10 community banks that broke from the pack in 2Q

Bank earnings in the second quarter have been a mixed bag.

A large number of banks met expectations, with more than half of the companies tracked by Keefe, Bruyette & Woods reporting earnings that topped forecasts.

But a third swung and missed consensus estimates during the quarter. Another concerning statistic: The number of overachievers fell from the 60% that topped estimates in the first quarter.

A number of factors have worked against banks, including narrower net interest margins, slower loan growth and one-off credit issues.

Still, several community banks were able to stand out, reporting strong financial results and giving investors optimism that they can sustain the quarter’s momentum through the rest of 2019.

Here is a look at some of those high performers.

Live Oak Bancshares
Management’s decision to hold onto more Small Business Administration loans seems to be working out.

The $4 billion-asset company’s net interest margin expanded by 7 basis points from a quarter earlier to 3.70% while margins at many other banks shrank. Its average yield on earning assets rose by 8 basis points to 6.01%, and the rate for interest-bearing deposits increased by 3 basis points.

Total loans increased by 11% from March 31 to $3.1 billion.

While gains from loan sales at the Wilmington, N.C., company were much lower than a year earlier, due to a change in SBA strategy, they increased by 43% from the first quarter.

As a result, net income nearly doubled from a quarter earlier to $4.9 million.

“Origination volumes bounced back to the impressive levels of the past and drove very strong loan growth,” Aaron James Deer, an analyst at Sandler O'Neill, wrote in a note to clients. “What we liked best was simply that the results were consistent with what management promised to deliver.”
Revere Bank
The Rockville, Md., bank continues to produce strong loan growth.

Revere's net income rose 5% from the first quarter, and 15% from a year earlier, to $7.9 million. Total loans at the $2.6 billion-asset bank increased by 17% from a year earlier to $333.6 million. Management touted successful efforts to make more commercial loans.

The bigger surprise was the bank’s net interest margin, which expanded by 5 basis points from March 31 to 3.72%. Most analysts said they believe the margin could narrow in coming quarters.

The bank’s biggest challenge might be finding cheap deposits to fund the commercial loans it is making; the loan-to-deposit ratio stood at 108% at June 30.

Revere, while comfortable with its balance sheet mix, “would like to lower this ratio in the longer term,” Chris Marinac, an analyst at Janney Montgomery Scott, wrote in a note to clients. “Ideally, Revere grows deposits at a faster pace than loans.”
Nicolet Bancshares
Analysts praised the Green Bay, Wis., company's second-quarter results.

Excluding a large gain from selling a stake in a data processing company, the $3 billion-asset Nicolet reported that its earnings rose 7% from the first quarter and 14% from a year earlier.

Credit quality was a big factor, with nonperforming assets representing just 0.26% of total assets on June 30. The loan-loss provision was only $300,000.

Several other factors impressed Joseph Fenech at Hovde Group, including a sharp increase in mortgage banking income, well-controlled expenses and a 6% increase in tangible book value from the first quarter.

The next big challenge for Nicolet will be completing its acquisition of Choice Bancorp, which Nicolet agreed to buy in June for $72 million. The deal is expected to close in the fourth quarter.
Bridgewater Bancshares
The Bloomington, Minn., company showed that it could boost low-cost funding.

The $2 billion-asset Bridgewater’s core deposits increased by 21% from a year earlier to $1.6 billion even though it noted in its second-quarter earnings release that “local competition … remains fierce.”

The strong performance allowed the company to reduce its reliance on brokered deposits to 14% of total deposits from 16.3% a year earlier, though the company still had a 105% loan-to-deposit ratio at June 30.

Total loans increased by 21.9% to $1.8 billion, offsetting a net interest margin that contracted by 22 basis points to 3.60%

Net income increased by 19%, to $8 million.

“In an environment where every bank is fighting tooth and nail for good core funding, we are very impressed with recent trends” at Bridgewater, Sandler O’Neill analyst Brendan Nosal wrote in a research note.
Eagle Bancorp Montana
Residential mortgages were again a bright spot at Eagle Bancorp Montana in Helena.

The $970 million-asset company originated nearly $121 million in mortgages during the second quarter. It sold $101.4 million in mortgages at a 3.3% average gross margin on sale.

Eagle has hired six mortgage lenders within the last 12 months.

Mortgage activity paced a quarter where Eagle had $5.5 million in noninterest income. Overall, the company's second-quarter profit was more than double what it reported a year earlier.

Eagle’s net interest margin expanded by 13 basis points to 4.31%

The strong performance “could be repeatable in future quarters,” Tim Coffey, an analyst at Janney Montgomery Scott, wrote in a client note. The margin “showed resistance due to both the company's relatively rural footprint and the addition of new customers.”
Old Second Bancorp
Old Second can hang its hat on commercial loan growth.

Total loans at the Aurora, Ill., company increased by 3% from a year earlier to $1.9 billion, largely because of gains in commercial and industrial lending, which rose by 13% to $338 million.

The $2.6 billion-asset Old Second is looking to book more commercial loans after hiring a team from MB Financial, which was sold this spring to Fifth Third Bancorp.

Overall, net income rose by 47% to $9.3 million. Another notable factor was a margin that expanded by 16 basis points to 4.15%.

“The highlight of the quarter was … core margin expansion,” Andrew Leisch at Sandler O’Neill wrote in his client note. “Fee income was also slightly higher than expected.”
Banner Corp.
The Walla Walla, Wash., company continues to become more efficient.

The $11.8 billion-asset Banner’s efficiency ratio improved to 62.2% at June 30 from 65.4% a year earlier.

Revenue increased by 10% to $139 million, while noninterest expense was relatively flat at $86.7 million.

Net income rose by 23% to $39.7 million, though year-over-year comparisons were somewhat skewed by the company’s November purchase of Skagit Bank.

“Our operating performance generated solid revenue growth with increases in … net interest income and noninterest income,” Mark Grescovich, Banner’s president and CEO, said in a press release announcing the results.

“The ongoing benefits of the Skagit … acquisition also contributed to profitability, as expenses declined through the realization of synergies from the transaction,” Grescovich added.

Expenses will likely tick up in coming quarters after Banner agreed on July 24 to buy AltaPacific Bancorp in Santa Rosa, Calif. Banner said it expects to incur $9.4 million in one-time expenses to buy and integrate AltaPacific.
MVB Financial
MVB Financial had a strong quarter once analysts looked beyond a handful of one-time factors.

The Fairmont, W.Va., company’s earnings increased by 70% from a year earlier to $4.8 million, excluding a $10 million gain tied to its fintech investment portfolio and $446,000 in profit from discontinued operations.

The $1.8 billion-asset MVB is in the process of selling its insurance agency. The quarter also included $57,000 in securities losses.

“The gain realized in the second quarter from our forward-thinking fintech investment portfolio was a critical boost to earnings,” CEO Larry Mazza said in a release announcing quarterly results. He added that the fintech portfolio has yielded a more than a 200% internal rate of return since its creation.

MVB impressed Nicholas Cucharale, an analyst at Sandler O’Neill, with fee income that increased by 20%, excluding the fintech-related gain. He also noted that MVB allowed $96 million in brokered certificates of deposit to run off during the second quarter.
Prosperity Bancshares
Prosperity Bancshares in Houston was able to keep costs in check during the second quarter.

The $22.4 billion-asset company’s noninterest expense fell by 3.3% from a year earlier to $80.8 million. Salaries and benefits fell slightly, while occupancy and equipment costs decreased by 3.5%.

Prosperity also benefited from lower regulatory assessments and federal deposit insurance costs.

Total loans rose by 5% to $10.6 billion, countering a margin contraction of 12 basis points.

Net income, as a result, rose by 1% to $82.3 million.

“Consumer confidence remains strong as evidenced by increased credit card purchases,” David Zalman, Prosperity’s chairman and CEO, said in an earnings release. “Businesses continue to do well as reflected by increased sales tax rebates to most cities and small towns.”

Prosperity recently agreed to buy LegacyTexas Bank. The $2.1 billion acquisition is among the biggest bank deals announced this year.
CB Financial Services
CB Financial Services in Washington, Pa., company did an effective job boosting revenue.

The $1.3 billion-asset company reported a 16% increase in net interest income to $10.7 million, and a 14% rise in noninterest income to $2.4 million.

Net income, which included a lift from the company’s April 2018 purchase of First West Virginia Bancorp, nearly tripled from a year earlier. CB Financial had nearly $30 million in net loan originations in the second quarter.

“Earnings results exceeded expectations in several areas, most notably with total operating revenues of $13.2 million,” Michael Perito, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients.

Loan growth “displays positive progress from the multitude of investments management has made to amplify lending production in recent quarters,” Perito added. “Fee and expense trends were both ahead of our forecast.”