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Signature Bank posted higher quarterly profit after adding more loans and deposits.
April 23 -
Revenue is expected to strengthen at least a little in the second quarter, but cost-cutting is here to stay until the economy really improves.
April 19
Cutting expenses is easier said than done, especially for growth-starved banks.
Banks of all sizes have discussed the
Noninterest expenses are up 3% in the first quarter compared to a year earlier, averaging $38 million among 135 community banks that have reported quarterly results through Monday.
There are risks to increasing expenditures in the pursuit of growth, industry observers warn. For starters, there is no guarantee that investments will deliver the anticipated results.
"It's a zero-sum game at best," says Terry McEvoy, an analyst at Oppenheimer. "For every new hire, there could be a loss in another business unit."
Still, a number of banks are trying, including Taylor Capital (TAYC) in Rosemont, Ill.; Signature Bank (SBNY) in New York; Customers Bancorp (CUUU) in Wyomissing, Pa.; and Fidelity Southern (LION) in Atlanta.
Most expansion-minded community banks are pursuing lending teams with a proven book of business that can immediately add revenue, McEvoy says.
At the $18 billion-asset Signature Bank,
Signature has expanded its payroll and increased compensation costs in a way that reflects rising revenue, says Bob Ramsey, an analyst at FBR Capital Markets. The compensation model "basically compensates the banker based on the profit they bring to the bank and dings them for credit issues when they arise," he says.
"To the extent that [lenders] bring in business, Signature will pay them an unlimited amount of money," Ramsey adds "It's not a big base salary and there are not big recruiting bonuses."
Signature has recently hired from Citigroup (NYSE: C), lifting lenders that had been at the New York giant for "decades," Joseph DePaolo, Signature's president and chief executive, said during a Tuesday conference call to discuss quarterly results. He said Signature's hiring rate is "probably as active as it's ever been."
Signature expects noninterest expense will grow by about 10% in the second, third and fourth quarters, compared to the same periods in 2002, DePaolo said in an interview Wednesday. The higher costs will "be offset by revenue growth," he says. Newly added teams "are all generators."
First-quarter noninterest expense at Taylor Capital rose 42% from a year earlier, including a 44% spike in salaries and benefits. Customers Bancorp reported a 35% year-over-year increase in noninterest expense, largely because of investments in staffing and technology. Fidelity Southern's expenses rose 28% from a year earlier due, in part, to higher commissions tied to mortgage lending.
Still, some banks are reluctant to be that aggressive. Old Florida Bancshares in Orlando takes a "traditional" approach to compensation, relying heavily on salary and bonuses, says John Burden, the $682 million-asset company's president and chief executive.
Total loans at Old Florida rose 24% last year compared to 2011, to $498 million. Noninterest expense rose 9% last year, to $20 million. Old Florida's bank has yet to file first-quarter financials with the Federal Deposit Insurance Corp.
"The person you hire has to be able to cover his or her own direct costs," Burden says.
Bank of Marin Bancorp (BMRC) in Novato, Calif., is hesitant to hire, despite opportunities to make construction loans around San Francisco, said Russell Colombo, the company's president and chief executive. Until recently, the economic downtown had forced some lenders to work as "collection people," he said during a Monday conference call to discuss quarterly earnings.
"We are starting to see some new life the other way, and that's great," Colombo said. "But we haven't added people. We're not planning on adding."
Noninterest income at the $1.4 billion-asset Bank of Marin fell 1.4% in the first quarter compared to a year earlier. Total loans increased nearly 4% year over year, to $1.1 billion.
Cost control may be a high priority for management teams, but no banker is going to close the door on hiring a group of lenders with a proven track record of making good loans and boosting revenue, McEvoy says.
"There are banks looking for good-quality commercial banking teams," McEvoy says. "If [the lenders] have a book of business, I'm sure they can find a home for them."
