In what may be a harbinger of things to come from other banks, Centura Banks Inc. reported strong loan growth in the first quarter loan but shrinkage of its net interest margin as deposit costs rose.
Centura, one of the first banks to report this quarter, said on Thursday that it earned $13.9 million in the period ended March 31, 32% more than a year earlier. Centura's earnings per share of 67 cents were in line with consensus estimates.
"It was a good quarter," said analyst John A. Heffern, with Natwest Securities Corp. in Baltimore. "At the same time, we can't ignore the fact there is this latent margin compression taking place.
"What that says for Centura is what it says for most other banks: Don't expect blowout positive earnings surprises as we go forward."
Centura, which is based in Rocky Mount, N.C., attributed its first- quarter improvement mainly to a jump in net interest income, which reached $48 million.
With an asset-sensitive balance sheet, Centura benefited from a recent increase in the prime lending rate, which rose 50 basis points after the Federal Reserve raised short-term interest rates in February. This benefit was compounded by Centura's loan growth, which was 14% annualized in the first quarter compared with 13% for all of last year.
However, Centura, which has $4.4 billion of assets, was hurt by the need to raise deposit rates. As a result, the bank's net interest margin fell 13 basis points to 4.99% from the fourth quarter to the first quarter.
Deposit pricing pressures were exacerbated in North Carolina by a one- day special from Wachovia Corp., Winston-Salem, on high-yielding certificates of deposit. The Wachovia campaign forced most competitors, including Centura, to boost their own rates last month.
"Generally, in the industry in this state, you kind of wait to see who's going to fire the first shot," said Centura controller Mike Hilton. "That was the first shot. And just about everybody reacted in some fashion."
Analysts anticipate similar deposit pricing problems at other banks this quarter. "We're expecting to see real serious signs of margin pressure," said Henry Coffey Jr., with J.C. Bradford Co. in Nashville.
"It's just a very simple equation. The loan growth is out there, but attracting the deposits to fund that growth is going to have to get expensive."