WILLIAM RYAN – ‘Little-known fact’

The second quarter saw small and medium-sized community banks do much better than their behemoth counterparts, according to analysts.

A combination of mergers, acquisitions and a steady if not slightly improving economy played a part.

“You had a combination of lower interest rates and moderately strong consumer spending and a sector that is much more conservative than the tech and telecommunications sector, which performed poorly,” according to Gary A. Gerulskis, chief investment officer with Framingham-based First Financial Trust.

While the financial news continues to be dominated by layoffs and shabby earnings, financial institutions, which generally don’t have a quick growth rate in earnings, fared better.

Massachusetts did better than many areas of the country, particularly because of the continued merger and acquisition activity, he said.

“There were a couple of situations that stimulated interest, particularly in the smaller community banks. During the quarter, MetroWest Bank [Framingham] was acquired by BankNorth Group. So MetroWest was up about 62 percent for the quarter. BankNorth also purchased at the same time Andover Bancorp, and Andover was up 49 percent for the quarter,” he said.

Overall, Portland, Maine-based BankNorth experienced an 8 percent net earnings growth over the second quarter last year, totaling $59.9 million. Net income was up more than 200 percent from last year.

“Those two names [MetroWest and Andover] in particular have been on the radar screen for potential takeouts. The price paid for the banks was very attractive, so that’s one of the reasons the stock price went up so dramatically in the second quarter,” said Gerulskis.

During a second-quarter-earnings conference call, William J. Ryan, chairman, president and chief executive officer of BankNorth, said he wanted to share “a little-known fact” with listeners.

“We’ve been told over the years our stock doesn’t trade well because we’re such a northern New England franchise. Five years ago we had no assets in Massachusetts. Now 43 percent of our company will be in Massachusetts. So I think we’ve done a good job of moving our company south in areas the market considers good banking markets to compete in.”

As a result of the market excitement caused by the rather unusual BankNorth move of acquiring two banks at once, some overflow reached Cape Cod Bank and Trust’s stock prices, which rose about 38 percent for the quarter, said Gerulskis.

“Again, the idea being that maybe acquisition activity is heating up and maybe someone would like a nice franchise down on the Cape. So the stock price went up in reaction,” he said.

Stephen B. Lawson, chief executive officer and president of Cape Cod parent CCBT Financial Cos. characterized the rise in stock price as an “overreaction.”

CCBT experienced a growth of 2 percent in net income totaling $4.386 million over last year’s figure of $4.353 million. That raised the amount earned per share from 50 to 51 cents.

Sovereign Bank New England has continued to prove naysayers wrong. Despite the fact that it purchased a large commercial loan division through the Fleet divestiture, Sovereign really didn’t have a reputation as a commercial lender and many industry insiders said it wouldn’t be able to pull if off. But Sovereign has increased its commercial loan portfolio. Commercial loans for the bank totaled $8 billion, 38 percent of the total loan portfolio, which represents a growth from the first quarter of 36 percent or $7.9 billion. The growth represents a strategic shift by the company to commercial credits, according to its second quarter report.

Additionally, Sovereign has retained 99 percent of its net deposits from the acquisition.

“Originally they [analysts] thought because New England was not familiar with the Sovereign name, they may leave and go to another bank but … depositors are actually staying with Sovereign,” said Gerulskis.

Another bank that performed well during the second quarter was Boston’s Capital Crossing Bank, which reported a 40 percent increase in earnings on a per diluted share basis at $2.6 million, compared to $2.4 million at the second quarter of 2000.

Reflecting the slowdown in the economy, Richard N. Wayne, president and co-chief executive officer said the bank increased its allowances for loan and lease losses by 19 percent since the close of the fourth quarter last year from $12.8 million to $15.3 million.

“In addition, for the third consecutive quarter our total non-performing assets net as a percentage of total assets remained under 1 percent. This is especially noteworthy given the current economic environment and the concerns many financial institutions have regarding the quality of loans in their portfolio,” Wayne said during a conference call to discuss second-quarter earnings.

Increasing reserves is a typical reaction for banks, said Gerulskis. “You have to remember all the banks are gun-shy because of the debacle they went through in the late 1980s and early 1990s. So banks are very conservative these days in terms of setting up an appropriate reserve for potential losses and quickly acting or reacting to a credit that’s turning negative,” he said. Cape Cod, BankNorth, and Sovereign also increased reserves.

As reported in last week’s Banker & Tradesman, FleetBoston Financial under-performed for the quarter. That was due to write-offs for investments in the capital markets, said Gerulskis.

But in general, the takeovers and resulting stock price stimulation for a lot of the small to medium-sized banks had Massachusetts financial institutions enjoying a nice second quarter.

The outlook for the rest of the year is both good and bad, said Gerulskis. “The Fed will [probably] continue to lower interest rates. That’s good news. You have a consumer that is holding up very well despite a slower economy. That is good news. The real concern here is if the economy continues to stay weak, eventually commercial loans will have problems. Then you have companies not paying their interest, the bank has to write off the loan – that effects earnings.”

But future bank earnings reports won’t be compared to the same kind of strong numbers in the third and fourth quarters as they were in the first half of the year.

“You have to remember the second quarter earnings they’re comparing to the second quarter of 2000. Generally speaking, that was a very strong quarter for the economy. As we get on in the year, we’re comparing with the third quarter of 2000. That wasn’t as strong. So the comparisons get easier,” he said.

Additionally, consumers are likely to keep spending in the short run as they receive the tax rebate checks.

Community Banks Outpace Goliaths in Second Quarter

by Banker & Tradesman time to read: 4 min