In a year during which the economy experienced only modest growth, larger banks experienced slight improvements, while community banks (institutions with total assets less than $1 billion) struggled. Despite these sector-wide struggles, a number of community banks achieved higher profitability levels and attained top performer status by opportunistically growing noninterest income and loans while repositioning the deposit mix to reduce the cost of funding.
Noninterest Income Boost
As in previous years, a number of top performers received significant one-time gains that provided a material lift to net income. A few top performers, such as Farmers and Merchants Bank of Kendall (#1 small S corp), received a significant bargain purchase gain arising from an acquisition. Some benefited from a series of one-time provision reversals and tax benefits. Other top performing community banks continued to focus on expanding fee-based lines of business. Live Oak Banking Company (#1 large S corp) grew noninterest income by 10.3% through increases in servicing fees and gains on the sale of SBA loans. CBW Bank (#4 small non-S corp) and First Covenant Bank (#9 large non-S corp) generated high levels of noninterest income through prepaid card lines of business. Liberty Shares, Inc. (#1 large non-S corp) grew noninterest income levels through deposit service charges, income from ATMs, and bank and credit card interchange fees.
Opportunistic Loan Growth
Unlike the overall community bank sector, which experienced minuscule loan growth, top performing banks found ways to grow loans. For example, top-performing small non-S corps experienced median loan growth of 7.13% in 2013 versus 1.50% for all small non-S corps. In general, the large top performing community banks turned to commercial real estate lending for growth. Among those top performers with double-digit CRE loan growth were PrinsBank (#4 large S corp) and Pacific City Financial Corp. (#7 large non-S corp). Smaller community banks relied on agricultural production and farmland loans to fuel growth. ACB Bank (#5 small S corp) grew both agricultural production loans and farmland loans by more than 30% in 2013.
Deposit Mix Adjustment
Deposit growth slowed considerably for the overall community bank sector during 2013 in comparison to 2012. In part, this slowdown was due to a repositioning of the deposit mix. Many institutions allowed time deposits to run off while attempting to replace them with lower-cost core deposits. The deposit mix adjustment for many top performers, including Almena State Bank (#3 small S corp) and CFG Community Bank (#2 large S corp), enabled the banks to reduce interest expense levels and improve profitability.