A Penny Saved Is A Penny Earned

Luther Burbank Savings’ CEO and President John Biggs has headed the company since the mid-1980s, but he didn’t have a secretary until a few months ago.

“We type our own letters,” he explains.

When he opens new branches, he designs them himself instead of hiring consultants. Setting up a toll-free line for the thrift, he excluded calls from outside California. “I don’t have any customers outside California,” he says.

It’s all part of a culture of expense control that’s endemic to Luther Burbank’s culture, helping to make the Santa Rosa-based savings and loan with $3.5 billion in assets one of the most efficient in the nation, based on its 24 percent efficiency ratio during the last two years. The median for all banks and thrifts is 68 percent. Luther Burbank is eclipsed only by Hudson City Bancorp in Paramus, New Jersey, long known as extremely efficient, and OneWest Bank in Pasadena, California, which bought the failed IndyMac and recorded a one-time gain on the acquisition that boosted its efficiency ratio.

There are many ways to measure efficiency, and the efficiency ratio is not necessarily the best one. It is heavily influenced by economic conditions, and thrifts often look better because they tend to have simple business models that focus on mortgage lending and reducing costs.

Still, even the biggest banks in the nation have begun to look at more efficient ways of doing business, as the economy continues to trudge along with few opportunities to grow revenue even while existing fee-based revenue streams, such as debit fee income, are taking huge hits. Luther Burbank Savings may not have much to teach the Bank of Americas of the world, but the basic drive toward simplicity is something a lot of financial institutions can learn from, because it can increase earnings power while helping revenue, analysts say.

“I think management is grasping that the revenue environment is not going to be as generous,” says Scott Siefers, a bank analyst with Sandler O’Neill + Partners in New York. “Cost is one of the leverages management teams can control.”

Wells Fargo is in the middle of an initiative called “Project Compass,” where employees are being asked to come up with ideas to increase efficiency.

Bank of America, after earlier announcing plans to cut 10 percent of its branches, is now embarking on further cost cutting by asking employees how best to do it. CEO Brian Moynihan said at an analyst day in March that the bank’s efficiency ratio could be cut from 62 percent down to 55 percent. The bank hired EHS Partners and Promontory Growth and Innovation, an affiliate of Promontory Financial Group, to help.

“Our process is focused on embedding efficiency in the way of doing things,” says Promontory Growth and Innovation CEO Neil Smith, who declined to discuss Bank of America. “Number one is making sure the CEO and senior management team are communicating to the people in the organization that this is important, and leaving behind a process of continuous improvement.”

The culture of efficiency has to start at the top, Smith says, and it has to continue long after the cost saving program is done.

“It’s often people one or two levels below top management who know how to do things better,” says Smith.

One bank, Smith found, could save millions by sending out soon-to-be-issued new credit cards rather than replacements when a customer lost a card. Banks often just send a replacement card, even though the card is about to expire and be replaced with a new version in a few months, he says.

Smith was working at EHS Partners several years ago when it increased efficiencies at two Pittsburgh banking companies, Mellon Financial Corp. and PNC Financial Services Group. Often, the solutions sound fairly simple, but large, complex organizations don’t try them because they prefer to conduct business the way they always have.

PNC adopted changes in 2005 that improved profitability by more than $400 million annually. In part, the company improved processes and technology so different departments, such as real estate and commercial banking, operations and underwriting, communicated better, says Eric Holder, founder and managing director of EHS Partners.

Banks can save if they synchronize technology in different departments, says Julian Ortiz, a senior executive at New York-based management consulting firm Accenture’s financial services practice.

Oftentimes, someone in retail will enter information about a customer, and then someone in another department has to reenter that information into a different software system, and so on. None of the systems communicate with each other, which limits cross-selling opportunities, Ortiz says.

“Banks recognize the need to do that, but they are impeded by technology silos,” Ortiz says.

In the same vein, many banks buy other banks and then keep legacy checking accounts for years.

“Is there a good reason?” Holder says. “There’s probably not a good business reason.”

Banks have realized that reducing paper also reduces costs. Holder says he found one insurance company digitized policy statements to agents, but then continued to pay $1.5 million for another year and a half to print the policy statements and mail them to agents, even though they were getting thrown in the trash.

However, focusing on such cash-shaving measures hasn’t been the priority the last few years, where banks have been mired in economic turmoil and new compliance burdens. That is changing, analysts say.

“Banks really haven’t had an opportunity to step back and say: ‘How do we make sure we’ve aligned our business to target our customers?”’ Ortiz says.

Holder thinks there will be a divide between companies who react to a slow economy with more belt-tightening and further cuts and those “who approach it more proactively and look to retool their business in ways large and small, and position themselves to take advantage of growth returns.”

However, Mike Moebs, the CEO of economic research firm Moebs Services Inc. in Lake Bluff, Illinios, has been consulting with banks on reducing expenses for decades, and thinks the problem is deeper than that.

“There is a fascination with growth, a feeling that ‘I will grow us out of the problem,”’ he says. “Now we see we can’t grow ourselves out of this problem. Wal-Mart has a culture of getting expenses down. The banking industry does not.”

Some of the most efficient organizations are not the largest banks, he says, but banks and credit unions between $400 million and $5 billion in assets. Thrifts also do well on efficiency because of the types of loans they do tend to be limited to residential. Deposits often are in certificates of deposit and money market accounts, which are less costly to manage than transaction-heavy checking accounts.

Luther Burbank Savings, named after a famous local horticulturalist, is one of those.

It was started in the 1980s by brothers Vic and Mark Trione and former president George Mancini.

“We stuck to our knitting,” says Vic Trione, the chairman of the board. “We didn’t try to be all things to all people.”

Even when the bank expanded into southern California, it kept branches close to one another. It has only bought one other financial institution, in 1996.

The thrift has 65 percent of its loans in apartment developments, which have done well in the recession and another 25 percent in jumbo single-family mortgages that average $1 million in size, loans that have turned out to be relatively stable in California’s slumping real estate market, according to the thrift’s CEO, John Biggs.

The institution made $80 million in profits last year.

With seven branches, the thrift averages $430 million in deposits per branch, and it attracts depositors by offering deposits that are 10 to 15 basis points above market, says Fred Ptucha, a financial advisor for Financial West Group who keeps track of local community banks.

“If there is one sector that’s held up best in this recession, it’s apartments,” he says. “Their non-performing loans have been low.”

A bank with a similar funding model is the National Republic Bank of Chicago, which has just $1.3 billion in assets and an efficiency ratio of 25 percent during the last two years.

Even though it’s not a thrift, it concentrates in just a few lending areas, mostly hotels and gasoline stations, while doing very little retail consumer business in its two branches. It funds its loans through brokered deposits and CDs, neither of which require a big support staff, says executive vice president Robert Hinman.

“We have identified a small niche that we can service,” Hinman says of the bank, which is owned by local Indian-American Hiren Patel. “The business model has been in place for a long time and it’s been highly successful.”

The bank made $31 million in profits last year, a slight decline from 2009 when it made $37 million, according to the Federal Deposit Insurance Corp.

But as the bank passed the $1 billion threshold, its regulatory burden increased and it had to add some employees, particularly accountants.

The bank focuses on improving information technology rather than “throwing more bodies” at the compliance needs, because people are expensive, Hinman explains.

Banks such as National Republic may have a tougher time going forward, both because of increased regulatory scrutiny, higher capital demands and the challenge of justifying loan concentrations to risk-wary regulators.

Hinman says that regulators dislike his bank’s funding mechanism: CDs and money market accounts. Concentration in particular loan classes and funding with CDs always garners greater scrutiny, he says.

Rick Childs, a director at Crowe Horwath LLP and an accountant by trade, says regulatory changes and new oversight from the Consumer Financial Protection Bureau will have some impact on costs, “but we have yet to really feel that,” he says.

“What we don’t know is how it’s going to be implemented and whether it will really drive as many expenses as we thought,” he says.

Childs says that if anything, banks could learn from institutions that are simple in design, because adding new products and services to grow sometimes masks the fact that the growth doesn’t justify the expense.

And with the slow growing economy, the expense lever might be one of the few that banks can pull.

“The economy is not picking up very quickly,” Smith says. “It’s actually going to take a lot of time to get out of the gloom we’ve been in the past couple of years. The growth rates financial institutions have seen historically are just not there. There are not that many options that are under an institution’s control, but one of the strongest ones is the cost cutting.” |BD|


Naomi Snyder


Editor-in-Chief Naomi Snyder is in charge of the editorial coverage at Bank Director. She oversees the magazine and the editorial team’s efforts on the Bank Director website, newsletter and special projects. She has more than two decades of experience in business journalism and spent 15 years as a newspaper reporter. She has a master’s degree in journalism from the University of Illinois and a bachelor’s degree from the University of Michigan.

Join OUr Community

Bank Director’s annual Bank Services Membership Program combines Bank Director’s extensive online library of director training materials, conferences, our quarterly publication, and access to FinXTech Connect.

Become a Member

Our commitment to those leaders who believe a strong board makes a strong bank never wavers.