Strategic Insights From Leading Bankers: First Financial Bankshares

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Few banks have built value for their shareholders like Abilene, Texas-based First Financial Bankshares.

Over the 20-year period ending June 30, 2020 — the cut-off date for institutions featured in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP — the $10.6 billion bank generated a 2,074% total shareholder return. That figure is second only to Bank OZK in Little Rock, Arkansas, for the entire banking industry. First Financial placed sixth overall in the study and earned top honors in the Best Bank for Creating Value category. It also rated highly for its retail strategy.

“They’re one of the best banks out there,” says Brett Rabatin, head of equity research at Hovde Group. First Financial’s culture, M&A track record and competitive strategy — delivering a high level of service in small-town markets — set it apart. “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.”

To delve further into First Financial’s performance for the RankingBanking study, Bank Director Vice President of Research Emily McCormick interviewed First Financial Chairman and CEO Scott Dueser about the bank’s customer-centric philosophy, prospective M&A opportunities and how he leverages his Texas connections. The interview was conducted on Oct. 14, 2020, and has been edited for brevity, clarity and flow.

BD: Based on my earlier reporting on First Financial and its culture, I know you have placed a strong cultural emphasis on building excellence and serving the customer. How does that differentiate First Financial from other institutions in its markets?

SD: I like to think of us as the Ritz-Carlton of banks because of what [Ritz-Carlton Hotel Co. co-founder] Horst Schulze has done for us. Horst has been outstanding, not only [in] training us [on] customer service, but also as a mentor on business and dealing with people. Horst doesn’t call it hiring people; you select people and that changes your whole attitude about it. We have a very strong team of people that work together extremely well.

I’m disappointed if somebody leaves our bank and is not extremely happy. That’s what we want to accomplish every time somebody walks in.

Our philosophy of how we do business is very important to us, and adds to the bottom line and the value of our stock. That’s the fact that we’re not in the big city, we’re in the small towns around the big city, where we can be the big fish in the little pond and be the No. 1 bank. We’re not in the big cities fighting the big boys; that takes a lot of money and a lot of time, and it’s a battle that frankly, I don’t think we can win. Why not stay in the areas [where] we do well and focus on that? That’s been our focus, along with credit quality and going after the better customers in our markets. 

BD: Covid-19 has impacted how banks serve the customer. Has anything really shifted for your bank in that regard, or do you feel like the situation is proving your strategy out in a way?

SD: It’s proven the strategy out. I will tell you the best thing that we did was we never closed our doors. We stayed open, and we came to work every day, and we learned how to work through Covid and how to serve the customer [in that environment]. We got a lot of business from it, because when customers went to their bank and found it locked, they didn’t like it. Those banks that locked their doors lost a lot of business, because 33% of the [Paycheck Protection Program] loans that we made were somebody else’s customers. To do that, we asked [those customers] for all their business, and they moved all their business. We grew about a billion dollars through the pandemic.

We made the decision not to cut hours and not to lock our doors, but to be here. We split big departments [where] half the people went home, half the people stayed here, but everybody that was customer facing had to come to work. Our goal was to make the workplace the safest place our people could be. Frankly, today we still feel like the safest place to be is here at work. We’ve kind of managed Covid, not that we haven’t gotten it. We manage it by masking and social distancing, and don’t come to work if you feel bad. We don’t want you to work [then]. That’s kind of the main rules.

I have been on the governor’s task force to reopen Texas. That has helped me tremendously, because I knew the inside scoop of how the state was fighting Covid.

BD: You also had a hand in the Texas Tech Excellence in Banking program that opened in 2020. I assume you see some indirect benefits to keeping those types of networks and communication lines open.

SD: No question. The Excellence of Banking Program was something that I took to Tech and said, “We really need to do this. It will be great for Tech. It’ll be great for the banking industry.” We were able to raise $12 million to endow that program; that’s from foundations and banks. There were about 50 banks involved in that program that gave $1,000 and above.

What’s neat about this program is it is focused [on] bringing minorities and women into banking. That’s something that we really need. We had interns from that program here this summer, and I’m very impressed with the high level of students that we have. I think all the banks that have participated are impressed with the interns that they got out of it. We are hiring people out of that program as we speak. It’s a direct benefit to the bank, but also a direct benefit to my alma mater.

BD: Looking at your past few M&A deals, First Financial does an excellent job of keeping costs down. With pricing coming down, do you see some opportunities on the horizon?

SD: I think there’ll be lots of opportunities next year. I do think Covid has made a lot of people think about whether they want to stay in the industry or not, and whether they want to keep their bank. If they don’t have people lined up to run their bank, they probably need to put it on the market. I think we’ll see a lot of banks go on the market, especially from the fact that a lot of banks missed their heyday when they could have gotten a premier price a year ago. That’s not going to happen today. Pricing is down. They’re going to say, “Hey, I’d rather take today’s price and see what happens next.”

With our price and our premium on the price, even in today’s market, we can go buy some banks that other people probably can’t, because they can’t make the deal work. With our stock price, we can make the deal work.

RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform. Click here to access the agenda.

A Common Trait Shared by Elite Bankers

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investment-8-2-19.pngIf you talk to enough executives at top-performing banks, one thing you may notice is that not all of them see themselves as bankers. Many of them identify instead as investors who run banks.

It’s a subtle nuance. But it’s an important one that may help explain the extraordinary success of their institutions.

This came up in a conversation I had last week with the president and chief operating officer of a $2.6 billion asset bank based in New England. (I’d share the bank’s name, but they prefer to keep a low profile.)

His bank is among the most profitable in the country and is a regular fixture atop industry rankings, including our latest Bank Performance Scorecard.

Its profitability and earnings growth are consistently at the top of its peer group each year. More importantly, its total shareholder return (dividends plus share price appreciation) ranks in the top 3% of all publicly traded banks since the current leadership team gained control in 1993.

The distinction between investors and bankers seems to lay in how they prioritize operations and capital allocation.

For many bankers, capital allocation plays a supporting role to operations. It’s a pressure release valve that purges a bank’s balance sheet of the excess capital generated by operations. As capital builds up on the balance sheet, it impairs return on equity, which can foster the illusion that a bank isn’t earning its cost of capital.

To investors, the relationship between operating a bank and allocating its capital is inverted: The operations are the source of capital, while the efficient allocation of that capital is the ultimate objective.

Bankers who identify as investors also tend to be agnostic about banking. If a different industry offered better returns on their capital, they’d go elsewhere. They’ve gravitated to banking only because it’s a peculiarly profitable endeavor. In no other industry are businesses leveraged by a factor of 10 to 1 and financed with government-insured funds.

There are plenty of other bankers that fall into this categorization. The recently retired chairman of Citigroup, Michael O’Neill, is one of them. He said this when I interviewed him recently for a profile to be published in the upcoming issue of Bank Director magazine.

O’Neill’s time as chairman and CEO of Bank of Hawaii bears this out. A major objective of his, after refocusing its geographic footprint, was reducing the bank’s outstanding share count.

Bank of Hawaii had 80 million shares outstanding when O’Neill became CEO in 2000. When he left 4 years later, that had declined by 38% to only 55 million outstanding shares. This helped the bank’s stock price more than triple over the same stretch.

Another example is the Turner family, which has run Great Southern Bancorp for almost half a century. Since going public in 1991, Great Southern has repurchased nearly 40% of its original outstanding share count. A $2 million investment during the initial public offering would have been worth $140 million last year.

The Turners never said this when I talked with them last year, but it seems safe to infer that they view banking in a similar way. They’re not trying to build a banking empire for the sake of running a big bank. Instead, they’re focused on creating superior long-term value.

This philosophical approach coupled with meaningful skin in the game insulates a bank’s executives from external pressures to chase short-term growth and profitability at the expense of long-term solvency and performance.

“Having a big investment in the company … gives you credibility with institutional investors,” Great Southern CEO Joe Turner told me last year. “When we tell them we’re thinking long term, they believe us. We never meet with an investor that our family doesn’t own at least twice as much stock in the bank as they do.”

M&T Bank Corp. offers yet another textbook example of this. Of the largest 100 banks operating in 1983, when its current leadership team took over, only 23 remain today. Among those, M&T ranks first when it comes to stock price growth

I once asked its chairman and CEO René Jones what has enabled the bank to create so much value. One of the main reasons, he told me, was that they could gather 60% of the voting interests in the bank around the coffee table in his predecessor’s office.

And the bank in New England that I mentioned at the top of this article is the same way. The family that runs it, along with its directors, collectively hold 40% of the bank’s stock.

The moral of the story is that it’s tempting to think that capital allocation should play second fiddle to a bank’s operations. But many of the country’s best bankers see things the other way around.