Top community banks: How SBA lending and expansion lifted one winner

The top-performing community banks this year were connected by two common threads: specialization and expansion.

Banks that specialized in certain business lines and expanded those units beyond their geographic footprint were among the top-performing publicly traded banks under $2 billion of assets on a list published annually by American Banker, according to Claude Hanley, a partner at Capital Performance Group, which assembled the list. 

One example of a bank that rose through the ranks is US Metro Bank in Garden Grove, California. US Metro reported earnings per share of 23 cents in the first quarter, compared with 14 cents a share a year earlier, a 61% increase in consolidated earnings year over year.  

The $1.1 billion-asset bank moved up 227 positions, from No. 291 to No. 64. The bank primarily serves low- to moderate-income customers, people of color and small-business owners, and it attributed its growth primarily to its SBA lending program. 

Dong Il Kim, US Metro Bank
"Banking business is the people's business," said US Metro CEO Dong Il Kim.

US Metro expanded its branch network to enter new SBA markets specializing in 7(a) loans, according to its chief executive, Dong Il Kim. In 2021, it opened four new loan production offices and reopened another. The bank now has six branches across major cities in California and six loan production offices in California, Texas and Washington state. 

"Those LPOs and the fact that there was a great demand for credit, especially government-guaranteed credit, last year, enabled them to essentially post incredible loan growth," said Hanley.

The higher loan numbers helped US Metro's standing on the list. Return on average equity is a key metric used to determine the rankings. In 2021, US Metro reported ROAE of 22.11%, up more than 14 percentage points from the prior year and more than 8 percentage points greater than the top 200 group median.

SBA lending is attractive to banks because the government guarantee allows them to continue lending heavily to small businesses despite economic uncertainty, said Dan O'Malley, chief executive of the Boston-based fintech Numerated, which partners with banks and credit unions to offer digital lending platforms.

"We don't really know how the economy's going to be performing in the next two years. [So] banks, when they lend, like to have confidence in the loans they're making," said O'Malley. 

Focusing on customers as people

US Metro also attributed its performance to its "people first" culture.

"Banking business is the people's business," said Kim.

The philosophy extends to the bank's management. When opening a new branch, US Metro selects a branch manager with a proven reputation in the area before setting the location. By picking the talent first and then the geography, most branches hit the breakeven point within a year and reach above $100 million within the next, Kim said.

"It's the right strategy in my opinion. … Ultimately, community banking is relationship based, and if you are trying from scratch to develop all your relationships in your market, that could be tough," said Greyson Tuck, a consultant and analyst at Gerrish Smith Tuck in Memphis, Tennessee.

US Metro experienced a 230.22% increase in net income growth from 2020 to 2021, which trumped the median net income growth of 25.91% for the top 200 banks. 

The end of government support

But Tuck noted that "there's a lot of noise in that income statement. For a lot of banks, when you look at their 2020 and 2021, yes, they made a lot of money, but their core profitability was not as strong as what was reflected in their income statement."

The three most common banking strategies in the past two years were core lending, Paycheck Protection Program loans and mortgages, he said. Banks engaged in these business lines benefitted from the strong refinancing and homebuying markets that accompanied last year's low rates and government-supported pandemic-relief funds, as well as PPP business lending, which the government also underwrote. 

"When you think about that as a three-legged stool, in 2022 two of the three legs are gone," said Tuck. "You've got many banks that are looking at a 2022 budget and now six months' worth of performance — and many bankers knew this — realizing that 2022 is not going to be what the past two years have been in terms of profitability."

For US Metro, 2022's less rosy banking environment means it has to double down on its strategy. 

Kim says the bank has plans to continue to expand by opening two more branches in Seattle and Los Angeles and building up its mortgage loan technology infrastructure in preparation for the market to bounce back.

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