Who Says There’s No Growth In Banking?

If you’re not growing, you’re dying. It’s an often-used aphorism that has been attributed to such disparate sources as former college football coach Lou Holtz, the legendary Bob Dylan and a character played by the actor Morgan Freeman in “The Shawshank Redemption.” Unfortunately, it’s also a painful truth that a lot of bankers are living with nowadays as they search for growth in an environment that seems specifically designed to strangle it.

Many banks that survived the financial crisis of 2008-2009 have, for the last three years, struggled to grow their revenue and sustain a level of profitability that would justify the higher levels of capital that all insured depository institutions are required to maintain by their regulators in a much stricter post-crisis world. Some banks that survived the crisis might find the current business environment so harsh that they eventually choose to sell out.

And yet not every bank today is struggling to produce top line growth. Working with Bank Intelligence Solutions, a subsidiary of Fiserv Inc., Bank Director magazine ranked all U.S. banks and thrifts across four key growth areas (click here to view the charts). The four categories in our inaugural Growth Leaders Ranking are core income (defined as net-interest income plus noninterest income, excluding available-for-sale gains and losses and other-real-estate-owned gains and losses), core deposits, net loans and leases and core noninterest income. Of the four categories, the most important is core income since it is inclusive of the other three revenue sources. The rankings were based on regulatory agency call reports for the first three quarters of 2012.

One bank nearly dominated the entire ranking: Customers Bank, the Phoenixville, Pennsylvania-based subsidiary of $3.2-billion asset Customers Bancorp Inc., which placed first in the core income and net loans and leases categoriesu2013with growth rates through the first three quarters of 2012 of 43.1 percent and 19.77 percent, respectively-and second in the core noninterest income category, at 69.77 percent. With the backing of an investment group, Chairman and Chief Executive Officer Jay S. Sidhu acquired Philadelphia-based New Century Bank in 2009, renamed it Customers Bank and moved the holding company headquarters to Wyomissing, Pennsylvania. Sidhu has pursued a niche strategy built around specialty lending and a unique distribution strategy that emphasizes mobile technology rather than brick-and-mortar branches.

The top place finisher in the core deposit category was Cole Taylor Bank, a subsidiary of $5.1-billion asset Taylor Capital Group Inc. in Rosemont, Illinois, a suburb of Chicago. Cole Taylor grew its core deposits by 12.91 percent through the first three quarters of 2012, followed by First Niagara Bank, the $35-billion asset unit of Buffalo, New York-based First Niagara Financial Group Inc., which grew deposits at a 12.22 percent rate.

The core noninterest income leader was State Bank & Trust Co., a $2.6-billion asset subsidiary of State Bank Financial Corp. in Atlanta, whose growth rate was an eye popping 97.29 percent. In recent years State Bank has been an active acquirer of failed banks from the Federal Deposit Insurance Corp. (FDIC), and most of those transactions have included loss share agreements with the FDIC where State Bank manages pools of distressed assets and receives reimbursements from the agency, which are booked as fee income. Finishing behind State Bank in the core noninterest income category was Customers Bank, with a 69.77 percent growth rate. The majority of Customers Bank’s noninterest income came from a large warehouse mortgage lending operation, which generates a high level of fee income.

Growing revenues in this environment has been difficult for most banks in part because of a weak U.S. economy, which has restrained borrower demand for loans and led to intense competition among lenders for what good loans are out there. Another crucial factor is the Federal Reserve’s monetary policy of the last couple of years known as quantitative easing, where it has purchased large amounts of government bonds and mortgage-backed securities from member banks in an effort to increase the money supply and drive down interest rates. While lower rates have significantly lowered the industry’s funding costs-which normally is a good thing-it has also reduced what banks can earn on their investment portfolios, and many banks now have more deposits than they can productively put to work.

“The cost of funds is about as low as it can go,” says Bank Intelligence Solutions President Kevin Tweddle. “And loan pricing could get even more competitive.” One strategy that many banks have deployed is to cut their loan pricing to stimulate greater volume, although that ends up being a costly race to the bottom which further compresses net interest margins. The Fed has stated that it intends to continue quantitative easing at least through 2014, or until the U.S. economy starts growing more strongly, which could force an increasing number of banks to consider one of the few options left-an acquisition or sale. For some institutions, “The only thing left that can move the needle is a merger,” says Tweddle. “It’s fairly simple banking math.”

So why are some banks able to grow loans or fees when most others can’t? Clearly, part of it has to do with location. Tweddle points out that many of the banks that finished in the top 10 on one of the four ranking categories happen to be located in markets where economies are stronger than the national economy. “Some of the best markets in the country are on those lists,” he says. “A big part of growth is tied to the health of the market.” Another important variable is the quality of the bank’s management team. Since banking is a highly competitive-and in some respects, highly commoditized industry with thin profit margins-the skill of execution (or lack thereof) is often reflected in an institution’s financial performance. “Executive teams and the people running the bank are a big part of [the growth story],” says Tweddle. “Certain people have a golden touch and Jay Sidhu would be one of those guys.”

And yet Sidhu himself is quick to say it’s vital for banks to have a strategy that clearly sets them apart from their competitors. In addition to its mortgage warehouse lending business, Customers Bank also has taken an unusual approach to consumer banking distribution that lowers its overhead costs while allowing it to pay a little more to attract consumer deposits. (For a fuller explanation of his strategy, see “A Second Act for Jay Sidhu” on page 37.) Both of those elements have helped Customers Bank succeed against some of the largest banks in the country.

“Because of market conditions, because of the regulatory environment, because of technology, I think you are going to see the emergence of niche players and in my opinion, the only small banks that are going to survive are the ones with niche plays,” Sidhu says.

Enterprise Bank & Trust, the $3.1-billion asset subsidiary of Enterprise Financial Services Corp. in St. Louis, placed third in the core income category-at 20.44 percent-using its own niche strategy. Enterprise caters to privately held businesses and their wealthy families in the St. Louis, Kansas City and Phoenix markets, providing both commercial banking and investment management services. It fits in between some of the very large banking companies in its market, including Bank of America Corp. and U.S. Bancorp, and smaller community banks. The best way of summing up Enterprise’s strategy is that it provides a range of products that smaller banks can’t match, with a level of service that larger banks can’t rival. “We take a very consultative approach,” says President and CEO Peter F. Benoist. “We built this to be a relationship management driven (banking) platform.”

Enterprise has done a handful of acquisitions-since 2009 it has purchased two failed banks from the FDIC in Arizona and one in Kansas City-but these deals were for the purpose of gaining access to new markets rather than an attempt to buy growth that it couldn’t produce organically. Still, Benoist says that a significant amount of Enterprise’s loan growth has come at the expense of larger banks, which he feels very confident competing against. “We’ve obviously done a lot of share pull,” he says. “We’ve done that by bringing in a lot of talent from the large [institutions].”

Barrington Bank & Trust Co. in Barrington, Illinois, a $1.6-billion asset subsidiary of Wintrust Financial Corp. in Lake Forest, Illinois, used a highly successful mortgage lending operation to power itself to a fourth place finish-at 18.76 percent-on the core income ranking. “Our mortgage operation has been booming,” says Wintrust President and CEO Edward J. Wehmer. “In this environment it’s hard to find growth, but the mortgage side has been good to us. We’re in that business for the long haul.” With $15 billion in assets, Wintrust has a unique operating structure: It owns 15 different banking subsidiaries in Illinois and Wisconsin, each operating under its own charter. Barrington Bank & Trust, which has a national charter, handles mortgage origination for all of the parent company’s subsidiary banks through its Wintrust Mortgage division.

Wintrust’s subsidiary banks, including Barrington, have also seen good growth in middle market commercial and commercial real estate, including real estate development loans as a recovering housing market begins to stimulate demand for new construction. “You have to be careful with that, and we have been careful,” Wehmer says.

All three of these top-ranked banks, as well as many others included in the rankings, used a market niche of some type to find growth when many other institutions couldn’t. Sidhu says that it’s crucial that banks find ways of differentiating themselves in an industry crowded with me-too competitors.

“Too many bankers are clueless about what they’re going to do tomorrow,” he says. “Their strategy for tomorrow is hope.”


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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