Banking's Top Performers

Mark P. Suter, vice-president, Monument Financial Group, Alexandria, Va. , and Nancy Michael, managing associate, Furash & Company, Washington, D.C. PART 2: THE COMMUNITY BANKS The best banks point the way to a rapidly changing, but profitable, future Predictions about the future of community banks are about as reliable as a daily horoscope. They foretell outcomes ranging from Davids triumphing over Goliaths to annihilation at the hands of every conceivable competitor from megabanks to Pat Robertson--well, maybe not Pat just yet. No matter what the outcome, a few things are certain. The role of community banking will change drastically over the coming years, and the forces affecting this change are as unstoppable and irreversible as the alignment of the planets. To survive, community banks will need to have strategies in place to take advantage of both short- and long-term changes occurring in the financial services arena. Last month, part one of the seventh annual ABA Banking Journal Performance Rankings reviewed the performance of the nation's largest bank holding companies. Now, in part two of the rankings, we showcase community banks that have consistently delivered solid returns to their shareholders. The numbers posted by these institutions are impressive compared to their peers. We used a different ranking methodology this year, which is described on the page opposite. Over the past seven years, return on equity for all banks with assets under $100 million has decreased from 11.79% to 10.15%, and return on assets has declined slightly from 1.15% to 1.14%. Net charge-offs also fell during the period, from 0.54% to 0.30%. In contrast, for this year's top performers in this asset category, ROE increased from 20.86% to 37.38%, ROA grew from 1.78% to 3.48%, and net charge-offs dropped from 2.50% to 0.55%. These results stem from execution of strong strategies, improvement in asset quality, and reduction in capital levels. In the larger size category (between $100 million and $1 billion in assets), the top 50 banks showed an increase in ROE from 27.90% to 31.23%, compared to a rise from 12.73% to 13.57% for all banks in that size range. ROA increased from 2.04% to 2.70% for the top performers, while the rest of the banks in this category achieved an increase from 1.03% to 1.31%. In reducing net charge-offs to total loans, top banks passed their counterparts, decreasing the rate from 1.88% in 1992 to only 0.28% last year. Over the same period, other banks of this size saw a decrease in this ratio from 0.74% to 0.39%. Despite this strong performance of community banks, 1,024 of them have disappeared in mergers over the past two years. Easy pickings won't last The recent consolidation wave has opened the door for community banks to capture market share by picking off disenfranchised customers of newly-minted megabanks and supper-regionals. What they offered' was (and still is) compelling for many consumers and small businesses: the personal attention of a knowledgeable, locally-based crew of personal bankers. Many community bankers quickly recognized this opportunity and took advantage of it, and they should be applauded. The strategy may remain effective as the pace of industry consolidation continues and large banks continue to implement technologically advanced, but increasingly impersonal, delivery mechanisms. To the benefit of community banks, mergers have also required extensive systems integrations; product, fee, and personnel changes; and branch closures or divestitures, all of which tend to create or exacerbate customer service difficulties in the short run. The easy pickings, however, won't last forever. Integration problems will be resolved. Product and service offerings of merged banks will be aligned. Local delivery networks will once again expand as branch divestitures slow. Last but not least, children of the technology age will increasingly become the primary purchasers of bank products. …