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PCBB Banc Investment Daily June 14, 2013
Banc Investment Daily
June 14, 2013

Making Step by Step Choices the Dilbert Way

In a recent blog, Scott Adams, the creator of the comic strip Dilbert (known for its satirical office humor) argues government sequestration is not as evil as it's been made out to be. He contends that when budgets are slashed across
the board, departments naturally adapt. In other words, even though people may gripe about having to make difficult choices, forcing things fuels creativity, says Adams, who previously worked as a budget manager for a bank and for a phone company.
Whether or not you believe Adams is right or is joking, it's sound business practice to look for efficiencies on an ongoing basis. It's generally a bad idea to let things get to the point where you are forced to make drastic, across-the- board cuts.
To be sure, most community banks are not in the financial disarray experienced by the largest banks and have also produced a decent pretax ROA over the past 15Ys. Moreover, several segments within the community banking sector have posted strong and steady earnings. Still, community banks must be constantly vigilant about restraining costs to keep performance humming along.
This is one area where it makes sense to be smart about cost- cutting. There are really no areas of a bank that should be off limits when it comes to cost savings, so emotions must be kept in check and customer trends must be continually analyzed as the bank business model is constantly refined over time.
Many banks have chosen to close branches as a way to reign in real estate and personnel costs. Overall, banks closed 2,267 branches last year and opened only 1,149, according to SNL Financial. The result was a loss of 1,118 branches across the country, the highest level since 2005.
Beyond closing branches, there are other ways banks can become leaner, such as modifying tellers' hours to match customer traffic patterns or cutting back on non-essential positions. Outsourcing can also be a way to scale back costs and non-essential or uninteresting jobs are a great place to target.
The flip side of the efficiency coin from cost is revenue. Here, banks are looking everywhere to increase revenue. Whether that means trying out new products/services, monitoring the competition or going to more conferences to mingle with other bankers, it is a continual process to be sure.
To get started, consider a KPMG survey last year of community banks that found 93% of respondents said fee income accounts for 20% or less of their bank's total revenue and nearly 50% expected loan-related fees to provide the greatest potential to boost fee income.
Beyond loans, there are other areas to potentially generate fees (depending on the competition) that include prepaid debit cards, mobile banking, checking accounts, ATMs, credit cards and advisory-related. These take time to develop, but some can add to the bottom line.
Like the government, banks must find ways to cut costs, but be smart and diligent when cutting to avoid unintended consequences. Then, augment cuts by proactively seeking out new revenue opportunities and you have taken a few more positive steps up the long and winding performance staircase.