When It Comes to Efficiency, How Low Can You Go?

When it comes to the efficiency ratio, Chris
Nichols believes the magic number for banks will soon be 40%.

“That number is derived from our internal
projections, [based on] how fast banks were adopting technology and how fast
banks were reducing costs,” says Nichols, the chief strategy officer at $17.4
billion asset CenterState Bank Corp., based in Winter Haven, Florida. Its
efficiency ratio was 50.5% at year-end 2018.

Nichols’ 40% projection reflects a range of 38% to 45%. “We look at where the puck is going, we think the industry starts to stabilize right around a 40 [percent] or sub 40% efficiency ratio,” he says.

A bank’s efficiency ratio measures how
effective it is at managing costs in relation to revenue, so it’s an important
metric to consider when examining a bank’s performance. Just 102 banks had an
efficiency ratio of 40% or lower as of year-end 2018, according to data from
S&P Global Market Intelligence, representing a mere sliver of the 5,200
financial institutions insured by the Federal Deposit Insurance Corp.

Many of these banks don’t operate under a
traditional model. For example, $3.9 billion asset Merrick Bank Corp. boasted a
23% efficiency ratio at the end of 2018; the South Jordan, Utah-based bank
primarily issues credit cards and interacts with customers directly rather than
through branches.

But some operators offer traditional banking services while gaining efficiency in their operations.

Over the past five years, Seacoast Banking
Corp. of Florida has seen significant improvement in its efficiency ratio, from
81.4% at the end of 2013 to 56.4% at year-end 2018. The metric dropped even
further, below 50%, in third quarter 2019.

That improvement is the result of doing
“thousands of things better,” says Dennis Hudson III, CEO of the Stuart,
Florida-based bank.

Acquisitions have played a role, in tandem with a concerted effort to shed branches. About five years ago, the bank had 52 offices at one-third of its current asset size, says Hudson. Today, the $6.9 billion asset bank has just 49 locations – despite closing seven deals since 2014. Branches and physical interactions are still an important part of Seacoast’s customer interactions, but “we can be a lot more strategic in terms of where [branches are] located and what we do in them, and get a lot of operating leverage that we can create if we do this right,” says Hudson.

Overall, Seacoast is “de-investing in parts of
the organization that are no longer relevant to our customers, while we take a
relatively small part of that de-investment and invest it [in] digital [and]
data analytics,” says Hudson. “That’s probably the highest-level strategic reason
for this change that is occurring in our expense ratio.”

Seacoast has also increased its use of robotic
process automation, both in its back office and as part of its M&A
strategy. The company prefers small targets; RPA helps it quickly integrate

Banks are increasingly using automation to save time and money, allowing employees to focus on other tasks and reducing headcount as they grow. Almost three-quarters of executives and board members responding to Bank Director’s 2019 Technology Survey said that creating a more efficient operation informs their bank’s technology strategy; 68% invested in automation in 2019 to work toward this objective.

Hudson says implementing new technology is the
easy part; it’s harder to get 900 employees on the same page. With that in
mind, Seacoast organizes a regular training session so everyone’s on board.

“Every two years, we get all of our employees together – it used to be in one room, now we do it in three locations across the state – and we spend half a day with all of those employees, training them on the strategy we’re executing,” says Hudson. Employees work together in eight-person groups to understand the overall strategy and their role in executing it. Groups are mixed, so employees interact with other departments; one person is trained to lead the exercise. Materials map out the strategy so employees can visualize how it all fits together, including their role in it. “It’s really a fascinating process [that] helps our people align and engage with the strategy and the direction of the organization,” says Hudson.

While Seacoast has made tremendous progress,
Hudson doesn’t believe a 40% efficiency ratio is a reasonable goal for his bank
in the near term; that would require a lot more automation, he says.

But he agrees that efficiency ratios are trending
lower. “We have the ability to get there today due to technology and automation,
and if you’re not doing that today, you’re going to get left behind,” he says.
“There’s an advantage [to] getting this right and that advantage is, it creates
value for shareholders – and that drives everything.”


Emily McCormick

Vice President of Editorial & Research

Emily McCormick is Vice President of Editorial & Research for Bank Director. Emily oversees research projects, from in-depth reports to Bank Director’s annual surveys on M&A, risk, compensation, governance and technology. She also manages content for the Bank Services Program. In addition to regularly speaking and moderating discussions at Bank Director’s in-person and virtual events, Emily regularly writes and edits for Bank Director magazine and She started her career in the circulation department at the Knoxville News-Sentinel, and graduated summa cum laude from The University of Tennessee with a bachelor’s degree in Spanish and International Business.