Sunday, August 20, 2017

Small Bank-Big Bank: Spending on People, Technology

I was recently slated to speak at an industry conference and I was diligently preparing when the organizer asked if I would be on a panel instead. Fine. But what about my diligent preparation?

I have a blog.

My remarks, should I have made them, were going to revolve around how much large banks spend on strategically significant resources compared to small banks. I took no bias into my search. I ran the data, and here are the results based on bank Call Report data.

The initial news was good. Smaller banks, either under $10 billion in total assets or the smaller group, under $1 billion, dedicate a greater proportion of their total operating expense to salary and benefits. The under $1 billion cohort spends nearly 9% more of their operating expense on employees. This would seem to be crucial, as I frequently hear bank strategy teams identify employees as a strategic advantage smaller banks have over larger ones.

Not so fast. I broke down salary and benefits per employee as well. And in that case, it appears as though the larger financial institutions pay more. The greater than $10 billion banks pay $103,235 per employee versus the under $1 billion banks at $76,411, a 26% difference. That explains why no hands went up at the Pacific Coast Banking School when the director asked how many students went to college to be community bankers.

To further the challenge for small financial institutions, the $1 billion to $10 billion cohort pays 12% more. So if the altruist wants to work for a community bank that is closer to its communities, they can make more with big brother. 

I understand that many, if not most under $1 billion banks are in rural areas, and therefore the salary and benefits disparity may be misleading. But we would be hard pressed to find a college senior that says they'll take a 26% pay haircut and work in Tombstone, Arizona. Although I'm sure there are exceptions.

I'm sure Tombstone is nice. I use as an example recognizable by all. Please refrain from angry comments and e-mails.

My second data search revolved around IT expenditures using the same asset size cohorts. Actually, the Call Report category is Data Processing expense. Although I've been poked for using this 70's-80's phraseology. You know who you are!

A note on the data. It does not include personnel.

The news looks good for smaller banks, spending a relatively larger proportion of their operating expenses on IT. But the larger banks are gaining ground, growing this line item at a compound annual growth rate of 10% over the past 10 years. The banks in the middle cohort spend relatively the least on IT.

What was alarming was how little this expense represented of total operating expenses. Reading industry literature one would think IT would dominate the expense ledger. Not so. 

But it will. 

Were there any surprises in the above tables?

~ Jeff


  1. Thank you for mentioning me in your post. I mean, I know you didn't mention me by name, but when you said you've been poked for using 70s phraseology, I assume you meant me. :)

    I have a couple of problems with this post. It has to do with your judgement calls. For example, when you say...

    "The initial news was good. Smaller banks, either under $10 billion in total assets or the smaller group, under $1 billion, dedicate a greater proportion of their total operating expense to salary and benefits"

    ...I wonder, why is that "good"? Couldn't a higher % of spend on salary/benefits be an indication of inefficient, manual (i.e., not automated) processes?

    You also call out smaller banks' larger % of spend on IT as a good thing. Doesn't it strike you odd that smaller banks are spending more on BOTH people and IT?

    Jeff, I've looked at bank spending on marketing, and I've found that, as a % of assets, marketing spend is remarkably similar for banks and credit unions over $500m in assets, but actually larger for smaller FIs.

    I think the reality here is that smaller banks have less line items in their expense sheet, and therefore the % of spend on people, IT, and marketing is therefore higher than it is for larger FIs.

  2. Ron,

    You are observant beyond your years. Smaller banks would gravitate to a larger proportion spent on comp and tech due to their size.

    When I hear "bank personnel" or some variant mentioned as strategic strengths as often as I do, one would assume that a bank spends more to get better people. Not so in the comp/fte stat.

    I think what community banks should strive to do is have relatively fewer people that get paid more. To automate repetitive processes. Because paying for an IT solution to auto-balance suspense accounts, for example, is less expensive than paying a staff accountant to do it.

    That's when you'll see DP expense as a % of op expense go up, Sal+Ben as a % of op expense remain steady, and Sal+Ben per employee trend up for community banks.

    As a point of reference, USAA Federal Savings Bank, lauded by many for their tech distribution system, dedicates 15% of their total operating expense to DP expense (2nd quarter).

    Thanks for the comment!

    ~ Jeff

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