High interest rates and stubbornly persistent inflation made 2023 a tough year for community banks. Their travails were reflected in Capital Performance Group's annual ranking of the top-100 publicly traded banks with assets under $2 billion.
Though the under $2 billion-asset cohort continued to enjoy pristine asset quality, the benefits of low-to-no charge-offs were outweighed by core deposit runoff alongside a slowdown in revenue growth. Though still solid, most bottom-line metrics failed to match 2022 levels, even among top-performing banks, according to
To be sure, there were bright spots. "Despite challenges brought on by elevated rates and deposit outflows, the median net interest margin increased by nine basis points for the top 100," Emma Metzler, a consultant and project manager at Capital Performance Group, wrote in an email to American Banker.
In general, though, profitability measures were down industrywide. For top performers, the best that could be said was that they managed the downside better than most. Return on average equity averaged 15.83% among the top 100 under $2 billion-asset public banks, a climbdown from 17.20% in 2022. The same held true for all 361 banks in the under $2 billion-asset cohort, with ROAE dropping a meaningful 125 basis points year over year.
Capital Performance Group ranked the institutions using three-year average ROAE, which covers from 2021 to 2023. For the top performers, the median for this figure was just under 15%, while for the entire asset class, the median totaled just under 11%. (Click
Behind those numbers lay the Federal Reserve Board's decision to keep interest rates high, as well as a run-up in inflation, a combination that has rarely played well for community banks, or the economy in general.
One institution that beat the trends and produced increases across virtually all statistical categories was the No. 1 bank on the Capital Performance Group list, the $1.3 billion-asset FFB Bancorp in Fresno, California. FFB recorded a 31.33% ROAE, up 2 basis points from 2022. FFB's three-year average ROAE totaled 29.7%. The three-year return for the No. 2 bank, the $611 million-asset Finwise Bancorp in Murray, Utah, totaled 27%.
FFB, which rebranded from Fresno First in March 2023, operates as a single branch on North Palm Avenue in Fresno, a fact that "obviously helps with efficiency," CEO Steven Miller said in an interview. Indeed, its 44% efficiency ratio fell well below the average and median for the top-100 banks on the list.
FFB's 2023 net income of $33.6 million — up 27% year over year — was driven by $12.9 million in net revenue produced by its merchant services business. FFB is an acquiring bank and its own ISO, meaning it processes card brand payments for merchants. There aren't many acquiring banks, according to Miller, who added that those in the business are typically larger than FFB.
"Every day, we wake up with a banking charter and an acquiring license, which is a pretty good thing these days," Miller said. "We're blessed to be involved in the evolving payments space. It allows us to expand our customer and deposit base at a very low cost. That's kind of the crux of why we've been successful."
FFB's digital-first strategy evolved as much by chance as by design.
"I would love to tell you it's a great strategy, but there's probably some dumb luck involved as well," Miller said. "When the bank was founded [in 2005], the founding chairman wanted to focus on small business and the lower-end of the commercial market. We knew those customers didn't need branches on every corner."
FFB's reliance on technology deepened during the COVID-19 pandemic, the result of $160 million of Paycheck Protection Program loans that the bank originated, as well as customers' increased comfort level with remote banking.
"It got ourselves and our customers really comfortable with technology," Miller said. "Our bread is still buttered in California, but we now have customer relationships in 42 states. … We see that as where banking is going."
Strategies varied across the top-100 list, with several institutions producing low levels of noninterest income to average total assets. For instance, the $777 million-asset Golden State Bancorp in Glendale, California, had just three basis points. Still, most top-performing banks benefited from higher levels of fee income. The median for the top 100 was 0.55 basis points, compared to 0.48 basis points for all banks on the list.
FFB does Small Business Administration 7(a) lending in addition to its payments work. It's originated $32.4 million in SBA loans so far in the agency's 2024 fiscal year, focusing on loans of $500,000 to $2 million, a range Miller termed the company's "sweet spot." FFB has looked at expanding into smaller 7(a) loans, of $250,000 or less, but remains a ways off before any move in that direction. "We do think there's a big opportunity in those small-ticket loans, but you have to have a very efficient model to be successful. … We're not there yet."
Miller, however, doesn't want FFB to be known as an SBA bank, or even a payments bank. "I want us to be known as a really solid community bank," Miller said. "We still feel the hardest thing in banking is getting someone to move their checking account. That's what we focus on most."
One noticeable change to the top-performers list was its size. In past years, Capital Performance Group has listed the top-200 performing public banks under $2 billion of assets. With ongoing consolidation, including that many institutions made less sense. Indeed, the entire universe of under $2 billion-asset public banks numbered just 361 banks this spring, as Capital Performance Group was finalizing results. That total was down from 391 banks in 2022.
"The industry overall, and especially this group of banks, has faced stark levels of consolidation over the last 10 years," Metzler said. "To put it in perspective, when we started this analysis with American Banker in 2015, this asset tier had about 750 banks total. That being said, it made complete sense to reduce the number of top performers."