Profit Warnings At Community Banks: A Theme For 4Q?

The fourth-quarter profit outlook for banks, already clouded by several high-profile warnings, dimmed further as a handful of community banks last week said they would fall short of analysts' earnings estimates for the period.

The cautionary comments from Myrtle Beach, S.C.-based Anchor Financial Corp. and MetroCorp Bancshares Inc. of Houston did not generate the kind of marketwide worries that recent warnings from larger banks did. However, analysts said the smaller banks' woes may be more indicative of where the real profit risks lie this quarter.

The explanation for much of the earnings weakness is simple enough: rising interest rates. A problem not just for smaller banks, tighter-than-normal interest margins were also behind earnings warnings from $79 billion-asset U.S. Bancorp and $85 billion-asset National City Corp.

The reduced expectations are "not a lot different from what we're hearing from a lot of banks in general," said Christopher T. Kelley, an analyst with Memphis-based Morgan Keegan Inc.

Because of their relative lack of diversification, smaller banks are viewed as more susceptible to a downturn when interest rates move higher.

"It's probably more likely from the small banks because they have a less broad product offering. They are more reliant on their net interest income," said Markos Kaminis, an analyst with S&P Equity Group. More diversified financial service providers "are going to be less hurt by that because they are generating income from different sources, like trust and money management, and they're earning fees on those."

Not everyone is buying into a gloom-and-doom scenario.

Jeffrey Miller, an analyst for Villanova, Pa.-based Acadia Fund, said most banks should do just fine.

"I think the fourth quarter is going to be pretty strong," he said. "The thing is that the ones who are doing a bad job are the ones you hear about in December, because they have to preannounce. The companies that are doing well, you never hear from, because you don't preannounce good earnings."

Both Anchor and MetroCorp had special circumstances to contend with. In the case of $1.2 billion-asset Anchor, which last week said earnings would decline to 35 to 38 cents per share, far below First Call's consensus estimate of 48 cents, hurricanes Floyd and Irene, as well as loan losses from a recent acquisition, played roles in the shortfall.

As for $651 million-asset MetroCorp, that company said earnings would drop to between 17 and 19 cents per share, compared with estimates of 26 cents. The bank blamed a $1.8 million chargeoff brought on by the oil services industry's failure to rebound with higher oil prices.

Another bank on the earnings watch list for Mr. Kaminis is Harrisburg, Pa.-based Keystone Financial Inc. Mr. Kaminis said that he is close to adjusting his estimate downward on the bank, again in part because of tight margins. "That's certainly possible here," he said, "because they have been having some rough times recently."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER