Too Small To Fail: Community Banks In The Northeast

by: The Wall Street Transcript

Smaller community banks operating in local geographies have not received much attention from the financial press. The real estate devaluation and complex toxic securities that drove larger financial institutions to the brink of insolvency has not affected certain banks operating within key regions or using competition beating strategies. An opportunity for investors exists for high returns from dividend paying well capitalized small banks with unique economic advantages.

In Pennsylvania, small banks have been buoyed by a growing local economy. The expansion of the shale gas industry in the Marcellus Shale regions of the state including Indiana county provide banks in the region with new customers. Todd D. Brice, President and Chief Executive Officer at S&T Bancorp (STBA), discussed the influence of this bonanza with The Wall Street Transcript in a January 9, 2012 interview:

“It has been a tremendous boost to the region. Unemployment regionally is about 7%. Commercial occupancy rates are very high compared to national averages, and in some classes, you can argue there is a shortage of properties. There has been a lot of activity with companies moving into the region.

Historically, Indiana County has been a very active shallow-well production region. We had a lot of service companies headquartered here. Halliburton (HAL) has a big operation here. Superior Wells, another Halliburton-type service firm, which is headquartered about 10 miles south of town, sold out to Nabors Industries (NBR), I believe. There is a lot of service work right under our nose, bringing a lot of jobs into the region, well-paying jobs."

Many small banks see their individual customer service as a unique differentiating factor that permits them to compete effectively against larger competitors with a national footprint. Delivering a customer friendly focus with a high level of service is one method for securing long term high margin relationships.

John Ritacco is President and CEO of CMS Bancorp (CMSB) of Westchester County in New York state which operates in an area of wealthy suburban communities close to New York City. This is a highly competitve banking environment. The local hands on strategy is described this way by Mr. Ritacco:

“A lot of the big banks – Chase (JPM), Bank of America (BAC), People's Bank (PBCT) - they're all in here. I think the local banks like Community Mutual, Greater Hudson Bank (GHDS), The Westchester Bank and Mahopac have made up ground during the past several years.

The advantage community banks have is being locally run. I sit in White Plains and I can go from Mount Vernon to Mount Kisco and visit any customer or branch within 30 minutes. That's a distinct advantage today…I often pick up my own phone and answer the questions and concerns of our customers."

Another banker in a highly banked region also describes the challenges of operating in a competive environment. David Nasca, the CEO of Evans Bancorp (EVBN) in upstate New York describes the competitive landscape in his region this way in an interview this month:

“We've been trying to expand our brand presence in the community. In 2010, we talked about how western New York is a very competitive marketplace. There are three top-25 banks in the area with First Niagara (FNFG), M&T (MTB) and KeyCorp (KEY). Additionally, there is an international bank with HSBC (HBC). All of those have major complexes or are headquartered here.

We jokingly say we're the last community bank standing. "

The strategies for competing as a local bank work well when the local economy is growing. But even the strongest local economy cannot overcome global concerns affecting all businesses. Financial repurcussions from the world economy worry even the CEO of a small Maine bank. In a recent interview published January 9, 2012

“Whether it’s a situation in Greece or a situation in Europe, we have to be aware that global trends can impact a community bank in Maine,” says Gregory Gregory Dufour, the President and CEO of Camden National Corporation (CAC).

“No longer can banks our size — and probably any bank — ignore these global events, because they ripple through the interest rate environment that we operate in. "

Company Ticker Price P/E P/B Yield
JP Morgan Chase JPM $36 7.7 80% 2.8%
Bank of America BAC $6.51 N/A 33% 0.6%
HSBC HBC $38.60 8 88% 4.7%
M&T Bank MTB $82 6.9 120% 3.4%
Key Corp. KEY $8.32 8.5 81% 1.4%
People's United PBCT $13.66 25.3 89% 4.7%
First Niagara FNFG $9.50 14.5 70% 6.7%
S&T Bancorp STBA $20.50 14.7 117% 2.9%
Camden National CAC $33.14 9.5 117% 3%
Evans Bancorp EVBN $12 9.4 72% 3.3%
CMS Bancorp CMSB $7.77 58 60% N/A
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.