The Rise of Regional Banking: How Smaller Institutions Are Outperforming Their Larger Counterparts

Across America, from the quiet town of Mount Olive, North Carolina, to the vast wilderness of Anchorage, Alaska, a new trend is emerging in the banking industry. While giant financial institutions like JPMorgan Chase and Citigroup dominate the headlines, it’s the smaller, regional banks that are making waves in performance and customer satisfaction. Forbes’ recent ranking of the top 100 publicly traded banks reveals that the top 10 banks on the list are all relatively small institutions, each with less than $25 billion in assets. These banks, deeply rooted in their communities, are proving that size doesn’t always matter when it comes to delivering exceptional results.

One such standout is First National Bank Alaska (FBAK), which climbed from 30th to 6th place on Forbes’ list this year. With $5.6 billion in assets and 28 branches across 19 cities, this Alaska-based bank has been a cornerstone of the local economy for decades. Under the leadership of CEO and Chair Betsy Lawer, First National has added $2 billion in assets over the past decade and grown its annual net interest income by 60% to $167 million. The bank’s success is built on its deep connection to the community, serving small businesses, families, and even historical customers like fur traders and gold miners.

Lawer’s journey to the top is a testament to dedication and legacy. Born into a banking family, she grew up watching her father conduct business calls on Saturday mornings and listening to stories from Alaskan entrepreneurs. After earning an economics degree from Duke University, she returned to Alaska to join the family business, where she has worked for 51 years. Today, she leads a bank that not only excels financially but also holds a unique place in Alaskan history, once storing pelts and gold in its vault.

Strong Financials and Community Focus: The Secret to Regional Banks’ Success

The performance metrics of these regional banks are nothing short of impressive. First National Bank Alaska boasts a risk-based capital ratio and Common Equity Tier 1 ratio that rank among the top five of the 200 banks analyzed by Forbes. Non-performing assets make up just 0.16% of its total assets, a figure that places it in the top decile. Its shares have risen 15% over the past year, a clear sign of investor confidence.

At the top of Forbes’ list is Southern Bancshares (SBNC), a Mount Olive, North Carolina-based bank with $5.3 billion in assets and 60 locations across North Carolina and Virginia. Southern Bank shines with a return on tangible common equity of 26% and a return on assets of 2.2%, the highest in the rankings. Its net charge-offs as a percentage of average loans are a remarkable -0.02%, indicating that the bank recovered more loans than it wrote off in the past year.

The bank’s success is rooted in its commitment to serving multiple generations of families, small business owners, and farmers. “They know their customers by name and understand their needs in a way that larger banks often can’t,” says Peter Gwaltney, CEO of the North Carolina Bankers Association. Southern Bank’s focus on smaller communities also helps keep its costs low, as it avoids the expensive markets where larger banks compete.

Historical Family Ties and Community Roots: The Story of Southern Bancshares

Founded in 1901 as the Bank of Mount Olive, Southern Bancshares has deep roots in eastern North Carolina. Its expansion into Virginia came in 2011 with the acquisition of the assets of the failed Bank of the Commonwealth. Today, the bank is led by CEO Drew Covert, who has been with the institution since 1998. The bank’s board includes notable figures like Olivia Holding and her sister Hope H. Bryant, fostering a sense of continuity and trust.

Southern Bancshares’ story is not unique. Many of the top-performing regional banks have similar histories, with family ties and local roots playing a significant role in their success. These banks are often led by executives who have spent decades serving their communities, building trust, and understanding the unique needs of their customers. Their commitment to personalized service and community involvement sets them apart from larger, more impersonal financial institutions.

Regional Banks and the Metrics That Matter

Forbes’ ranking of America’s Best Banks is based on 11 equally weighted metrics, including credit quality, profitability, and stock performance. The analysis includes data from the 200 largest publicly traded banks and thrifts, with the top 100 selected based on their performance. Key metrics like efficiency ratio, net charge-offs, return on average assets, and return on average tangible common equity are used to evaluate each bank’s financial health.

For First National Bank Alaska, these metrics tell a story of stability and growth. The bank’s efficiency ratio, which measures expenses as a percentage of revenue, is stellar, and its low level of non-performing assets underscores its careful approach to lending. Similarly, Southern Bancshares’ exceptional return on tangible common equity and low net charge-offs highlight its prudent management and strong financial position.

Balancing Tradition and Growth in a Changing Banking Landscape

Despite their strong performance, regional banks face challenges in a rapidly changing financial landscape. The failure of larger banks like Silicon Valley Bank and First Republic Bank in 2023 sent shockwaves through the industry, raising concerns about the stability of smaller institutions. However, regional banks like First National Bank Alaska and Southern Bancshares have proven resilient, leveraging their local knowledge and customer relationships to thrive.

Their success is not just about numbers; it’s about the people they serve. Regional banks often work with multiple generations of families and small businesses, building long-term relationships that are harder for larger banks to replicate. “They’re not just banks; they’re partners in the community,” says Gwaltney. This approach not only fosters loyalty but also creates a foundation for sustainable growth.

The Future of Regional Banking: Opportunities and Challenges

Looking ahead, regional banks are well-positioned to continue their success. With a potential deregulation under a new administration, these banks could see lower compliance costs and more flexibility in lending. The KBW Nasdaq Regional Banking Index, which tracks the performance of regional banks, has already shown signs of recovery, gaining 10% in 2024. Investors are betting on these banks’ ability to adapt and thrive in a changing economy.

However, challenges remain. Regional banks must balance their traditional strengths with the need to modernize and compete in a digital-first world. While they may not have the resources of larger banks, their agility and focus on customer service give them a unique advantage. As the banking industry evolves, regional banks like First National Bank Alaska and Southern Bancshares are proving that sometimes, it’s the smaller players that make the biggest impact.

In conclusion, the rise of regional banking highlights the importance of community-focused, financially disciplined institutions in the banking industry. While larger banks may dominate the headlines, it’s the smaller banks that are quietly outperforming expectations. Their stories are a reminder that in banking, as in life, sometimes the smallest players can make the biggest difference.