May 31
1st Security Bank

Small Banks Are in Good Shape, so Why Aren't They Doing Better?

By 1st Security Bank
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Community bankers are struggling under new regulations. But they also are in their best shape in years.

Those contrasting accounts summarize the fate of community banks since the financial crisis. Big banks’ woes have created opportunities for small banks, which, for example, are buying branches that big banks are shedding. At the same time, community banks maintain that they are being hurt with regulations enacted with big banks in mind.

Even with their recent success, community banks say, they have been slower to rebound from the crisis than their bigger brethren.

“It’s a hell of a lot better than it was 2010 to 2012, but it’s still not where it was” in 2004 to 2006 said Camden Fine, president and chief executive of the trade group Independent Community Bankers of America, in an interview.

The mix of success and stress has fed tensions between small and big banks that recently bubbled over, with Mr. Fine publicly trading barbs with James Dimon, CEO of J.P. Morgan Chase & Co.

In some respects, community banks—typically banks under $1 billion in assets, or over $1 billion but serving a limited geographic area and focusing on local lending and deposits—have little to complain about. Their earnings rose 9.7% last year, better than industrywide growth of 7.5%, according to Federal Deposit Insurance Corp. data. Community banks’ loan portfolios grew 8.6%, versus the industry’s 6.4%.

But according to FDIC data, banks under $1 billion in assets still had less in net income last year than they did in 2007, while the industry’s 2015 earnings were up 55%. Banks under $1 billion have 18% less in loans than in 2007; banks as a whole have 12% more.

The big banks’ problems have created opportunities for smaller banks to expand and win more business. A good example is 1st Security Bank of Washington, which in January purchased four branches from Bank of America Corp. BofA has reduced its branches by nearly 1,000 since 2011, selling 325 of them to community banks.

1st Security’s holding company, FS Bancorp Inc., posted record earnings in 2015, as loans increased nearly 30%. The purchase of the Bank of America branches added about $186 million in deposits, helping fund 1st Security’s loan growth and expanding the bank’s footprint west onto Washington state’s Olympic Peninsula, from the Puget Sound region where the lender is based.

“We’re definitely a bank that is looking to grow,” said Joe Adams, 1st Security’s CEO.

Updated May 31, 2016 4:41 p.m. ET

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