Community banks are taking another look at slimming down as historically low interest rates, tepid loan growth and regulatory costs punish their bottom lines.
Bankers discussing first-quarter results in recent weeks are eager to point out how they are going to lower efficiency ratios.
"Most banks have control on nonperforming asset expenses," says Michael Iannaccone, the president of MDI Investments. "They're trying to outsource or reduce ongoing expenses and reduce overhead to get efficiency ratios down and make themselves more profitable."
That ratio, which compares expenses to revenue, is working against many banks. The ratio seems to have increased in the first quarter compared to a quarter earlier, based on the results of banks that have reported so far.
BancorpSouth in Tupelo, Miss., unveiled a series of cost-cutting moves Monday, including a plan to reorganize into four regional offices from 10. The company also plans to streamline oversight of businesses such as corporate banking, equipment leasing and home equity lines.
"This is a prudent and an important step in increasing efficiency ... and meeting client needs," said Aubrey Patterson, the company's chairman and CEO, during a conference call with analysts. "It is an important foundational step and a long-term strategy to enhance our position in the rapidly changing financial services industry."
BancorpSouth (BXS) did not disclose its efficiency ratio, but first quarter noninterest expenses were flat compared to the fourth quarter and rose 4.4% from a year earlier.
FirstMerit in Akron, Ohio, told analysts during a call Tuesday that it has launched an efficiency program to cut $15 million in expenses this year and $30 million by the end of 2013. FirstMerit (FMER) gave no details, but Terry Bischsel, the $14.7 billion-asset company's chief financial officer, vowed to discuss specifics at an investor conference next month.
Last week, investors rejected FirstMerit's compensation plan in a nonbinding say-on-pay vote. A call to the company was not returned.
CVB Financial (CVBF) in Ontario, Calif., said it is determined to improve its efficiency, even after it managed to cut noninterest expenses by 13%, compared to a year earlier. CVB wants to get its efficiency ratio down to 45% from its first quarter level of 47.3%, said Chris Myers, the company's president and CEO.
CVB plans to reduce professional service fees, renegotiate its branch leases and close offices, Myers said.
Some banks are cutting costs after acquisitions, such as CenterState Banks (CSFL) in Davenport, Fla. The $2.5 billion-asset company's efficiency ratio hit 101% at Dec. 31. The ratio plunged to 84% after CenterState closed four branches; it plans to close another six.
Glacier Bancorp (GBCI) in Kalispell, Mont., is consolidating 11 banks under one charter as the $7.2 billion-asset company looks to lower compliance costs.
Banks are doing more than closing branches. Iannaccone says bankers are looking to make branches more efficient. "There's a lot more analysis of whether a branch has been unprofitable, or if it's been low on" assets or deposits, he says.
Banks need to be even more active at closing branches, says Jeff Davis, an analyst at Guggenheim Securities. "The industry is going to regret that it has not been more aggressive in closing branches," he says. "Technology is either the great equalizer, or, as I've heard others describe it, a cancer that just keeps growing," he says.
Small banks can only cut so much, says Ken Zerbe, an analyst at Morgan Stanley. Lower costs from foreclosures will help, but most banks must growth revenue to get more efficient, he says.
Growing revenue is a tough task, says R. Scott Siefers, an analyst at Sandler O'Neill & Partners. "Broadly, [first-quarter] revenue came in higher than we thought it would, but it is still really tough out there," he says.
Siefers says many cuts involve from branch tinkering and layoffs. "More and more companies are paring back underperforming branches," he said.
The economy "appears to have bottomed out but … we're not rebounding as quickly," says John Corbett, the president and CEO of CenterState's bank. "The longer that goes on, where banks aren't driving revenue growth, the more time we have to focus on expense control."