Sunday November 29th, 2015 12:43PM

Lending limits help banks weather the storm

By The Associated Press
MONTGOMERY, Ala. (AP) -- More than 500 financial institutions have failed nationwide since Birmingham-based ServisFirst Bank was founded in 2006.

Although in 2009 Colonial Bank became the sixth-biggest bank collapse in U.S. history, it was one of only seven bank failures in Alabama. And despite that well-publicized crash, ServisFirst President and CEO Tom Broughton said the industry here has managed to stay relatively healthy during the downturn because of a strong state banking department and smart lending rules.

Georgia led the nation with 88 failures from 2007 to 2013. Banking rules in the Peach State allow institutions to lend their entire capital to a single developer for multiple projects.

"In Alabama they can only borrow 20 percent, so we lost a lot less on some of those bad developers," Broughton said. "That's a big difference and one reason why our industry is healthy."

ServisFirst's assets and earning have climbed each of the bank's seven years in existence. The Montgomery office opened in 2007, and the bank has headquarters in Dothan, Huntsville, Mobile, Pensacola, Fla., and Nashville.

That period of growth has come during a time of change in the industry, as failing or struggling banks are swallowed by larger institutions. In 1990, there were 12,351 financial institutions in the United States. By the end of 2012, only 6,112 remained.

But ServisFirst hasn't been part of the bank-buying spree.

"We have never made an acquisition," Broughton said. "We do not buy failed banks. They fail for a reason, in my estimation."

While he said the industry here is healthier than in neighboring states, Broughton also pointed to some trends that he finds worrisome.

The number of institutions have dropped sharply since the 1980s, but the number of bank branches have grown. In 1990, each institution had an average of four offices. Today, each has an average of nearly 14 offices.

"You wonder why banks are building all of these new branches, with all the technology we have today," he said.

That could factor into another issue: Alabama banks' low rate of return on common equity. While the state rate of 6.83 is slightly better than the regional average, it's far below the national number of 7.39. And even that is too low, Broughton said.

"I don't know any industry in America that can last with a return on equity of less than 10 percent," he said. "So there's obviously overcapacity in our industry and poor utilization of capital."

Still, there are positive signs.

A report from the U.S. Department of the Treasury last week showed a $62.1 million increase in small business lending in Alabama for the third quarter of 2013 over baseline levels.

That's good news for the economy and for the banking industry, Broughton said.

"Loan demand is picking up," he said. "It's been much better than (it was) during the recession."
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