Top Community Banks Post Hefty 1990 ROAs
Underscoring the profit potential of small institutions, an American Banker survey has found that the most successful community banks were twice as profitable last year as the average U.S. bank.
The 100 most profitable community banks with assets between $50 million and $500 million earned an average of 2.04% on assets, the survey found.
The most profitable community banks with assets of less than $50 million did even better, posting a 2.2% return. By comparison, the average U.S. bank's ROA was 0.91%.
To be sure, the typical community bank's peformance was closer to the industry average. Large community banks had an average return on assets of 0.97%, while smaller institutions earned 0.77%.
But, while specific comparative data were not available, the returns of the top-performing community banks clearly exceeded those of their larger counterparts, experts said.
"There is not another group that compares," said Frank Anderson, a senior analyst with Stephens Inc., an investment firm in Little Rock, Ark.
Success Formulas Varied
The top-performing community banks were spread across 32 states and showed great diversity in their success formulas. But the all had one thing in common: expertise.
"These are smart operators," said Arnold Hayes, a community bank consultant and former officer at the Federal Reserve Bank of Dallas. "They are out to make money."
This year's survey was expanded to include institutions with up to $500 million in assets. Previous surveys defined community banks as having between $50 million and $200 million in assets.
The survey counted federally-insured commercial banks owned independently or by a one-bank holding company. Qualifying companies also had to have reported profits for the past three years.
This is the first year that the survey divided community banks into two groups. The survey included 4,411 large community banks ($50 million to $500 million in assets) and 4,600 small community banks (assets of less than $50 million).
Myriad portfolio strategies emerged at top community banks. The most profitable of the small community banks, Republic Bank, Norman, Okla., had 47% of its loans in real estate and an additional 37.2% in commercial credits.
By contrast, Kentucky-Farmers Bank, Catlettsburg, Ky., devoted 64% of its loan portfolio to consumer credits. No. 3 in profitability among large community banks in 1990 and No. 1 in 1989, Kentucky-Farmers derives much of its income from a huge securities portfolio that includes municipal bonds and mortgage-backed securities.
One common attribute of many top-performing community banks was a high concentration of interest-free demand deposits. The most profitable small community bank - Republic Bank - derived 23.4% of its liabilities from noninterest-bearing accounts.
Benefits of Loyalty
"It takes time to do it, but banks can benefit tremendously by building loyal deposit relationships," said James Sexton, a former director of bank supervision for the Federal Deposit Insurance Corp.
Cost control emerged as another priority of bankers at top-performing institutions. First Bank of Immokalee, Florida, for example, does not operate an automated teller machine and has refused to buy a facsimile machine for the office.
"If the gadget doesn't make money, we're not interested," said Steve Price, president and chief operating officer.
Where the determined cost-cutting really shined through was among the productivity leaders, as measured by pretax operating income per employee. The leader among small community banks, First National Bank, Johnson, Neb., in 1990 racked up $137,000 of operating income per employee - compared with $15,350 for the average U.S. bank employee.
The community banking stars identified by the American Banker exhibited much greater proportionate growth than the industry at large. During the past three years, for example, the top 100 large community banks reported average asset growth of 36.8%; the ratio was 21.6% for the smaller institutions. By contrast, the U.S. banking industry expanded its asset base by 12.97% during the period.
The Most Profitable Community Banks Based on return on average assets in 1990
Republic Bank 3.6%
First American Trust 3.5
Santa Ana, Calif.
First National Bank 3.3
First Bank of 3.3
Bank of Talmadge 3.0
Source: American Banker [Tabular Data Omitted] [Graph Omitted]