Community institutions in the Southeast had little to crow about in their second-quarter earning reports - and analysts held out little prospect for improvement in the coming months.
"It was a hold-your-own quarter at best," said Gray Medlin, bank stock analyst at the Carson Medlin Co. in Raleigh, N.C. "We're probably seeing the earnings as good as they're going to be."
With a few exceptions, community banks and thrifts in the region reported modest to negligible gains in earnings. Robinson-Humphrey Co. in Atlanta said the average gain was about 5% for the companies it follows, which was about what was expected - slightly lower than the first-quarter numbers.
Analysts pointed to increased pressure on the net interest margin, declining loan demand, and an oversaturated market as the primary reasons for the sagging performances.
"The issue is margins," said John W. Coffey, analyst with Robinson- Humphrey. "They continue to be under pressure. Deposit interest is going down, while funding costs are going up. This became very evident in the second quarter."
Mr. Coffey said one of the main causes of the tighter margins is a dramatic shifting of customer funds - from the lower-cost transaction accounts to the higher-cost time deposit accounts. Money market funds and certified deposits are drawing more customers than ever, and consequently, the cost of funds has shot up.
CD rates on average are about twice what they were a year ago, and are now in line with Treasury bond yields, Mr. Coffey said. This more attractive payoff, coupled with the growing appeal of investing among average customers, have made these instruments more popular than ever, analysts said - to the detriment of the cheaper traditional deposit accounts.
Among those with modest gains, $386 million-asset Anchor Financial Corp. earned $844,000 in the quarter, up 7.6%. The Myrtle Beach, S.C., institution was hampered in part by a 185% gain in nonperforming assets in the quarter. Earnings at Central Bancshares, a $457 million asset bank in Lexington, Ky., inched up by just under 1%.
There were some big gainers, however.
CCB Financial Corp. of Durham, N.C., for example, achieved a 29% increase in earnings, compared with the same quarter a year ago. The $4.8 billion-asset company completed its acquisition of Security Capital Bancorp two months ago and may already be realizing cost savings from the deal, Mr. Coffey said.
Though CCB's net interest income increased by 11% from the year-earlier quarter, it was down slightly from the first-quarter number.
First Liberty Financial Corp. of Macon, Ga., reported a 34% increase in earnings compared with last year. The $776 million-asset company said its interest rate spread increased to 4.06% from 3.78% last year. The bank attributed these numbers primarily to a reduction in nonperforming assets and more earnings assets. It grew by about 20% due to several acquisitions.
"There are some banks that are not experiencing the same kind of margin pressures that most are feeling," said Kathryn H. Bissette of Sterne, Agee & Leach Inc. in Atlanta. "They are mainly the smaller ones that are strong in small-business lending and have a strong core deposit base."
As another example, Ms. Bissette pointed to $2.8 billion-asset Bancorp South of Tupelo, Miss., which saw its core deposits rise by 8% in the past year. Earnings grew by 19% to $8 million in the quarter, it reported.
Looking to the future, analysts said southeastern banks, like those in the rest of the country, will be challenged to match even the modest gains of the last quarter. One reason is that the intense cost-cutting that has helped to strengthen earnings in recent years may be nearing an end.
"The banks have been doing a lot on the expense side of the equation," said Vernon Plack, analyst at Scott & Stringfellow in Richmond, Va. "But I think we've seen as much as we're going to see in efficiency gains. Now comes the hard part - generating revenue."
Analysts warned that if all of these factors come together at the same time, at just the moment when the credit cycle begins to turn, dark days could lie ahead.
"The earnings that we're seeing now could be on borrowed time, in a sense," said Mr. Medlin. "If we get another down loan cycle and nonperformers increase again, then everybody goes back to loan losses, and that will make earnings even more difficult."
Concurred Mr. Plack, "It's a fairly tough environment for banks to operate in. What makes it worse is that the industry is still suffering from overcapacity. A lot of banks are chasing the same loans."
Though stock prices of banks and thrifts are generally high at the moment, they are deceptive. Most have been boosted by merger speculation, rather than by banking fundamentals, analysts said. Not surprisingly, everyone interviewed believes the consolidation trend will only speed up.
Among other banks reporting earnings:
National Commerce Bancorp. of Memphis earned $11.9 million in the quarter, a 10.2% jump. This was achieved in part by loan growth and a 66% reduction in non-performing assets, the $3 billion-asset bank said.
F&M National Corp. of Winchester, Va., earned $5.6 million in the quarter, up 22%.