In a year that saw interest rates rise at the quickest pace in years, top-performing smaller regional banks thrived by insulating themselves from the variable effects of these rate increases.
Robust noninterest income and small cost-of-funds increases helped a select handful of banks lead the list of top-performing banks with assets between $10 billion and $50 billion. Consulting firm Capital Performance Group compiles the annual ranking. This year's list used year-end 2022 data.
At Commerce Bancshares, noninterest income totaled 1.62% of average assets last year. That is well above the median of 0.63% for the 85 banks analyzed by CPG. Cost of funds for the $32 billion-asset bank increased just 0.19% in 2022, well below the median of 0.43% for all banks on the list. Commerce was ranked No. 8, up from No. 12 last year.
"All banks are seeing an increase in their cost of deposits," said Chuck Kim, chief financial officer at Commerce, which is headquartered in Kansas City, Missouri, but operates full-service branches across five states and offers commercial banking services in an additional 11 states. "We will also see that, but because of our strong checking account and Treasury services performance, it won't be as hard on us as it is on some other banks."
These regional banks are often more sensitive to changes in interest rates than their big-bank counterparts because they have smaller deposit bases and fewer business lines. But the regional institutions that performed the best last year navigated around the obstacles of higher interest rates, which the Federal Reserve increased seven times in 2022.
"At the end of the day, it's about who can play defense better," said Claude Hanley, a partner at Capital Performance Group. "That defense came in a few different varieties: They managed to maintain their margin in the face of rising interest rates and slowing loan demand, and they managed to maintain noninterest income."
Other top-performing banks managed to keep their noninterest expenses in check in 2022. At ServisFirst Bancshares in Birmingham, Alabama, noninterest expenses were 1.06% of average assets, well below the median of 1.97%.
ServisFirst also managed to take advantage of excess funds on hand to make loans in areas like commercial real estate, CEO Tom Broughton said. The $14.6 billion-asset institution was ranked No. 3 on this year's list, the same as the previous year.
"We were taking excess funds out of our Fed account and putting them into decent-rate loans, so that's one driver we had last year — plenty of excess liquidity," he said.
CPG primarily ranked the banks by their three-year average return on average equity between 2020 and 2022. The median ROAE for all banks in the $10 billion to $50 billion asset category was 9.64%, a slight increase from the year-ago figure of 9.13%. This metric was 17.03% for the top 10 performers.
Commerce Bank reported a ROAE of 14.69% between 2020 and 2022, while ServisFirst's ROAE over the three years was 19.52%.
The drivers behind the 10 best-performing banks differ from those of 2021, when a significant widening of spread revenues boosted
As for this year, executives leading some of the top banks see a normalization in credit quality on both consumer and commercial loans and reduced liquidity as likely trends for the remainder of 2023.
"We really do invest for the long term," Kim of Commerce said. "We've been around for 157 years, and we plan to be around for 150 more.