Vigilant Eyeshades


Missouri bank sharpens focus on trimming expenses

By Ed Avis

When John Zimmer took over as president of HNB National Bank in Hannibal, Mo., in 2012, he figured there was likely some fat to be trimmed. The $396 million-asset community bank had merged with another bank four years earlier, doubling the size of its branches, staff and operations, and Zimmer was convinced some unnecessary or overlapping expenses still existed.

“One of the main things that I set out to do when I became president was to take a hard look at all of those things to see where we could maybe negotiate some better vendor terms and cut some wasteful things,”
Zimmer says. “It was mind-boggling what I found.”

After Zimmer’s first year personally scrutinizing all expenses, HNB National had eliminated $402,000 in costs. The second year it trimmed another $250,000. Moreover, the expense cutting led to an overall organizational culture that more keenly appreciates the competitive importance of eliminating unproductive costs, both large and small.

“This kind of took hold and spread to the point where today, in 2016, by the time it gets to me, all of the negotiating and bartering is done,” he says.

Early wins

In the first year of Zimmer’s hunt for costs to trim, he found 108 expenses to reduce or eliminate. Some individual expenses amounted to substantial savings, but many were small but accumulated into big savings that haven’t hindered operations and have helped prevent layoffs.

“I was amazed at how easy it was,” Zimmer says of the expense cutting. “It was just simple things that no one had done.”

Among the expenses eliminated was $36,000 per year that the bank paid for asset-liability consulting services. Zimmer says the bank wasn’t unhappy with the consultant, but he realized the bank simply did not need that level of outside expertise. Today the bank pays about $2,000 for the service.

HNB National’s telecommunication service connection met with Zimmer’s budget buzz saw. The bank had paid more than $100,000 a year for T1 lines. “We switched everything to virtual desktops and voice over IP technology, and that was a tremendous savings. Our board of directors strongly supported this change.”

As part of the bank’s search for savings, Zimmer also cleaned up the expenses for daily housekeeping services. “We said, ‘Instead of cleaning our branches every day, what if we just do Monday, Wednesday and Friday?’ And we cut the bill in half.”

Advertising and sponsorships also were scrutinized—“things that we just kept doing year after year because we’ve always done it,”
Zimmer says—for how much they truly benefited the bank, and many were cut. The bank saved $800 a year by ending its sponsorship of an hourly weather update on a local radio station, for instance.

Well-intentioned donations to many activities that had mounted over the years, from Little League teams to church functions, including some involving children or family members of staff, were eliminated. Zimmer says HNB National still generously contributes to local charities and causes, but the bank now considers the true value and impact of its donations. The bank began posing questions such as whether those asking for donations were even customers. “You can’t say yes to everybody, and that’s what we had been doing,” he says.

No more rubber stamp

Perhaps more important, Zimmer transformed some of the bank’s expense procedures. He eliminated the process of “rubber-stamping” invoices and outgoing checks from the bank’s various departments, opting instead to carefully inspect each expense personally.

“I spent a couple of hours, two or three hours every Friday, sitting down, going through these bills, seeing what we were paying for,” he says. “I would see something that would sound very expensive to me, and I would go back to our accounts payable clerk and say, ‘What’s the history of this?’”

Zimmer also tightened vendor oversight. He started questioning automatic cost “escalators” in contracts that increased the bank’s contract annual outlays by 3 to 5 percent or potentially more. He also began carefully scrutinizing contract line items, spurring his staff to do the same. One example of clauses clipped was gasoline surcharges imposed supposedly to cover vendors’ rising fuel costs at the pump. When gasoline cost $4 per gallon, those charges might have been justified, but when gas prices fell by half some vendors kept invoicing for the surcharges that the bank sometimes continued to pay without questioning. A few invoices marked for payment by staff had costly errors, contributing to a mountain of accumulated waste.

“You’ve got to really watch what people are billing you for,” Zimmer says.
Zimmer says community banks shouldn’t be hesitate to negotiate with their vendors. It’s common for employees to become complacent with vendors they work with frequently or closely. Unchecked and unquestioned, that tendency often leads to contracts with overly generous terms and invoices with inflated expenses. Multiplied across scores of contracts across multiple departments, that dynamic can harmfully accumulate needless costs across an organization.

Vendors will often drop fees, charges and costly terms if they’re only asked, Zimmer says. “You don’t have to be demanding or threatening, or anything,” he says. “But, you know, you can say, ‘We noticed your prices went up 30 percent a year for four years. Can we talk about that?’
“You start a dialogue, and it’s pretty amazing where that can end up sometimes.”

Culture change

Every community bank thinks it’s thrifty and cost conscious. Zimmer points out that his expense-cutting crusade was undertaken when HNB National was performing well, its profitability leading most of its peers. In the past, the bank was consistently posting return on average assets of 1.25 percent. But the bank’s efficiency ratio hovered in the 70 percent range, and Zimmer knew still greater

“I was amazed at how easy it was. It was just simple things that no one had done.”
—John Zimmer,
HNB National Bank

efficiencies were achievable and necessary to ensure the bank’s future in an increasingly competitive financial services industry.

“There was no red flag that we had a problem here. It wasn’t anything like that at all,” he says.

“You just have to educate your team. You might’ve been able to do that 25 years ago when you were a two-branch bank, but as you grow, you just can’t keep doing those same types of things.”

expense reviews have made an impression on his colleagues. Today, he says, employees are proud to show off their negotiating skills and their prowess at trimming expenses. “There’s just a little bit more ownership and pride in getting and negotiating those costs down for the better of the bank. Many of our key managers have become very good at it.”

The results have been demonstrable. With its renewed expense awareness taken hold, HNB National is consistently posting 2.25 percent return of average assets. Its efficiency ratio fell impressively to an ideal 51 percent.

“If your bank is struggling profitability-wise—due to loan loss or margin pressure or whatever—it’s even that much more important that you get your expenses under control,” Zimmer says, “or you’re not going to survive.”

Ed Avis is a freelance writer in Illinois. Tim Cook, ICBA’s senior vice president–publications, contributed to this story.