Small Banks Still Have Growth Opportunities

June 4, 2002
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GRAND RAPIDS — De novo banks, just like all companies, have been impacted by the economy and have to find ways to raise the money they need to grow.

Edmond Olejniczak III, an associate in the investment-banking firm of Donnelly, Penman, French, Haggarty & Co., believes the current environment in West Michigan does offer opportunities to small banks. 

He sees three general trends in community banking: in operations, in capital raising, and in merger and acquisition activity.

The Fed lowering of the interest rate 11 times this year has effectively compressed banks’ margins. On the operational side, Mercantile Bank, for instance, has responded to that by introducing new lines of business and a wider array of fee-based services, Olejniczak pointed out.

As to funding growth, raising capital in a soured economy is tough, and small banks may have to look to the more seasoned bank investors, he said. The sophisticated investors who are in it for the long term might be more willing to put up the money to fund growth initiatives.

Acquiring or merging with another small bank is always another growth maneuver, and Olejniczak sees a “reawakening” in this market in that respect. He points to the recent announcement of the Macatawa Bank and Grand Bank merger as an example of two companies combining their synergies and customer bases to grow.

“We may see more of these synergistic mergers,” Olejniczak predicted. “Banks that choose not to do anything will fall behind.”

Sridhar Sundaram, an associate professor of finance at Grand Valley State University’s Seidman School of Business, said banks are in very good shape but he is concerned about the condition of  businesses coming out of the recession.

“That will be very important for the banking industry, simply because their level of borrowing would increase and you would expect to see more business on the wholesale and commercial level. Their performance is going to be indicative of how businesses start to pick up after the recession.” 

Another concern, he said, is that layoffs continue and growth in the number of personal bankruptcies could start to have a significant impact on smaller banks. 

But the local banks have really gotten a boost with all the real estate refinancing activity of the past few months, fueled by the Fed’s series of cuts in short term interest rates.

“They’ve been overwhelmed by the amount of business they have had on the refinancing side and that has really helped them a lot as far as generating income and keeping their mortgage business very prosperous.”

Opportunity still exists to prudently grow small banks in the West Michigan market, said Michael Moran, executive vice president of Capital Bancorp Ltd. The firm is a Lansing-based bank holding company that operates as a bank development company.

“We continue to do a lot of very basic blocking and tackling to build the business,” he said. 

Capital Bancorp has established 27 community banks in six states, 11 of them in Michigan. Five are West Michigan affiliates.

“We’re not only proud of what our affiliates have accomplished in their markets, but we’re also optimistic about the opportunities that lie ahead,” Moran said.

“I think there’s a continuation of dislocation that has been caused by the big bank mergers as well as a sense of customers being disenfranchised with many larger organizations.

“There are some larger banks that do an excellent job on the customer service front but these mergers typically do cause quite a bit of dislocation and upheaval.”

Like other companies, he said, Capital Bancorp is closely monitoring the economy, watching for the first signs of a recovery.

Moran said the 2002 hurdles for community banks are much the same as for any other business: maintaining strong cost controls and solid asset quality, and dealing with the economic uncertainty. 

The banking industry in general remains very healthy, and banks, particularly in the central part of the U.S., will enter 2002 in “tremendous shape,” said Joseph Stieven, director of financial institution research for Stifel, Nicolaus & Co. Inc. Their asset quality remains exceptionally sound, earnings are good and capital is strong, he said. 

“The growth in banking will ebb and flow a little bit with the economy,” he noted. “When the economy is slow, growth is slow; that’s just part of the cycle. The fact that growth has slowed on the asset side of the balance sheet shouldn’t surprise anyone to any extent.” 

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