Small Banks Top the Giants in Profit Gains
Epstein, Jonathan D., Sullivan, Annie, American Banker
Community banks are on a roll.
A review of third-quarter earnings reports suggests that they're performing considerably better than their bigger rivals. In fact, many have racked up eye-popping profit gains.
The nation's smallest banks have steadily gained customers from larger banks undergoing mergers, according to bankers and analysts. As a result, many small banks have outpaced the rest of the industry in loan growth.
And lacking the credit card exposure of their larger competitors, small banks have been spared the writedowns that have dampened earnings at many of the nation's biggest institutions.
"We had good, strong loan demand this quarter," said Donald R. Mengedoth, chief executive of Community First Bankshares in Fargo, N.D., whose upper Midwest and Mountain States loan portfolio grew by 11.4% in the last year.
Reports from smaller banks have been "across-the-board excellent," said Steven J. Didion, analyst at Hoefer & Arnett in San Francisco. "We've been seeing improvements in credit quality, stronger margins, and loan growth."
"This is their time," said Michael Abrahams, a Sutro & Co. bank analyst: "Community banks will have plenty of opportunities to snag customers."
Such assessments, and a sampling of community banks considered bellweathers for their regions, suggest that even the most phenomenal earnings increases were largely driven by core operating performance, as opposed to the one-time gains that characterized community bank earnings in the early '90s.
By contrast, large banks are generating their earnings growth mostly by cutting costs.
Jerry Jones, managing director of Duff & Phelps in Los Angeles, said small banks are reaping the advantage of lower insurance premiums and strong interest margins, while increasing fee income and keeping costs down.
In the Northeast, the rash of big-bank mergers last year yielded extra benefits for the region's community banks.
Barry B. Davall, president and chief executive of Community First Banking Co. in Tinton Falls, N.J., said its earnigs rose 66% thanks to new business from rival Central Jersey Bancorp, which was acquired by National Westminster's New Jersey unit. The Natwest unit was subsequently bought by Fleet Financial Group, Providence, R.I.
"That's fueled most of our growth," Mr. Davall said.
Thomas R. Venables, president and chief executive officer of Grove Bank in Chestnut Hill, Mass., attributes his bank's 24% jump in earnings to higher-than-normal loan demand; the bank's loan portfolio grew 12% in the year ended Sept. 30.
Chip Wittman, a bank analyst at Wheat First Butcher Singer in Richmond, Va., said community banks in the Middle Atlantic states generally saw a 10% to 12% growth rate, even with the special deposit assessments to recapitalize the Savings Association Insurance Fund, the one blot to community banks' and thrifts' bottom lines.
Mr. Wittman said banks focusing on commercial lending are showing double- digit growth, while those focusing on consumer lending aren't having as much success.
Aided by a strong economy, community banks in the central United States reaped strong loan and asset growth by keying on niche markets.
Sterling Bancshares, Houston, has targeted owner-operated businesses as its niche, a strategy that has translated into compounded growth of 22% over the past five years. …