Don't expect second-quarter earnings reports from community banks to set the world on fire, as low rates, fierce competition and a lackluster economy take their toll.
Some small banks were able to generate slight momentum in the first quarter, with Eagle Bancorp (EGBN) of Bethesda, Md., one of the banking companies that produced double-digit profit growth from a year earlier. Yet those positive trends are easy to misread, some analysts say. Profit growth at many banking companies will be modest, they predict.
And a large portion of profit growth in the second quarter, unlike the first quarter, is expected to come from more purges of bad assets.
"The possibilities for improvement on the bottom line are much more likely to come from decreased provisioning," says Theodore Kovaleff, an analyst at Horwitz & Associates.
Many community banks in the first quarter were able to decrease nonperforming assets to a small fraction of their overall assets, with some nearing the optimal level of NPAs as 1% of total assets.
The persistence of the low-rate environment is taking its toll on profit margins, says Jeffrey Rulis, a senior research analyst at D.A. Davidson & Co. Low rates are putting pressure on securities portfolio yields, he says.
"Without significant loan growth to offset that, most banks have lowered their cost of funds to a point where there is not much more room to grow from that category," Rulis says.
Year-over-year profit comparisons will be more favorable than the growth expected from the first quarter to the second quarter. Sandler O'Neill & Partners analysts Casey Orr and Alexander Twerdahl projected sequential earnings growth of about 4% for the banking industry, compared with year-over-year growth of about 10%.
Even though bankers financial have reported increased demand for credit among consumers and businesses, the competition for those loans is fierce, and there are multiple players in the fight ranging from big banks to community banks, credit unions and mortgage lenders.
Many banks describe their new loans that as business they took from rivals.
"It's not a growing pie," Rulis says. "It's more stealing from competitors or from banks that are perhaps exiting the landscape."
"Underwriting and terms are certainly being pushed, and while banks won't admit that they're doing it, certainly someone is doing it," Rulis says.
There is a notable battle in metropolitan New York over lending to the multifamily market, one of the brightest segments for loan demand, Kovaleff says. The $11.3 billion-asset Investors Bancorp (ISBC) of Short Hills, N.J., and Signature Bank (SBNY), a $15.3 billion-asset company based in New York, reported strong first-quarter performance from multifamily lending in metro New York.
Community banks are again eyeing single-family mortgages, after big banks were burned by the category. The 25 largest banks grew mortgage volume by 2% from the fourth quarter of 2011 to the quarter, according to Federal Reserve data. At all other banks, mortgages grew 17% in the same period.
"Mortgages are providing a nice bit of revenue," Rulis says. "The perception is that it's a lumpy business and I don't know that it obtains the multiples of revenue growth from other types of lending. But it's certainly nice when you have it."
Refinancing has also continued to be a strong performer, further contributing to mortgage revenue, Sandler O'Neill's Orr and Twerdahl wrote in an earnings preview report.
Community banks will begin reporting second-quarter earnings during the second week of July, with the $3.8 billion-asset Bank of the Ozarks (OZRK) in Little Rock, Ark., the $14.4billion-asset Washington Federal (WAFD) in Seattle and the $19.1 billion-asset Webster Financial (WBS) in Waterbury, Conn., expected to kick things off that week. A much larger group of banks will report earnings the next week, including the $3.7 billion-asset Community Trust Bancorp (CTBI) in Pikeville, Ky., and the $10.6 billion-asset Cathay General Bancorp (CATY) of Los Angeles.