Top Performing Tier 1 Banks: How 11 Institutions Sustained Success

And Consistently Ranked in the 1st Quartile (2006 – 2008)

The key findings include an analysis of the 11 Tier 1 banks that consistently achieved 1st Quartile for 2006, 2007, and through 3Q2008. This analysis shows that a bank can be highly profitable and not be dependent on just one business strategy, geographic location, or the institution’s size. An analysis of the key business strategy pursued by each of the 11 institutions produced a set of four alternatives. The number of branches was not a constraint as five of these institutions had fewer than 100 branches. Key operating characteristics of the 11 top performing large banks and thrifts included, but were not limited to, superior net interest margin, low credit related loss, and strong non-interest income ratios. Three bank technology vendors dominated the technology selections, serving as the primary FinTech vendor for 10 of the 11 institutions. In addition, the 10 most profitable banks in Tiers 2, 3, and 4 through 3Q2008 are identified. 13 of these 40 institutions sustained a top 10 status in their respective Tier for all three years. The report contains 19 tables and four charts.

To complete this analysis, all 8,384 FDIC insured banks and thrifts as of Sept. 30, 2008 were considered. The final number of bank entities analyzed in this report is 7,220. The difference of 1,264 chartered institutions is due to two primary factors. First, 138 non-bank chartered institutions were removed from the universe because their business model is very limited and does not represent a full service bank or thrift institution. Second, we consolidated multiple affiliates into a single institution entity. This latter process reduced the institution count by 1,026. In spite of the consolidation, the banking industry is still bottom heavy with assets of less than $1 billion. Over 92% of the 7,220 institutions are concentrated in the two smallest asset segments: <$100 million and from $100 million to $1 billion.

To achieve a fair and universal profitability ranking process, we developed an algorithm for calculating institutional profitability. The concept that guides this algorithm strives to achieve a between return on equity and an appropriate measure for the earning capacity of the bank’s asset base. Return on assets (ROA) is an often used alternative to return on equity as a measure of profitability. However, ROA runs into obstacles that relate to taxes and Subchapter S status, which avoids taxes altogether at the institution level. To achieve a level playing field, the profitability algorithm for this study equally weights pre-tax return on assets and return on equity. This balance is achieved by establishing a mathematical relationship between pre-tax return on assets and return on equity for the entire industry.

A total of 84 Tier 1 institutions were analyzed and ranked. The 11 institutions that achieved 1st Quartile status in each of the three years represent only 13% of all Tier 1 institutions. The current Top 20 banks, ranked by average assets during 2008 manifest the downward shift in performance from 2006 to 2008. For the 20 largest banks, the drop in 1st Quartile rankings (8 to 6), increase in 3rd Quartile rankings (1 to 3), and increase in 4th Quartile rankings (1 to 4) reflect their difficulty maintaining profitability.

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