Much of the financial crisis that led the United States into recession six years ago can be summed up in four words: Too big to fail.
But if a top-heavy banking sector that put too much power in the hands of the biggest players left us all teetering on the brink of financial collapse, these massive banks were never the only game in town.
Smaller, community banks serve an important segment of the banking sector, providing small business loans, mortgages and traditional checking and savings services to millions of consumers who are more comfortable doing their business on Main Street than Wall Street.
And many of these banks are doing well. Just this spring I wrote about several successful community banks.
But, are smaller banks succeeding against the odds? Are they competing on a level playing field? This question has been under consideration this month as Federal Reserve Chairwoman Janet Yellen said that she would support some changes to regulations that many of the nation’s smaller banks have found burdensome.
The regulation in question is the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, in large part to reign in those too-big-to-fail banks. Since then, however, smaller banks have complained that it’s hard for them to comply with the additional reporting required by Dodd-Frank, given their limited resources. Yellen has proposed raising the threshold for the size of banks that would be subject to this tougher level of scrutiny.
Such a change certainly could not hurt community banks – unless the regulations became so relaxed that it set up some sort of a too small to fail scenario. But it’s important to note – as I did in my recent column – that many of the nation’s smaller banks are doing pretty well already.
Bank of the Ozarks (NASDAQ: OZRK), for example, with assets of less than $10 billion, is by all definitions a community bank. Earlier this month, the bank reported a 69% increase in second-quarter net income. This growth was partly due to an aggressive strategy of acquiring other community banks, but it also points to strength at the community banking level, of many of basic financial services such as mortgage lending, which increased 57.4% in the second quarter. Over the past five years, Bank of the Ozarks shares have grown more than 350%.
Preferred Bank Los Angeles (NASDAQ: PFBC) is another community bank that’s pretty successful. Earlier this month it reported a 16% increase in second quarter income, and strong growth over the past five years have helped lift its stock more than 260%.
Diversity Among Community Banks
These are not the only ones. Investors considering buying community banking stocks should keep in mind that while community banks are relatively small, the sector is massive and quite diverse. There are community banks that are fairly large and some that are quite small. Since they operate all over the country and are subject to local economic conditions, it’s difficult to view them as a group. Some, such as East West Bancorp (NASDAQ: EWBC), even have some overseas operations.
East West Bancorp is another small bank that had a strong second quarter, with net income growing 17%. And others, such as University Bancorp (NASDAQ: UNIB), with total assets of less than $200 million, are teeny tiny … even by community bank standards. If you’d invested in shares of this Ann Arbor, Michigan, bank two years ago, your shares would have appreciated 145%.
It’s likely that any regulations that reduced reporting requirements on these small banks would help them, but it’s important to keep in mind that many are already enjoying strong growth. Ironically many of these banks that are defined by their small size are now growing quite rapidly by acquisition.
There are many good investments to be found in the community bank sector, but you have to look for them. Not all community banks are created equal.
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