Higher Personnel Costs in 3Q Will Pay Off in Long Run, Bankers Say

For some regional banks, it's a situation of spending money to save money.

Huntington Bancshares. Susquehanna Bancshares, Zions Bancorp.and several other regional players reported higher salary and benefit costs in the third quarter compared to a year earlier, largely due to severance paid to employees whose jobs were eliminated when the companies realigned operations or made upgrades to technology.

In other cases, personnel costs rose as banks added staff to chase new business.

Either way, the increases in personnel costs come at a time at when banks remain under intense pressure from analysts and investors to keep expenses in check. But executives at these banks insist that the additional spending in the third quarter will ultimately pay off in the form of higher revenue and improved efficiency.

The $19 billion-asset Susquehanna Bancshares in Lititz, Pa., recorded a $1.6 million severance expense in the third quarter, after it realigned its lending groups into geographic regions. Those led to a 10% increase in salaries and benefits, but Susquehanna expects the changes to result in yearly savings of $5 million on salaries and benefits, starting in the first quarter.

"The realignment... is not simply to create greater efficiency," William Reuter, Susquehanna's chairman and CEO, said during an Oct. 23 conference call. "While some of the initiatives will result in cost savings, it is also designed to improve our ability to... grow revenue."

The $59 billion-asset Huntington recorded about $19 million in severance costs as a result of its plan to lay off 200 employees and close 26 branches. Those moves were made as the Columbus, Ohio, company integrates 13 branches it acquired earlier in the year from Bank of America and continues to replace traditional branches with smaller ones in grocery stores.

"We continue to make investments in the franchise," Mac McCullough, Huntington's chief financial officer, said during an Oct. 17 conference call. "We're adding the Bank of America branches and we're accelerating our investments in stores."

Huntington's salary and benefit expenses rose 21% from a year ago to $275 million. The elevated level of expenses will continue through next year at Huntington. McCullough projected that its total 2015 expense base will rise between 2% and 4% from this year.

Banks are also spending more to overhaul branch locations with new technology that allows customers to conduct more transactions without the help of a teller. The result is that banks is need fewer employees, and they're paying severance to those who have been terminated.

The $56 billion-asset Zions Bancorp., in Salt Lake City, recorded $5 million in severance payments in the third quarter. Separately, Zions added staff to work on technology projects. Those two factors contributed to a 7% increase in salary and benefit costs to $246 million.

Other banks went on hiring sprees or paid higher sales commissions to existing staffers to chase loan growth. The payoff is potentially higher revenue in the longer term, said Tim Reimink, director of performance advisory services for financial institutions at Crowe Horwath.

"Revenue is growing slower, so banks are looking for ways to find faster growth, particularly in commercial and asset-based lending," Reimink said. "That does require hiring groups of lenders who can bring in the business."

The $32 billion-asset City National Bank in Los Angeles said salary and benefit expenses rose 10% to $142 million as it incurred "additional incentives paid on higher-than-expected revenue, increased salary expense related to the addition of new colleagues and higher benefit costs."

"Since we are a pay-for-performance organization ... as we add more people and they bring in more business, there's more incentive compensation," Chris Carey, the bank's chief financial officer, said during an Oct. 23 conference call.

The $4.2 billion-asset Eagle Bancorp, in Bethesda, Md., saw higher salary costs in the third quarter, as a result of loan growth booked earlier in the year, Ron Paul, chairman and chief executive, said in an interview.

"We have a very extensive incentive plan and a lot of those incentives don't kick in until the third quarter," Paul said. "You're just reconciling that to the success of our loan growth."

Increases in personnel costs at some banks were largely a result of acquisitions. At the $8.4 billion-asset Provident Financial Services, salary costs rose 18% to $25 million. The Jersey City company on May 31 closed its acquisition of Team Capital Bank in Bethlehem, Pa. Provident's higher personnel costs were largely, although not entirely, due to that deal, said Rick Weiss, an analyst at Boenning & Scattergood.

Some bankers took pains to assure the investment community that, while their compensation costs are growing, they're not going to let their expense base get out of hand.

At the $18 billion-asset BankUnited in Miami Lakes, Fla., salary and benefit costs rose 13% to $50 million. John Kanas, its chairman and CEO, told investors during an Oct. 23 conference call that the issue of noninterest expenses was at the top of mind.

"To be frank with you, and I think you've heard me say this before, we have paid a lot of attention to the run rate of noninterest expense

in this company for the last four or five years," Kanas said. "We're looking over expenses pretty carefully. We expect the growth of noninterest expense to slow down."