You Have Got To Have A Plan

If there’s one thing that all three winners of the 2015 Bank Performance Scorecard have in common, it’s a carefully focused strategy that is the polar opposite of the plain vanilla business models that most banks pursue.

Capital One Financial Corp., in McLean, Virginia, winner of the $50 billion asset and above category, features a regional banking franchise that has been grafted onto the root stock of one of the country’s largest credit card operations.

Little Rock, Arkansas-based Bank of the Ozarks Inc., which took the top honors in the $5 billion to $50 billion asset category, combines an ambitious mergers and acquisition strategy with an equally ambitious nationwide commercial real estate lending business.

And Preferred Bank, located in Los Angeles and the top ranked bank in the $1 billion to $5 billion asset category, focuses all of its attention on business customers in the country’s second largest metropolitan statistical area, or MSA, while it goes head-to-head with some of the world’s largest banks.

The performance of these three companies underscores a truism in today’s banking industry: The most profitable companies are often those whose strategies are intentional, focused and differentiated. It also helps to grow revenue, which most of the top performers also accomplished in 2014. “The biggest driver [in 2014] was top line growth,” says Mark Fitzgibbon, a principal and director of research at Sandler O’Neill + Partners LLP. “The industry had very good growth last year.”

The Bank Performance Scorecard is a ranking of the 300 largest U.S. banks listed on the NASDAQ OMX and the New York Stock Exchange, based on their 2014 financial data. Overall, the industry’s net income last year was actually down 1.1 percent compared to 2013, to $152.7 billion, according to the Federal Deposit Insurance Corp. This was the first annual decline in five years, according to the agency. But that performance needs to be put into some context. The annual decline was due primarily to lower revenue from the sale, securitization and servicing of residential mortgages, and higher litigation expenses at some of the very largest banks. “Almost two out of every three banks (64 percent) reported higher net income than in 2013,” the agency said.

For the most part, the 2015 Scorecard shows banks improved on their performance compared to last year’s ranking. One exception was the median tangible common equity to tangible assets ratio for the $50 billion and above banks, which declined from 8.37 last year to 8.26 this year, although this was probably due to the fact that several institutions in that group received regulatory approval to buy back shares of their stock in 2014, which would have had the effect of lowering their tangible common equity (TCE) ratios. Banks in the two other asset categories also saw their median return on average equity (ROAE) ratios decline even as their return on average assets (ROAA) ratio increased slightly. The area that saw the most improvement was asset quality, where the ratios of nonperforming loans to real estate owned, and net charge offs as a percentage of average loans, both showed significant decline. Six years into the country’s economic recovery, it would be hard for the industry’s asset quality to get much better.

The Scorecard uses five key metrics that measure profitability, capitalization and asset quality. ROAA and ROAE are used to gauge each bank’s profitability. The TCE ratio, a conservative metric that excludes less reliable instruments like preferred stock and debt, is used to measure each bank’s capital strength. And the ratio of nonperforming assets to total loans and other real estate owned, and the ratio of net charge offs to average loans, are used to assess each bank’s asset quality.

The banks received a numerical score in each of the five metrics, with the best performers receiving the lowest score. These scores were then added across and the bank with the lowest total score in each of the asset categories was the winner. For scoring purposes, ROAA, ROAE and the TCE ratio were given full weighting, while the two asset quality metrics were each given a half weighting. Banks that rank high on the Bank Performance Scorecard typically do well in all of the metrics rather than dominate just one or two. The Scorecard rewards banks that are well balanced across the full spectrum of profitability, capitalization and asset quality-but with a slight bias towards profitability.

As in previous years, Sandler O’Neill constructed the rankings using data provided to it by SNL Financial LLC, a financial research firm in Charlottesville, Virginia.

Capital One’s strong performance in the $50 billion and above category was aided by placing second in ROAA, fifth in ROAE and fourth in tangible common equity. The bank managed a 7 percent increase in net income last year despite having flat revenue growth compared to 2013. “Credit cards tends to be a high return on asset business,” says Sandler O’Neill stock analyst Chris Donat, and its card operations still drive Capital One’s financial results despite having a significant regional banking franchise. Capital One also bought back approximately 19 million shares of its common stock in 2014, which would have added the side benefit of boosting its ROAE, which is calculated by dividing net income by the number of tangible shares outstanding. By reducing the number of shares, the bank effectively lowered the denominator in that calculation.

Bank of the Ozarks placed first in the $5 billion to $50 billion category after winning the $1 billion to $5 billion category in 2013 and 2014. The bank placed second in ROAA, third in ROAE and 12th in TCE out of 102 banks in the $5 billion to $50 billion category. Nonpurchased loans and leases grew by 51 percent last year, which helps account for its exceptional profitability, along with a string of acquisitions that it has made since 2010. (To read more about Bank of the Ozarks, please refer to page 14.)

Preferred Bank, which was started in 1991 and operates 10 branches in the Los Angeles, Orange County and San Francisco markets, posted strong loan growth last year, including a 24 percent increase in multi-family loans and a 39 percent jump in commercial and industrial loans. Its highest finish among the five performance metrics was ROAA, where it ranked 17th out of 178 banks.

Chairman and Chief Executive Officer Li Yu credits the bank’s strong performance in 2014 to several factors, beginning with its strategic focus. “Number one, we’re a very focused bank,” he says. “We are totally focused on serving the business community and wealthy [individuals]. We know what they need.” Secondly, the bank has a very basic product line that does not include, for example, any consumer loans. “We’re a very simple bank,” says Yu. “We try to keep our product line very simple, [which is] basically commercial loans, real estate loans and some construction loans.” Preferred Bank also has a flat organizational structure that allows it to be very responsive. “The decision making is very fast so that our customers can get an answer from us very easily,” he says. And finally, the bank places a great deal of emphasis on incentive compensation. Employee bonus plans accounted for 35 percent of its total compensation expenses in 2014.

Preferred Bank originally focused on the Chinese-American market in Los Angeles but has since diversified into the broader business banking sector. “Currently, about 40 percent of the deposits are from the Chinese-American community and about 80 percent of the loans are from the mainstream community,” Yu says.

Although the bank has enjoyed strong organic growth in recent years, Sandler O’Neill stock analyst Aaron Deer says that Preferred Bank would also like to expand through acquisition. “They have indicated that they would like to do a small acquisition or two to help get a little better scale,” Deer says.

Signature Bank, which finished third in the $5 billion to $50 billion category, had the eighth best ROAE and sixth best nonperforming asset ratio among the 102 banks in the group. Signature also enjoyed record loan and deposit growth in 2014, and reported record earnings for the seventh year in a row. The bank focuses on the financial needs of privately owned businesses, their owners and senior managers through teams of highly experienced bankers providing a single point of contact for clients.

President and CEO Joe DePaolo says that most of the growth has come from those teams of bankers that have been recruited away from Signature’s competitors since 2013. The company does not acquire other banks-DePaolo says that “very little can go right and very much can go wrong” with a traditional bank takeover-but it is an active acquirer of talent from other institutions. Signature looks for veteran bankers with a portfolio of loyal clients who will follow them if they leave. Oftentimes the catalyst is an acquisition or change in leadership that has a team of lenders and relationship managers upset. “We need someone who hasn’t moved in decades,” DePaolo explains. And in return for moving to Signature, DePaolo gives them a considerable amount of autonomy. “They’re running their own bank,” he says. Currently, Signature has 95 such teams, “and I say we have 95 banks.”

San Diego-based BofI Holding Inc., which does business primarily over the Internet through its BofI Federal Bank subsidiary, placed fourth in the $5 billion to $50 billion category while ranking second in ROAE and sixth in ROAA. (The bank’s high ROAE was offset by a middle-of-the-road ranking for tangible common equity, at 52nd.) BofI’s performance last year was driven primarily by strong loan growth and improved efficiency. “We were able to continue profitable asset growth in a diverse range of businesses where we were able to maintain our [loan] yields,” says President and CEO Greg Garrabrants. “Our continued growth in C&I lending was an important component of that yield maintenance. Continued cost and efficiency improvements resulting from a comprehensive cost management strategy allowed us to gain some economies of scale. And significant diversification in our business deposit gathering allowed us to reduce our cost of deposits.”

BofI, which was already managing at a highly efficient level, was able to take 400 basis points of cost out of the bank in 2014, which lowered its efficiency ratio to 37.56 percent for the year-and it did this while investing heavily in its C&I loan production platform and risk management systems and processes. Garrabrants says the bank underwent an extensive expense review last year and found significant cost savings, which gives the bank on average a 180 basis point cost advantage over most traditional banks.

Which banks will emerge as top performers in 2015? For one, it might well be those institutions that do the best job of managing their way through a rising rate environment, since Federal Reserve Board Chair Janet Yellen has sent persistent messages that the country’s central bank will begin raising rates this year. And it also might be those banks that are able to raise low cost core deposits. Or as Fitzgibbon puts it, “Which institutions can find a way to grow their deposits to keep up with their loan growth?”

One thing is certain. The top performers will most likely be those banks that have developed profitable strategies that set them apart from their peers. In this industry, the road less traveled is often the better one.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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