It's suddenly pruning season for a number of banks that have grown rapidly through acquisitions.
One of the industry's most noted community-bank buyers, Iberiabank, underscored the point Thursday when it said it was closing 10 branches as part of an expense-reduction campaign. Second-quarter earnings fell short of analysts' expectations because of higher expenses tied to bank deals and a higher provision for loan losses.
Iberiabank executives could have continued to ride on increases in revenue and loans. Instead, they decided they had to cut expenses.
"A year ago, everyone was focused on credit and capital. Now, they're focused on earnings," Iberiabank's president and chief executive, Daryl Byrd, said in an interview Thursday. "We had grown a lot the last few years and there are some areas we need to prune a bit and we'll continue this effort. … When we need to do something we just do it. "
Net income fell 35% to $12.6 million from the previous quarter though earnings doubled from a year earlier.
It is common for banks under financial duress to cut back. But it becomes more telling about the overall bank earnings outlook when even the healthy buyers begin aggressively cutting expenses.
Iberiabank officials "are very ahead of the curve, so I take these maneuvers very seriously in that other banks likely [will] follow a couple quarters from now," said Chris Marinac, an analyst at FIG Partners.
Other bank buyers including CenterState Banks (CSFL) in Davenport, Fla., First Financial Bancorp (FFBC) in Cincinnati and KeyCorp (KEY) in Cleveland discussed taking further expense reductions in their quarterly earnings calls. The $86.5 billion-asset KeyCorp plans to cut up to 5% of its 1,000-plus branches by 2014.
During some of these conference calls, analysts expressed their frustration in trying to predict a company's overall value when deal expenses rise and profits suffer.
Even CenterState's chief executive, Ernest Penner, started the conference call Thursday by thanking analysts for "being patient" despite its unpredictable performance.
"Since the crisis started, the transparency of this company has been hard to keep track of because we've had so many things going on between the massive number of conversions and acquisitions," he said. "We're beginning to feel much more comfortable with the future."
CenterState started cutting branches earlier this year after it acquired eight banks during the last three years. The company has consolidated 11 offices to date with four more closures planned for August.
Like Iberiabank, most of the branches that CenterState's is closing came from acquisitions of failed banks.
Both companies are trying to lower efficiency ratios after these deals quickly ballooned operating expenses. CenterState's efficiency ratio was 80% and Iberiabank's was 78% in the second quarter. Most banks aim to get near or below 50%.
"Did that [branch closures] get us to where want to be in our efficiency ratio? No, not quite," John Corbett, the executive vice president at CenterState, said during the earnings call. "But I do think it's been a good healthy exercise to scrub that down."
Even Marinac admitted he was "a little perplexed" by Iberiabank's efficiency program.
"But really the efficiency ratio is too high and they need to reconfigure the overhead, so the more I digest it … I think it is probably the right pill to swallow," he said. It's "just a little painful since this is confusing to some investors and analysts."
Most of these management teams cautioned that the moves do not mean they have stopped searching for acquisitions.
First Financial, which is cutting 10 branches, is still targeting growth markets to expand operations in Cincinnati later this year.
And Iberiabank recently expanded its commercial loan group in Houston. Among its seven branch closures in Florida, Iberiabank is shuttering all three of its branches in Jacksonville. Management said it is doing this so it can get bigger in markets across the state with higher growth potential.
"We have $300 million to $400 million in excess capital where we can deploy that" into acquisitions or organic growth, said Anthony Restel, Iberiabank's chief financial officer. "We're an equal opportunity shopper."