Community banks are critical players in the country’s overall financial well-being. They fund more than half of all small business loans, make 90 percent of all agricultural loans and bring much-needed financial services to even the most rural and remote areas of the country, according to Independent Community Bankers of America.
The success of community banks helps ensure the stability of the entire banking system, yet not all small banks are doing as well as everyone would like. Examining what successful small banks are doing can help others understand what’s working in the marketplace, and what products and processes they can adopt to improve their own performance.
Best small banks
Every year, investment banking firm and broker-dealers Sandler O’Neill rank the country’s best small banks, based on key performance metrics including earnings-per-share growth, loan and deposit growth, return on average equity, and ratio of non-performing assets to total loans. The publicly held small banks (market capitalization of less than $2.5 billion) that make it onto the firm’s Small Bank All-Stars List represent the top 7 percent of all small banks evaluated by Sandler O’Neill.
The 27 All Stars represent a wide range of “small,” from banks with less than $650 million in assets to those holding more than $8 billion. They are primarily from the south, southeast, northeast and California, with a few representatives from the middle of the country. Some made the list for the first time, while others have been long-standing repeat nominees.
American Banker, which reported on the list, noted that many of the banks on the list shared common indicators of success, including:
- Superior earnings-per-share growth.
- Loan growth that outstripped that of their peers.
- Deposit growth that was significantly higher than that of their peers.
- Acquisitions that helped drive loan and deposit growth.
- Organic growth in loans and deposits.
- Double-digit loan growth and deposit growth.
In all, 27 banks made Sandler O’Neill’s list. Here are some highlights of who they are and what they’re doing to differentiate themselves in their respective markets:
Filling niches is a success tactic of multiple All-Stars on the list of best small banks. This is a topic we’ve talked about extensively in a few of our webinars over the past year or so. When looking at “How Best Run Community Banks Maximize ROAA” we uncovered that rallying around a key niche was a common emphasis that came up at both Clayton Bank and Evabank. I encourage you to tune in for this webinar when you get a chance, but in the meantime here are a few examples:
Allegiance Bancshares Inc., which operates 16 locations in the Houston area, focuses on serving small to medium-sized business owners in addition to individual account holders. Founded in 2007, the bank reported Q3 earnings of $5.5 million, a 35.2 percent increase over 2015, according to EconoTimes. Net income per diluted common share rose 5 percent over Q3 2015.
BofI Holding, Inc., the parent company of Bank of Internet USA, differentiates itself as the first internet bank in the country. BofI Holding focuses on providing financing for single and multi-family residential properties, small to medium-sized businesses in targeted sectors, and selected specialty finance receivables, according to the bank’s website. In Q1, which ended Sept. 30, 2016, the company reported net income of $28.9 million, an increase of more than 13 percent over Q1 2015. Earnings per diluted share increased 13.4 percent during the same time period.
With 11 locations in Washington, FS Bancorp, Inc., parent company of 1st Security Bank, was one of the smallest financial institutions on the All Star list. The bank emphasizes its community orientation throughout its website and product offerings, focusing on home improvement loans, first and second mortgages, home equity products, commercial real estate loans and commercial business loans. The company reported Q3 2016 net income of $3.5 million, or $1.18 per diluted share; in Q3 2015, net income and income per diluted share were $2 million and $0.66, respectively.
The largest of the group, Eagle Bancorp of Bethesda, Maryland, has made the list five times in the past six years, including four consecutive years. Focusing on serving the business community in Maryland, Washington, D.C. and northern Virginia, reported Q3 net income of $24.5 million, a 14 percent increase over the same quarter in 2015, and its 31st consecutive quarter of record earnings.
Mergers and acquisitions drove growth for multiple All-Stars. Carolina Financial Corporation, the parent company of CresCom Bank which operates 27 branch locations in North and South Carolina, achieved growth through a merger with Congaree Bancshares, which was completed in June. In early November, Carolina Financial announced it signed an agreement to acquire Greer Bancshares Inc., and merge that company’s banks into CresCom.
First Busey, which operated about a dozen locations in middle states, drove growth through the acquisition of St. Louis-based Pulaski Bank. The merger adds more than 30 locations to the company’s portfolio, including 27 in Illinois, one in Indianapolis, and five in southwest Florida. The move also boosted mortgage business by adding 17 loan production offices in locations across the Midwest. American Banker notes the merger allowed First Busey to increase loans 52 percent year over year.
Insights that come from growth
Patterns of success emerge among all the All Stars. Largely, these small banks are embracing their status as community financial institutions, and leveraging the historic strength of the community bank/customer relationship to help drive growth. Many have identified a niche opportunity and focused on developing products and services to serve that niche. Finally, strategic mergers and acquisitions have allowed the small bank All Stars to drive growth while retaining the integrity of their brands.