Community banks in the West are hoping that a boomlet in loan demand will carry their gains of the first half of 1995 through the margin squeeze of the second half.
Through the June quarter, independent banks in California and Texas had nothing but good to report. California's asset-quality woes have faded, and Texas' small banks enjoyed a lively economy.
But with rate pressure on the way, some analysts suggest that, especially in California, a heady loan-growth cycle is kicking in that could ameliorate the negative affects on earnings of margin shrinkage.
"It's like a third wave," said Steve Didion, who follows small banks throughout California and Texas for Hoefer & Arnett. "First, asset quality improved. Then it was spread improvement. Now it's loan growth."
Though many community banks and thrifts have not yet reported on second- quarter performance, Mr. Didion said those he follows have had excellent quarters across the board.
In California, where a year ago banks were still sifting out the dregs of the state's commercial real estate problems (and community banks were still failing), year-to-year increases of 40% or more for the second quarter are not uncommon.
The upward trend in California has been evident since mid-1994. According to Sheshunoff Information Services, banks with less than $1 billion of assets in the Golden State earned a composite 0.02% return on average assets in 1993. Last year, they earned 0.36%. In the first quarter, the group earned 0.89%.
Redwood Empire Bancorp, a holding company for both a bank and a thrift in Northern California, slightly increased its second-quarter earnings, to $762,000. While its mortgage banking activities, led by Allied Bank, are unprofitable, its National Bank of the Redwoods is performing famously.
"Our bank subsidiary reported strong earnings growth driven by improved net interest income and growing fee income," said John H. Downey, chief executive of Redwood Empire. "The prospects for National Bank of the Redwoods remain excellent."
Redwood Empire's net interest income grew 14% due both to a recent acquisition and respectable loan growth, the company reported. Fee income from banking services such as merchant bank card processing, SBA lending, and electronic banking services also increased.
In Southern California's Ventura County, Camarillo Community Bank's performance has been typical. After three lean years, $76.5 million-asset Camarillo's first-half net has grown 272%, to $427,000.
Douglas Shearer, Camarillo's chief executive, chalked up the increase to a year-long effort to reduce the bank's overhead and problem loans.
In Colorado, one of the best community banking markets in the country in the last two years, good fortune continued. Aspen Bancshares Inc. reported a 20.5% increase in first-half net income.
"We've been experiencing good loan demand in the Aspen and Telluride markets," said chief executive Charles Israel.
But Mr. Israel cautioned that competition for deposits is increasing, a trend that could temper earnings increases for the rest of the year.
Similar reports have come out of Texas, where margin pressure for the rest of the year is expected to dampen earnings. Sterling Bancshares, Houston, had record earnings for the second quarter of $2.1 million, a 28% increase. The company said loan demand is high.