With the threat of recession lurking and loan demand slowing, a new theme could emerge during community bank earnings season this month: cost cutting.
To be sure, banks are routinely looking for ways to become more efficient and profitable. But expense reductions now, including staff layoffs, could be driven by a need to get ahead of falling revenue should lending recede in an economic downturn. Bankers are tempering fee income expectations, too, given anticipated pullbacks in consumer spending and card use — on top of an already sharp drop in residential
And like most other businesses, banks are wrestling with rising costs amid inflation that surged to a four-decade high this year. That created urgency to curb expenses where possible, analysts at Piper Sandler said in earnings preview.
The analysts said they are modeling banks' third-quarter operating expenses to rise 1.5% from the prior quarter and 7.5% from a year earlier, "largely due to inflationary pressures, especially wages," but they expect reports of offsets in the form of branch closings and staff reductions.
"I think we're going to see pretty strong loan growth still with the third quarter, but people are looking ahead to a slowdown," Piper Sandler analyst Brad Milsaps said. "And fee income is already not the best story. So yes, cost control becomes more important."
A few banks have announced new cost-cutting endeavors ahead of earnings.
For example, First Northwest Bancorp in Port Angeles, Washington, said in September it had conducted a comprehensive review of its bank unit's costs and decided to reduce its workforce by about 5% through job cuts and attrition. The company's $2 billion-asset First Fed Bank will save about $1.3 million in annual operating expenses after the cuts. Its estimates that the workforce reduction, including severance pay, would incur a one-time cost of $225,000.
"While making the decision to reduce our workforce was very difficult, it was a necessary step to better align our resources" to
Also in September, Orrstown Financial Services in Shippensburg, Pennsylvania, said it will close five branches and trim staff to generate approximately $3.4 million of pre-tax annual expense savings — $2.7 million from staffing adjustments and $700,000 from reduced facilities costs.
The $2.8 billion-asset bank expects to incur a one-time pretax charge of $3.1 million. It plans to reinvest some of the savings in automation tools and digital banking initiatives that would create long-term efficiencies.
The actions "serve as a critical step towards repositioning the franchise to focus on emerging delivery channels and digital solutions and maximizing our efficiency through continued automation," Thomas Quinn Jr., Orrstown's president and CEO, said in a release announcing the changes. "The savings generated will allow for expense control while also supporting the investments needed to achieve our long-term vision, which includes a robust digital experience to align with evolving client needs."
The Federal Reserve in September
Banks, already affected by inflation, now expect to see the Fed's actions curb economic activity, loan demand and overall revenue. During economic downturns, loan losses also tend to rise, driving up credit costs.
D.A. Davidson analysts said in a report that banks may soon have to start increasing provisions for loan losses. When banks set aside more to cover potential losses, it cuts into profits.
Analysts at Moody's Investors Service said credit quality among consumers, in particular, has begun to deteriorate amid inflation and rising rates. This includes credit cards and auto loans.
Credit "will continue to weaken moderately," the Moody's analysts said, adding to ongoing cost pressure. "The personal savings rate is at its lowest level since 2009, as high inflation reduces disposable income" and affects borrowers' collective ability to make loan payments.
