv's study aimed for "controlled growth" and did not over extend their branch networks during times of economic growth.
Instead, they invested in technology, such as online banking. "The key to any business is being able to predict the future and that's what these banks did," Tweddle says.
Closing branches and whittling down staffing are obvious ways to cut expenses, but management teams at smaller banks are often reluctant to make those cuts, industry observers say. Still, there are other, less-drastic means to reducing overhead, they say.
More community banks are conducting better due diligence and accepting bids for transactions, Smith says. It is also important for small banks to outline expectations for new products, including the justifications of the purchase and projected benefits and expenses, he adds.
Community banks should also complete annual cost and performance reviews of their biggest vendor contracts to make sure expenses remain within expectations. Smith says that banks often get overcharged near the end of a five-year contract — and executives cannot explain why.
Smaller banks should "build a bias among employees and customers toward electronic transactions," says Trent Fleming at Trent Fleming Consulting. This includes providing incentives to customers who sign up for things like monthly electronic statements. Such changes may save a small amount each month, but it adds up over time.
Community banks need to make sure that compensation for certain jobs is appropriate, Fleming says. For instance, some banks over pay their tellers because the same employees stay in those posts for a prolonged period of time and get raises each year.
To correct this, banks should have clear job descriptions and expectations that include salary caps. They also need to offer a clear career path for employees to move up in the company and increase their pay, Fleming says.
"Community banks get paralyzed by 'this is the way we've always done it,'" Fleming says. "Cost cutting has to be a philosophy. The best banks keep it at the forefront."
More multibank holding companies are looking to cut costs by using the same computer systems across all of their banks, including Dentel Bancorp in Victor, Iowa. The company's $50 million-asset Victor State Bank topped Fiserv's list in revenue per full-time employee and cost foundation, and its $90 million-asset Corydon State Bank had the lowest five-year average efficiency ratio, at 21.27%.
Dentel is family owned, so "we treat every expense like it is coming out of our own pocket," says Robert Dentel, Victor State's president. "You can always be more efficient, but sometimes you have to get creative."
Dentel's management has converted its six banks to the same computer system, which has saved some of the banks up to $100,000 a year. The company only buys technology that works for all of the banks.
Additionally, management at Dentel's banks utilize the strengths of their fellow presidents. For instance, Dentel says he enjoys managing investments so he handles these portfolios for all of the banks.
"Bankers have had trouble making money from their investments, and on their loans, so they have found out that being efficient was a way to increase profits," Dentel says. "The difference between us and a lot of bankers is we've been doing it the entire time."