Fed report: It’s not easy being small

First, the bad news.

Small and medium-size banks continued to bear the brunt of the sluggish economy in the first quarter of 2010 compared with large banks, according to a report released Monday by the Federal Reserve.

Now, the good news.

The Fed study looked at things from a nationwide perspective, and the most recent figures from the FDIC show that many smaller locally based banks have, at least in the first quarter, improved their performance since the end of 2009.

In 2009, nine out of the 19 banks headquartered around Richmond reported a loss for the year, according to FDIC figures. (Please see the chart at bottom of the story).

Only four of those banks reported a loss in the first quarter of 2010, including Virginia Business Bank, Xenith Bank, Bank of Virginia and New Horizon Bank.

The biggest turnaround in the first quarter was at Midlothian-based Village Bank. The $596 million bank lost $12.7 million in 2009, according to the FDIC. It turned a $665,000 profit in the first quarter of 2010.

Central Virginia Bank also turned a profit of $113,000 in the first quarter after an $8.4 million loss in 2009.

The Bank of Southside Virginia and C&F Bank led the local pack in terms of profit, bringing in $2.2 million and $1.9 million, respectively, in the first quarter.

Nationwide, profits at small and medium-size banks as a whole, defined in the report as those with less than $7.9 billion in assets, declined in 2009 thanks to rising levels of loan losses. About 30 percent of those smaller institutions reported losses in 2009, up 7 percent from the year before. Approximately 120 smaller banks failed in 2009, and there were about 700 banks on the FDIC’s watch list by the end of the year.

Larger banks, by contrast, turned a small profit as a group during 2009, and that good fortune spilled over into the first three months of 2010.

Not so for smaller banks, according to the Fed. “Regional and smaller banks continued to struggle with profitability” in the first quarter, the report said.

The report, titled “Profits and Balance Sheet Developments,” also said that losses on commercial real estate lending kept small bank failures in the first quarter on pace with 2009.

It showed that smaller banks’ concentration in commercial real estate, historically their bread and butter, has left them vulnerable to a slump in that market. CRE loans accounted for about 46 percent of total loans at such banks, compared with about 17 percent of loans at the 100 largest banks in the country, the report found.

Hugh Newton, regional president for M&T Bank’s Central Virginia region, said smaller banks’ focus in real estate lending, particularly land development loans, has left them no choice but to increase their reserves against rising losses in their portfolios, ultimately draining capital.

“Most of the community and small banks have been so real estate dependent,” said Newton.

That dependence on lending also hurts them when loan demand is down, which is the case presently, Newton said.

“There’s not a lot of new business activity to create that loan demand,” he said.

Larger banks like M&T Bank, which has almost $70 billion in assets and branches in numerous parts of the country, also have the advantage of geographic diversity, leaving them less vulnerable to regional downturns, Newton said. Most small community banks typically operate in a single region.

Because of the pressure to compete with larger banks in town, Newton said, smaller banks are also feeling some pain from having to pay higher returns to retain deposits and keep new deposits coming in.

The Fed’s study explained that big banks have other revenue generators and more products.

Perhaps most noticeably, figures in the report show just how much control the nation’s largest banks have in the wake of the recession.

Of all the assets held at the 6,900 banks left in the United States at the end of 2009, the nation’s 10 largest banks controlled 59.5 percent. The 100 largest banks control controlled 81.5 percent of all assets in the country

Locally-based bank earnings

Bank name                                              1Q’10 net income                 ‘09 net income     Assets

The Bank of Southside Virginia        $2.2 million                            $7.1 million            $509.6 million
Citizens and Farmers Bank                $1.9 million                            $6.5 million            $868.4 million
Franklin Federal Savings Bank         $1.5 million                            $665,000                 $995.4 million
Union First Market Bank                    $783,000                                 $10.8 million *       $3.3 billion
Village Bank                                           $665,000                                 – $12.7 million        $596.8 million
Peoples Bank of Virginia                     $460,000                                 $1.8 million            $288 million
Bank of McKenney                               $448,000                                 $432,000                 $184.9 million
First Capital Bank                                $363,000                                 $520,000                 $536.3 million
Virginia Commonwealth Bank          $341,000                                 – $530,000               $315.5 million
Consolidated Bank and Trust Co.     $245,000                                 $294,000                 $76.5 million
Community Bankers’ Bank                  $132,000                                 – $597,000               $147.5 million
Virginia Community Bank                   $122,000                                 – $503,000               $210.8 million
Central Virginia Bank                           $113,000                                 – $8.4 million          $470 million
New Horizon Bank                               – $315,000                               – $708,000               $15 million
Bank of Virginia                                    – $358,000                               – $3.6 million          $217.1 million
Xenith Bank                                          – $1.1 million                            – $44,000                 $211.9 million
Virginia Business Bank                       – $1.5 million                          – $4.1 million          $159.6 million

Figures according to FDIC reports from March 31, 2010

* Figure combines income of Union Bank & Trust and First Market Bank. The two merged earlier this year.

Michael Schwartz covers banking for BizSense. Please send news tips to [email protected]

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