Officials at Boston-based Wainwright Bank characterize the bank’s loan portfolio as “squeaky clean.”

Local banks enjoyed record earnings and asset growth in the second quarter, while avoiding the rising trend of troubled commercial and industrial loans plaguing larger banks across the nation.

According to the recently released Federal Deposit Insurance Corp. preliminary bank earnings report, earnings nationwide climbed to a record-high $23.4 billion, while asset growth also set a quarterly record. Higher non-interest income and nonrecurring gains lifted profits, and net interest margins improved at most community banks. Meanwhile, commercial loans led a rising trend in charge-offs.

But not so at local community banks.

“We have not seen any real deterioration [at] community banks, in any way, of commercial credit,” said George Darling, chief executive officer of Darling Consulting Group in Newburyport. “Community banks [locally] don’t seem to have seen increasing delinquencies or write-offs.”

Nationally, economic boondoggles at corporations such as WorldCom and Nortel have affected larger banks, he said. For example, FleetBoston Financial, the seventh largest bank in the United States, suffered losses due to bad corporate loans to communications and other companies, including Enron.

Although much smaller, Rockland Trust Co. was not immune to such downfalls, as net income decreased due to a $4.4 million hit related to WorldCom. Nonetheless, compared to the same time last year, the South Shore bank’s net operating earnings increased by 30 percent. Net interest margins and assets increased as well.

“One of the hallmarks of our company is our asset quality. I think we’re generally considered to be a fairly conservative lender,” said Denis K. Sheahan, chief financial officer and treasurer of Independent Bank Corp., the parent company of Rockland Trust. “In the local economy, we’re not seeing that kind of deterioration we’re seeing on the national level.”

The FDIC reported that commercial banks’ loan loss reserves fell by $748 million, the first time in three years reserves have declined.

“My guess is that would be larger banks writing off big credits, not smaller bank issues,” Darling said. “I don’t have any [clients] experiencing any major credit defaults. My sense is they [community banks] are not a part of the $748 million loss.”

Locally, liability costs are down, Darling added. “I don’t see anybody having to put aside major provisions. Community banks aren’t seeing the same type of write-offs.”

Local bank executives concur.

“We have strong credit underwriting standards, and we stick to them. As a result of our strong standards, we have not seen significant problems,” said James J. Barrett, senior vice president and chief financial officer of Wainwright Bank, which has branches in Boston’s Financial District and new locations in Somerville, Cambridge and Watertown. Barrett described the institution’s portfolio as “squeaky clean.”

Some problems in 2001 caused Wainwright to add to its reserve that year. But this year, “We added more modestly to our loan loss reserve, which is adequate,” said Barrett.

While deep credit problems have not surfaced at smaller community banks, they are a lagging indicator, Darling warned; in other words, such problems aren’t immediately apparent, even when economic indicators warn they may be expected. “Are troubled loans aberrations, or are they to be a 2003 trend? Will it affect only larger banks, or will it be filtering its way down to community banks?” Darling wondered.

Aside from that particular national trend, Darling’s overall assessment is that the industry is “relatively healthy.” Strong local earnings are “typical of what we’re seeing across the country. There have been a lot of origination mortgages sold in the secondary market, which has been pretty strong,” said Darling. “Most of my clients had record earnings last year, and most had record earnings again this year.”

Net interest margins followed the same trend of strength.

“My guess is that people are leaving the market on their own and going into products banks are selling. So margins would have gone up, and peaked perhaps, in the first couple of quarters [of 2002],” Darling said.

The biggest reason for record-breaking earnings at Wainwright stems from increased net interest income, an occurrence also in line with the national trend.

“Our net interest income is $1 million ahead on a quarterly basis,” Barrett said, a 24-percent increase compared with the second quarter last year.

The bank is also on par with the national trend of continued growth in service charges on deposit accounts, contributing to non-interest income.

“Our level of transaction-oriented deposit accounts has increased greatly in the past 18 months,” said Barrett.

However, Barrett was not sure the upward trend would continue. “Margins – net interest yield – is as wide as it’s been in our history. Our goal is to maintain that” while growing the bank, Barrett said. But maintaining that level may prove difficult.

“With short-term values as low as they are, there isn’t a lot of room to go,” he said.

“Competition for good commercial loans is fierce,” Barrett added. “Although our president and senior credit officer say quite often we will not lower our credit standards, we will try to generate business in the best way we can while maintaining an acceptable rate on loans.”

Profit Pressure

Rockland Trust also experienced an improvement in its net interest margin compared to last year as the Federal Reserve dropped interest rates.

“We are a liability-sensitive institution. If rates go up, in small or large increments, it will affect how well our net interest margin does in the future,” Sheahan said. “We do expect net interest margins to compress somewhat as rates go up, especially with near-term rates so low – we all believe rates will go up.”

“It is reasonable to say there will be some flattening,” Sheahan continued. “The challenge is, as always, to have continued earnings growth and profitability.”

Darling warned that next year might not bode so well for banks.

“Normal banking profits will be under pressure – there’s no question – if the current economic environment continues. This second quarter may have been the peak margins for the industry,” said Darling, who noted that growth for a number of his clients peaked in the fourth quarter last year, while others peaked in the first and second quarters of this year. A few others are likely peak in the third quarter of 2002.

“I think [earnings] have peaked,” Darling said. “I think they’re going to start to level off; I think margins will level across the board. If values continue at the same level, 2003 will be a difficult earnings year with a lot of challenges.”

Officials at Portland, Me.-based Banknorth Group, one of the country’s 35 largest commercial banking companies, are not overly concerned. The institution experienced its ninth consecutive record earnings year, and expects to continue increasing earnings in the next two quarters.

“We’re really comfortable with our earnings estimates for the rest of the year. Of course, the further out you look, the more guesswork involved,” Banknorth Senior Vice President of Investor Relations Brian Arsenault said. “I think we’ll be increasing earnings for the next two quarters. Our goal is to produce another record-earnings year, but that’s dependent on the economy, which seems to be slowly gaining strength.”

But if the country becomes embroiled in a conflict with Iraq, the subsequent spike in energy prices may place the northeast economy in some jeopardy, Arsenault noted. Another potential concern is the still-jittery stock market. However, “We’re reasonably optimistic that the economy will continue to grow, but it certainly bears watching,” Arsenault said. “We’re cautiously optimistic.”

Community Banks Dodge Bad Loan Bullet

by Banker & Tradesman time to read: 5 min