Analysis: Little profit to local banks' growth

Loans still rising, credit quality still mending

Next time you hear bankers complain about the relentless margin pressure they're facing, listen a little more closely than you might have before. They're not poormouthing you.

Case in point when it comes to Middle Tennessee's community banks: Over the past year, the 27 banks we track grew their loan portfolios by about $956 million to almost $12.1 billion. During that time, though, their combined profit fell by almost $790,000 — and in neither period did a single institution post a loss. Excluding the results of CapStar Bank, which got to book a big tax benefit in Q1 2012, profits grew $4.6 million — 0.6 percent of the total loan growth.

The 27 banks in our spreadsheets — check out the full numbers here — posted a combined profit of $42.5 million in the first three months of 2013. That was up slightly from the fourth quarter but down 2 percent from early 2012. Over the past five quarters, local banks' cumulative profitability has stayed in a very narrow range of $39.9 million to $43.2 million. Whether the Federal Reserve's policy of keeping interest rates low is really stimulating the economy remains a subject of debate. But it's clearly having an impact on the banking sector's bottom line. Without truly robust demand growth, bankers are having to park a lot of cash in investments that are yielding basically nothing. (Click here for an SNL Financial report from earlier this week on this dynamic.)

Another trend — maybe related to the above — is that Middle Tennessee's larger community banks appear to be better positioned to grow. Seven of the nine largest banks in our universe grew their loan books in the first quarter, but only three of the 10 smallest did. Loan portfolios at local banks with less than $500 million in assets actually shrank by 2 percent in early 2013.

Still, the profit frustrations of some bankers shouldn't obscure the fact that their sector is still steadily healing. Credit quality among locals continued to improve in Q1, albeit not on all measures. The total value of noncurrent loans in our survey dipped to $202 million, a $24 million drop from a year ago. Big year-over-year decreases at Pinnacle, First Bank and Wilson Bank & Trust naturally account for the bulk of that, but overall, 21 institutions are in better shape than last year when it comes to delinquent borrowers. (See chart on the right.)

Similarly, the median net charge-off rate fell to just 0.11 percent during the first quarter versus 0.79 percent late last year and 0.29 percent in early 2012. But the median rate of noncurrent loans to total loans ticked up to 1.37 percent from 1.18 percent in the fourth quarter, suggesting that the banks still struggling with their bad-loan loads aren't really getting a grip on their problems.