Academic journal article ABA Banking Journal

Banking's Top Performers: The Best Got There by Attracting Low-Cost Deposits and Focusing Their Lending on (or Benefitting from) Healthy Economic Sectors

Academic journal article ABA Banking Journal

Banking's Top Performers: The Best Got There by Attracting Low-Cost Deposits and Focusing Their Lending on (or Benefitting from) Healthy Economic Sectors

Article excerpt

Community banks did not dominate the headlines in the past 12 months, but they shared in much of the turmoil. The continuing decline in credit quality among construction and land development (CLD) and commercial real estate (CRE) loans caused difficulties for institutions with total assets of less than $3 billion, much like declining quality in mortgage portfolios and mortgage-related securities caused trouble among larger banks and thrifts. Many institutions were unable to take advantage of the lower rate environment to strengthen margins. As competition for creditworthy borrowers increased, demand for credit slowed, and money moved from the markets into interest-bearing deposit accounts.

Nevertheless, community banks and savings institutions, on average, remained profitable in 2008, unlike the nation's largest banks, which posted an average return on average equity (ROAE) of -4.21%. In part 2 of our bank performance rankings, we take a closer look at how the most profitable community banks and thrifts managed to overcome the obstacles to good performance that tripped up so many in 2008. The tables accompanying this year's article show the top 25 institutions in each of our four categories. The full consolidated rankings--and our charter-level rankings--may be found at www.ababj.com.

Ranking methodology

Our ranking assesses the performance of four groups of community financial institutions, defined by size and corporate structure:

* Non-subchapter S commercial banks, thrifts, and bank holding companies with consolidated total assets less than $100 million;

* Non-subchapter S commercial banks, thrifts, and bank holding companies with consolidated total assets between $100 million and $3 billion;

* Subchapter S commercial banks, thrifts, and bank holding companies with consolidated total assets less than $100 million; and

* Subchapter S commercial banks, thrifts, and bank holding companies with consolidated total assets between $100 million and $3 billion. The rankings are based on consolidated statistics for the highest regulatory reporting level available for each institution (for further detail on this methodology, please see www.ababj.com) . Where consolidated statistics were not available but data was reported for a subsidiary that accounted for at least 90% of a holding company's assets, we used subsidiary data.

The rankings focused on institutions that offered traditional banking services; as a result, we have excluded from the analysis bankers' banks, special purpose industrial loan companies, and nondepository trusts, as well as institutions with less than 10% of their assets in loans, less than 10% of their liabilities in deposits, or over 70% of their loans in credit card receivables. Companies that were not in operation for the full year also were excluded.

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Within the four groups identified, institutions were ranked on their ROAE for 2008. Data were obtained from SNL Financial, LC and reflect operations for the year ending Dec. 31, 2008. In cases where certain ratios were not available from SNL but the component data had been reported by the institutions, these ratios were calculated. Restated data were used where applicable.

Top performers

Upon closer examination, the top 10 banks and thrifts in each of our four groups of institutions are not as different from each other as asset size and corporation type might suggest. As with large banks, core banking activities separated the top performers from the rest in 2008. The effective execution of core banking principles helped even banks with real-estate-heavy loan portfolios. Case in point is Priority Bank of Ozark, Ark. (#1 on our list of S-corps with total assets of less than $100 million), a savings institution at which 92% of loans were one-to-four family mortgages and at which nonperforming loans represented 0.00% of total loans. …

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