by: Jeff Marsico
Here is a question that dogs us: Should we follow a strategy that drives top quartile performance in operating expenses or cost of deposits? If your answer is “yes”, your execution better be flawless. Because the two don’t often go together. In my search, described below, only two banks made top quartile performance in both categories.
Low Operating Expense Banks
The low operating expense bank typically comes with a limited branch network and higher average deposits per branch. Bank futurists think this a good thing since branches are millstones around our collective necks. So in order to attract deposits, these banks tend to use premium rates to get people comfortable with not having a nearby branch, and tend to have a larger proportion of CDs.
Low expense banks tend not to have sophisticated commercial banking operations too. Preferring instead to focus on residential real estate lending combined with transactional commercial real estate lending. By transactional, I mean the bank may resort to price to get deals, and not extensive customer relationships, as many of these customers don’t value relationships anyway.
Low Cost of Deposit Banks
Conversely, low cost of deposit banks tend to have more expansive branch networks to get core retail and business account balances. Anecdotally, the most often heard reason a business customer objects to opening an operating account at a bank is because it lacks a nearby branch. In light of remote deposit capture and the movement towards a cashless and checkless society, this objection is slowly becoming outdated.continue reading »