Academic journal article ABA Banking Journal

Banking's Top Performers One-Time Gains Help Many Move Up

Academic journal article ABA Banking Journal

Banking's Top Performers One-Time Gains Help Many Move Up

Article excerpt

At first glance, community banks appeared to have escaped the storms of 2006 with less damage than their larger counterparts. Despite an inverted yield curve, increased reliance on higher-rate deposit funding, and slowing loan growth, banks with total assets of less than $3 billion posted higher net interest margins, on average, than their larger competitors, and the gap between the two groups continued to widen.

But they still saw a decline in margins on average. This decline is indicative of the many challenges community banks face. They continue to generate the bulk of their revenue from interest--most still have not found ways to supplement intermediation income with sustainable earnings streams from non-interest sources. In addition, higher-yielding commercial real estate (CRE) and commercial and industrial (C&I) loans constitute a larger portion of community bank portfolios than in the past, attracting continued regulatory scrutiny. As competition for these loans has increased, credit quality has declined, and large banks have continued to improve their ability to penetrate niche markets that were once primarily the domain of community banks.

Last month, Part 1 of the 15th annual ABA Banking Journal performance rankings reviewed the performance of the nation's largest banks, bank holding companies, and thrifts. This month we highlight the successes of community banks and savings institutions that exhibited outstanding performance in 2006. This year's top performers engaged in various strategies to address both the economic environment and the competition, with many benefiting from one-time gains from the sale of assets to keep earnings at or above 2005 levels. Although some institutions generated record earnings in 2006, the sources of these earnings may not be sustainable in the long-term.

Non-S banks & thrifts under $100 million The top performers in this category saw little change in their profitability in 2006, posting an average ROAE that was virtually unchanged relative to 2005 levels. The category as a whole, however, which numbers 1,982 institutions, did not fare so well--overall average ROAE declined from 6.01% to 5.42%. The minimum ROAE to make the top 50 was 16.30%, 42 basis points higher than last year.

This year's top performer was Borrego Springs Bank, NA of Borrego Springs, Calif., which moved from 1,431st to the top of the list with a 2006 ROAE of 38.97%. The bank sold its Indian Gaming Services subsidiary, a cash-access provider to the gaming industry, to Cash Systems, Inc. in February 2006. Absent this gain-on-sale and other extraordinary items, the bank would have reported a net loss for 2006.

Noninterest income played a smaller role in the success of other top performers--the average ratio of noninterest income to average assets among the top 50 dropped by 82 basis points to 1.07%. Among all institutions in this asset tier, this ratio stayed relatively flat, declining by six basis points to reach 0.64%.

No company in this year's top ten ranked among the top ten last year, either at the subsidiary or consolidated level. Third-ranked Utah Community Bank moved up from its 11th place position in last year's rankings, while previously top-ranked University Bank, Mich. slid to 30th on this year's rankings. (A profile of Utah Community Bank follows this article; page 38.)

Five companies in the top ten--First National Bank of Heavener, Okla. (2nd), Community Bank of Bristow, Okla. (5th), Lakeside Bank of Salina, Okla. (8th), First National Bank in Munday, Tex. (9th), and Bridge City State Bank of

Bridge City, Tex. (10th)--appeared under their parent company's name on the $100 million to $3 billion list in last year's ranking, but none of the parents filed consolidated financials this year (see "Ranking methodology," p. 36).

First National Bank in Munday showed one of the more dramatic improvements in rankings. …

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