Making good on a promise to cut expenses, Fargo, N.D.-based Community First Bankshares announced Friday that it is eliminating 200 jobs and taking a $5.5 million charge during the fourth quarter.
The $6 billion-asset company had been hinting for weeks that a cost- cutting plan was in the works to address a slowdown in acquisitions, rising expenses, and a flattening yield curve.
"There is pressure on earnings," said Donald R. Mengedoth, chairman and chief executive. "We needed to take some steps to reduce expenses."
The plan calls for Community First to spend half of the $5.5 million charge on severance packages and half to get rid of unneeded computer equipment acquired in recent bank deals. The company expects pretax earnings to increase by $18 million annually as a result of the cuts.
Community First has already eliminated 200 jobs since March, partly because it sold its subprime lending subsidiary last quarter. The additional 200 jobs will be cut throughout the company, Mr. Mengedoth said.
Community First, which has doubled its assets in two years primarily through acquisitions, had recently relied on mergers to increase earnings 10% to 15% a year.
But like most regional banks it has hit an acquisition dry spell because sellers have not adjusted expectations to meet acquirers' lower stock prices, Mr. Mengedoth said. Since Aug. 1, Community First's stock is down 17%.
Community banks are often shocked to receive bids that are half of what they would have received six months ago, Mr. Mengedoth said. "They realize that they missed the market."
Market skittishness has also hurt fee income. Customers are unsure where to invest these days and are buying fewer stocks and trust services-two key sources of fee income for Community First.
"We're seeing customers say, 'I'm going to wait and see before I invest in this mutual fund,'" Mr. Mengedoth said.
While fee income growth has slowed, expenses have inched upward. The company's efficiency ratio hit 65.9% for the first nine months of the year, up from 60% for the same period in 1997. Mr. Mengedoth said the fourth- quarter cost reductions should bring Community First back to 60% for 1999.
Analysts said they are pleased with the company's cost-cutting plan.
"Now internal growth will get them where they need to be with earnings," said Joseph Roberto, a bank analyst with Keefe, Bruyette & Woods Inc. in New York. "Any further acquisitions would be gravy."
More acquisitions are likely. Mr. Mengedoth said he expects to announce a new deal by yearend, either in the company's primary Midwestern market of Minnesota and the Dakotas or in the Rocky Mountain states.
Community First is also said to be in the running for a group of branches that Wells Fargo & Co. and Norwest Corp. will divest in Arizona as part of their planned merger. Mr. Mengedoth would not comment on the branches, but he said he expects a decision on the divesture soon.