Who Says Banks Can’t Grow Revenues?

Don’t tell the busy bankers at Texas Capital Bancshares in Dallas that you can’t grow revenues in a sluggish econ-omy. The $6-billion-asset bank generated top-line growth of 23 percent over a 12-month period ending June 30 of last year, and a good part of the increase came from the basic underpinning of bankingu2013growing assets, which is something that a lot of banks aren’t doing these days. Texas Capital also benefited from the retreat of other lenders from the Dallas market, which allowed it to expand its loan portfolio , while a low federal funds rate helped it boost its net interest margin 45 basis points to 4.24 percent.

Just as importantly, the bank is positioning itself for continued growth when the economy finally makes a come-back by siphoning off deposits and picking off staff from neighboring institutions struggling with credit quality is-sues. “In a market like Texas you really need to have the fire power and dry powder,” says George Jones, president and chief executive officer of the bank. “We are trying to position ourselves so we can take advantage of the recovery.”

Texas Capital isn’t the only bank that is thriving in spite of the tough economic environment. Members of this ex-clusive group are well capitalized and free of any regulatory restrictions that would prevent them from lending. They often are hiring staff and gearing up for even faster growth down the road. Generally they are finding ways to aug-ment business lines or develop new ones, and some are growing top-line revenues through acquisitions. But one trait they all share is that they are all actively lending and thereby stealing customers from sluggish competitors who are either unable or unwilling to do likewise.

“When we hear banks aren’t lending, that is music to our ears,” says Tony Nuzzo, chairman, president and chief executive officer of $94-million-asset First Commons Bank, a closely held financial institution that opened its doors in July 2009 in Newtown Centre, Massachusetts, outside of Boston. “That provides us with plenty of opportunities. We have an abundance of capital to put to work. It gives us opportunity to look for quality borrowers.”

“The high performance institutions haven’t been backing off their loan growth,” adds Michelle Gula, president and chief executive officer of m.rae associates inc., a consulting firm in Bethlehem, Pennsylvania. “They still have strict credit policies, but they are able to now really give a look at what sort of customers are coming in-they gain the customers that have lost their lines of credit and had loans called.”

Banks with a strong revenue-growth story are indeed rare. Only 87 out of 504 publicly-traded banks were able to grow operating revenues by 20 percent or more over four linked quarters ending June 30, 2010, according to a list compiled by Sandler O’Neill + Partners in New York, based on data provided by SNL Financial in Charlottesville, Virginia.

Sandler looked at a universe of roughly 500 publicly traded banks. The firm defines revenue as net interest income plus noninterest income, less gains from sales of securities and nonrecurring events. Using this definition, revenues for the industry as a whole were $166 billion in the second quarter, down from $172 billion a year earlier, according data from the Federal Deposit Insurance Corp. in Washington DC.

The top 100 revenue growers were primarily banks with $10 billion in assets or less. Only one bank with more than $100 billion in assets made the top 100: McLean, Virginia-based Capital One Corp., which placed 32nd with revenue growth for the period of 37 percent. The company benefited from the high spreads it gets from its $62-billion-asset credit card portfolio, and also from low-cost deposits in its retail branches.

Large banks with a big retail presence have had a tough time of it, with few generating any meaningful growth. Retail banking is facing a strong headwind, caused in part by recent developments such as higher FDIC premium assessments, new government restrictions on debit card charges for overdrafts and limits on how banks can charge fees for credit card customers.

“It is a tall order to get revenue growth in this environment,” says Richard Hartnack, vice chairman of consumer banking at U.S. Bancorp, a Minneapolis-based bank with $283 billion in assets that managed to grow its top line 7 percent over the four-quarter time period. The growth came in part from stepping up its mortgage underwriting business, helped by so many other originators going out of business, along with some acquisitions, Hartnack says. The bank has also gained commercial banking market share thanks to some of its competitors either failing or pulling back when capital problems forced them to curtail their lending. “We have a lot of wounded competitors,” Hartnack says. “They are going to have to say to their clients, ‘I’m sorry we can’t do business with you right now.’”

Meanwhile, only six midsize regional banks-those with $10 billion to $100 billion in assets-made it into the top 100 revenue growers, with five of the six doing so with the help of acquisitions. That underscored an important theme: Generally the only way for larger banks to grow quickly is by acquisition. Eight of the top 10 banks boosted revenues with an acquisition of some sort between mid-year 2009 and June 30 last year, three of which were FDIC assisted takeovers.
“Revenue growth really is a challenge if you are not growing your loan portfolio organically,” says Bob Ramsey, an analyst at FBR Capital Markets. “If you don’t grow your assets, it’s difficult to grow your earnings unless you are able to do acquisitions, cut out a lot of the overlapping costs and extract revenue and expense synergies.”

For example, First Niagara Financial Group, a $21-billion-asset bank located in Buffalo, New York, ranked fourth on the list, with revenues jumping 68 percent for the 12 months ending June 30. That kind of growth was helped by the purchase of $5.6-billion-asset Harleysville National Corp., and the acquisition of 57 National City Corp. branches, representing $757 million in performing loans and $3.9 billion in deposits, from Pittsburgh-based PNC Financial Services Group following PNC’s acquisition of National City.

Only two banks in the top 10 achieved 20 percent or better growth without an acquisition. Herald National Bank, based in New York City, topped the list, with a whopping 637 percent growth in revenues. The $464 million-asset bank achieved those impressive results by spending money on hiring veteran lenders that have helped the bank, which opened up two years ago, generate its first profit ever in the third quarter.

Banks with strong revenue growth are a diverse group geographically, without any region dominating the list, un-like say, seven years ago, when Florida and Nevada banks held sway due to rampant growth in their respective housing markets. Both banks and thrifts were also prevalent. “It is more company specific than macro-trend driven,” says Mark Fitzgibbon, director of research at Sandler O’Neill.

“We are in an environment where revenue growth is tough to come by,” Fitzgibbon adds. “Loan demand is lax. Banks are really fighting tooth and nail for any way to grow revenues.”

Banks as a group have struggled growing the top-line in part because their bread-and-butter business lending has slowed to a trickle as many of them write off bad loans and follow regulatory orders to recapitalize their balance sheets. Assets for all banks fell by $136 billion to $13.2 trillion, or 1 percent, in the second quarter of 2010, accord-ing to the FDIC. Banks as a group reported a profit of $21.6 billion in the second quarter of 2010, compared with a loss of $4.4 billion for the same period in 2009. Yet most of the net income came from a $27.1 billion reduction in provisions for loan losses, not revenue growth.

Banks were also fortunate to ride the tide of wider margins, benefiting from a low federal funds rate, with the central bank keeping the rate in the range of 0% to 0.25 percent, giving banks better spreads. “Bank revenue growth has been driven by margin expansion over the last 12 to 18 months,” Ramsey says. “That has really been the case whether you are a very large bank or smaller bank.”

Nevertheless, well-capitalized banks are the ones making money because their strong balance sheets allow them to lend and grow revenues briskly. “To grow the top line you are going to have to grow your assets, it’s that simple,” says Ray Davis, chief executive officer of Umpqua Holdings Corp., a $10.8-billion-asset community bank based in Roseburg, Oregon. “If you can’t grow in this kind of environment and you are still charging off loans, your top line is going to come down.”

The ability to lend has also enabled high-revenue-growth banks to invest in preparation for a rebound in the U.S. economy. Umpqua, which grew its revenues by 12 percent for the 12 months ending June 30, has during the last year been hiring commercial and industrial lending teams from other banks, some in new markets. For example, last September the bank announced the addition of a 25-year veteran from U.S. Bancorp to run its new commercial banking center in Reno, Nevada. It has also added new credit market and international banking teams to serve larger customers.
“We realize if we want to grow the loan portfolio, we probably aren’t going to grow it much stronger than the last few years with the same number of people that we have,” Davis says. “We have reached out.”

One aggressive institution that has been stealing talent from its larger competitors is Beneficial Mutual Savings Bank, a $4.9-billion-asset thrift based in Philadelphia. Beneficial, whose annualized revenues rose 12 percent in June of last year, has snatched a group of municipal lenders from TD Bank, the U.S. subsidiary of Toronto-based TD Bank Financial Group.

In order to grow revenues, banks will have to be opportunistic, says Gerard Cuddy, Beneficial’s president and chief executive officer. “I think it is about understanding what your existing capabilities are and what the best opportunities are to augment those capabilities within your existing geographies,” Cuddy says.

Another strategy that can help drive revenues is to pick off a competitor’s disgruntled customers. Beneficial gained some new deposit customers after local banks were acquired by large institutions, including Madrid-based Banco Santander’s takeover of Sovereign Bancorp and TD Bank’s purchase of Commerce Bancorp. “There has been plenty of market disruption here with a lot of large international banks coming in here taking over local players,” Cuddy says. Deposits at the bank grew 19 percent to $3.7 million for the 12 months ending June 30. Operating rev-enues jumped 23 percent over the same period.

At the same time, high-revenue-growth banks are also digging up new ways to generate revenues, all the more important since a spate of new regulations, such as changes to Regulation E, which limit debit card fees, have cut into lucrative fee income for banks. Embassy Bancorp. Inc., a closely held $492-million-asset bank headquartered in Bethlehem, Pennsylvania, found an opportunity with some of its business customers who are dissatisfied with high merchant processing fees they were paying to other banks and independent sales organizations. The merchants complained about arcane statements and fees that were hard to decipher. Embassy set up a platform that would charge a flat fee based on average volume and ticket size of the merchant.

“We have been able to find a way through listening to address an objection and be able to make a good value-add to the merchant,” says Dave Lobach, chairman, president and chief executive officer of Embassy. The service has also helped the bank win new clients who can then be sold a variety of checking, savings and loan products. “It helps us build relationships,” Lobach says. That kind of mentality helped the bank grow operating revenues 44 percent to $9.3 million for the 12 months ending June 30.

At Texas Capital, the bank has taken advantage of the refinancing boom to increase its mortgage warehousing business, which has roughly doubled during the economic downturn. The bank holds loans for sale on behalf of originators for about 10 days, collecting spread income and fees, and repeats the routine three times a month. It also asks the originator to bank at Texas Capital, which brings in deposits. “It is a wonderful business for us,” Jones says. “It provides an alter ego approach to lower growth in other parts of the portfolio.”

Texas Capital is also aggressively courting new customers, a common trait among high-revenue-growth banks. “In tougher economic times, banks have got to redouble their marketing efforts,” Jones says. “They have got to be disciplined in terms of getting the relationship managers out into the field, making those calls, and bringing in new business. It is not necessarily growing your own organic base as much as it is getting those customers from your competition.”

Also key is maintaining strong underwriting standards, which is easier said than done with all the pressure to grow the top line. “This is the best time to make a loan to people qualified under these conditions,” says Davis. “Yet one trap banks have to be careful of is weakening underwriting or competing on price. Those are short-term decisions that will kill you in the long term.”

Bankers also need to get out and pound the pavement. “It is really important that community banks are out knocking on doors and aggressively trying to get and attract businesses that are going to be around after this re-cession,” says Brad Elliott, chairman and chief executive officer of $422-million-asset Equity Bank, based in Ando-ver, Kansas. “They need to specifically target those customers that are attractive long term and figure out a way to get them in the institution today, even if the last year or so hasn’t been perfect. That is what is going to gain a cus-tomer for you for a long time.”

For closely-held Equity, which grew revenues 5 percent, that means going after non-real-estate businesses such as manufacturers, cleaning companies, environmental service companies, government suppliers, oil and gas companies and agricultural businesses. In one successful situation, the bank closed on a loan to an aircraft manufacturer even though its offer came in 60 basis points higher than a large regional bank competitor. Equity made up for the higher price with better service.

“We are competing on the fact that if that customer banks with us, they have a relationship with our institution,” Elliott says. “They know who the CEO is. If they need something they can make it happen and at least have an au-dience. They know our customer structure is a little different, but our process in how we handle them is also differ-ent.”

That different way of handling customers is an important key to growing revenues, adds Don Musso, president and chief executive officer of FinPro Inc., a consulting firm in Liberty Corner, New Jersey. “Banks need to keep it simple now,” he says. “They need to do a lot of listening to what the customers want. If you say you will get back with answers in 24 hours, get back to them. Ask them for the information once-don’t keep going back to them.”

If all it took to grow revenue is capital, then bank earnings are poised to take off like a rocket. The industry’s common-equity-to-assets ratio reached 11.33 percent in the second quarter of 2010-more than any other time since 1935. “Banks are massively over capitalized,” says Richard Bove, a securities analyst with Rochdale Securities in Stamford, Connecticut. “The ability to leverage the balance sheet is extraordinarily high.”

Bove likens today’s situation to 1991, right before bank earnings exploded and jumped in the range of 500 percent to 600 percent over the following six to seven years, and he predicts lending will ramp up in mid-2011. To be sure, the federal government’s controversial Troubled Asset Relief Program didn’t pump much money into the economy because most banks sat on the cash-although the program did help prevent a collapse in the banking system, Bove says. But this time around, with the Federal Reserve’s $600 billion “quantitative easing” program-where it will buy U.S. Treasuries from banks-the money will make its way into borrower’s hands since the industry is more strongly capitalized than it was when TARP was first rolled out, and that makes it more likely to start lending again on a big scale. It’s also likely that regulators will begin easing back on their demands for more capital as the industry’s balance sheet shows improvement, Bove adds.

“The capacity to earn a large amount of money is available when the economy is right, i.e., when loan demand increases-and when the U.S. government backs off,” Bove says.

The pace of acquisitions will also accelerate in 2011, Fitzgibbons says. “We are going to see a massive consoli-dation wave over the next several years. One of the easier ways to grow revenues in a tough economic environment is for them to merge with the bank down the street and extract 20 percent or 30 percent cost savings.”
Fitzgibbon expects the merger wave to start in the Northeast and expand outward since banks there have emerged in better shape from the recession than those in other regions.

And in fact the buying has already begun. First Niagara announced in August it would acquire NewAlliance Bancshares of New Haven, Connecticut. And Buffalo-based M&T Bancorp. announced two deals in the first week of November: the acquisition of beleaguered Wilmington Trust Corp., a Delaware-based financial institution with $10.1 billion in assets; and the purchase of Randallstown, Maryland-based K Bank, with $500 million in deposits and $411 million in assets, from the FDIC.

Banks looking to generate revenues must recognize that things are now different than before the recession. “Every bank is going to have a different set of challenges and opportunities in front of it,” says Hartnack of U.S. Bancorp. “The key is whatever the heck got you through the last seven or eight years before the recession is highly unlikely to be the exact same mix of activities and efforts to get you through the next 10 years.”

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