UW News

December 8, 2005

Washington banks’ returns exceed national average

For the third consecutive year, banks with headquarters in Washington state delivered an average of 10 percent return to investors, according to researchers at the UW Business School. The study, led by Alan Hess, UW professor of finance and business economics, shows that returns from Washington banks exceeded the national average return for all banks, 9.7 percent, and the national average return for small banks, 6.7 percent respectively, reported by the Federal Deposit Insurance Corp.

“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.”

Hess and Ben Iiams, an undergraduate honors student who helped compile the statistics, analyzed balance sheets and income statements of financial institutions with headquarters in Washington state. Only three of the 93 banks analyzed did not deliver positive returns to investors. Fife Commercial Bank had the largest return of any bank, 31.6 percent.

According to Hess, banks in the Northwest have in recent years outperformed more traditional investments such as treasury securities and stocks, and 2004 was no exception. Investments in treasury securities yielded 1.4 percent in 2004, 8.6 percent less than Washington banks. Standard & Poor’s 500 Index, one of the most common benchmarks of overall market performance, returned 10.87 percent, though with greater risk than investment in Washington banks carries, noted Hess.

The research indicates the highest-performing banks in Washington were those with the highest profit margins. Banks that best controlled operating expenses as a percentage of revenues, as measured by a low efficiency ratio, had the highest profit margins. The efficiency ratio is the ratio of operating expenses to revenue. First Savings Bank of Renton, the bank with the best efficiency ratio, spent less than one-third of its revenues to pay for operating expenses. The average bank in Washington maintained operating expenses equal to two-thirds its revenue.

“If a bank can control its expenses, it has a higher rate of return on equity,” said Hess. “The efficiency ratio provides investors with a window into how effectively banks operate.”

The research also indicated that returns were unrelated to bank size — small banks and large banks performed similarly. “In Washington, size does not determine performance,” said Iiams.

Banks in Washington displayed diverse returns, ranging from minus 25.2 percent to 31.6 percent.

The most profitable banks in Washington in 2004 to complete the top 10 were 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), and Heritage Bank (Olympia).