Academic journal article ABA Banking Journal

New Crop at the Top

Academic journal article ABA Banking Journal

New Crop at the Top

Article excerpt

Slow and steady may still win in the long term, but in the annual bank performance race, the results increasingly depend on transactions. That shift represents the changing nature of banking, where acquisitions, divestitures and other one-time events have become much more common, even among the community bank segment.

A quick glance at the three large tables of top 50 banks accompanying this article shows an unusual amount of movement. Of 150 banks, no fewer than 79 are new to the lists this year. The prize for single biggest leap goes to Central Federal Savings and Loan, Cicero, Ill., which shot from number 2,976 to number 11 among non S-corp banks and thrifts between $100 million and $3 billion, thanks to a $6.9 million gain on sales of securities.

The turnover also reflects the tougher competition community banks face from large bank rivals, credit unions, and nondepository competitors. Large banks have been encroaching upon community banks' coveted small business market, and with improved customer service, they are chipping away at community banks' traditional source of competitive advantage. Credit unions, which used to meet relatively simple needs, now are offering their members more sophisticated services. Nondepository financial services providers, with fewer regulations, are winning an increasingly large share of business.

Notwithstanding these competitive forces, 2005 was a year of record profits in the financial services industry, and community banks as a group performed quite well. Returns on both equity and assets among the top performers were comparable to returns generated by their large-bank counterparts, and net interest margins were significantly higher in 2005 for community banks, on average. Performance varied, but, in general, community banks weathered the competition quite successfully.

Last month, Part 1 of the 14th annual ABA Banking Journal performance rankings reviewed the performance of the nation's largest banks, bank holding companies, and thrifts. Part 2 highlights the successes of community banks and savings institutions that exhibited outstanding performance in 2005. The details of how the rankings are tabulated are explained on page 39.

Non-S banks and thrifts under $100 million

After a 10% decrease in the number of banks and thrifts in this category in 2004, the pool shrank by an additional 8% last year, leaving a total of 2,085 institutions. The minimum ROAE needed to make the top 50 was 15.88%, 21 basis points lower than last year. The top performer in 2005 was University. Bank, Ann Arbor, Mich., with an ROAE of 65.36%.

The bank experienced losses in 2004, so 2005 results represent a significant turn-around. In addition to improved asset quality, the bank benefited from a lease termination buyout as well as from a spinoff into a separate corporation of its Islamic banking division.

Peoples Savings Bank, of Elma, Iowa, was number two with an ROAE of 38.30%. The bank's parent, R&J Financial Corp., was sold to an investor group at the end of 2005, resulting in a $3.8 million gain that more than tripled net income. At number three was American Interstate Bank, Elkhorn, Neb. It moved from the larger asset-size category, where it ranked fourth last year, when its assets decreased by 10% to $95 million.

The mean ROAE for the top 50 performers in the category was virtually unchanged from 2004 at 19.97%, while return on average assets declined by 12 basis points to 1.77%. Average ROAE across all institutions in the category was only 6.01%. ROAA was 0.63%.

The top performers earned an average of 22.13% of their total revenue from non-interest income in 2005, an increase of 1.17 percentage points over the previous year. Non-interest income was 1.89% of average assets, increasing by 12 basis points over the previous year, while non-interest expense increased slightly less to 3. …

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