Is Size an Advantage? Not Always, Our Ranking of Regional Banks Shows

The combination of higher regulatory expenses and reduced income from interchange fees is taking a toll on the profitability of banks with $10 billion to $50 billion of assets.

Despite having a size advantage, this group of regionals was less profitable than banks with $2 billion to $10 billion of assets, and only marginally more efficient.

In nearly every major category — including loan, deposit and revenue growth — the regionals lagged their smaller counterparts, and that translated into lower returns on assets and equity, according to an analysis by Capital Performance Group. For three-year return on average equity — the basis for our rankings — the regionals posted a median of 8.03%. That is well below the 8.79% median for the banks with $2 billion to $10 billion of assets.

A simple explanation is that regionals must deal with higher compliance requirements and caps on swipe fees once they pass the $10 billion-asset threshold, said Kevin Halsey, a senior analyst at Capital Performance Group. “Compliance costs are really impacting these institutions and keeping them from being as efficient as possible,” he said.

Still, there are plenty of stellar performers in the $10 billion- to $50 billion-asset group. The top three banks in the ranking, Bank of Hawaii, FirstBank and Western Alliance, all posted three-year ROAE above 14% by either capitalizing on growth opportunities at home or expanding to new markets.

For the $16 billion-asset Bank of Hawaii, the economic rebound in its home state has been the key to its recent success, said Peter Ho, chairman and chief executive. Bank of Hawaii gets about 90% of its business from the Aloha State, he said. Not coincidentally, Hawaii had just 3.2% unemployment, fifth lowest of all the states, as of May 31.

“A bank can only be as good as the environment they exist in,” Ho said. “We’re getting good inflows from the U.S. mainland as well as the Asian markets. And the housing market has been very, very strong and very balanced, and it’s likely that will continue for a while.”

The $16 billion-asset FirstBank has branches in Arizona and California, but the large majority of its deposits come from Colorado, which also happens to be doing well economically. Colorado had the seventh-lowest unemployment rate at 3.4% in May.

Bank of Hawaii and FirstBank share other characteristics. Neither made a whole-bank acquisition during the three-year period measured by the ranking, and both have fairly diverse loan portfolios. “Moderation is the key across the risk spectrum,” Ho said. “We want to be omnivores across many different asset categories.”

The best-performing regionals also tend to manage their expenses better, Halsey said. Noninterest expenses as a percentage of average assets for the top 10 regionals was 2.29% last year. That is 20 basis points lower than for the entire peer group, which makes a big difference, Halsey said.

Acquisitions have helped bolster the performance of some strong performers, such as Western Alliance, while other banks are still waiting for deals to pay off.

The three-year ROAE for active acquirers lagged when compared with the 13.09% median for banks in the top 10. Each of the six banks in the peer group that made at least three whole-bank acquisitions from 2013 to 2015 had a three-year ROAE below 9.2%.

Notes: Ranking is of top consolidated bank holding companies, banks, and thrifts with total assets of between $10 billion and $50 billion as of 12/31/15 and is based on three-year average ROAE from 2013 to 2015.

Additional data is for the 12 months ended 12/31/15; year-over-year changes compare 2015 to 2014. Financials are from SEC filings. If unavailable, regulatory financials were used.

Excludes industrial banks, nondepository trusts, foreign-owned banks, and bankers' banks, as well as institutions with credit cards to total loans of more than 25%, loans to total assets of less than 20%, or loans to total deposits of less than 20% at 12/31/15. Excludes institutions with a leverage ratio of less than 5%, Tier 1 risk-based capital ratio of less than 6%, or total risk-based capital ratio of less than 10% during any quarter in the ranking period. Excludes institutions that received a tax benefit of greater than 10% of net income or that did not report data for any year in the ranking period. Also excludes institutions that have fewer than five depository branches and are owned by a company not primarily focused on commercial or retail banking. Ties broken using the 2015 ROAE and subsequently the 2014 ROAE.

* Denotes an institution that operated as a subchapter S corporation for at least one quarter between 2013 and 2015. Its profitability ratios were calculated from regulatory financials and adjusted using an assumed tax rate.

Source: Capital Performance Group analysis of data provided by SNL Financial
© 2016 American Banker Magazine