Small Banks Are In Good Shape, So Why Aren’t They Doing Better?

By Michael Rapoport, The Wall Street Journal


Community bankers are struggling under new regulations. But they also are in their best shape in years.

Those contrasting accounts summarize the fate of community banks since the financial crisis. Big banks’ woes have created opportunities for small banks, which, for example, are buying branches that big banks are shedding. At the same time, community banks maintain that they are being hurt with regulations enacted with big banks in mind.

Even with their recent success, community banks say, they have been slower to rebound from the crisis than their bigger brethren.

“It’s a hell of a lot better than it was 2010 to 2012, but it’s still not where it was” in 2004 to 2006 said Camden Fine, president and chief executive of the trade group Independent Community Bankers of America, in an interview.

The mix of success and stress has fed tensions between small and big banks that recently bubbled over, with Mr. Fine publicly trading barbs with James Dimon, CEO of J.P. Morgan Chase & Co.

In some respects, community banks—typically banks under $1 billion in assets, or over $1 billion but serving a limited geographic area and focusing on local lending and deposits—have little to complain about. Their earnings rose 9.7% last year, better than industrywide growth of 7.5%, according to Federal Deposit Insurance Corp. data. Community banks’ loan portfolios grew 8.6%, versus the industry’s 6.4%.

But according to FDIC data, banks under $1 billion in assets still had less in net income last year than they did in 2007, while the industry’s 2015 earnings were up 55%. Banks under $1 billion have 18% less in loans than in 2007; banks as a whole have 12% more.

The big banks’ problems have created opportunities for smaller banks to expand and win more business. A good example is 1st Security Bank of Washington, which in January purchased four branches from Bank of America Corp. BofA has reduced its branches by nearly 1,000 since 2011, selling 325 of them to community banks.

1st Security’s holding company, FS Bancorp Inc., posted record earnings in 2015, as loans increased nearly 30%. The purchase of the Bank of America branches added about $186 million in deposits, helping fund 1st Security’s loan growth and expanding the bank’s footprint west onto Washington state’s Olympic Peninsula, from the Puget Sound region where the lender is based.

“We’re definitely a bank that is looking to grow,” said Joe Adams, 1st Security’s CEO.

However, community banks say the Dodd-Frank financial overhaul law and other regulations have weighed especially heavily on them because they don’t have the scale to help them cope. For instance, call reports—the detailed quarterly financial reports all banks file with regulators—have become costly and burdensome for small banks to put together, saysJerry Felicelli, principal in charge of financial institutions at accounting and consulting firm CliftonLarsonAllen LLP.

“Clearly the cost of doing business in an over-regulated environment adds some additional stress to that community bank profit,” Mr. Felicelli said.

The sentiment that community lenders have been tarred with the same brush as too-big-to-fail banks spilled over into a public feud in May between Mr. Fine of the ICBA and J.P. Morgan’s Mr. Dimon.

Mr. Dimon called Mr. Fine “a jerk” in a TV interview. Mr. Fine said those remarks “reflect Wall Street’s inability to take responsibility for the economic crisis it caused.” The two had squabbled about previous comments of Mr. Dimon’s that big and small banks should work together; Mr. Fine had said community banks wouldn’t follow along “just because Jamie Dimon says let’s sing ‘Kumbaya.’”

Community bankers see their sector as coming back into fashion and resonating with consumers, especially against continuing public rhetoric over big banks. “I think there’s more appreciation and understanding for what community banks represent,” said Rebeca Romero Rainey, chief executive of Centinel Bank of Taos, N.M., and chairman of the ICBA.

Advancements in technology also have helped small banks compete. Small banks have access to many of the same tools for online and mobile banking and remote check deposit that larger banks do, though rising costs also make technology a challenge for some banks.

Technology “allows us to be much bigger than what we are,” said Jeff Dick, CEO of MainStreet Bank in Fairfax, Va. “We’ve used it as a growth strategy as opposed to putting branches everywhere.” MainStreet offers online account access, bill-paying and other services and apps for mobile banking.

Community banks have also ventured into online lending, partnering with companies like LendingClub Corp. and Prosper Marketplace that arrange consumer loans from private financiers. More than 200 small banks have joined in BancAlliance, which facilitates community banks’ purchases of LendingClub loans, though BancAlliance suspended purchases in May after improprieties were reported in some LendingClub loans.

Then there is the personal touch that community banks have long claimed as an advantage over bigger banks. Fountain Trust Co. of Covington, Ind., caters to an Amish community in its area. Vice President Lucas White says it won the community’s respect and business when a Fountain Trust loan officer showed he could drive a team of mules. 

He “kind of immersed himself in their culture,” Mr. White says