There is a classic saying that bad ages to live through are good ages to learn from. By all accounts, today’s times constitute a bad age for banking and financial companies, and the experiences many Americans have with them. However, nothing is easier than complaining. Far more useful and instructive is examining how various banks are being run and extrapolating the behaviors of these institutions. In short, what sets good banks apart from bad banks? Why are some continuing to thrive while others (even frighteningly similar competitors, in some cases) are spinning their wheels? Today, BillShrink sets about answering these questions with profiles of the six best and six worst banks in America for 2010.
The Best Banks
Bank of Hawaii
Topping Forbes’ list of America’s best banks is Bank of Hawaii, whose conservative strategy was vindicated during the reckless 2000′s. According to HonoluluAdvertiser, Bank of Hawaii prospered mainly by “sticking to a conservative policy on loans at a time when many banks were lured into risky real estate deals by the promise of higher returns.” Expressing pride in the chief virtue of his bank, Bankoh CEO told Forbes that “boring is good”, contrary to the behaviors of more “exotic” banks and finance companies over the last decade. In fact, Bankoh’s success highlights a timeless lesson in just about any industry – while competitors will often rush to chase the “next big thing” (subprime mortgages, in this case), rewards often await those who stick to the fundamentals that have worked for generations. Nor, it should be noted, did Bank of Hawaii accept any bailout money.
Kansas City-based UMB Financial can boast truly humble beginnings, opening its doors with $1,100 in first day deposits. The fact that it holds $10.2 billion in assets today owes largely to the same conservative, old-fashioned, fundamentals-focused approach Bank of Hawaii exhibited. Mariner Kemper, UMB’s CEO, remarked that “As most banks are looking forward to forgetting 2009, we look back knowing our hard work and adherence to traditional business practices continues to reap rewards” when asked his thoughts on being recognized as America’s second best bank, according to Yahoo Finance. As it turned out, regional banking was key to UMB’s success. Rather than expanding its business throughout the U.S., UMB stuck to “our time-tested prudent business practices, such as making loans within our territory, building relationships with our customers and understanding that strong underwriting practices produce quality results.” Perhaps uncoincidentally, UMB also declined to participate in the federal government’s TARP program.
Yet another bank to maintain strong performance and high assets thanks to a conservative management strategy is Kansas City-based Commerce Bancshares. After joking that there “must be something in the water” for KC to boast 2 of the top 5 banks in the country, TradingMarkets.com points out that it’s hardly the water. More instrumental to the success of Commerce and it’s more than $18 billion in assets is the fact that only 1.6% of its loans were categorized as “non-performing.” Put another way, Commerce had in reserves an amount roughly equal to 114% of its non-performing loans. Local consumers unsure of where to park their money during the recession (and after) have some excellently-managed choices in UMB Financial and Commerce Bancshares.
The success of Houston’s Prosperity Bancshares calls to mind the old saying “an ounce of prevention is worth a pound of cure.” While many banks are staggering beneath the weight of non-performing loans that should never have been made in the first place, Prosperity quietly boasts the best NPL as a percentage of total loans rate in the industry. Prosperity also has more reserves as a percentage of NPL’s than any of the 100 largest banks in the country, according to Forbes. Like UMB, Prosperity Bancshares also declined to participate in TARP, maintaining that it was “considered well capitalized under regulatory guidelines and should be able to continue building its business and take advantage of opportunities” according to MarketWatch.
SVB Financial did accept $235 million in TARP money (and promptly repaid it, according to MSN), but nonetheless benefited greatly from its long-standing relationships with prominent venture capitalists. The Santa Clara bank also reportedly “played an important role in the early days of companies including Cisco Systems, Electronic Arts and Intuit”, as Forbes writes. The bank has also evidently kept itself going strong by playing a part in new technologies, including clean tech. SVB’s website notes that it was recently honored for working with “approximately half of all venture capital-backed cleantech companies and holds deposits for nearly 200 cleantech companies nationwide.” Perhaps the best lesson to extract from SVB’s success (to include a 1.6% NPLs/loans ratio) is to remain focused on the customers you are best suited to serve — tech companies and VCs, in this case — rather than expanding haphazardly for expansion’s sake.
Community Bank System
Finally, we round out the six best banks with Dewitt, NY’s Community Bank System, whose reserves as a percentage of non-performing loans are second best among the 100 largest banks in the U.S. With branches in Chautauqua, Cattaraugus, Allegany and Wyoming counties, Community Bank System did not make the fatal error of trying to operate beyond where it had proven itself stable. As has been seen so far, a major key to bank stability and success amidst the recession has been adherence to modest, manageable, even “boring” management practices, even when that meant bucking the trend of the larger banking industry. The numbers don’t lie however, as CBS has continued to thrive irrespective of the larger industry’s woes.
The Worst Banks
Being named the worst bank in America (among large banks) by Forbes isn’t much to brag about, but the facts are unavoidable. After “racking up huge losses for three straight years”, Flagstar has slipped into the decidedly unenviable position of having one of the lowest net interest margins (1.6%) while simultaneously having among the highest amount of non-performing loans. In fact, NPL’s comprise almost 10% of all of Flagstar’s outstanding loans. Unsurprisingly, Flagstar Bancorp is located in Michigan, which is rapidly acquiring a stigma as an economic wasteland.
When you have the highest ratio of non-performing assets, the highest ratio of non-performing loans and the lowest capital loan ratios, it’s tough to imagine being anywhere but among the worst banks in America. Puerto Rico’s R&G Financial finds itself precisely in this lamentable state, with non-performing loans comprising a mind-blowing 20% of its overall loans outstanding. Perhaps now is a good time for R&G’s management to re-assess the operating practices that landed it here and take some lessons from the six best banks discussed earlier!
Spokane-based Sterling Financial had about as good a year on the NASDAQ as it did when compared to its peers, which is to say, a terrible year. Besides being among the industry’s worse capital ratios at the end of 2009, Sterling was also the third worst performing stock on NASDAQ of 2009, falling 93% in value according to USA Today. But the trouble just keeps coming for Sterling, whose parent company was recently slapped with an employee lawsuit stemming from “heavy imprudent investment of employees’ retirement plan assets into Sterling stock, despite the bank’s foray into risky commercial real estate loans” according to the Pudget Sound Business Journal. Reportedly, the plan held over $13 million in Sterling common stock, good for roughly 20% of the plan’s overall assets. Here again we are reminded of the virtues of time-tested, old-fashioned bank management!
Lansing, Michigan’s Capital Bancorp has fallen upon such hard times that it is actually in the process of divesting assets in six of the seventeen states it serves simply to stay alive. IStockAnalyst reported in December 2009 that Capital Bancorp was indeed “planning to sell its e-filing financial services division” as part of an “ongoing effort to strengthen its capital ratios”, which are scraping pavement in comparison to its comparably sized competitors. Even this, however, was evidently done with an eye toward becoming more like the regionally-focused banks at the top of this list. CEO George Leis remarked that he hoped the sell-off would “help return Pacific Capital Bancorp to its roots of being a pure community bank serving the central coast of California.”
The biggest of any bank on the bottom 10 of Forbes rankings, Banco Popular also holds the dubious distinction of being fifth-worst among comparably sized banks in terms of reserves as a percentage of non-performing loans. Despite being more than a century old, Banco Popular apparently needed to fall this far before officially renouncing its ties to the subprime mortgage market in 2007, according to Reuters. It’s been three years since Banco Popular vowed to renew its “focus on profitable businesses”, but the bottom line numbers are still pretty dismal thus far!
Central Pacific Financial
Hard as it may be to imagine Hawaiian banks at the top and bottom of this list, it simply reinforces how crucial a bank’s own operating practices are to its success or failure. While Bank of Hawaii is the toast of the banking sector, Central Pacific Financial (also headquartered in Honolulu) is a laughingstock. The bank holds an appalling 48% of reserves to NPLs, and accordingly, its stock price – hovering below $10 – is down an alarming 86% from 2008. In striving to understand why two seemingly similar banks produced such wildly different results, NationalPost.com pointed to the way in which Central Pacific “got deeply involved with subprime lending in California.” This contrasts, of course, with Bank of Hawaii’s admittedly “boring” management style, which has equated to bottom-line financial performance that is anything but boring.