By Vanessa Mambrino, consultant & Nick Robin, business analyst, Capital Performance Group LLC, Washington, D.C., a firm providing advisory, planning, analytic, and project management support to the financial services industry.  www.capitalperform.com

 

 

Continental Bank of Salt Lake City, Utah, finds itself among the top 10 subchapter-S-corporations with total assets of between $100 million and $3 billion for the second straight year. With an ROAE of 66.28%, Continental Bank moved to the very top of our large S-corp rankings, after appearing at #2 last year (and the bank achieved this with a leverage ratio of 20.52%). Its ROAE was almost two-and-a-half times larger than the average ROAE seen among the top performing large S-corps of 25.79%. 

The bank focuses on meeting the commercial credit needs of businesses around the country by providing lease financing and C&I loans to fund the purchases of revenue-generating equipment. In 2010, loans in these two categories made up just over 61% of Continental Bank’s loan portfolio. The bank benefited from the higher yields on leases that were prevalent in 2010, which helped drive a year-over-year increase in interest income as a percentage of average assets from 12.88% to 17.45%. On average, interest income was equivalent to 5.41% of average assets among top performing large S-corps, and 4.89% of average assets among all large S-corps. While many of these lease receivables were generated organically, Continental Bank also purchased select equipment finance credits from the FDIC and others during 2010. 

The remainder of Continental Bank’s loan portfolio is comprised of CRE, multi-family, and construction and land development loans; the bank does not have a consumer lending business. Like many of the top performers of 2010, Continental Bank’s strategy has been to find a niche market in which the bank’s management and staff has high levels of expertise and to focus on that particular niche (in this case, equipment finance) instead of trying to meet a wider variety of banking needs. “If you do what everybody else is doing, then you can only differentiate yourself in your results by taking on higher levels of risk,” says CEO Nathan Morgan, who founded the company in 2003. Morgan chose the equipment finance niche after working for many years at a large regional bank and finding that leases had a similar default rate to traditional C&I loans, while offering higher yields without greater risk. He admits that this strategy is not for everyone, noting that “it is important for bankers to stay within their comfort zone,” rather than try to emulate a niche strategy in use at another institution.

Continental Bank “zealously” manages asset concentrations within its own loan portfolio to offset some of the risk than can be inherent in a niche strategy. In 2010, the bank’s call report showed nonperforming loans at 1.30% of total loans—compared with an average of 1.39% among top performing large S-corps and 2.79% among all large S-corps. Continental Bank does not plan to diversify into consumer lending. In 2011, the bank plans to continue to grow both organically and via the opportunistic acquisition of assets. While noting that 2010 was indeed “extraordinary,” Morgan believes that the bank’s outlook for the remaining three quarters of 2011 is positive: “We will continue to be opportunistic … and to try to excel in our execution.”

 

<< Back to main page  

 

 

[This article was posted on June 10, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]  

TrackBack URI for this entry