An American Banker Roundup

Being a small bank at a time of global economic uncertainty can have its advantages.

While foreign loans and exposure to shaky hedge funds pounded some of the largest banks in the third quarter, earnings at community banks continued to impress analysts.

"Earnings are coming in across the board as expected, credit quality remains good," said Cassandra Toroian, a research analyst at Ryan, Beck & Co., Livingston, N.J. "We are very pleased with what we are seeing."

"Community banks are not wrestling with exposure to D.E. Shaw and Long- Term Capital Management," observed Michael M. Moran, a bank analyst at Roney Capital Markets in Detroit. "A community bank's biggest exposure to the Asian markets is when the CEO orders Chinese take-out for lunch."

Many community banks avoided the carnage by doing what they do best: making loans to local customers. Despite fierce competition-and regulators' repeated calls to tighten credit standards-small banks posted strong earnings because demand remains robust for consumer and commercial loans.

St. Louis-based Mississippi Valley Bancshares dwarfed analysts' estimates when it reported a 28% increase in net income for the third quarter. The $1.3 billion-asset company, which specializes in small- business lending, cut expenses and increased its loan portfolio by $49 million.

The consumer loan portfolio at Unity Bancorp in Clinton, N.J., has ballooned by 200% this year, which contributed to a 15% increase in third- quarter earnings.

"The big banks are getting further away from their local communities, where the smaller banks can thrive," said Christopher T. Kelley, an analyst with Morgan Keegan & Co. in Memphis. "And that part of the economy still looks real good."

Some community banks are venturing outside their markets to make loans. Bank of Commerce, a San Diego institution with $700 million of assets, recently opened lending offices in Atlanta and Salt Lake City-to go along with a thriving Texas operation-and has its sights set on Chicago and Boise, Idaho. Its third-quarter earnings soared 54%, to $3.8 million.

Other strong performers included Centennial Bancorp of Eugene, Ore., which earned $3 million, up 24%; Northrim Bank of Anchorage, whose earnings climbed 36% after it acquired a 50% stake in a newly-formed residential mortgage company; Republic Bancorp in Ann Arbor, Mich., increasing earnings to $6.2 million from $5.4 million a year earlier, mainly due to a 37% boost in residential mortgages; and First Financial Corp. of Providence, R.I., which reported a 21% jump in net income.

"We have been able to add quality new loans to our books, which has added very substantial loan income without needing additional reserves," said Patrick J. Shanahan, chairman, president and chief executive officer of $137 million-asset First Financial.

It isn't just loans fueling community banks' growth, however. Columbia (Md.) Bancorp, for example, increased its loan portfolio by just $3 million in the third quarter yet saw earnings climb 19% and fee income a whopping 87%. Gold Banc, a $690 million-asset holding company in Leawood, Kan., attributed a 60% increase to its three bank acquisitions.

The positive results helped revive the battered stock of many community banks. Shares of Palo Alto, Calif.-based Greater Bay Bancorp, for example, were trading near $30 at midday Tuesday after plunging to a low of $23.375 during the September selloff, while National Bank of Alaska was up nearly 30% from its September low of $28.50.

Of course, not all community banks are immune from the global crisis. Commercial Bank of New York said Tuesday that it lost $335,000 as a result of its investment in Russian and Ukrainian securities. The $1.5 billion- asset company earned $2.4 million in the third quarter of 1997.

Indeed, a number of community banks reported only marginal growth in the third quarter, a sign of what might be ahead.

"The pressure is on," said Peter Q. Davis, chairman and chief executive officer at Bank of Commerce. "Loan competition is already forcing down the spreads."

Net income at $2 billion-asset Chittenden Corp., Burlington, Vt., grew only 2%, a result of heightened competition. Mid-America Bancorp, a $1.4 billion-asset company in Louisville, Ky., also had a 2% jump in third- quarter earnings.

Interest income is expected to fall as banks, heeding regulators' warnings, tighten credit standards and pull back on real estate lending. There is also concern that the recent interest rate cuts by the Federal Reserve Board will erode earnings, especially at smaller banks that have fewer sources of fee income.

"Narrowing margins are a major issue for us to contend with," said William E. Martin, president and chief executive officer at Pioneer Bancorp. in Reno. "They are killing us."

Mr. Martin said that while he was pleased with a 20% boost in third- quarter earnings, he wonders how the $970 million-asset company will make up for an expected $100,000 of lost interest income.

Analysts said the days of double-digit growth could not continue indefinitely.

"They can't keep going the way they have been growing," said Ryan Beck's Ms. Toroian. "But I think we are going to continue to see high single-digit growth, which is still pretty good."

And so far, there are no signs that a weakened economy will lead to extensive write-offs.

"Regulators have certainly given them the warnings," said Morgan Keegan's Mr. Kelley. "From the look of it, banks are listening."

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