In 2008, the leadership at Home BancShares Inc. of Conway set its sights on achieving a sub-40 percent efficiency ratio. Seven years later, the $8.5 billion-asset bank holding company made the mark in the third quarter: 39.79 percent.
“That’s been a major goal of ours,” said Johnny Allison, chairman of Home BancShares. “I wasn’t sure if we would get there.”
The metric, which has grown in profile in the post-2008 finance world, reflects how many pennies it costs a company to make a buck. In the case of Home BancShares, the cost was slightly less than 40 cents for every $1 in revenue during the quarter ending Sept. 30.
The company’s Centennial Bank of Conway (39.37 percent) is among three Arkansas-based banks that recorded sub-40 percent efficiency ratios through the first six months of 2015.
First Security Bank of Searcy was No. 1 at 32.13 percent followed by Little Rock’s Bank of the Ozarks at 35.9 percent.
(Purchase the list of the Top 75 Arkansas banks ranked by efficieny ratio in either PDF or spreadsheet formats.)
The average efficiency ratio among all Arkansas banks through the first half of 2015 is about 70 percent.
Randy Dennis, president of DD&F Consulting Group, said the strong showings by First Security, Bank of the Ozarks and Home BancShares Arkansas continue to attract national attention.
The Little Rock bank consultant pointed out that Reynie Rutledge uses a different fiscal recipe to produce First Security’s enviable efficiency ratio.
“His is lower by the nature of his business model,” Dennis said of Rutledge, chairman and CEO of First Security. “He’s a bond bank. He’s more wholesale than retail. He’s always been a bond guy, and he’s always done well at it.”
The bank’s parent company owns the Little Rock investment firm of Crews & Associates, which specializes in bonds.
Instead of loans, securities are the main ingredient in First Security’s total assets. Stocks and bonds account for more than 52 percent of the private company’s $4.8 billion asset total.
That compares with a much lighter mix of securities in total assets at the publicly traded Bank of the Ozarks (8.7 percent) and Home BancShares (18 percent).
Treading in the land of sub-40 percent efficiency ratios is familiar territory for Bank of the Ozarks. It’s a source of corporate pride for George Gleason, chairman and CEO.
Bank of the Ozarks was named the top performing bank in the nation with total assets of between $5 billion and $50 billion by Bank Director for a third consecutive year.
While Gleason is pleased with the strides made, his sights are set on an ultimate goal of achieving a sub-30 percent efficiency ratio. Wall Street investors appreciate the earnings boost typically reflected by low efficiency ratios, too.
“They’re very complimentary of Home (BancShares) and George (Gleason) and his organization,” Allison said.
A seven-year push at Home BancShares resulted in an improved efficiency ratio of 20 percentage points, a feat accomplished while acquiring 15 banks.
“It’s a balancing act,” said Donna Townsell, senior executive vice president of corporate efficiencies for Home BancShares and its Centennial Bank. “It was hard to get here, and it will be hard to stay here.”
Where does Home BancShares go from here?
“Thirty-five is our next number,” Allison said. “I didn’t tell Donna that.”
Metric Formula
What goes into calculating an efficiency ratio?
The number is derived from dividing noninterest expense (overhead) by tax-equivalent net interest income plus noninterest income (revenue).
In general, lower is better. However, serious operational problems can lurk beneath low efficiency ratios.
Dennis said that was evident during 2007 and 2008 when banks with once-glowing call reports began recording ugly numbers that exposed their tell-tale efficiency ratio.
“Are they covering all the bases in order to manage the bank?” he said. “Where is the low efficiency ratio coming from? A low efficiency ratio can sometimes indicate a lender doesn’t have enough back office staff to support healthy growth. Growth covered all sins.
“You have to drill down on both high and low efficiencies. If it’s high, we try to see how they’re overspending. If it’s too low, we look at their noninterest expenses — audit, loan administration and things like that — because it can tell you a lot.”
Bank of the Ozarks and Home BancShares have built thriving multistate franchises accelerated by opportunities afforded by FDIC-assisted transactions of failed banks.
“I’m so proud of those guys,” Dennis said. “They are so good. They took a good idea and just ran with it. Now they’re buying failed-bank acquirers. They know the business model. They know how to do it even better.
“I told people back in 2010 that Arkansas could be the next regional banking force. I think it’s being proved out even as we sit here and watch.”
The whopping $800 million deal to buy Community & Southern Bank of Atlanta established a new mountaintop experience on the acquisition trail for Bank of the Ozarks.
“They just bought a whale of a deal,” Dennis said. “I think C&S has a great franchise over there. It’s everything Bank of the Ozarks knows. Compared to so many other banks in the country, they have been able to get the jewel out of the muck and create a great franchise in the Southeast.”
C&S was built through 11 acquisitions, eight that were government-assisted. The $4.4 billion-asset concern carried an efficiency ratio of about 66.9 percent as of June 30.