Analysis: Community banking gets top heavy

Largest lenders adding to loan market share; credit quality mending more broadly

Community banking in Middle Tennessee has in recent years been a game of the haves and have-nots. Some lenders — mainly those who took their medicine to cure bad loans early — have been able to steer through a choppy recovery and set course for new growth. Other bankers have had to endure quarter after quarter of big writedowns and losses while being unable to do much more than triaging.

Now it appears that success in community banking in the Nashville area is more and more a function of size. If you have it, you can scale further. If you don't, you are more often than not simply treading water.

During the three months ended Sept. 30, the five largest community banks in the region grew their loan books by $264 million — about 4 percent — to $6.95 billion. Aggregate growth at the remaining 21 lenders was just $100,000. In terms of profitability, the numbers were even clearer. The top five earned $25.1 million during the quarter, up from $23.7 million in the spring. The remaining banks saw their combined profit shrink more than 15 percent to $14 million.

Even accounting for the law of large numbers, the difference is stark. And while it should be noted that CapStar's numbers were boosted in large part by its acquisition of American Security Bank & Trust, CEO Claire Tucker last month told that loan growth at CapStar's Davidson and Williamson county operations clocked in at 6 percent during the quarter. That's a growth rate only two banks outside the five largest — Franklin Synergy and Sumner Bank & Trust — could match.

The profitability gap between the region's larger lenders and small players isn't likely to close soon. One of the first things a community banker will fret about these days is the cost of new regulations. Adding staff to keep up with what Washington wants is a fixed cost that taxes the smaller institutions disproportionately and has many market watchers thinking we will — finally, some will say — see a marked rise in merger and acquisition activity along the likes of the CapStar-American Security deal.

One area through which the benefits of the recovery are being shared more equally is credit quality. Two-thirds of the banks on our list lowered their ratio of noncurrent loans to total loans. At half of them, that number now stands at or below 1.5 percent. And the median net charge-offs ratio of 0.1 percent was the lowest such number since the first quarter of 2008.

For our full number set, click here. To view our past quarterly reports, click here.