For midsize banks (institutions with total assets between $1 billion and $10 billion), 2013 was not a year without challenges. While macroeconomic conditions showed signs of improvement, banks were faced with a significant drop in residential mortgage activity. This year’s top-performing midsize banks were able to develop and successfully pursue a wide range of strategies to generate higher earnings. These strategies included loan growth and a focus on efficiency gains.
Loan growth drives revenue
The median net loan growth for the 25 top-performing public midsize banks was 12.30% for 2013, compared to median net loan growth of 6.95% for all public midsize banks. Amongst top performers, growth occurred primarily in residential real estate loans, commercial and industrial (C&I) loans, and commercial real estate loans. Central Pacific Financial Corp. (#1 public) grew its loan portfolio by 19.4% during the year, with increases in its consumer, residential mortgage, and commercial loan portfolios. The bank credited improvements in the Hawaiian economy and an effective consumer loan marketing campaign as having contributed to its success.
Focus on efficiency gains
Top-performing midsize banks posted significantly lower efficiency ratios than their peers and developed means of improving efficiency beyond just cutting costs and closing branches. Despite significant investments in personnel and facilities during the year, Eagle Bancorp (#22 public) was able to successfully leverage its lenders to grow its C&I and income-producing commercial real estate loan balances. The resulting increase in net interest income was more than enough to offset the additional expenses incurred during the year. Bank of the Ozarks (#6 public) made progress towards its sub 30% efficiency ratio goal during 2013. The bank aligned its overhead to support revenue-generating activities, investing in growth engines, including the bank’s Real Estate Specialties Group.
Outlook for the rest of 2014
In the year ahead, banks will have to address a number of challenges, including slow economic growth, sustained margin compression, and increasingly burdensome regulation. Those banks that successfully develop and execute strategies to grow loans, increase net interest income, and absorb compliance costs have the best chance of finding their way to the top of next year’s top performers list.