Expense Control Takes Center Stage at Community Banks

Expense control is getting extra attention at several smaller banks this earnings season, though the reasons for the scrutiny vary depending on the institution.

At Hancock Holding (HBHC), investors have been pressuring the Gulfport, Miss, company to cut costs. Berkshire Hills Bancorp (BHLB) in Pittsfield, Mass., unveiled plans to trim expenses after getting caught flat-footed by rising long-term interest rates.

Texas Capital Bancshares (TCBI) also drew attention with larger-than-expected expenses, but the Dallas company settled nerves by tying the rise to its current growth trajectory.

Regardless of the catalyst, second-quarter results are showing that banks must stay focused on cost control, even as credit improves and as they gain traction making loans.

Hancock's "goals are in place for ... becoming a more efficient organization," Carl Chaney, the $19 billion-asset company's president and co-CEO, said during a Friday conference call to discuss quarterly results.

Berkshire Hills reported lackluster quarterly results earlier this week, after a spike in long-term rates cut into its mortgage business.

"We didn't expect the strong mortgage market to last forever ... but we did expect it through the end of the year," Michael Daly, the $5.2 billion-asset company's chairman, president and CEO, said during a Thursday conference call to discuss the quarter.

Perhaps as a way to preempt investor criticism, Daly said the company would cut total annual costs by 4% to 5%, or $5.6 million to $7 million, starting next month. Layoffs are expected; he said the effort could also cut up to $3.2 million in annual compensation expenses.

"This is a start," Daly said, promising a review of Berkshire Hills' branch network, facilities and vendor contracts. "We have to reset for the environment that's in front of us."

Analysts said the cost-cutting moves were necessary. Berkshire Hills "has clearly reset the bar lower after a disappointing" quarter, Mark Fitzgibbon, an analyst at Sandler O'Neill, wrote in a Thursday note to clients.

Berkshire Hills also has several corporate level vacancies. The company continues to look for a replacement for former chief financial officer, Kevin Riley, who left earlier this month to join First Interstate BancSystem in Billings, Mont. Berkshire Hills also announced last week that Patrick Sullivan, who had been its top commercial lending executive, was leaving.

Hancock also has a plan in place to combat criticism that it failed to aggressively cut costs after its $1.5 billion acquisition of Whitney Holding. The company has already outlined plans to close or sell 40 branches in cities such as Houston and Jacksonville, Fla. Hancock expects to cut annual expenses by $25 million, starting in next year's first quarter.

Hancock will place a greater emphasis on commercial lending in those cities. At June 30, commercial loans rose 5% from a quarter earlier, to $4.7 billion.

"It really comes down to fine-tuning the markets, particularly the markets where we don't have a significant [retail] market share … but they're large markets and growing," Chaney said during the Friday conference call.

In Houston, Jacksonville and Tampa, Fla., Hancock is "redeploy[ing] the expense base that previously was attributable to the retail branch network we inherited or acquired ... into a specific commercial-focused effort," Chaney said.

Unlike Hancock and Berkshire Hills, the $11 billion-asset Texas Capital resisted the urge to announce a cost-cutting program, even though its expenses spiked in the second quarter.

Noninterest expense at the $11 billion-asset company rose 27% from a year earlier, to $68.7 million. Management said the rise reflected growth opportunities.

Compensation rose 50% from a year earlier, to $45.2 million, as Texas Capital's loan officers received higher commissions. Higher costs were "directly related to the success we've experienced in recruiting, build out and new product expansion," Peter Bartholow, the company's chief financial officer, said during a Wednesday conference call.

Increased originations — loans rose 20% from a year earlier — also forced Texas Capital to record a higher loan-loss provision, which increased sevenfold from a year earlier, to $7 billion.

"Strong growth required a significant increase in our provision," George Jones, Texas Capital's president and CEO, said during Wednesday's call.

"The second quarter was probably the best recruiting and hiring quarter we've had in some time," Jones said. "We're going to see some additional expense due to that, but it will pay off in spades on a go-forward basis."