If there was one strategy that defined the top-performing regional banks of 2021, it was their capacity not to be so regional anymore.
"We think of ourselves as a national bank," said Michael Dunlap, president and CEO of Merchants Bank of Indiana, the subsidiary of Merchants Bancorp which finished No. 1 on the list of top-performing publicly traded banks with assets between $10 billion and $50 billion compiled by the financial services consulting firm Capital Performance Group.
Merchants has "always called ourselves a nontraditional bank," Dunlap said in an interview. With 10 branches managing $9 billion in total deposits, the Carmel, Indiana, bank provides traditional services including small-business as well as commercial and industrial lending.
But Merchants also operates a real estate business that finances affordable multifamily housing and provides "interim funding arrangements" through a residential mortgage warehousing operation in California.
"We're not building apartments on Park Avenue in New York," Dunlap said. "We're building apartments where a certain number of units are dedicated to people within a certain percentage of median income."
"The beauty of our business is that we're national. We don't have specific markets; our loans follow developers wherever they're going," Dunlap said.
CPG primarily ranked the banks by their three-year average of return on average equity (ROAE), with Merchants' 20.51% between 2019 and 2021 leading the pack.
The median ROAE for the 10 top-performing banks was 15.68%, according to CPG's ranking. The median ROAE for all 84 banks in this asset category was 9.13%.
Regional banks have pursued growth "through lines of business outside of their traditional footprints," according to Claude Hanley, a partner at CPG.
"Around $10 billion of assets is probably a size in which it becomes more difficult achieving the growth you need inside your traditional geographic bounds," Hanley said in an interview.
"We're in an environment where, as others felt significant pain from interest rates, top-performing banks saw loan growth, fee income and efficiency become vital sources of revenue," he said.
Median net income for the top-performing banks in this asset category was 31% higher than all banks in the ranking, even though median net interest margin for the top performers was 12 basis points lower than the median for all institutions.
These standout performers all reported a three-year return on average equity above 14%. Two of them topped 20%.
The median efficiency ratio of the top-performing banks was 51.19%, stronger than the median of 55.97% for the overall group. Banks that have pursued a "branch-light strategy" have been able to "capitalize on upfront investments in digital services to export themselves into different areas of the country," Scott Siefers, senior research analyst at Pipe Sandler, said in an interview.
Flagstar Bancorp was able to do just that, finishing second in CPG's bank performance ranking with a 20.09% three-year ROAE.
The Troy, Michigan, bank deploys a "variable-cost model" that allows Flagstar to "scale up and down" its mortgage business depending on economic conditions driving markets, according to Jim Ciroli, chief financial officer of $25.5 billion-asset Flagstar.
Flagstar is in the midst of a
"We scaled up to the point where we originated close to $50 billion worth of mortgage loans over the last few years," Ciroli said. "That's not an easy feat to do, but that's what has led to our outsize performance."
Ciroli said Flagstar's mortgage business entered a "tough position" this year as interest rates began to rise. The bank's core deposit growth fell 11.81% last year while net loan growth declined 22.01%, according to data from CPG. Flagstar's overall revenue dropped 10.23%.
"In response, we've scaled our mortgage business down," Ciroli said. "What's driving our performance now? We've fallen back on our community banking and loan-servicing businesses."
ServisFirst Bancshares, which finished at No. 3 in the ranking with a three-year ROAE of 18.99%, has pursued an "expansion model that doesn't focus on a particular market," said Tom Broughton, president and CEO of the Birmingham, Alabama, bank.
Broughton described ServisFirst's structure as more of a "typical community bank model" that relies on only 17 branches in five Southeastern states.
"What I've found is that, everywhere we have a good branch manager, we do very well," Broughton said. "We grow our business through clients that value relationships over convenience. I'd much rather hire a private banker with a deposit network that will exceed the performance you'd expect by opening a branch."
Siefers, the Piper Sandler analyst, points to a "massive widening of spread revenues" as a strong driver in bank performance this year despite the
"There was a lot of potential energy in the system that was just sitting there delayed until the Federal Reserve started raising interest rates," Siefers said. "Now, that coiled spring is releasing."