Three regional banks demonstrated the delicate balance that banks face in managing expenses.
Executives from Regions Financial (RF) and Synovus Financial (SNV) were grilled with questions about their surging costs Regions for its hiring spree and Synovus for legal expenses.
Signature Bank (SBNY), on the other hand, hired scads of people, too. But the New York bank got a pass from analysts on its soaring expense base, in part because its efficiency ratio fell as average loans increased.
The increased focus on cost-cutting comes as SunTrust Banks (STI), Huntington Bancshares (HBAN) and other regional banks across the country continue to struggle with the collapse of the mortgage-refinancing market and historically low interest rates.
At the $117 billion-asset Regions, in Birmingham, Ala., net income fell 5.3% to $285 million, from a year ago. But the investment community homed in like a laser on Regions' cost base. Total noninterest expense rose 1.7% to $884 million, fed by an increase in salaries and employee benefits.
Grayson Hall, the chairman and chief executive, noted in a conference call Tuesday that Regions had made hires during the third quarter in wealth management, "the branch distribution channel" and "relationship managers."
"We're ready to grow our revenue because you cannot generate shareholder value in the long term from expense reductions," Hall said.
But Erika Najarian, an analyst at Bank of America Merrill Lynch, noted that Regions' efficiency ratio had climbed to about 68%, from 64% a year earlier. (The ratio is a measure of expenses to revenue, so the lower the better.)
"As we look out into the near-term efficiency goals next year, could you get back to that mid-60% level?" Najarian asked.
"We really want to be careful that we don't just shoot for a particular goal in any given quarter on efficiency. We want to make the long-term decisions," responded David Turner, the chief financial officer. "We are not going to sit here and accept a 67% efficiency ratio." (Regions reported an adjusted efficiency ratio of 67%.)
Later in Tuesday's call, Keith Murray, an analyst at International Strategy & Investment Group, said he would "beat the expense horse one more time."
"In areas like wealth management, how much more hiring do you think needs to occur?" Murray asked. "What kind of revenue lift or productivity goals do you have? What is the breakeven? Does it take six months, 12 months, 18 months?"
"We make investments in people that will pay for themselves within a year," Turner said, referring to the wealth-management hires. "Different businesses have different time frames in terms of when they pay for the investment."
Regions' stock had fallen 3%, to $9.74 per share, in late afternoon trading.
Turner later pointed out that Regions' mortgage business is geared toward new purchases, rather than refinancings. Since new purchases are projected to rise, the bank needs to hire people to prepare for that business opportunity, he said.
"We want to make sure we have mortgage loan originators out there," Turner said.
Turner also stressed that Regions, like many other banks, has fired workers and chopped compensation to deal with the collapse in mortgage refinancing.
"We have reduced our back office 22% thus far, and that's primarily through reductions in temporary staff and overtime in some people," Turner said.
Still, analysts wanted more. Ken Usdin, an analyst at Jefferies, asked if Regions would reduce costs in its retail network; Regions operates about 1,720 branches.
"Is there anything you guys are contemplating on the branch and staffing side to also cut out?" Usdin asked.
"We spend an awful lot of time looking at all of our sales and service channels," Hall responded. "The branch channel is one of our more expensive channels." But, Hall said, "We don't have anything to announce today."
The theme was similar for the $26.2 billion-asset Synovus. Noninterest expense at the Columbus, Ga., company fell about 2% from a year earlier, but it rose by about 3% from the second quarter.
"Expenses were stubbornly high," Chairman and CEO Kessel Stelling said during a conference call Tuesday. Most of that, however, such as litigation costs, was beyond the bank's control, he said. Professional fees and other costs related to loan workouts and foreclosed real estate were elevated in the quarter but were expected to decline going forward.
Synovus reduced its headcount by about 6% in the third quarter, from a year earlier, and the company's plan to lower expenses by $30 million is on track, Stelling said. He also promised additional cost reductions next year.
Synovus shares had fallen 1.2% to $3.35 per share in late afternoon trading.
At the $21 billion-asset Signature, expenses rose rapidly, increasing 13.5% from a year earlier. The cost increase came as Signature continued to add teams of bankers.
But analysts and investors were unfazed because the new teams are bringing in business. Signature reported its 16th consecutive quarter of record profits as its average loans in the quarter climbed 38% year over year, to $11.6 billion. And while Signature's salary and occupancy costs increased by 12% from a year ago, its efficiency ratio fell by more than 100 basis points, to a rock-bottom 35.57%.
In late-afternoon trading Tuesday, Signature's shares were up 5.5% from Monday's close, to $101.15.