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To curb efficiency ratios, community banks continue cost-cutting

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To curb efficiency ratios, community banks continue cost-cutting

With the first round of 2016 earnings releases behind them, communitybanks continue to manage their efficiency ratios with cost-saving efforts.

S&P Global Market Intelligence looked at results for thequarter ended March 31 among banks with less than $10 billion in assets. The analysisincludes banks that reported earnings as of May 6. The smallest banks in the analysis,those with less than $1 billion in assets, reported the highest efficiency ratioon a median basis — 73.13%. Banks with between $1 billion and $5 billion in assetsreported a median efficiency ratio of 64.75%. Among the largest community banks— those between $5 billion and $10 billion in assets — the median efficiency ratiowas 59.89%. All three groups saw median efficiency ratios decline year over year.

Sandler O'Neill & Partners analyst Stephen Scouten notedthat low rates have limited the power of the "revenue side of the equation,"leaving banks searching for cost saves in areas like branch rationalization. Regulatoryexpenses are also a factor on the expense side, Scouten said, particularly for thebanks over $6 billion that have a higher chance of moving past the $10 billion benchmarkafter a deal.

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Small banks, too, feel the pinch from regulation. "One ofthe harder things to deal with being a smaller institution is all of the regulatorycosts," said John Marzullo, CFO at HamiltonBancorp Inc. The $393 million Maryland bank reported an efficiency ratioof 89.22% for the quarter, down more than 18 percentage points year over year butstill on the high end of the spectrum.

"We have to be in line with some of the stuff that largerbanks are doing. We're obviously not as efficient because of our scale, to accommodatesome of those expenses," Marzullo said. Like Scouten, he highlighted the challengeslow rates present. "Net interest margin is getting tighter. I think a lot ofbanks are looking to noninterest income to supplement that and more innovative waysto generate noninterest income compared to just the interest side of things,"he said.

Marzullo noted that Hamilton Bancorp is continually looking forways to cut costs, including evaluating its vendor contracts and shopping aroundfor less costly options. "We're a publicly traded institution," he said."[The efficiency ratio] is a key metric that our investors are looking at andI think in this rate environment and this economy, it is something that banks areheavily focused on."

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Some banks with long-held strategies of cost-cutting manageddown their efficiency ratios despite the challenging environment. Conway, Ark.-basedHome BancShares Inc. reporteda 37.54% efficiency ratio for the first quarter, down 3.30 percentage points yearover year. During the bank's earnings call, executives touted their ongoing effortsto push the ratio lower. Donna Townsell, senior executive vice president of corporateefficiencies, pointed out that the bank is keeping a "watchful eye on expenses"as revenue inches upwards. She noted that the bank closed four branches in the firstquarter and a fifth in the current quarter.

"We have said it before, it was hard to get here and itis equally hard to stay here," Townsell said.

Scouten of Sandler O'Neill said Home BancShares has focused onmanaging expenses for years. "They've shown a propensity to manage expensesover the long haul," he said. "It's not a new phenomenon for them."

Birmingham, Ala.-based ServisFirstBancshares Inc. is another bank on the low end of the efficiency ratioscale. Sandler O'Neill analyst Brad Milsaps attributed the low figure to the factthat ServisFirst does not have a large network of branch or retail locations. Instead,the business-focused bank spreads it commercial lenders around each of its marketsfor a more efficient strategy, Milsaps said.

Banks like Seattle-based HomeStreetInc. on the high end of the efficiency ratio spectrum are hopeful thatthey can improve through the end of the year. HomeStreet reported an efficiencyratio of 84.27% in the first quarter, up 7.44 percentage points year over year.During the company's earnings call, management said the bank expects its core efficiencyratio to fall to the mid to low 60% range by the end of 2016. On the expense side,executives said that "overhang" from the bank's latest , five new office openings andthe lack of material loan sales or securities gains impacted the ratio for the firstquarter.

More broadly, Scouten said that the efficiency ratio is an "exclusionary"metric for many investors who tend to raise concerns only when the figure is abnormallyhigh or low. "Some of these banks have taken a long time to work past the lastcycle and haven't really gotten the cost out of their banks," he added.

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