We are honored to make the American Banker magazine's Top 200 list again this year. Being listed is testimony to the dedication and hard work of all our teammates and the outstanding relationships they have with our customers and our communities.
May 6, 2020
What drove top performance for banks last year will be very different from what drives top performance in 2020.
Lower interest rates and the economic fallout from the coronavirus pandemic have forced banks to rework their business plans, and they will need to reprioritize the metrics they focus on in the process.
Credit quality will be key going forward, along with expenses, said Claude Hanley, a partner with Capital Performance Group who compiles the data for our annual ranking of publicly traded banks and thrifts with less than $2 billion of assets.
Neither has been much of a concern for high-performing banks in a long time.
“In past years we saw a lot of the top institutions typically grew revenue at levels greater than their peer group,” Hanley said. “But in all likelihood they’re not going to have the wherewithal to grow revenue like they have in the past.”
(Click on the button at the end of this article to see this years ranking — which is based on return on average equity across three years — and use the links below to go to the rankings from past years.)
Overall profitability in 2019 for the banks in this size category — though “solid,” Hanley said — declined slightly from a year earlier due to the Federal Reserve's interest rate cuts. The three cuts, in July, September and October, reversed nearly all of the upward movement of the previous year.
Contracting margins could have made a bigger dent in profitability, if the banks had not managed to contain expense growth, Hanley said.
The median return on average equity for the 511 institutions that fit the ranking criteria slipped by 25 basis points from a year earlier, to 9.28%. By comparison, the median for those in the top 200 fell by 84 basis points, to 11.46%.
One metric where the banks diverged was loan yields.
The top 200 enjoyed a median yield on average earning assets that was 14 basis points higher than the peer group — 4.71% vs. 4.56% — a key advantage that helped them outperform.
"But with rates in freefall essentially, those yields are going to be much lower this year,” Hanley said, pointing out that the Fed, in its emergency actions this spring, further slashed rates to a record low.
Hanley recommended that banks focus more heavily on other measures to improve performance amid the uncertainty of the pandemic and the resulting business upheaval. In addition to asset quality and expense control, he believes demand deposits will be a differentiator that helps separate the best from the rest.
"Having that non-interest-bearing source of deposit funding will become more crucial,” he said.
Though the core deposit ratio is a more commonly used measure, Hanley said that metric has become muddied lately, thanks to the proliferation of high-yield savings accounts. He looks at demand deposits, a subset of core deposits, for better insight into the level of true core funding.
“What’s happened is, more banks are offering high-yield savings so, de facto, very interest-rate sensitive deposits, which in years gone by was mainly confined to CDs," he said.
For both the top 200 and the larger peer group, core deposits as a share of total deposits fell last year, when compared with 2018. The core deposit ratio was a median of 77.64% for the high performers (down 171 basis points) and 73.30% for the peer group (down 34 basis points).
Though the top 200 still have an edge in overall core deposits, they are not doing as well on demand deposits.
They posted a median ratio of demand deposits to total deposits that is 79 basis points lower than that of the peer group. The ratio was 14.34% for the high performers, down 30 basis points from a year earlier, compared with 15.13% for the peer group, an improvement of 9 basis points.Click below for a list of this year's participant list. Check us out at #14!
If you'd like to read more, check out the article on American Banker:
Rankings from previous years: