Two Snohomish County banks were among the 10 most-profitable banks in the state during 2004, a recently completed University of Washington study found.
The survey also found that investors can bank on good returns from financial institutions, according to Alan Hess, the UW Business School professor who led the study.
Golf Savings Bank in Mountlake Terrace and Frontier Bank of Everett were among the 10 most-profitable banks in the state last year, the study found.
The key to profitability is keeping a rein on costs, Hess said. “If a bank can control its expenses, it has a higher rate of return.”
Frontier is known in the industry as highly efficient bank that doesn’t have to spend a lot of money to make it. In 2004, it recorded a 41 percent efficiency ratio, meaning it spend about 41 cents for every dollar it earned. The average among Washington banks is about 66 percent, Hess said.
Frontier emphasizes cost control on a management level, bank president John Dickson said.
“Unlike some other banks, we budget down to the individual bank and department,” he said, and managers are held accountable for reaching revenue and expense goals.
At the same time, “the culture that we’ve developed in the bank is one where our employees are rewarded based on profitability.”
Frontier sets aside two pools of money that is doled out through profit sharing, with some going directly to employees and some into their 401(k) retirement savings. The combination can amount to 15 percent or more of an individual’s annual salary.
That’s a strong incentive for individuals to keep costs down, Dickson said.
And instead of limiting stock options to top executives, Frontier grants them to all employees who’ve been with the bank more than five years, Dickson said. “We have some messengers and tellers who receive stock options.”
“When these people are owners in your company, they take on a whole new attitude toward expense control,” he said. “There’s almost a double incentive for employees.”
Having good employees who perform well also is key at Golf Savings, chief executive Charles Ainslie said.
Ainslie said the secret to his bank’s success has less to do with financial controls and more to do with hiring good people and ensuring they’re happy.
“It seems to be the happier your employees are, the happier your customers are,” he said. “Everybody talks about providing great service to their customers, but I’m not sure everyone does it.”
Golf managers also have focused on high-quality credit, Ainslie said. The bank had no delinquent loans in 2005.
Profitable banks are good investments, Hess said.
He found that Washington state bank stocks far out-performed T-bills in 2004. Washington banks had average returns of 10 percent, compared to 1.4 percent for Treasuries.
The average bank return for Washington banks compared closely to the Standard &Poors 500 Index, which increased 10.87 percent in 2004. But while S&P did slightly better, the bank stocks were a safer bet, Hess said. Only three of the 93 banks analyzed failed to deliver positive returns in 2004.
Washington banks exceeded the national average return for all banks, which was 9.7 percent, according to the Federal Deposit Insurance Corp. They were well above the national average return for small banks, which was 6.7 percent.
For investors, size does not matter, Hess said. His survey found that small banks were just as likely to post strong returns as large ones.
But a bank’s efficiency ratio is a key indicator, he said, because it “provides investors with a window into how effectively banks operate.”
“Our state’s financial institutions have done an excellent job of managing their operating costs,” said Hess. “The discipline they exercised in managing employee wages and benefits should be an encouraging sign to investors.”
Reporter Bryan Corliss: 425-339-3454 or corliss@heraldnet.com.
State’s banks with highest profits
* Fife Commercial Bank (Fife)
* Golf Savings Bank (Mountlake Terrace)
* Frontier Bank (Everett)
* The Commerce Bank of Washington (Seattle)
* Venture Bank (Lacey)
* Pacifica Bank (Bellevue)
* Security State Bank (Centralia)
* Bank of Whitman (Colfax)
* Cashmere Valley Bank (Cashmere)
* Heritage Bank (Olympia)
Source: University of Washington Business School
State’s banks with highest profits
* Fife Commercial Bank (Fife)
* Golf Savings Bank (Mountlake Terrace)
* Frontier Bank (Everett)
* The Commerce Bank of Washington (Seattle)
* Venture Bank (Lacey)
* Pacifica Bank (Bellevue)
* Security State Bank (Centralia)
* Bank of Whitman (Colfax)
* Cashmere Valley Bank (Cashmere)
* Heritage Bank (Olympia)
Source: University of Washington Business School
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