The top-performing banks in the $2 billion-to-$10 billion asset class are a diverse group made up of traditional commercial lenders, mortgage powerhouses, serial acquirers and fee generators. But one common characteristic is that they are unafraid to invest in their growth. This is especially striking given the pressure all banks are under to control expenses these days.

Last year the median spending increase for those in the top 20 was 10.92%, compared with 6.33% for all 238 banks that qualified for this ranking. Not coincidentally, the standouts generated stronger growth in both interest and noninterest income than the peer group and, despite higher overhead, had lower efficiency ratios. Most notably, their median return on equity — at 14.30% for 2016 — was a whopping 558 basis points higher than that of their peers.

Three newcomers — Stearns Financial in St. Cloud, Minn., Independence Bancshares in Owensboro, Ky., and Sterling Bancorp in Southfield, Mich. — topped the ranking, which is based on return on average equity across three years. They are among 22 banks appearing here for the first time after having crossed the $2 billion-asset threshold in 2016.

Stearns is one of 11 banks in the top 20 whose year-over-year spending increased by more than double digits. It has a niche in equipment finance and other specialty lending, and continued investment in those business lines helped it achieve loan yields and a net interest margin that are far superior to those of its peers.

“Those that invest wisely in the businesses that best support revenue growth are the ones that are able to improve profitability over time,” said Kevin Halsey, a Capital Performance Group consultant who compiled the data for this annual ranking. (Click on “view table” at the end of this article to see the ranking for this year and click on the links below to go to midtier rankings from past years.)

See rankings from past years:

Apart from their willingness to spend money, the top-performing banks do not have much else in common, Halsey said.

Some are what Halsey calls “fee-income superstars,” like Woodforest Financial Group in The Woodlands, Texas, and State Bancshares in Fargo, N.D.

Woodforest, which has more than 700 branches in Wal-Mart stores throughout the country, generates much of its income from ATM fees and deposit service charges, such as monthly maintenance fees and overdraft fees. Its ratio of fee income to average assets was 9.6% last year, by far the highest of any bank in the rankings. State Bancshares’ 5.30% was next highest, plumped up by fees generated from the sale of mortgages.

Other standouts include ServisFirst Bancshares in Birmingham, Ala., which has succeeded largely by hiring successful teams of bankers away from competitors, and Watford City Bancshsares in North Dakota, a commercial lender that, outside of Stearns, had the highest ratio of interest income to total assets in the group.

Then there’s Hingham Institute for Savings, which can actually point to expense control as its secret to success. A newcomer to the ranking for banks in this size range, it enjoyed strong loan and deposit growth last year. But the metrics where the Massachusetts bank really stood out were its ratio of noninterest expenses to assets — a rock-bottom 1%, compared with a median of 2.66% for the top 20 overall — and an efficiency ratio in the low 30s.

“As you can see, there are many ways to be a top performer,” said Halsey, who also wrote this BankThink about some effective strategies banks at the top of our annual rankings have used.

Alan Kline

Alan Kline

Alan Kline is a senior editor at American Banker overseeing its consumer finance and national/regional banking coverage. He also helps direct coverage of the annual Most Powerful Women in Banking rankings.

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