Analysts are using words like “tough” and “lackluster” to describe community banks’ second-quarter earnings, but they expect that rising interest rates and an expanding economy will lead to an upturn sometime this year or in early 2005.
However, loan growth — particularly commercial — remains muted and the Federal Reserve Board’s raising of the federal funds rate has yet to bear fruit. As a result, the yield on banks’ assets continues to spiral downward faster than the cost of their liabilities, shaving points off their net interest margins and pennies off their earnings-per-share estimates.
A case in point is Southwest Bancorp of Texas, almost universally regarded as one of community banking’s best performers. Its earnings of $16.2 million were higher than last year’s second quarter, but its per-share earnings of 23 cents fell 2 cents short of the analyst consensus because of continued margin compression and merger-related expenses.
Nonetheless, Brett D. Rabatin of First Horizon’s FTN Midwest Research, and Peter J. Winter of Advest Inc. both restated their “neutral” ratings on the $6.2 billion-asset Houston company. They pointed to prospects for solid loan growth and balance sheet expansion.
Scott Alaniz, who works out of Atlanta for Sandler O’Neill & Partners LP, said that the community banks he covers are hopeful that a combination of loan growth and rising rates will boost their results in upcoming quarters. If their results do pick up, he said, “then we should start to see upward revisions and companies beating forecasts” by the middle of next year.
Theodore P. Kovaleff of Sky Capital LLC in New York was even more optimistic. He said the improvement should begin to bear out in third-quarter results.
“If you have loan growth … with the economy on the upswing, which I believe very strongly that it is, I have to expect that this will show through certainly in the commercial loan growth side,” Mr. Kovaleff said. “And that should happen early on rather than later.”
Most money-center banks met or beat estimates, but they did so by relying on one-time gains on security sales, tight expense controls, and releasing cash from their loan-loss reserves, analysts said. Big banks’ core results were weaker than many observers had predicted.
In that respect they were similar to many community banks. Only a scattered handful of community banks experienced losses, and a fair number posted record earnings, but several prominent names had disappointing earnings and others had to stretch to meet expectations.
Fulton Financial Corp. of Lancaster, Pa., which is also viewed as a high-performing company, missed its consensus EPS estimate by a penny. Loan growth was modest and margins shrank for the $10.6 billion-asset company, which earned $37.9 million, or 31 cents a share.
Bank Mutual Corp. in Milwaukee also fell 1 cent short of analysts’ estimates. The $3.1 billion-asset company reported net income of $7.1 million, or 9 cents a share.
Dime Community Bancshares Inc. of Brooklyn, N.Y., met its consensus estimate, reporting earnings of $12.4 million, or 34 cents a share. But the $3.5 billion–asset company said it might miss its third-quarter target because of a sharp drop in its net interest margin.
“Dime has positioned itself for rising rates, but they’re getting hurt because” bank interest rates “haven’t started rising yet,” said James Abbott of Friedman, Billings, Ramsey & Co. in Arlington, Va.
Mr. Abbott characterized the period as “lukewarm” over all for community banks.
“It wasn’t a stellar quarter,” he said. “The companies we’ve been following either barely met their estimates or missed them. Generally, I’ve been taking estimates down rather than up.”
He said the few bright spots included the $4.9 billion-asset East-West Bancorp of San Marino, Calif., which reported record earnings of $18 million.
Mr. Alaniz said the three months were a “bottoming out” phase for most banks — especially commercial outfits like Southwest and Fulton.
If anything set the three months apart from the previous two quarters, it was banks’ outlook, said Christopher Marinac of FIG Partners LLC in Atlanta.
“Companies were very uncertain after the fourth quarter and the first quarter,” he said. “With the Fed’s action on rates, people are more positive. I think the forward look is more optimistic.”
