Fortune, as they say, favors the bold. And the midtier banks that were boldest in 2020 not only outperformed their competitors, they outperformed themselves against prior years.
Though the coronavirus pandemic virtually eliminated demand for most types of loans and forced banks of all sizes to increase reserves for loan losses, top-performing banks in the $2 billion- to $10 billion-asset class still generated strong profits. They did so mainly through fee income from mortgages and wealth management and a flood of government-backed emergency loans to small businesses.
The banks that managed to outshine their peers the most generally leaned into the Small Business Administration's Paycheck Protection Program, said Claude Hanley, a partner at Capital Performance Group, which compiled the annual midtier ranking for American Banker based on average return on equity across three years. Many of the banks in this size range took PPP applications even from noncustomers, unlike their big-bank counterparts, and stepped up their marketing after those banks stopped taking applications altogether, Hanley said.
The top 20 banks in the midtier ranking were more profitable in 2020 than in 2019, increasing their median return on average equity to 17.79%, up 85 basis points.
"Pretty amazing when you think about the provisioning that went on and the lack of loan demand," Hanley said. "Even more amazing when you think about the fact that their net interest margins were lower than their peers."
Last year the median return on average equity for all 282 banks that qualified for the midtier ranking dropped 100 basis points from the previous year, to 9.56%. The median net interest margin for the overall group fell by 27 basis points, to 3.37%.
But those ranked in the top 20 actually had a median net interest margin 6 basis points lower than that of the peer group, attributable at least in part to a higher cost of funds.
Fee income was a big part of the story for these banks, driven by mortgage lending and wealth management. The high performers had a median noninterest income to average assets ratio of 1.50% last year, compared with 0.82% for their peers.
(Click on “view table” at the end of this article to see the ranking for this year and click on the links below to go to midtier rankings from past years.)
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Hanley also pointed to expense management as a metric worth noting.
In rankings, the standouts generally do grow revenue at a faster rate than their peers, but they often also have a higher rate of expense growth, Hanley said. In other words,
But in 2020, the top performers among the midtiers generated more revenue than peers, while also keeping their expense growth in line with peers.
For the overall group of midtier banks, noninterest expenses increased by a median of 6.81% year over year.
By comparison, the median increase for the top 20 was 6.42%. That’s a big improvement from the year-over-year noninterest expense growth for these same 20 banks in 2019 — it was a median of 9.7% that year, or 328 basis points higher.
All of these factors helped the high performers significantly improve their efficiency ratios in 2020, to a median of 44.88%, down from 48.62% in 2019. The median efficiency ratio for the entire midtier group was 58.22%, down from 60.82%.
Looking ahead, the hangover effect of the pandemic continues to cloud the prospects for loan growth.
Bankers are eager for lending to return to normal, but Hanley said he expects loan demand to remain weak until borrowers are more confident in the economy. "I think the industry has pivoted from being defensive to offensive, but they can only do so much," Hanley said.
Click on "view table" below to see the latest ranking.
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