3 banks in state 'outstanding' in efficiency

Information about Arkansas banks by the numbers
Information about Arkansas banks by the numbers

Most banks are considered to be efficient if they operate with an efficiency ratio of 50 percent, said Randy Dennis, president of Little Rock bank consulting firm DD&F Consulting Group.

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SOURCE: BauerFinancial, Coral Gables, Fla., www.bauerfinancial.com. Compiled from data reported to federal regulators.

Information about Arkansas-Based Financial Institutions

An efficiency ratio of 50 percent means the bank spends $50 to earn $100. The lower the percentage the better the bank's efficiency.

Only 32 of 104 banks in Arkansas had an efficiency ratio below 60 percent in the second quarter. Only seven were below 50 percent in efficiency and only three were below 40 percent.

A bank with an efficiency ratio below 40 percent to 50 percent is considered "outstanding," Dennis said.

Bank of the Ozarks in Little Rock had an efficiency ratio of 32.22 percent in the second quarter, First Security Bank of Searcy was at 33.55 percent and Centennial Bank of Conway was at 35.75 percent.

One report indicated that Bank of the Ozarks was among the 10 most efficient banks in the country, said George Gleason, chairman and chief executive officer of Bank of the Ozarks.

Bank of the Ozarks, which had more than $12 billion in assets in the second quarter and offices in nine states, has focused on lowering its efficiency ratio since the late 1990s, Gleason said. At the time, the bank had an efficiency percentage ratio in the high 50s to low 60s, about the industry average, he said.

"Every banker wants to lower their efficiency ratio," Gleason said.

When most banks consider improving their efficiency, they think of cutting staff, closing offices and taking actions to cut other costs, Gleason said.

"We look at it the other direction," Gleason said. "We expect that we're going to add staff members every year and add new offices every year. But we're going to add staff members and offices in such a way that we generate a disproportionately large increase in revenue."

The efficiency ratio is a combination of overhead expense and revenue, Gleason said.

"Clearly we think the best way to improve your efficiency ratio is to deliver products and services that the customers find so compelling that you get lots of new customers and generate a lot of revenue," Gleason said. "As a result, your efficiency ratio gets better even as you're spending more money."

Bank of the Ozarks believes that it can still lower its efficiency ratio, "ultimately reaching a sub-30 percent ratio," Greg McKinney, the bank's chief financial officer, said on an April conference call.

That is a goal over the next two or three years, Gleason said.

"We're certainly not going to get to sub 30 [percent] in the next few quarters," Gleason said.

In 2008, Centennial Bank, which had $9.6 billion in the second quarter, hired a consulting firm to help it become more efficient. The consultant is now a division of FIS Global, which has about 1,200 employees in Little Rock.

At the time, Centennial Bank, with offices in Arkansas, Florida, Alabama and New York, had an efficiency ratio of 59 percent, said Donna Townsell, a senior executive vice president who was given the task of overseeing the efficiency effort.

Centennial eventually came up with 240 initiatives to improve efficiency.

There will be "no sacred cows in the study," John Allison, chairman of Centennial's parent company, said during a conference call, meaning the bank would consider any changes the firm suggested to improve efficiency.

Centennial even went so far as to begin collecting paper clips customers used for transactions. It wasn't uncommon for barrels of paper clips to be stored behind the tellers' window.

Home BancShares, the parent company of Centennial Bank, planned to spend about $700,000 for the study. Changes that were suggested paid for the cost of the study many times over, Townsell said.

Since the efficiency effort began in 2008, Centennial has bought 15 banks.

When a bank was acquired, there was no need for an extra chief financial officer or other executives at the new bank, Townsell said.

"If all those banks had all their back-office departments as well, you can imagine the duplication of efforts," Townsell said. "Some of these acquisitions have been quickly [profitable] for us because their efficiency ratio might have been 70 or 80 percent. There is obviously a lot that we could go in and quickly trim up."

Centennial works to keep expenses normalized each month, Townsell said.

Operating more efficiently is not something only for billion-dollar banks.

Horatio State Bank, with $173 million in assets in the second quarter, had the fourth best efficiency ratio in the state at 42.83 percent.

People's Bank of Sheridan, with $138 million in assets, had an efficiency ratio of 46.15 percent in the second quarter, the fifth-best ratio in the state.

John Manatt, People's Bank's chief executive officer, acknowledged that because the bank has only two offices, its overhead expenses contribute to the low efficiency ratio.

"Most banks our size have more locations than that," Manatt said. "But in today's times, with online banking and mobile banking, the volume of branches is not needed as much as it was at one time."

People's Bank, which has 24 employees, was started in 2000 and historically has tried to run an efficient operation, Manatt said.

People's Bank also collects paper clips. And when it is facing a major expense, it always takes bids from two or three vendors to be sure it gets the best price.

"It's tough to make the same 10 cents out of the same dollar," Manatt said.

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