THE BLOG
11/11/2014 10:49 am ET Updated Dec 06, 2017

Is Your Community Bank Well Run?

The best-run community banks in the U.S. are mostly small, independently owned banks with fewer than a dozen retail branches, less than $500 million in assets, and, in some cases, an unusual focus, based on an analysis by Sageworks, a financial information company.

Very few of their names (see list below) may ring a bell. However, these banks are some of the most efficient institutions and some of the most effective at generating income from their deposits, loans and other assets, according to the Sageworks study.

The State Bank of Texas generated the top ranking, based on an analysis of more than 4,500 banks that had between $100 million and $10 billion in assets. Based on return on average assets (ROAA), a metric Warren Buffett reportedly uses to identify the best big-bank investments, State Bank of Texas does the best job at generating income using available assets ($413.3 million as of June 30). Its efficiency ratio was also superior to the other banks evaluated using data from Sageworks Bank Information.

This family-owned Dallas-based bank, started about 30 years ago with the personal and family investments of an immigrant hotel owner from India, specializes in lending to the hotel industry, according to its website.

To determine the ranking, Sageworks evaluated the complete list of U.S. banks with total assets between $100 million and $10 billion as of June 30, and then ranked these institutions by ROAA and efficiency ratio. To make the top 15, a bank had to be among the top 5 percent for both ROAA and efficiency ratio. ROAA was used to determine the rank order of the top 15.

"These institutions have been spending less overhead to earn each dollar and have generated higher profits utilizing their internal assets, which speaks volumes on how well these institutions are being run this year," said Sageworks analyst James Noe.

State Bank of Texas has produced a 5.1 percent return on average assets and an efficiency ratio of 24.4 percent through June 30 of this year. The efficiency ratio gauges a bank's ability to generate revenue from its non-funding-related expense base. The ratio can be affected by the types of products offered by a bank; for example, a bank providing only lower cost products such as auto loans and home mortgages should have an easier time maintaining a low efficiency ratio than a bank providing more complex, expensive products. Nevertheless, it reflects a bank's overhead as a percentage of its revenue, so it is a frequently assessed metric to determine bank performance.

Other community banks in the ranking with more traditional product lines take a hands-on, efficiency-focused approach to the bank management. Stearns Bank of St. Cloud, Minn., No. 3 on the Sageworks Bank Information list, explains that there are 10 rules established by the bank's CEO Norm Skalicky, including "No top heavy staff," "No unnecessary anything," and "No throwing away money."

Also making the list: Prins Bank, based in Prinsburg, Minn., Eva Bank of Eva, Ala., NewBank of Flushing, N.Y., two banks in Missouri, and three banks in North and South Dakota.

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