Just when it appeared banks could relax, there's reason not to get too comfortable.
True, several regional banks on Wednesday reported margin growth in bleak times for rates, and Texas lenders went a long way toward dispelling any concerns that weakness in the oil sector might spill over into the broader Texas economy.
However, those rosy margins look unsustainable, the Fed's latest economic outlook was hardly rousing, and oil prices are dropping again.
Most large and regional banks that have released second-quarter results this month reported continued declines in their net interest margins, but several smaller regionals — including UMB Financial in Kansas City, Mo., Cullen/Frost Bankers in San Antonio and BOK Financial in Tulsa — bucked the trend by successfully adding higher-yielding loans and securities to their balance sheets.
The $19.7 billion-asset UMB reported an impressive 26-basis-point increase to 2.86% from the same period last year, thanks largely to a 2015 acquisition that added about $1 billion of loans. A shift toward higher-yielding securities also bolstered the margin, executives said on a conference call with analysts.
Cullen/Frost boosted its margin by 10 basis points to 3.57%, largely by adding more than $730 million of municipal bonds to its securities portfolio. The $29 billion-asset parent of Frost Bank also said that the Federal Reserve's 25-basis-point hike in interest rates late last year helped to boost loan yields.
But both companies acknowledged that the margin gains may not be sustainable in the months ahead — and that was even before the Fed announced in late afternoon that it would not raise its benchmark rate.
Cullen/Frost Chief Financial Officer Jerry Salinas said he expects margins to be "flat to down" in the coming quarters due largely to "pricing pressure" on loans. Meanwhile, UMB executives hinted that the company could slow its purchase of investment securities. The average yield on UMB's securities book was 2.11% as of June 30, compared with 1.93% a year earlier, but executives noted on the call that bond yields have fallen since Great Britain voted in June to exit the European Union.
"Your guess is as good as ours, based on what our investment opportunity is," Mariner Kemper, UMB's chairman and chief executive, told investors when asked about the company's plans for purchasing more securities.
Additionally, more than half of the company's loan book is scheduled to reprice in the coming quarter. That could have a mixed impact on the margin, given that the rates on a portion of the loans are tied to indexes, said Mike Hagedorn, UMB's interim CFO.
While margin pressure remains a huge concern, bankers are feeling a little more upbeat about credit quality tied to energy lending.
Loss provisions and chargeoffs remain elevated, but BOK, Frost and Prosperity Bancshares in Houston all said Wednesday that credit quality has improved since the first quarter, thanks largely to stabilizing oil prices. That is consistent with what investors have been hearing from other active energy lenders, including Comerica, Texas Capital Bancshares and Hancock Holding.
Addressing oft-heard concerns that the energy slump could affect the broader economy, Texas banks in particular took pains to assure investors and analysts that that's not the case. Executives at both Frost and the $22 billion-asset Prosperity noted Wednesday that unemployment in Texas' major markets remains below the national average and pointed to other key metrics — like rising home prices and surging housing starts — as proof of Texas' resiliency.
"Given Texas' economic diversity, favorable job and population growth and business-friendly environment, we currently believe that significant contagion is unlikely," Phil Green, Frost's chairman and CEO, said on the call with analysts.
David Zalman, Prosperity's chairman and CEO, added that he believes oil prices have just about hit their bottom and predicted that the energy industry would start adding jobs by the middle of next year.
Green made no such predictions but noted that some Frost clients have started to increase their drilling and add rigs in certain markets. He said, too, that stabilizing prices — along with improved drilling technology — have helped to boost land values, allowing some struggling clients to sell off valuable land to pay off bank loans.
Still, banks can't be too careful given the volatility in energy prices. Late Wednesday the price of crude oil had fallen to $41.88 a barrel, down 2.4% for the day and off nearly 24% from its 52-week high. Prosperity and Frost scaled back their energy lending in the second quarter and will likely continue reducing their exposure to the sector for the foreseeable future.
Green said that Frost's loan portfolio can remain "stable" if oil prices stay between $40 and $45 a barrel. Though the bank is unlikely to increase its oil and gas lending anytime soon, Green said Frost remains committed to the energy sector.
"We're going to continue to be in this sector," Green said. "It's important to Texas and it's important to the country, and we're going to be in it for the long term."