Creating long-term value for shareholders doesn’t result from a single successful moment. Rather, it’s the culmination of years of decision-making, centered around strategic discipline.
“The strongest performing banks set a consistent strategy,” says Crowe Partner Kara Baldwin. “They’ll be nimble when they need to be, but they isolate into a few strategic imperatives, and they follow those consistently.”
The institutions analyzed in the 2021 RankingBanking study reflect this long-term focus, and First Financial Bankshares does it better than anyone.
“Our long-term value comes from a long-term return on equity, and [we’ve been] consistent in growing earnings for the last 34 years,” says Chairman and CEO Scott Dueser. “That’s what creates the value of our stock.”
To identify the best bank for creating shareholder value, Bank Director examined and ranked each institution based on its ability to consistently generate a high level of profitability, through average return on assets and return on equity from December 2014 to December 2019, as well as the standard deviation of both metrics. We also looked at growth in ROE, ROA and pre-tax pre-provision (PTPP) income over the same time frame. And we factored in dividend growth and average trade volume to understand the liquidity of each bank’s stock. These factors were ranked to produce an overall score. The category rewards growth but places a greater emphasis on consistency.
First Financial rates highly for consistency, particularly in terms of average ROA (second at 1.79%) and ROE (fourth at 13.89%); its average trade volume exceeded 511,000 shares in September 2020.
“It’s a different breed of bank than most players out there,” says Hovde Group analyst Brett Rabatin, citing First Financial’s culture, conservative lending strategy, fortress balance sheet and successful M&A track record. Another factor is its strategy to compete with a handful of banks in its small-town markets; the bank prefers to skirt around metropolitan areas. First Financial is also a true relationship lender, Rabatin adds. “A lot of banks like to say, ‘we’re relationship lenders,’ [but] this is one of the few banks where it shows up. It shows up in their loan yield, it shows up in the profitability.”
Ranking second, Southside Bancshares is another Texas bank that scores highly for consistent profitability, with an average ROA and ROE at 1.17% and 11.65%, respectively. Similar to First Financial, Southside is a dominant player in its markets with a conservative credit culture, says Rabatin. “Management’s done a good job of keeping the ball on the fairway.”
Glacier Bancorp ranks third, with an ROA averaging 1.42% and the second-highest level of trade volume, at more than 660,000 shares. Lakeland Financial Corp., at fourth, rates highly for its average ROA (1.44%) and ROE (13.71%).
Finally, Bank OZK sports the highest average ROA, at 2.05%, and trade volume, exceeding 970,000 shares.
With more than 40 years in banking — he’s served as CEO of OZK since 1979 — George Gleason says it’s easy to value long-term performance over short-term gains. “Many investors seem to be overly focused on short-term results, so it takes discipline,” he says. “We have always focused preeminent attention on achieving longer-term objectives, and that has paid off tremendously well.”
Banks that successfully grow shareholder value demonstrate an ability to execute on their mission and produce consistently strong earnings, says Crowe Partner Rick Childs. They manage their capital levels in ways that reward shareholders, through instruments like dividends, stock buybacks or acquisitions.
The year 2020 has been replete with unusual circumstances. The Covid-19 pandemic, sudden drop in interest rates to nearly zero — and for many of the banks in this study, the implementation of the current expected credit loss accounting model — have put heightened pressure on earnings. Banks with an eye to long-term performance will weather these shifts while remaining focused on the future.
“What’s going to happen over the next few years?” says Baldwin. Successful banks “constantly re-envision their strategy, so they can hold to their strategic imperatives and still plan for the future — not just this year.”
Dueser isn’t afraid to evolve, as evidenced by the bank’s recent work with Ritz-Carlton Founder Horst Schulze to further enhance the bank’s culture. But he also sticks to the bank’s overarching strategy: A strong culture, great service, conservative underwriting and an ability to compete as a “big fish in a little pond,” as Dueser says. “Our philosophy of how we do business is very important to us, and adds to the bottom line and the value of our stock.”
How They Ranked: Best Bank For Creating Value
YE 2014 – YE 2019
|AVG. TRADE VOLUME
|CATEGORY WINNER: First Financial Bankshares||7.92||1.79%||511,782|
|4||Lakeland Financial Corp.||8.92||1.44%||132,968|
|6||Meta Financial Group||9.29||1.08%||240,842|
|7||Independent Bank Corp.||9.92||1.17%||125,709|
|8||Stock Yards Bancorp||10.08||1.54%||88,751|
|9||The First Bancorp||10.29||1.17%||15,787|
|11||Community Bank System||10.46||1.37%||263,598|
|12||Auburn National Bancorp.||10.63||1.03%||10,584|
|13||City Holding Co.||10.83||1.53%||74,314|
|13||Southern Missouri Bancorp||10.83||0.96%||14,695|
|15||Greene County Bancorp||11.42||1.20%||3,900|
|17||Eagle Bancorp Montana||11.71||0.87%||30,150|
|18||WSFS Financial Corp.||11.92||1.21%||270,004|
|19||Hingham Institution for Savings||13.13||1.33%||3,581|
SOURCE: S&P Global Market Intelligence, Yahoo! Finance