His bank was four years into a five-year contract with its chief information technology vendor, and he’d decided the costs of processing had to come down.

 

“Our contract didn’t expire for another year,” says Hoskins,  “but we told them that we wanted to negotiate a contract renewal a year prior to expiration of our contract.  And we told them that if we didn’t get a good deal, we were going to go out for bids.”

The vendor was no pushover.

“And so we started negotiating,” says Hoskins, “and we kind of negotiated all year long. It was really excruciating and painful throughout the year.”

Then, in December, something changed.

“You know how it is, you get to the last week of the year, and the salesman wants to put together a contract. And suddenly, the company had a big deal fall apart, somewhere,” says Hoskins. “And all of the sudden, they came to the table, and we got everything we wanted—plus some.”

Hoskins, president and CEO, First Community Bank, Corpus Christi,  told his story during a recent ABA Banking Journal roundtable on cost-cutting and cost control. It turned out he wasn’t the only banker in the room who’d decided to talk turkey with a supplier. Several bankers had taken similar tacks.

Larry Callais,  president and CEO at M C Bank & Trust, Morgan City, La., told another large tech vendor that his institution was negotiating with other suppliers and engineered a big savings.

Indeed, bankers taking part in the roundtable seemed to have decided that there’s no harm, and quite possibly big savings, in rejecting the “rack rate” offered.

Medical insurance, bane of many employers, serves as a dramatic example. Tom Leetch, president and CEO of Peoples Federal Savings Bank, Brighton, Mass., could be obtaining his 70 employees’ coverage from a state trade association deal. However, he’s found that Peoples can save money by putting the bank’s health coverage out for bid. In fact, the bank managed to obtain the same program from the same insurance carrier at a cheaper rate, a savings, most recently of close to $12,000 a year.

Peter Blyberg, president and CEO of Ellsworth, Maine’s Union Trust Co.,  on the other hand, joined a Maine bankers self-insurance program and “that’s helped contain costs significantly. Where you really save money is on the administration, because that’s about 25% of your benefit costs and that’s really where the self-insured group can control things.”

Cutting communication and tech costs
One workaday item that the bankers have attacked with technology is the cost of telephone and internet service.

Several bankers have been using, or have recently adopted, voice over internet protocol (VOIP) service.

The three bankers that spoke about it said the level of quality was “excellent,” “good,” and “as good as standard service.”

Peoples Federal recently signed up for the service and expects to save $1,200 a month, says Tom Leetch, adding that the system should pay for itself in four years. The bank’s vendor offers a back-up system, so that if the internet is down, it will still be able to use the phones.

CommerceWest Bank, Irvine, Calif., has had voice over internet for about three years. “The neat part is the extra features you get with this equipment at no extra cost, such as videoconferencing service built right into the phone,” says Ivo Tjan, chairman and CEO.

First Community Bank had some technical problems at the very beginning, says CEO Hoskins, but it got those ironed out. “We have nine branches and we have a great many conference calls, and with this system we can do that on a moment’s notice.” That capability is included in the VOIP service, he says, saving the bank about $1,000 a month over standard conferencing fees.

Besides the direct savings seen through such steps as adoption of internet phones, bankers were also looking for less-quantifiable, but still genuine, savings in the form of staff  time. 

Both Hoskins and Tjan, for instance, have gone with document handling systems and software that enable their banks to better handle agreements, memos, and other important  “papers” that require collaboration. The systems coordinate so that nothing gets put through in a form it shouldn’t be.

Hoskins’ bank, for instance, uses a system that allows officers to electronically sign off on documents. 

And Tjan says the system his bank uses allows employees in far-flung branches to collaborate much more effectively, and allows for faster, less time-consuming turnaround. If a change is made by a subsequent reviewer, the electronic OK of anyone who has not seen the amendment automatically removes itself. Thus the file must go back to the  missing player for approval.

Automated brontosauruses?
A common viewpoint on the panel, as expressed by Boston’s Tom Leetch, was that ATMs are “a dying dinosaur.” With debit card usage surging and mobile banking payments ramping up relatively quickly, the bankers question how much longer the need for cash machines will exist.

But, like the real dinosaurs and their byproduct, oil, utility has a way of hanging on.

Many of the bankers have been squeezing extra income out of their ATMs, some by design, some by serendipity.

Mary Lenz, CEO of Slades Ferry Trust, says her bank found that 80% of its ATM transactions are by noncustomers, so it began putting in more machines offsite to take advantage of consumer’s thirst for convenience. “We’ve found these people really don’t care whether they’re paying the fee or not,” says Lenz.

Tom Leetch has put ATMs in unusual locations such as a building that houses both a TV station and a large manufacturing company’s headquarters and has put others in convenience stores. These all generate high fee volumes, which have been helpful to the bank. A number of bankers have sited ATMs in high-traffic locations to build fee income, but none with so unusual a “strategy” as Ivo Tjan’s CommerceWest. His institution is about as “un-retail” as a bank can get, so much so that examiners sometimes give him some heat about it. But Tjan sees his niche as strictly business. Hence his ATM success is a radical departure.

“We had a hole in the wall of one of our new branches,” explains Tjan. “Well, we had to fill it with something. It turned out that the cost of buying a used ATM was the same as the price of reconstruction.” The bank didn’t expect its own clients to use the machine much, except for occasional convenience.

But the branch is surrounded by busy office towers and a new café. The bank priced transactions at  $3.25 a pop, and the machine is making $1,500 to $2,000 a month, quickly paying for itself.

The bank, meanwhile, obtained extensive free ATM access for its clients by taking advantage of a U.S. Bancorp deal. In exchange for  having the larger bank service the single ATM, at only $400 a month, CommerceWest customers become eligible to use ATMs at any U.S. Bank location, nationwide.

“It’s kind of a crazy deal, but it’s pretty good for our clients because there’s no fee to the U.S. Bank machines, nor PayPass machines at 7-11 convenience stores,” says Tjan. Ed Gutzmann’s bank has a similar arrangement with Wells Fargo.

Savings in branching
Facilities represent one of the biggest expenses of running a bank. Finding the right place to put them becomes a greater challenge as the best locations get gobbled up. But running them and owning them is also a challenge.

“Our bank was founded in the mid-1950s and of course that was when real estate was king,” says Mary Lenz of Slades Ferry Trust. “So the board bought all of the facilities. Within the last year we’ve been looking at sale/leaseback of our nine different facilities. And there are some pretty good gains in the properties.”

Rather than profiting directly from the sales, the bank has plowed the gains back into its business. The bank has spent a great deal refurbishing its facilities and has offset that expense with the amortized gains.

As a result, what might have been a major expense “is pretty much a wash,” says Lenz.

Bill Carr and Bill Sones found a do-it-yourself tool to aid them in siting new branches.

“We had hired consulting companies in the past to try to tell us where we ought to be and it never worked,” says Carr president and CEO of Liberty National Bank, Kenton, Ohio. “So I went in on the FDIC website and looked at counties that we were in and surrounding counties, researching deposit growth trends over the previous five years.”

What Carr found was sobering, but also inspiring. Liberty’s home office and three branches, it turned out, sat in a market with an overall 2% drop in deposits.

But then Carr hit gold, a county with 24% profit growth, and that’s where the  bank is expanding. “We’re pretty excited about that,” he says. And he’s identified other areas of potential as well.

Bank of Brookhaven, Brookhaven, Miss., is a recent de novo and hasn’t branched yet, but Sones, president and CEO, is studying potential additional locations based on FDIC’s database as well. The annual deposit summaries, which come out in late June, are very helpful. Once he starts branching, Sones plans to build single full-service branches in any given market, bulking out the network in each market for customer service sake with smaller paying and receiving branches. The first branch will serve as the hub.

Outsourcing and people practices
The big costs in banking, as always, are employees, and this has become even more so as banks find themselves seeking expertise in narrower and narrower specialties. But the panelists increasingly find that even highly specialized functions can be quite handily farmed out or shared.

Sones’ bank, for instance, handles internal audit by sharing one expert with two other community banks in different communities.

“None of us needed a full-time internal auditor,” says Sones. “So we hired a CPA who had been doing my bank’s external audits. We agreed on a salary that we split. We all get a better quality product than we could afford if we each tried to hire someone for what we are paying in thirds, and we get it at a cheaper cost.”

This trend is growing. Roundtable bankers are sending out certain asset/liability management and profitability analysis functions, for instance. Then there’s compliance. Expertise is in more demand, and Mary Lenz says the last compliance chief she hired commanded a six-figure salary—for a $600 million bank. Things didn’t work out, and Lenz decided to make someone else the Bank Secrecy Act officer and to outsource the rest of compliance. The bank is spending only one third of what the staff expert had earned, and saves the costs of fringe benefits and training.

Several banks use interns, and have been pleased with the effort. Tom Leetch of Peoples Federal, whose bank is right in Boston’s university neighborhood, noted that his bank’s human resources director started as an intern. “Outstanding young lady,” he says. 

Sones and Hoskins say they have been able to save on staffing costs by tapping local pools of retired workers.

“Our little secret is what I call my ‘old folks club’,” says Wes Hoskins of Texas. “We have a pool of employees that are retired. Right now, one’s a retired accountant and one’s a retired engineer. Their wives want them out of the house, so they work for minimum wage basically, just enough to make their golf money.”
This is no charity move.

“These are very effective people,” says Sones. “They were running companies or had high-level jobs and they can bring a lot to the table and they really do have a great work ethic.” BJ