This year is shaping up to be stronger than 2009 for community banks' investment programs, based on first-quarter results.

Community banks reported investment program income of $110.1 million for the period, an increase of 4.6% from the fourth quarter of 2009 and a 12.6% jump from the first quarter of 2009, according to the Michael White Community Bank Investment Programs Report.

"Compared to last year, they are starting to head out of the woods," said Michael White, head of the research firm Michael White Associates in Radnor, Pa.

"They still have some ground to regain, but this is definitely a positive trend."

Banks with assets under $4 billion remain well below the $121.5 million in investment program revenue they tallied in the first quarter of 2008, 9.4% to be exact.

But many investors are concluding that despite the risks, they need to have stock exposure in their portfolios, according to Dean McSweeney, program manager of the PrimeVest Financial Services investment program at Columbia State Bank in Tacoma.

Often, those investors are turning to variable annuities because of the income protection guarantees that are available, he said.

"Clients realize they need to participate in the market because they need growth in their portfolios," McSweeney said, "but they're really concerned about downside risk."

Community banks' annuity fee income for the first quarter of this year was $27.54 million, a 10.3% increase from the fourth quarter of 2009, but a 14.5% decrease from the first quarter of last year, according to the White report.

McSweeney's program is evidence that some community banks are generating more revenue through their own initiatives.

The Columbia program posted a revenue increase of 38% for the first seven months of 2010 compared with a year earlier, and addressing customer needs more broadly had a lot to do with it, McSweeney said.

"Early on in the year, we made a consistent effort to move away from solely investment-based discussions with our clients to more of an advisory approach," he said. "We have used financial planning as the core for shifting that relationship."

The shift was fairly easy to accomplish because the 13-adviser team at Columbia had a financial planning tool and advisory model available through PrimeVest, the broker-dealer Columbia partners with.

Columbia's assets under management at the end of July were $525 million.

That's up from $350 million a year earlier — but it includes $150 million that was added because of the bank's acquisition early this year of the similarly named Columbia River Bank.

Organic growth in Columbia's investment program was about 7%, or $25 million, between July 2009 and July 2010.

Another factor that could help explain community banks' improving investment program revenue is the fact that they have taken advantage of wire houses' turmoil to hire away their brokers.

Columbia, for instance, nabbed a successful financial adviser from Merrill Lynch, and another from Morgan Stanley, and they have made important contributions, McSweeney said.

In addition, community banks may be benefiting from being "in vogue from a trust perspective," as McSweeney put it.

"That real strong energy is helping us," he said. "We sell to that."

The program at Columbia is positioned as that of a community bank, through an independent broker-dealer, involving no proprietary solutions or incentives to promote one particular solution rather than another, McSweeney said.

Despite the improvements, many small banks remain cautious, White said. They are concerned about the economy and what is to come on the regulatory front.

"Everybody is on edge, wondering what's next," he said.

The first-quarter data compiled by White revealed some of the toll taken by the banking crisis on the small-bank investment business. The number of banks in the business fell by 90, or about 6% between the first quarters of 2009 and 2010.

It's likely that some of those programs disappeared as the result of mergers, others as the result of bank failures and others after the bank decided to stop selling investments, White said.

The data may also show the potential for community banks to do a better job in cross-selling investments.

Small banks' penetration rate in the first quarter was $245 of investment program income for every million dollars of retail deposits.

Banks with more than $4 billion, on the other hand, averaged $341 per million dollars of retail deposits.