Stocks of small regional banking companies are finally showing some signs of life after turning in solid earnings for the first quarter.
The Salomon Smith Barney Mid-Cap Bank Index-a proxy for companies valued between $600 million and $10 billion-rose 4% during the two weeks ended Tuesday.
By contrast, the firm's Large Cap Bank Index and the Standard & Poor's 500 both increased by less than a percentage point during the same period.
Bank stock watchers are hoping that the healthy jump in midsize companies is proof of a recovery for a sector that has sharply underperformed large banks and the stock market as a whole for the last nine months.
"You are starting to see signs that these banks aren't going to be dead forever," said Jeffrey Miller, who manages the Acadia Fund bank stock portfolio for Miller & Jacobs Capital of Villanova, Pa. "Things are definitely picking up."
Mr. Miller and other analysts attribute the rebound, in part, to earnings that either met or slightly exceeded the expectations of most analysts.
A sampling of reports filed during the last two weeks demonstrates that these institutions are generating solid growth from both loans and fee income. This was the case with Commerce Bancorp, Cherry Hill, N.J.; Trustmark Corp., Jackson, Miss.; and Cullen/Frost Bankers, San Antonio.
Many of the smaller regionals reported a rise in net interest margins- the spread on loans-thanks to lower funding costs, analysts said.
And though a few banks, including Silicon Valley Bancshares, reported a rise in nonperforming loans, analysts say this phenomenon doesn't appear to be widespread, at least for now.
"While the major upside surprises this quarter were with the money- center banks, the smaller banks that do blocking and tackling continued to perform well," said R. Harold Schroeder, an analyst with Keefe, Bruyette & Woods Inc. "Commercial loan demand was even stronger than we expected."
Jacqueline Reeves, a regional bank analyst at Salomon Smith Barney, said there was little bad news. "There were few companies that missed expectations and, if they did, it was just by a penny. There were more cases of companies exceeding expectations."
Citigroup, Chase Manhattan Corp., and J.P. Morgan & Co. were helped last quarter by a strong rebound in trading and other capital markets activities, but smaller regional banks had to rely on basic commercial banking businesses to pull them through. And they didn't disappoint.
Trustmark shares have risen 12%, to $21.062, since it reported two weeks ago. The $6.5 billion-asset banking company reported a 23% jump in net income, to $24.1 million. Noninterest income was $23.7 million for the quarter, an increase of 20.0% from a year ago.
The growth in noninterest income was the result of investment services, mortgage activities and a substantial increase in new checking accounts.
On Friday, Trustmark's shares were upgraded to "short-term buy" from "short-term market-perform" by Robinson-Humphrey.
Cullen/Frost, a $6.7 billion-asset company, reported net income of $24.3 million, a 25% jump from a year earlier. Its shares have responded by increasing 7%, to $52.437.
The bank saw steady growth in both the interest and noninterest sides of the business, as well as one-time gains from the sale of assets.
Shares of Commerce Bancorp, a $5.6 billion-asset bank company, have fallen 1% since it reported its earnings two weeks ago. It was trading at $44.50 as of Tuesday's close. But Commerce's shares had been gaining steadily until a $1.75 selloff on Monday.
Cassandra M. Toroian, an analyst with Ryan, Beck & Co., said some of Monday's drop in Commerce's price might have been due to a selloff by insiders of Prestige Financial Corp., a Flemington, N.J., community bank that Commerce purchased earlier this year in a stock swap.
Commerce's first-quarter net income jumped 21%, to $15.5 million, thanks to solid revenue growth across the board. Total revenues grew 25%, to $82.9 million, thanks largely to a huge jump in both fee and spread income.
Noninterest income grew 29%, to $27.7 million, helped in part by the bank's growing insurance marketing business. And net interest income increased 24%, to $55.2 million.
It didn't hurt that the bank company's net interest margin for the first quarter rose to 4.54% - an increase of 15 basis points over the fourth quarter of 1998 - as overall funding costs declined to 2.58%.
Asset quality was strong. Nonperforming assets declined to $14.5 million, or 26% of assets on March 31.
Salomon Smith Barney's Ms. Reeves said many smaller regional banks are benefiting at the expense of larger institutions, some of which developed bad reputations because of service problems resulting from mergers. "Commerce Bancorp, for example, has gained share from First Union," she said.
But the ace in the hole for these smaller banks may be the economy. Though the Department of Commerce hasn't released its gross domestic product figures for the quarter, some economists estimate believe the economy grew on an annual basis of more than 3%.
"If you go back three to five months ago, there was a lot of doom and gloom about the economy to come," Mr. Schroeder said. "That has not come to pass."
Moreover, Mr. Schroeder said, total nonperforming loans as a percentage of total loans at regional banks remained steady this quarter compared with a year ago, at 61 basis points.
Still, he is mildly concerned that banks on average have slightly reduced their loan reserves as a percentage of total loans during the last year. He thinks this was a reaction to a regulatory crackdown last year on banks that were reserving to smooth out earnings.
With a decline in reserves, he said, "You will have less of a cushion than you did in the past."
