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Top Performers Have Common Traits

By: Elizabeth Whalen

Although four of the highest-performing community banks from around the country appear very different, they have actually built their success on similar foundations of efficiency, cautious lending and investing practices, and specialized expertise.

Pocahontas State of Pocahontas, Iowa, carefully manages its $92 million asset operation: Its efficiency ratio is in the 16 percent range, far lower than the community bank average of about 68 percent, according to President and CEO Robert F. O’Donnell.

“It’s having the right people who do their jobs and do them well. Everybody does more than one thing,” he said. All his employees are cross-trained on each others’ jobs so that, if necessary, the bank can operate effectively with half its normal staff of nine. That efficiency helped Pocahontas State place 11th on SNL Financial’s list of the 25 best-performing community banks of 2011.

Chartered in 1926, the bank brings that same level of control of its costs to its lending and investment policies. In fact, the bank had only one problem commercial loan throughout the recession and was eventually able to recover the entire amount it had lent.

For real estate, the bank funds only conventional loans of no more than 80 percent of the property’s value, and the bank itself makes the final determination of what that value is.

“If the appraisal comes in higher, it’s still 80 percent of what I feel the property is worth, just from experience and knowing what the market is in the area,” O’Donnell said.

That experience led Pocahontas state to avoid mortgage-backed securities.

“I wouldn’t buy those even before things crashed,” he said. “You can’t be lending more than a property’s worth, and we saw that happening even in this area. You would see the filings go through at the courthouse, and you’d just stand there and shake your head because it might be twice what that property would command as a price if you were selling it.”

Vibra Bank of Chula Vista, Calif., also has no non-performing loans, according to President and CEO Scott Parker. The bank, which opened in July 2008 and now has $115 million in assets, does not offer mortgage lending, but does provide commercial real estate and Small Business Administration loans along with home equity lines of credit.

“We underwrite cautiously and prudently,” Parker said. “Obviously, it’s easier to make money if you’re not charging off loans, and our loan quality is extremely high.”

Parker attributes Vibra’s success, which includes earning a Super Premier Performance Award from Findley Reports, to loan growth and the bank’s focus on the relatively underserved bicultural market: Chula Vista is about seven miles from the border with Mexico, and 75 percent of the area’s residents are Hispanic. The bank was founded to serve that market, especially its businesses and professionals.

The bank gets its “cultural credibility,” as Parker puts it, from the fact that many of its directors and founders are originally from Mexico. As a result, Vibra offers its customers more than just a bilingual staff.

“For instance, it’s not a huge part of our portfolio, but we will look at and consider income derived from Mexican sources in our overall credit analysis,” he said.

Vibra’s primary source for establishing repayment ability remains U.S. tax returns, Parker said, but the bank will look at Mexican tax returns as a secondary information source.

“We’re able to at least incorporate that information into our overall understanding of the borrower and their overall financial picture,” he said. “That’s something that most banks don’t do.”

Because Vibra Bank is relatively new, it has not made any post-recession operational changes. Parker has worked in banking since 1986, and he believes Vibra will need to continue to find ways to differentiate itself in order to remain a high performer. Similarly, O’Donnell said that Pocahontas State has no plans to make significant changes to its business model in order to maintain its high performance.

The same is essentially true for USNY Bank, of Geneva, N.Y., which opened in July 2007 and now has $137 million in assets, according to Mike Briggs, president and CEO.

“It’s the same people doing the same thing with the same business plan in the same market with the same type of customers. Other than adding a little bit of a focus on residential mortgages, the bank’s really the same as it was when we opened.”

The bank, which ranked 20th on SNL’s 2011 list of best-performing community banks under $500 million, recently added residential mortgages as a focus, not because it was initially avoiding the business line but because it was busy managing all the other aspects involved in founding a bank.

“Once we got through that, we realized that residential mortgage activity could be and should be an integral part of a community bank in our markets,” Briggs said. “In 2012, we’ve generated over $350,000 in residential mortgage premiums, so those fee income pieces are important.”

USNY primarily focuses on commercial agribusiness and agriculture and provides SBA and Farm Service Agency loans. Loans through those programs brought the bank more than $300,000 in premiums in 2012, according to Briggs.

SBA lending is growing in importance to Crestmark Bank of Troy, Mich., a business-to-business lending institution with $430 million in assets that, since its 1996 inception, had mostly focused on asset-based lending and factoring.

“We’re diversifying and expanding our product offerings. We were exclusively a working capital type of shop, mainly doing accounts receivable and inventory financing in the past. Over the last year and a half, and going forward, we’re adding other alternatives, such as the SBA program. We also have a leasing program, an equipment term loan program, just to name a few,” said Chairman and CEO W. David Tull.

Crestmark’s focus on high-margin businesses generates a net interest margin of about 15 percent, a figure many traditional banks might envy, said Tull, but that increased margin carries costs, too.

“Our asset management operating expenses are higher than most traditional banks’ because we have to monitor our accounts much more closely, but our efficiency and our deposit gathering help make up for some of those added expenses. If you keep your charge-offs at reasonable levels, then it falls to the bottom line, which is what happens in our case,” Tull said.

To ensure Crestmark’s charge-offs remained low during the recession, the bank analyzed the financial status of its clients and those clients’ customers.

“For example, in the automobile industry, in which we had fairly large exposure, we looked at what vehicles our clients’ products were going toward. If they were going toward the Hummer, it was a lot higher risk than if they were going toward another car. That would obviously make a big difference as to the potential collectibility. By doing that, we were able to support all our automobile clients throughout the recession.”

That careful examination of its clients helped Crestmark rank as one of SNL’s 2011 best-performing community banks under $500 million.

Now that the country is in recovery mode, USNY’s Briggs believes that today’s strong banks will be in the best position to grow along with the economy.

“I don’t really know where the future’s going to go, but I think opportunities are going to be there for banks that have good capital, have a good team, have good performance.”

Elizabeth Whalen is a contributing writer based in Berkeley, Calif.

Copyright (c) January 2013 by BankNews Media