There’s more than one way to run an efficient bank.
The efficiency ratio is a simple calculation: noninterest expense divided by net income. To drive that metric down, a bank can grow net income, it can slash expenses — or better yet, it can do both.
Some banks are just plain cheap: For them, it’s all about cutting costs. But the most efficient banks “think about it more than just from a cost savings standpoint,” says Crowe Partner Rick Childs. They focus on achieving a strong return on their investments, particularly when it comes to rising technology costs. These banks “think about it in terms of the dollar spend versus the return they get out of that; that kind of attention to detail tends to filter into the income statement and therefore into their efficiency.”
To understand which bank in our ranking is most efficient, Bank Director constructed an algorithm that looks at the efficiency ratio and overhead ratio — noninterest expense over assets — in a few ways. The average of these ratios over a five-year period, from December 2014 through December 2019, was calculated to award consistency. We also examined improvement in these ratios over the same time span and factored in their status as of December 2019.
Hingham Institution for Savings comes out on top, earning the best score across all metrics. Its efficiency ratio as of December 2019 was 30.26%. It has averaged a 32.67% efficiency ratio over the five-year period we examined and lowered it by almost 19%.
Hingham President and COO Patrick Gaughen says the bank’s high level of efficiency is the product of a deliberate, long-term strategy.
“We talk about efficiency as being the product of structural choices and operational choices,” says Gaughen, “and when we talk about structural choices, what we mean is, the business that we’re in is very, very simple.”
If you open up the bank’s investor presentation, you’ll find a slide dedicated to the types of businesses that Hingham won’t pursue. The bank focuses strictly on commercial and residential real estate, and of course, taking in deposits. “That is all we do,” Gaughen says. “We don’t have any C&I lending; we don’t do any small business lending that’s not secured by real estate; we don’t do floor plan, we don’t do asset-based lending, we don’t do any consumer — so if it moves, we don’t lend on it.”
Hingham also stays out of higher-cost fee-based business lines like insurance and wealth management, and benefits from operating a few branches in affluent areas, with larger loan and deposit balances per customer than is typically found in a community bank, he adds.
“We like to do a handful of things well,” says Gaughen. That laser focus yields some real payoffs when it comes to building an efficient operation. As he points out, every business line adds its own layer of complexity, from managing the business, to regulatory compliance and risk, to financial reporting. “We take all that complexity out by staying simple,” he adds.
Coming in second, Greene County Bancorp had a 46.55% efficiency ratio as of December 2019, averaging 50.79% over the five-year period. It has the second-lowest overhead ratio, at 1.55%.
At third, Bank OZK boasts the second-lowest average efficiency ratio, at 36.28%. Bank OZK’s efficiency performance is largely a function of revenue growth, while the bank makes further investments in its technology and risk infrastructure.
“We’ve really never managed [efficiency] from the expense side,” said Tim Hicks, OZK’s chief administrative officer, at a March 2020 conference. “If you looked at our expense balances each year, they increase. We really try to generate [a] favorable efficiency ratio [through] great returns and great revenue in each of our business units.”
OZK’s efficiency ratio actually crept back up from a low of 31.95% in December 2016, which the bank is working to address. “If we can begin to moderate that rate of expense growth in 2021, and we can get more in line with our historical growth rates in 2021 and 2022, then I think we can begin to see that efficiency ratio get better,” said CEO and Chairman George Gleason in a January 2020 earnings call.
Lakeland Financial Corp., which ranks fourth, also relies on revenue growth to drive efficiency improvement as the bank continues to invest in its operations, according to its second quarter 2020 investor presentation. Lakeland had the third-lowest efficiency ratio (44.45%) as of December 2019.
Rounding out the top five is The First Bancorp, with an average efficiency ratio of 51.46%; its ratio improved by almost 10% over the period we examined. Compensating the employees who fuel the bank’s growth was the biggest contributor to increasing noninterest expense, per the bank’s annual report.
How They Ranked: Most Efficient Bank
|EFFICIENCY RATIO (AVG.)
DEC. 2014 – DEC. 2019
|CATEGORY WINNER: Hingham Institution for Savings||1.25||30.26%||32.67%|
|2||Greene County Bancorp||4.25||46.55%||50.79%|
|4||Lakeland Financial Corp.||5.25||44.45%||46.62%|
|5||The First Bancorp||6.00||49.88%||51.46%|
|7||Southern Missouri Bancorp||7.38||52.30%||56.34%|
|8||First Financial Bankshares||9.13||48.46%||48.86%|
|8||City Holding Co.||9.13||50.51%||52.91%|
|11||Independent Bank Corp.||11.63||54.58%||60.43%|
|13||Auburn National Bancorp.||12.75||61.18%||58.06%|
|14||Stock Yards Bancorp||12.88||55.26%||57.68%|
|17||Community Bank System||16.00||60.35%||60.44%|
|18||Eagle Bancorp Montana||16.63||66.72%||74.98%|
|19||WSFS Financial Corp.||17.38||66.32%||63.21%|
|20||Meta Financial Group||17.88||64.45%||68.59%|
SOURCE: S&P Global Market Intelligence