The A-List

Having a vision for the future and the wisdom to implement that vision is a crucial component of success. Some might say leadership can make the biggest difference between a mediocre institution and a superlative one. But it hardly stops there. Other defining factors that inspire high performance and lead to increased shareholder value are uncompromising customer service, a well-honed M&A strategy, shrewd capital management, and leading-edge technology.

To further define these qualities and identify institutions that are examples of top performers, Bank Director put together a straw poll of banking analysts and asked them to posit which banks could be thought of as leaders in particular areas. We’ve run a list of their responses, and homed in on three institutions for each category where there was consensusu00e2u20ac”including the analysts’ comments on why they considered these institutions to be among the nation’s best.

Leadership: The Analysts’ A-List:

• Alabama National Bancorp.
• Bank of America Corp.
• Cascade Bancorp
• Commerce Bancorp
• North Fork Bancorporation
• TCF Financial Corp.
• Sky Financial Group
• Wachovia Corp.
• Wells Fargo & Co.

Wells Fargo & Co.

Richard Kovacevich, chairman and president of San Francisco-based Wells Fargo & Co., is a perennial favorite of analysts. For all his leadership power, Kovacevich, 61, runs Wells Fargo, a $428 billion institution with a management style that empowers its employees. Interestingly, say industry observers, the more things change, the more they stay the same at Wells.

“The first thing that comes to mind is consistency,” says Jason Goldberg, an analyst at Lehman Brothers. “Here is a company that established a strategy 15 years ago and hasn’t wavered from it. The company as a whole has benefited tremendously from that.”

All told, that approach has translated to a consistently high return on equity, which was 19.6% in 2004, the highest among the nation’s five largest banks. Wells Fargo had record diluted earnings per share of $4.09, up 12% from $3.65 in 2003. Net income rose 13% to $7 billion, up from $6.2 billion. And while its net-interest margin fell to 4.89% in 2004, down from 5%, it still leads its top rivals.

The linchpin in Kovacevich’s approach has been cross-selling to the existing customer base. That means motivating thousands of employees at 3,000 branches to comb through data on 23 million customers to unearth prospective new sales. In that spirit, Kovacevich has given employees control over decision making, empowering them in speeches and at branch visits on a regular basis. In doing so, he has been able to integrate disparate cultures from past acquisitions to work together in sharing customers and commissions. Wells Fargo workers meet for morning huddles at bank branches where they talk about daily goals and cheer each other on; other banks have copied the practice. And to keep the system going, workers are given incentives to make more sales.

That approach has won Kovacevich accolades from investors and analysts. “Banks that have those types of people set themselves apart from the weaker ones,” says Christopher Mutascio, an analyst at Credit Suisse First Boston who follows Wells Fargo. “One can argue that among the big banks, Wells is considered among the best.”

Cascade Bancorp

Patricia Moss, president and chief executive officer of Cascade Bancorp, based in Bend, Oregon, has guided the bank’s stellar performance over the years. Since she took the helm in 1998, the 51-year-old chief executive has steered the bank toward rapid growth. In fact, the bank’s assets have more than doubled in three years, topping $1 billion for the first time at the end of 2004. Return on assets for the year was 1.83%, well above its peers, while return on equity was 21.7%. Even more impressive, most of Cascade’s growth has been organic.

“She has got a great track record as one of the best CEOs in the business,” says Joseph Morford, an analyst at RBC Capital Markets. “She is a good leader in developing strategy. Part of it is just valuing people and attracting new players into the fold.”

It’s clear Moss, described as outgoing and energetic, knows a good opportunity when she sees one. For example, after Wells Fargo purchased Portland, Oregan-based Bank of the Northwest, a group of employees at the acquired bank proposed opening an operation in Portland. Though Cascade didn’t have plan to tackle Portland, Moss seized the opportunity and took on the group of 17 former employees en masse. It paid off: In late 2003 and 2004, the Portland location contributed to the bank’s phenomenal loan growth of 46% for the year. “She has hired on a good team,” says Jeffrey Rulis, an analyst at D.A. Davidson & Co, who believes Moss’s strategy made the difference between a successful expansion and a mediocre one. “They went for people first, then location.”

Alabama National BanCorporation

John H. Holcomb III, chairman and chief executive officer of Alabama National Bancorp., was applauded by our analysts for his ability over time to adhere to his stated strategy. The road map for the $5.3 billion bank includes three elements, says Jeff Davis, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee: maintaining a strong credit quality, growing earnings 8% to 12% a year, and pursuing high-growth markets.

To be sure, Holcomb, 53, has kept the focus. Credit quality is rock solid for the Birmingham-based bank: It has kept losses under 100 basis points over the last eight years, and Davis says its nonperforming loans at year-end 2004 represented 0.28% of overall loans. The bank is also pursing the Florida market aggressively: Branches in the state make up 45% of deposits now, a figure expected to grow to 65% in five years, according to Davis. “Holcomb is very good at executing a strategic plan,” he says. “He is good at figuring out where the organization has to be five years from now and continually updating that.”

Joseph Stieven, an analyst at Stifel Nicolaus & Co. in St. Louis, also placed Alabama National as a top-performing bank, stating that the bank has grown at a compounded annual rate of 28% over the last five years, excluding dividends. Stieven regards Holcomb as top-notch, putting him in a league of chief executives who “all have an exceptional passion to excel.”

“If you were playing on a sports team, you’d want these guys on your team. They are consummate overachievers. They all have a game plan. And while they might make changes, they are very loyal to their game plan.”

Customer Service: The Analyst’s A-List

• Bank of America Corp.
• Commerce Bancorp
• Mercantile Bankshares
• TCF Financial Corp.
• Wachovia Corp.
• Umpqua Holdings Corp.

Commerce Bancorp

Commerce Bancorp, the retail powerhouse based in Cherry Hill, New Jersey, has made a reputation for itself by successfully blending traditional banking and retailing. Led by chairman and president Vernon Hill, the $30.5 billion bank has been steadily growing through de novo expansion, all the while placing a premium on the customer experience. That strategy has driven its explosive deposit growth, giving the bank a low-cost source of funding.

Hill, whose business background includes real estate and fast-food restaurants, first brought the concept of retailing to banking in the 1990s. In those days, an old-fashioned retail strategy went against the grain as many banks tried to shift users from using physical locations to call centers, and later, the Internet. Commerce continued to open more branches, encouraging its customers to walk in and do businessu00e2u20ac”an approach Hill promotes to this day. To aid ease of access and familiarity, the bank chooses prime locations, creating branches with a similar sleek, modern design that features shiny black teller countertops, flat-screen televisions mounted on the walls, and pine-colored desktops notably devoid of paper. Moreover, checking is free, and branches are open seven days a week. Coin counters in each branch are available at no charge.

“It’s a very simple model in which they are going where the customer needs improved service,” says Andy Collins, an analyst at Piper Jaffray. Such a strategy, he continues, doesn’t require a lot of bells and whistles, it just means “building out branches, providing a good retail atmosphere, and being very customer friendly.”

The growth of low-cost deposits has allowed the bank to keep its cost of funds low as wellu00e2u20ac”just over 1%. As a result, the bank has generated a respectable interest rate margin (4.16% at year-end) with earnings per share rising 26%, to $3.26, in 2004.

In essence, says Gerard Cassidy, an analyst at RBC Capital Markets, Commerce’s undisputed success in its market has come from one superlative strategy: “By providing customer service above and beyond traditional service levels.”

Wachovia Corporation

Under the stewardship of G. Kennedy Thompson, Wachovia Corp.’s chief executive officer, the Charlotte, North Carolina bank has made great strides in customer service. The improvements began after Thompson took the helm in mid-2000, when he increased staffing levels at branches, call centers, and operations and enhanced compensation plans to emphasize service improvements as well as sales. To gauge how well these efforts were paying off, Thompson formed a customer satisfaction committee that has met monthly for the past five years. In addition, the bank uses Gallup polls to survey 60,000 to 70,000 customers each quarter to measure satisfaction levels. The sales force is monitored frequently, and retention partially drives incentive plans at the branch level. These measures are designed to ensure that loyal customers will stay with the bank longer, buy more products, and create word-of-mouth referrals.

“Wachovia is very customer-focused,” Piper Jaffrey’s Collins says. “It doesn’t try to do ‘sales per banker per day.’ It feels that promotes the wrong attitude toward serving the client best.”

The results have been positive. According to a 2004 survey performed by the University of Michigan, Wachovia scored a 78 on the school’s American Customer Satisfaction Index, up two points from a year earlier and bucking a trend of stagnating or declining service levels for banks. Meanwhile, shareholders were rewarded as well: Wachovia’s earnings per share increased to $3.81 in 2004, up 20% from 2003.

These results are a far cry from Wachovia’s shaky service reputation in the 1990s, when it went by the First Union name. At that time, many big banks such as First Union fell out of favor with customers when they used customer relationship management tools to measure account profitability and to eliminate low-balance account.

Now, many banks like Wachovia are finding the inverse to be more successful. In February, the bank actually boosted service to its free-checking offering by including free online bill-pay and erasing direct-deposit or minimum-balance requirements.

Credit Suisse analyst Mutascio notes the rise in Wachovia’s stock price. In mid-March it was around $53, up from $24 in November 2000. When asked whether he attributes the stock price rise to the changes in customer service levels, he says, “I don’t think what is happening here is any coincidence.”

Umpqua Holdings Corporation

Umpqua Holdings Corp. stands out among analysts for its retail-oriented model that focuses on service in its branches. The $3 billion bank in Roseburg, Oregon has developed a retail strategy that has been mimicked by others, analysts note. Most of its 92 branches, known as “stores,” have a retail feel, with a computer cafu00c3u00a9, hardwood floors, atmospheric lighting, and the bank’s own blend of coffee. Customers can buy caps, T-shirts, and umbrellas, and they are given a free chocolate after each transaction. Umpqua’s unabashed goal: to become the leading bank in the Pacific Northwest and Northern California.

“They are truly unique,” says Louis Feldman, an analyst at Hoefer & Arnett’s Portland office. “They are the innovator of the way a lot of banks are moving.”

When Raymond C. Davis, Umpqua’s chief executive officer, took over in the mid 1990s, the bank ranked No. 3 in market share in Douglas County, where it is headquartered. After opening the first retail-oriented branch in 1996, the bank became No. 1 in the county in 18 months. Davis aspired to turn the bank into a company known for service on par with retail chains such as Ritz-Carlton and Nordstrom’s. According to RBC’s Morford, at Umpqua, “there is a big commitment to service overall.” In the latest rollout of its store design, branch activities include such social gatherings as movie nights, poetry readings, and yoga classes.

The innovations have paid off. Net income rose 38% in 2004, to $47.2 million. Annual earnings have more than doubled since 2000, to $1.30 a diluted share, up 120%.

“The customers love the attentiveness of the people,” Feldman says. “They say the bank knows you and tries to anticipate your needs.”

Mergers & Acquisitions: The Analysts’ A-List

• Boston Private Financial Holdings
• M&T Bank
• North Fork Bancorporation
• Westamerica Bancorporation

M&T Bank

M&T Bank has developed a reputation as a company that won’t overpay for its acquisitions but instead buys banks that need a bit of work to turn around. It’s a strategy that has helped bring it to the upper echelon of our analysts’ picks for strong performers in the M&A category. “M&T has historically bought underperformers at low price and fixed them up, as opposed to giving synergies away by paying too much to companies that they have acquired,” Lehman Brothers’ Goldberg says.

Headquartered in Buffalo, New York, the $53 billion M&T has bought six companies since 1994u00e2u20ac”not a frenetic pace, but one that has allowed it to steadily keep betting on winners. In the 1990s, M&T stood out from the crowd because it preferred to use purchase accounting for its deals, rather than the more popular pooling method. Without the benefit of writing off goodwill allowed under pooling, M&T’s expenses often appeared higher than others. “They weren’t following the pack,” says Jacqueline Reeves, an analyst at Ryan Beck & Co. However, she says, using pooling accounting gave M&T the flexibility to shed less profitable businesses, which contributed to a leaner and meaner organization. This strategy gained favor with investors and has led to M&T’s reputation for having strong, rational management.

It its latest endeavor, M&T’s 2003 acquisition of Baltimore-based Allfirst Financial from Allied Irish Banks allowed it to jump into a rapid growth market with what many perceive as a great deal of upside potential. Now M&T, accustomed to working in low-economic-growth regions such as upstate New York, is simply applying a formula that works, says Reeves.

“It has been able to deliver returns from markets that haven’t been growing as quickly,” Reeves says. So far the slow and steady approach appears to be paying off: M&T’s earnings per share rose to $6 in 2004, up 21% from 2003.

North Fork Bancorporation

Through shrewd dealmaking, John Adam Kanas has transformed North Fork from a little-known Long Island institution into a thriving $30 billion player that ranks sixth in deposits for the Greater New York market. Kanas’s keen eye for expansion opportunities has overseen 11 bank and thrift acquisitions since 1994, and in a stretch of five deals between 1995 and 1999, the Melville, New York bank’s assets exploded, increasing more than fourfold to $12.9 billion. Kanas is known as a relentless costcutter who has been able successfully wring value out of deals, in some cases extracting more than 50% in cost savings within a year. “He does it very quickly,” Ryan Beck’s Reeves says. “He is a very good executor on deals.”

Kanas’s penchant for slashing costs is reflected in North Fork’s efficiency ratio, the rate that measures how much a bank spends for every dollar of revenue it produces. North Fork’s ratio was 36.9% in the fourth quarter, among the lowest nationally for financial institutions.

After a dormant period of nearly four years, Kanas returned to deal making last year by purchasing Trust Co. of New Jersey in May for $726 million and followed up by making its largest-ever purchase with the acquisition of GreenPoint Financial Corp. for $6.3 billion last October. That purchase allowed North Fork to leapfrog over Wachovia Corp. to take sixth place in market share.

Boston Private Financial Holdings

Boston Private Financial Holdings Inc., a Boston-based wealth management firm that focuses on private banking, also has mastered the art of dealmaking. The $3.3 billion company has completed 12 acquisitions since 1995, buying commercial banks, asset managers, and financial planning firms. The company’s approach is to cluster each of these three business lines near each other to cater to high-net-worth clients.

The aggressive acquisition strategy has given the company a presence in New England, New York, California, and the Pacific Northwest. Moreover, Boston Private has been able to hold onto the staff it acquires, while reaping fee gains from the new companies. “They have been successful in acquiring banks, asset managers, and financial planning firms and integrating them into the Boston Private culture,” says Cassidy of RBC Capital Markets. “They structure deals in a way that gives incentives to the people selling the institution to stay on board through earnouts, rather than having them sell out and just walk away from the management.” The company also allows acquired institutions to retain independence while gaining the efficiency of using a common back office. “It gives them a very high degree of autonomy to continue to run the business as they have done,” says Lana Chan, an analyst at Harris Nesbitt Corp. in New York.

Boston Private has supplemented strong organic growth in fee-based revenues with the acquisitions, according to Cassidy. The company closed deals last year with Encino State Bank and First State Bank in the Los Angeles area, which accounted for about 30 percentage points of the 40% year-over-year growth in net-interest income, according to Cassidy. Similarly, Boston Private’s purchase of Dalton Greiner added 28 percentage points to the 66% year-over-year growth in investment management fees. The company plans to continue growing fee revenue by making acquisitions in new cities.

Capital Management: The Analysts’ A-List

• National City Corp.
• M&T Bank
• TCF Financial Corp.
• U.S. Bancorp

TCF Financial Corporation

Banks manage extra capital from strong balance-sheet growth in three ways: paying dividends, repurchasing shares, and buying other companies. Most banks maintain attractive dividend payout ratiosu00e2u20ac”dividends divided by earnings per shareu00e2u20ac”of about 46% on average, according to Fred Cummings, an analyst at KeyBanc Capital Markets. Yet “the difference is the degree to which you buy back your stock.” When combining those two measures, a few banks stand out, one of which is TCF Financial Corp.

TCF, a $12.3 billion bank in Wayzata, Minnesota, has demonstrated consistent ability to return 100% of earnings over the last five years. “They have done [as good a] job as any,” Cummings says.

Known for its de novo expansion strategyu00e2u20ac”the bank opened 30 new branches in 2004, including 11 in supermarketsu00e2u20ac”TCF doesn’t use capital for acquisitions and has therefore focused on returning capital to shareholders in the form of stock buybacks and steadily increasing dividends. TCF’s dividend increased this year to 85 cents a share, up from 75 cents last year and 65 cents in 2003. Its compounded dividend growth rate of 19.6% over the last 10 years is the fifth highest among the 50 largest banks in the country, according to company reports.

Meanwhile, stock buybacks have rewarded shareholders as well. TCF repurchased 4 million shares of its stock in 2004 at an average cost of $29.14 a share. While the bank’s net income increased 18.1%, shareholders were given a nice boost from the buybacks: Diluted earnings per share jumped to $1.86 in 2004, an annual increase of 21.6%. Through Dec. 31, the bank has bought back 54.2 million sharesu00e2u20ac”29% of those outstandingu00e2u20ac”since January 1998, at an average cost of $17.58 per share.

U.S. Bancorp

After years of acquisitions and credit troubles that eroded its capital base, U.S. Bancorp is focusing on giving back excess capital to stockholders, a strategy that has gained favor on Wall Street, according to analysts.

The Minneapolis bank, with $195 billion in assets, announced in 2003 it would focus on returning 80% of earnings annually in dividends and buybacks. So far, U.S. Bancorp has held to its promise. “It is something they have committed to,” Lehman analyst Goldberg says. “They have stuck with it, and it has worked.”

The vision represents a dramatic shift from the past, when the bank strung together a series of acquisitions that some observers characterized as destroying shareholder value. When Firstar Corp. of Milwaukee bought the old U.S. Bancorp in 2001 (and adopted the name), a huge drain on capital occurred. Now the focus is on organic growth, and in 2004 U.S. Bancorp returned virtually all of its excess capital to shareholdersu00e2u20ac”a full 109% of earnings in the form of dividends and share repurchases.

The outlook, analysts say, is good for U.S. Bancorp, largely due to its capital management strategy. Diluted earnings per share increased last year to $2.21, up from $1.93 in 2003. Buybacks helped boost earnings per share, up 13%, beyond the 11.6% increase in net income.

National City Corporation

Abundant cash from strong profits and recent divestitures has allowed Cleveland-based National City Corp. to increase its dividends and buy back stock at a relatively fast clip. “No question, National City has been a very active manger of capital over time,” says Scott Siefers, an analyst at Sandler O’Neill & Partners in New York.

With $139 billion in assets, National City is focusing more on the business of banking, shedding noncore businesses and boosting its balance sheet in the process. Last year the bank sold two units, National Processing, a payments-processing subsidiary, for a pretax gain of $714 million and its bond administration division for $62 million. Meanwhile, the bank has been scooping up other banks. It acquired Allegiant Bancorp. in 2004 which providing National City with 33 branches in St. Louisu00e2u20ac”a solid platform. It also bought Provident Financial Group, giving it an entru00c3u00a9e into Cincinnati and Northern Kentucky with an imposing 52 branches.

Although its payments-processing and bond businesses were profitable, the bank didn’t have the scale to be a market leader. “They didn’t feel like they were getting the returns they wanted,” Siefers says. “They are now redirecting capital from areas where they thought they might not have managed it well to areas of their core competency.”

Much of that capital is going back to shareholders. National City’s dividend payments increased to $1.34 for 2004, up from $1.25 a year earlier. Meanwhile, the bank bought back 40.1 million shares last year, after repurchasing 11.5 million in 2003. Analysts expect National City to keep up the pace this year. Notes RBC’s Cassidy: “They are buying back gobs of shares.”

Technology: The Analysts’ A-List

• Commerce Bancorp
• U.S. Bancorp
• Wells Fargo & Co.

Wells Fargo & Co.

On one hand, technology has become commoditized over the years, with banks outsourcing more and rejecting proprietary systems in favor of off-the-shelf solutions. Keeping up is a necessary part of remaining competitive, analysts say, and staying ahead has become an even harder task. Yet analysts we polled mentioned several banks, such as Wells Fargo & Co., as those that are “out in front,” using technology to win customers and become more efficient versus their competitors.

Many analysts mentioned Wells Fargo in this category because of the way in which it dovetails technology with its employees and its interaction with customers. Furthermore, the company is growing its top line enough to plow investment back into technology to continue to remain in the vanguard.

“Wells Fargo is showing it has the revenue growth and can redeploy it into systems without hurting EPS growth,” Credit Suisse’s Mutascio says.

The most impressive use of Wells’s technology is its online presence. “It has been a leader in online banking in terms of developing that strategy,” Mutascio says. “It tends to be ahead of the game a bit.”

Since launching its Internet bank in 1995, Wells Fargo’s website has gain plaudits from experts and customers. Other innovations have helped maintain its heady reputation. It introduced an expense tracking feature for customers called “My Spending Report,” and it also has been praised for serving corporate customers with an online suite of products dubbed the “Commercial Electronic Office.”

Operationally, Wells Fargo benefits from platforms that help its employees cross-sell products, Lehman’s Goldberg notes. “One of the reasons it is so good at cross selling is because it has the technology systems to know which products its customers have and to help it compensate its salespeople for selling additional product,” he says.

Commerce Bancorporation

Along with getting high marks for customer service, Commerce received applause from analysts for its technology initiatives. With its penchant for organic rather than acquisition growth, Commerce has been able to upgrade its technology systems across the bank quickly, without the hassles of integrating multiple legacy systems. Moreover, unlike banks that have tried to reach the unattainable, Commerce has concentrated on deploying technology that supports, rather than carries, its core retail strategy.

“They clearly see the technology as an enabler,” says Reeves from Ryan Beck. “This is different from other companies that buy technology and think it’s a solution.”

For each relationship, whether it concerns a retail or commercial customer, Commerce’s computer screens have various tabs associated with the products and services that customers have with the bank. “It’s easy to navigate those relationships,” Reeves says.

Online signature verification is another example of a supporting system that enhances the customer experience. The bank has every signature on screen, completely viewable at any location and at any point of contact with the customer. That helps with approvals and also guards against fraud.

Technology initiatives such as these, says Reeves, are reducing fraud as well as providing consistent, reliable information at your fingertips. “It makes the process so much more efficient.”

U.S. Bancorp

Along with earning plaudits for its capital management abilities, U.S. Bancorp also sets itself apart from other banks by heavy investment in technology to streamline costs and boost its lucrative processing division, says Sandler O’Neill’s Siefers. The numbers demonstrate that the bank has contained costs: Its efficiency ratio continued to drop in 2004, to 45.3%, down from 45.6% a year earlier, making it one of the lowest among the nation’s largest banks.

Meanwhile, Siefers says the bank’s technology investment in its processing division is paying dividends. The division, dubbed “Payment Services,” covers a variety of processing niches including credit and debit cards, corporate and purchasing cards, ATMs, and stored-value cards. The unit serves a wide variety of customers, from small merchants to large, global clients. The contribution to earnings that piqued Seifers’ attention is not insignificant: Payment Services had a net income of $716.5 million in 2004u00e2u20ac”up 20% from 2003u00e2u20ac”and represents 17% of the bank’s 2004 earnings. As the United States’ payments system continues to move away from using cash to pay for goods and services, U.S. Bancorp is well-positioned for the future, he says.

“It’s mostly due to having the infrastructure and the scale,” Siefers says. “By virtue of its business mix and having these processing businesses, it has set itself up pretty well.”

Together, higher transaction volumes, rate increases, and new products are fueling the division’s growth. And U.S. Bancorp’s strong investment in technology in Payment Services also means the institution is well situated to accommodate the Check Clearing for the 21st Century Act, or “Check 21″u00e2u20ac”the law that took effect last year that allows banks to accept electronic images of checks, rather than paper ones. The industrywide transformation is expected to speed up the implementation of technology used to scan checks and process them, but for some institutions who haven’t stayed ahead of the curve, it will be like a cold bucket of water. Siefers says of U.S. Bancorp: “They are ready.”