Home Run Hitters: Results of the 2009 Bank Performance Scorecard

Glancing at the performance rankings of the nation’s largest 150 banks this year, it’s not hard to spot trouble. Nearly half of the banks lost money over a 12-month period ended June 30, 2009, a cruel reminder that many financial institutions are still paying dearly for the shaky underwriting conducted during the credit bubble earlier this decade. View the complete 2009 Bank Performance Scorecard results.

Yet a look at the top banks tells a different story. Despite the upheaval of bank balance sheets across America, there are many financial institutions still going strong, especially ones that adhere to a basic formula for successful banking: lend money to low-risk borrowers, keep a lid on expenses, and dominate local market share.

Once again, plain vanilla banking won out over the growth-at-any-cost mentality, according to our annual Bank Performance Scorecard. Based on measurement criteria and analysis complied by Sandler O’Neill & Partners LP, a New York-based investment banking firm that specializes in the financial services industry, the Scorecard usually includes repeat performers that generate high ranks in boom times and bust.

This year, most of the top 10 financial institutions are commercially focused, which shielded them from heavy losses stemming from deteriorating residential and consumer loans. The top five financial institutions in this year’s Scorecard are First Financial Bankshares Inc., Abilene, Texas; Bank of the Ozarks Inc., Little Rock, Arkansas; Glacier Bancorp, Kalispell, Montana; Westamerica Bancorp., San Rafael, California; and Republic Bancorp, Louisville, Kentucky.

The Scorecard looks at the nation’s largest 150 banks and thrifts with assets of $3 billion and up. Those banks are ranked by three main measures: profitability, capital adequacy and asset quality. The review period spans the last two quarters of 2008 and the first two quarters of last year.

Among the top performers, size mattered, with banks with $3 billion to $12 billion faring best. “It was really a year where being smaller was better,” says Mark Fitzgibbon, Sandler’s director of research, who oversaw the Scorecard’s compilation. “The midsize and smaller companies tend to be a little more conservative. During this past year, conservatism was critically important. The companies that were conservative tended to outperform.”

Compared with last year’s Scorecard, geography this time had less significance with the top performers, who came from all regions-even those battered by the highest unemployment rates and steepest housing downturns such as California. “They may feel some pressures from the slowing economic situation and their nonperforming assets, but they are able to grind through and have enough capital to fight through this difficult period,” Fitzgibbon says.

First Financial Bankshares, which ranked No. 1 on the Scorecard this year, received high scores in four of the six metrics used to gauge performance, while holding its own in the others. The bank, with $3.1 billion in second quarter 2009 assets, operates as a multibank holding company with 50 locations in west and north Texas.

The first two measurements on the Scorecard gauge profitability: return on average assets (ROAA) and return on average equity (ROAE). These metrics are based on publicly available data calculations for the third and fourth quarters of 2008 and the first two quarters of 2009. Over this period, First Financial’s 1.73% ROAA ranked second in the category, while its ROAE of 14.66% placed sixth. (The Scorecard’s philosophy views profitability as the most important performance criteria for a public company, giving ROAA and ROAE each a 25% weight of the overall score, thus making up half of the total. The other four metrics each receive a weight of 12.5% each, representing the other half.)

The next two metrics measure capital adequacy, which includes the Tier 1 capital ratio and leverage capital ratio on June 30, 2009. First Financial’s Tier 1 ratio was 17.36%, ranking it fifth, while its leverage ratio came in at 10.53%, in 31st place. The capital adequacy metrics make up a quarter of the Scorecard tabulation.

The final two measures gauge asset quality make up the final 25% of the score. One is the ratio of nonperforming assets (NPAs) to total loans and “other real estate owned,” or OREO, where First Financial came in 13th at 0.94%. The other number measures the percentage of loan loss reserves to total loans: First Financial ranked 95th at 1.57%.

While First Financial did not register No. 1 in any single category, it generated the highest overall score by coming in consistently high in the rankings, especially profitability. Top performers all generated high rankings in most categories relative to their peers.

For First Financial, that in part was due to its careful strategy of operating in markets where it can operate as the leader in terms of deposit market share. It ranks first or second in most markets. Its Texas footprint lacks fierce competition of the national banks, allowing it to charge higher rates on loans and lower rates on deposits. It also has benefited from a Texas economy that has fared better than other regions, thanks in part to a solid energy sector and a housing market that has not been as hard hit as other Sun Belt states. “Clearly this bank is in offensive mode,” Fitzgibbon says. “They have capital. They have clean credit metrics and reserves. And they are spinning out high levels of profitability in a difficult period. This is a company that is well positioned to capitalize on the dislocation that is occurring in the marketplace.”

First Financial, the runner-up in last year’s Scorecard, operates 10 banks under its holding company. While it rebranded all of its banks last year with the same First Financial name, each bank has a separate board and management, which make their own calls on lending, pricing, and marketing (see profile, page 26). “The decision-making process for the customer is at the bank,” says Scott Dueser, chairman, president, and chief executive officer of the holding company. “Each president, his loan committee, and board make the decisions.”

That means First Financial bankers know their customers and can detect problems early on among its diverse customer base. In Abilene, Texas, First Financial bankers cater to customers such as oil and gas companies, students, ranchers, and doctors. That is far different from Hereford, situated in the Texas Panhandle, an economy based around cattle and agriculture, where bankers often dress in boots and jeans to blend in with their customers.

Bank of the Ozarks, with $3 billion in assets at the end of the second quarter 2009, moved into second place, up from 12th in the previous Scorecard. Bank of the Ozarks has 72 branches in Arkansas, metropolitan Dallas, and the Texarkana metropolitan area, which straddles the Texas-Arkansas border. George Gleason, chairman and chief executive officer, bought the bank in 1979 when it had $29 million in assets. He has mainly grown the bank organically, luring away officers from bigger competitors. “We hire talented and experienced bankers, place them in prime locations in good markets, and arm them with quality products and services,” Gleason says.

In terms of profitability, the bank’s ROAA of 0.89% allowed it to inch up to 24th place in the rankings, from 27th, while its ROAE of 9.69% dropped the bank to 19th in the category, down from 6th. Yet the Bank of the Ozarks more than made up for it in capital adequacy, with its Tier 1 ratio rising to 15.74%, up from 11.20% in last year’s Scorecard, giving it a ranking of 12th in the category. Similarly, its leverage ratio rose to 12.50%, up from 9.01%, ranking it fourth in the metric.

The increase in the capital ratios was in part due to a raising in the fourth quarter of 2008 of $75 million as part of the Federal Reserve’s Troubled Asset Relief Program (TARP), which it later exited during the fourth quarter of 2009. Nevertheless, Gleason says steady earnings growth and a modest dividend of 25% of earnings has allowed the bank to boost capital and gives it the opportunity to purchase deposits and assets from failed banks from the Federal Deposit Insurance Corp. While the bank has favored organic growth over the years as a way to preserve its culture and avoid overpaying for assets, Gleason is open to buying up deposits and loans of failed banks. “We have been retaining a very favorable amount of earnings as the economy has slowed over the last couple of years,” Gleason says. “That puts us in excellent position to be able to look for acquisitions of failed FDIC institutions without an immediate need to raise capital.”

Coming in third on the Scorecard is Glacier Bancorp, last year’s winner, which once again did particularly well in profitability and capital adequacy. Glacier, which had $5.6 billion in assets at the end of the second quarter 2009, is situated in Kalispell, Montana, and operates 11 banks with about 90 locations in its home state and in Idaho, Utah, Washington and Wyoming. Similar to First Financial, its banks have separate charters and operate independently, with separate boards for each.

While its grades this year for profitability are comparable to the previous Scorecard’s rankings, Glacier-like most banks-has experienced rising nonperforming assets, which reached 3.92% of loans and other real estate owned at the end of the second quarter, ranking it 95th in the category, compared with 38th last year. (Glacier reported a third quarter 2009 loss of $1.5 million, with a $47 million provision for loan losses, which obscured its record operating income of $82 million for the period.) The rise in nonperforming assets was mainly due to higher NPAs in its construction and development portfolio in Boise following a significant slowdown in the local real estate market in September 2008, with fewer individuals from California and elsewhere purchasing homes in Idaho and Montana, according to Jennifer Demba, an analyst at SunTrust Robinson Humphrey in Atlanta. “They have realized they need to stick to their knitting, which is smaller markets,” Demba observes.

Glacier is also well capitalized to weather the storm. In the fourth quarter of 2008 it raised $98 million in an equity offering, despite the turmoil in the credit markets. Demba credits the shrewdness of management, with Michael “Mick” Blodnick, president and chief executive officer, at the helm. “Mick Blodnick is one of the better CEOs in the country,” Demba says. “He had the foresight to go out and raise capital proactively last fall.” That capital should help Glacier pick up troubled assets of competitors in the years to come, she adds.

Westamerica Bancorp, headquartered in San Rafael, California, ranked fourth overall in the Scorecard. Westamerica, with $5.2 billion in assets at the end of the second quarter last year, outperformed all banks in terms of profitability, with an ROAA of 2.08% for the four quarters ended June 30, 2009-the No. 1 ranking in the category. Westamerica scored second place for return on equity, with an ROAE of 20.77%.

There’s not much secret to Westamerica’s profitability, just steady conservative banking, says David Payne, chairman, president, and chief executive officer. The bank focuses on gathering core deposits from its customers, mainly small businesses with annual sales of $1 million to $10 million. Westamerica watches costs too, shunning prime locations such as high-traffic retail corners, and forgoing wood paneling and pricey furniture. In fact, Payne works out of a cubicle about 20 feet from a conference room at the bank’s main office. Branch personnel also lack private offices. The no-frills philosophy resulted in an efficiency ratio of 36% for the six months ended June 30 of last year. The savings allow the bank to better compete on servicing customers, Payne says. “That efficiency ratio gives us so much more flexibility, particularly when a customer wants a little bit better rate. And I know that I’m efficient enough to take care of that for the customer where my competitor down the street can’t afford to do it because their efficiency ratio is 60%.”

Westamerica also follows strict underwriting guidelines, focusing on cash-flow rich businesses. That seemed downright outdated earlier this decade, when other California banks made loans based on the rising value of collateral, which was usually the real estate itself. The approach was criticized by investors, who said Westamerica was leaving money on the table. Yet with the crash in home prices, those critics are most likely counting their blessings. Payne credits a conservative board that backed up management’s approach. “I was probably a bit more conservative than I needed to be through the upswing in the economy,” Payne says. “But I’m about consistency and so is the board. Our board was very strong in defense of ‘Let’s be consistent here. Let’s not necessarily follow the herd off the cliff.’”

Republic Bancorp Inc., which had $3.1 billion in assets at the end of the second quarter, took the fifth overall spot, moving up from 10th in the previous Scorecard. The Louisville, Kentucky, bank placed fourth in ROAA, at 1.41%. The bank also ranked fourth in ROAE, which was 16.94%.

Large financial institutions failed to make the top 10 this year. The biggest of the top 10 included Bank of Hawaii Corp., based in Honolulu with $12.2 billion in assets at the time of the survey. It came in sixth overall. International Bancshares Corp., situated in Laredo, Texas, ranked seventh, with $11.5 billion in assets.

In fact, the only large institutions to make the top 20 were trust-oriented banks: Chicago-based Northern Trust Corp., with $75 billion in assets, came in 11th; Boston-based State Street Corp., with $153 billion in assets, was 16th; and Bank of New York Mellon Corp., headquartered in New York, with $203 billion in assets, was 20th.

Surprisingly, only one bank from the Northeast made it to the top 10: New York’s Signature Bank, with $7.9 billion in assets, came in 10th place overall. The Northeast’s economy has fared better over the past year than other regions; its states do not match the troubles of those such as Florida, California, and Michigan, says Fitzgibbon of Sandler O’Neill. Fitting to Florida’s collapse in real estate, the only bank from the state on the list, BankAtlantic Bancorp, came in 143rd place. BankAtlantic, which had $5.3 billion in assets, had a negative ROAA of 4.42% and an NPA ratio of 10.84%.

Fitzgibbon also noted that the last time such a large portion of the 150 banks on the list were unprofitable was in the early 1990s, during the last real estate bust. Banks losing money have been hit hard by rising delinquencies and writeoffs. For example, First Horizon National Corp., which ranked 76th with a negative ROAA of 1%, marks a point on the list where banks start showing losses. Its NPA ratio of 6.16% tells part of the story.

Thrifts also did not fare well. Since they have large residential portfolios, only one managed to make the top 20: Capitol Federal Financial, an $8.3 billion savings association in Topeka, Kansas, came in 15th overall, buoyed by having the No. 1 Tier 1 capital rank, with a ratio of 22.90%, and the No. 6 ranking in of nonperforming assets, with a ratio of 0.62%. “In years past you would have found lot more thrifts at the top of this list,” Fitzgibbon says. “They were riding the wave of the consumer segment of the economy, which was obviously a tough place to be in the last year.”

Those pains might be remembered for some years to come, until the next banking boom at least.

View the complete 2009 Bank Performance Scorecard results.