Higher Salaries Come at a Cost

We all like to get our jobs done in the most efficient way that's practical, but for banks there are many factors that go into the efficiency equation that don't apply to the average person. How new is the institution? What is its business plan? How big is it? How many assets per employee does it have? How much money is spent on overhead? All of these and more go into the measure of efficiency of a bank.

We mentioned last week that Capital One Bank (before it merged with its affiliate, Capital One USA) had a less than optimal efficiency ratio of 73%. (With this ratio, a smaller number is better, under 50% is ideal.)

This week we look at 51 community banks that have an even higher efficiency ratio than Capital One did. You will see, they have other lapses in efficiency as well.

Higher Salaries Come at a Cost

After commenting last week on Capital One Bank’s efficiency ratio, we wanted to see which other banks are operating at “less than optimal” efficiency. The efficiency ratio measures how much revenue is absorbed by overhead expenses. In basic terms, it measures how much money a bank spends to earn a dollar in return.

For this week’s purposes, we limited our list to community banks. This is one area where Big Banks do, or at least can, reap benefits of scale. Of course, there are always exceptions. Pre-merger, Capital One was both a big bank & a big exception (JRN 41:05).

At the end of the third quarter 2023 the banking industry as a whole had an efficiency ratio of 54.75%. For community banks, that ratio was  over 63%. Both ratios increased during the quarter due to higher salaries and benefits being afforded to employees. Those benefits come at a price. That price is reflected in the efficiency ratio. That said, there are plenty of community banks with low efficiency ratios as well.

Listed on page 5, you will find 51 community banks that have a higher efficiency ratio than Capital One did pre-merger (73%). We took a couple of other liberties with this list as well: a) All of the banks are currently rated less than 4-Stars. B) They also have assets of at least $250 million.

In this manner, we eliminated the smallest banks as well the  strongest. But we didn’t stop there.

Another measure of efficiency is “assets per employee”. The national average is currently around $11 million in assets per employee. The banks on page 5 each have less than $7 million (some much less). That’s how we ended up with these 51  banks that we believe are operating at “less than optimal” efficiency.

3-Star Cenlar FSB, NJ and 3-Star Bank of England, AR each reported far less than $1 million in assets per employee. (These two banks are also  both operating under regulatory enforcement actions, as are several other banks listed on page 5. They are highlighted in a pale yellow.)

We have reported before on both Cenlar FSB and Bank of England, noting that they do operate differently than your average community bank. This is yet another type of exception that we spoke of:

Cenlar makes its money with  3,700 owner-employees servicing loans for other banks, mortgage companies and credit unions across the country (JRN 38:28).

Total deposits at Bank of England’s six branch locations are $322 million. Its affiliate, however, Bank of England Mortgage has well over 100 loan production offices spanning from coast to coast. (JRN 40:43)

These two banks rely (or relied) primarily on residential real estate loans, to the exclusion of most other loan types.

As a thrift, we expect Cenlar FSB’s loans to lean heavily on single family residential. Due to its business model, however, excluding shorter-term loans made Cenlar vulnerable to the rising rate environment we’ve experienced in the past couple years.

Cenlar FSB’s employee count fluctuated to accommodate the changes in the real estate environment, but it had a much harder time with its interest rate spread. Its assets, including loans, continue to decline as a result. In fact total loans dropped by 8% over the 12 month period ending September 30th. (Total assets dropped even more, 11.5%.)

Cenlar Bank was established in 1912 and still operates through a single location in Trenton, NJ. Established in 1898, Bank of England, is less than half the size of Cenlar FSB (by assets). Bank of England, however, operates 151 branch and loan production offices across the nation.

At the close of the second quarter 2023, Bank of England’s loan portfolio was also heavily weighted with single family real estate. In August, it as hit with a Consent Order from the FDIC. In a single quarter, and while working with its regulator, Bank of England retooled its loan portfolio.

By the close of the third quarter ’23, Bank of England had cut its dependence on residential real estate from 73% to 66%. Its mortgage loans, while still quite a bit higher than the its peers (which average 29.2%) had been cut considerably. Given its history, though, Bank of England’s mortgage loans may always be higher than its peer group.

Speaking of history, a de novo bank needs several years to get its efficiency ratio down to a reasonable number. 3-Star Varo Bank, UT on page 5 is one such de novo. It has an efficiency ratio of 182.2%. That’s the highest on page 5 (not the highest in the nation). Established in 2020, this ratio has more to do with the bank’s young age than anything else. At less than 4 years of age, that ratio is not unusual.

Varo Bank was the first “Consumer” Fintech to be granted a national bank charter by the Office of the Comptroller of the Currency (OCC) (JRN 39:17).  Varo touts itself as an affordable and accessible banking option for people who find traditional banks too expensive or too difficult to access. As a result, its loan portfolio is weighted heavily (97%) with consumer loans. This is another bank with all of its eggs in one basket. Consumers hold the reigns here.

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