{"id":1408,"date":"2018-11-28T15:54:26","date_gmt":"2018-11-28T15:54:26","guid":{"rendered":"https:\/\/albanknews.com\/?p=1408"},"modified":"2018-11-28T15:54:26","modified_gmt":"2018-11-28T15:54:26","slug":"quarterly-earnings-review-2018q2","status":"publish","type":"post","link":"https:\/\/albanknews.com\/?p=1408","title":{"rendered":"Quarterly Earnings Review- 2018Q2"},"content":{"rendered":"

by <\/i><\/span>Nancy A. Bush, CFA,<\/span> NAB Research, LLC for <\/i><\/span>Banks Street Partners, LLC<\/span><\/a><\/p>\n

LIFTOFF \u2013 FINALLY?
\n<\/b><\/span>Was this finally it\u2014the quarter which we had long awaited? Was this the quarter when the optimism that had been expressed for months by bank CEOs finally became a reality? Are we at the point when business owners finally have become confident enough to begin to invest in plant and equipment and to draw down long-dormant credit lines? In short, have we reached that long-elusive time when the yield curve will have a positive slope, there will be better-than-modest loan demand and credit quality will remain well-behaved? Is banking Nirvana finally\u2014FINALLY\u2014here?<\/p>\n

Well, maybe. But in banking there is seldom a silver lining without a small cloud trailing behind, and there were a couple of small clouds that shadowed the generally sunny management commentary in 2Q18. Among the most ubiquitous of these was the continuing issue of elevated loan payoffs that dampened respectable core loan growth rates\u2014in the 5 percent – 7 percent annualized range for our monitored universe overall\u2014back to something closer to low-single digits reported growth.<\/p>\n

There does not seem to be any one over-arching factor behind this persistent trend, but CEO Robert Hill of South State Corp. (SSB) seemed to us to give the most lucid explanation. South State experienced annualized loan growth of 7 percent in 2Q18 (which still looks pretty respectable to us), but Mr. Hill pointed out the difficulty in predicting future loan growth due to this lingering issue of filling the payoff hole. For his company, the issue has been paydowns and payoffs in the CRE segment, and he sees this as a healthy trend as these loans are being increasingly picked up by \u201cpermanent\u201d owners, such as insurance companies and investment funds. We concur with his view\u2014the less capital in the banking industry that is devoted to an historically volatile asset class, the better it will be for continuing stability and soundness (and growth) in the industry.<\/p>\n

The all-out hot topic of 2Q18\u2014and this one does not promise to go away any time soon\u2014was that of deposit beta, and it seems to us that a somewhat obscure concept that was scarcely mentioned only a couple of years ago has become the most-discussed topic in banking in record time. We recall that it was only late last year when the overwhelming management consensus was that deposit betas would remain well-behaved and below the industry\u2019s historic norms, due both to the amount of liquidity that was still sloshing around in the financial system and to the seeming indifference of retail depositors to rising interest rates.<\/p>\n

Well\u2014whatever happened to that? Deposit betas jumped\u2014or more accurately, galloped\u2014in the second quarter as competitive pressures were brought to bear in many growth markets and as senior managers (especially in the mega-community segment) apparently awoke to the reality that they might need additional funding in the months to come, and that they needed to defend their deposit bases to secure this.<\/p>\n

As one example, South State recorded a 50 percent-plus deposit beta (our estimate) in the second quarter (versus a beta we estimate to be in the 20 percent area in 1Q18) with the admission that they (like most in the industry) \u201chad lagged the first few moves\u201d of the Federal Reserve and now have a need to get ahead of the deposit-pricing curve. As a result, the cost of funds at SSB rose 9 bps sequentially (to 40 bps), which was one factor in an 8 bps decline in the net interest margin, to 4.14 percent.<\/p>\n

Even in the hyper-competitive large community segment, three major Southeastern competitors\u2014CenterState Bank Corp. (CSFL) and Seacoast Banking Corp. of Florida (SBCF) in Florida and United Community Banks Inc. (UCBI) in Georgia\u2014remain \u201cunder-loaned\u201d with LTD ratios of 86 percent, 84 percent and 82 percent, respectively, and thus are not likely to be forced into the deposit pricing maelstrom. And we would note that the recently announced acquisition of Charter Financial Corp. (CHFN) of West Point, GA, by CenterState will give that company an even larger base of rural and lower-cost deposits\u2014which it will likely need as it builds out its nascent presence in the hyper-competitive Atlanta market.<\/p>\n

The news on the housing front has been somewhat grim of late\u2014existing home sales fell for a fourth straight month in July\u2014as increasing materials costs and shortages of land continue to push up prices for the median home, up 4.5 percent from year-ago levels. This state of affairs seems to us to be predictable in an environment of rising rates and rising inflation (which will worsen if the impact of tariffs becomes more widespread) but we have heard scant discussion among our banks about an eventual organic slowing of one of the industry\u2019s most important businesses. While community banks like United Community are dealing with this new reality by adding experienced mortgage originators and trying to move market share, there will nonetheless be banks both large and small that will need to fill an important fee revenue hole in other ways.<\/p>\n

Now for the numbers\u2014which (mostly) improved for our monitored banks (of all sizes) in the second quarter. Returns on average assets and on tangible equity capital were up most significantly for the large community banks (1.51 percent average ROA and 17.51 percent ROTCE, up 3 bps and 29 bps respectively) as these banks continued to consolidate recently completed deals and cut costs (as well as to realize accretion) in the process. And the impact of the recent Fed increases were visible\u2014higher deposit betas notwithstanding\u2014in increased net interest margins for most of the banks on our list, with the strongest increase coming for the small community banks, where the average NIM increased from 3.84 percent in 1Q18 to 3.96 percent in the second quarter.<\/p>\n

But what about the yield curve? The curve has been inexorably flattening in recent weeks and there have been various predictions of doom and gloom as a result. The shape of the curve did not seem to be an impediment to decent banking results in the second quarter, but there were some concerns expressed nonetheless in management commentary. Most notably, the CFO of Entegra Financial Corp. (ENFC), David Bright, spoke of the bank\u2019s portfolio restructuring (which has not yet benefited results) but said also that the \u201cyield curve was presenting challenges.\u201d While many pundits have pointed out that the long end of the yield curve is not where American banks actually operate\u2014that happens more in the two-year to five-year segment, especially for more commercially oriented banks\u2014we would note that the long end reflects market sentiments and concerns that MAY eventually be translated into growth impacts on banking activity. In any case, if the curve continues to flatten, we expect to hear a lot more discussion of the subject at the time of 3Q18 earnings.<\/p>\n

Two other trends were notable. Incredibly for this late in the economic cycle, asset quality continues to be stable in most instances and improve in a few. Nonperforming asset levels declined in all of our banking segments and loan losses were flat for all but a few companies. (Most remarkably, almost all of our small community banks either had no losses or were in a recovery position.) Several CEOs pointed out that future credit issues were likely to be \u201clumpy\u201d\u2014i.e., the result of one or two credits going bad and showing up as blips on a low base of NPAs\u2014and we have seen that phenomenon at commercial lenders like Atlantic Capital Bancshares (ACBI) for the past year or so.<\/p>\n

Our other random gleaning from our compilation of quarterly trends concerns the level of expenses, and we can say with some conviction that overhead ratios improved almost everywhere in 2Q18. The major Southeastern banks had an average OH ratio of less than 60 percent for the first time in many quarters, and while this happy state of affairs may have been due partly to robust revenues in 2Q18, this also remains the banking segment most devoted to reducing expenses through digitization of banking functions and ongoing programs of cost reduction. The most efficient segment remains the large community banks, where sequential improvements at acquiring banks like CenterState, Pinnacle Financial Partners (PNFP) and South State brought the segment average below 55 percent for the first time in a long time. And while the Southeast\u2019s smaller community banks continue to struggle under the burden of high expenses, both Atlantic Capital and Home Bancorp (HBCP) made important progress on bringing down stubbornly high overhead ratios.<\/p>\n

So\u2014it was a good quarter, and better-than-good in some important respects. We also want to throw in a couple of observations from J.P. Morgan Chase (JPM) CEO Jamie Dimon, who is the industry\u2019s most important spokesperson and one of its best arbiters of banking trends. Mr. Dimon and his CFO, Marianne Lake, were positively effusive in their 2Q18 commentary, saying that the still somewhat subdued loan volumes \u201cdid not yet reflect the full impact of tax reforms\u201d and that NIM levels throughout the banking industry were still normalizing as rates rose and that we were \u201cnot yet close to normal rates.\u201d And when Mr. Dimon was questioned as to whether we were \u201clate in the game\u201d in this economic cycle, his view that while the cycle may be older the fact that \u201cgrowth was lower in the past decade\u201d than had been the norm argued for yet longer to go before recession. Add to these views the declaration of Bank of America CEO Moynihan that his company was off to the \u201cbest start to the year in the company\u2019s history\u201d and it\u2019s hard not to believe that CEOs throughout the banking industry are ready to take a victory lap.<\/p>\n

We would be remiss if we did not mention bank merger activity in the Southeast and how that might proceed from here. The 2Q18 earnings season saw the announcement of one of the more curious deals of our acquaintance\u2014the acquisition of FCB Financial Holdings (FCB) by Synovus Financial Corp. (SNV) at a below-market price\u2014and while we are unlikely to see that pattern replicated any time soon, we do believe that this deal will set off yet another round of consolidation in the Southeast. Terry Turner, Pinnacle Financial\u2019s CEO and the Dean of Deals in the region, reiterated that his company\u2019s \u201cdifferentiated model is transportable\u201d and we inferred from that that he is ready to take that model on the road after a brief respite in the wake of the BNC deal. There are attractive targets left in the region\u2019s most attractive markets, and we expect that many of these will be taken off the table in the next 18 months or so.<\/p>\n

So\u2014liftoff or a flame-out on the launch pad? It is true that the banking industry is facing some possibly significant challenges\u2014continuing flattening of the yield curve, the as-yet-unknown impact of tariffs on the American economy, and the general atmosphere of chaos in Washington\u2014but as of yet there is no reason to believe that these issues will soon dent a solid outlook for bank earnings. The major question for us is whether this bright future will be sufficient to lift the fortunes of a group of stocks that have lagged the markets thus far this year, and we believe that the third quarter of 2018 will be pivotal in providing that answer.<\/p>\n

To read NAB Research\u2019s disclosures for the preceding commentary, please follow this link:<\/i><\/p>\n

http:\/\/www.BushOnBanks.com\/disclosure.shtml<\/span><\/a><\/p>\n

This commentary was provided by <\/i><\/span>Nancy A. Bush, CFA of NAB Research, LLC<\/span> and is being distributed by Banks Street Partners, LLC. The views of the author do not necessarily represent the view of Banks Street, and Banks Street has neither directed nor had editorial oversight over the content. Material in this report is from sources believed to be reliable, but no attempt has been made to verify its accuracy. Past performance is no guarantee of future results. Banks Street actively seeks to conduct investment banking in the financial institutions sector, including with the companies listed in this report. To learn more about Banks Street Partners, please visit www.BanksStreetPartners.com.<\/i><\/span><\/p>\n

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by Nancy A. Bush, CFA, NAB Research, LLC for Banks Street Partners, LLC LIFTOFF \u2013 FINALLY? Was this finally it\u2014the quarter which we had long awaited? Was this the quarter when the optimism that had been expressed for months by bank CEOs finally became a reality? Are we at the point when business owners finally have become confident enough to begin to invest in plant and equipment and to draw down long-dormant credit lines? In short, have we reached that long-elusive time when the yield curve will have a positive slope, there will be better-than-modest loan demand and credit quality […]<\/p>\n","protected":false},"author":1,"featured_media":860,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[32,19,23],"tags":[],"class_list":["post-1408","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-board-briefs","category-breaking","category-publications","has_thumb"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/albanknews.com\/wp-content\/uploads\/2016\/09\/BB-web-header.jpg?fit=1109%2C858&ssl=1","jetpack_shortlink":"https:\/\/wp.me\/p4Y3P2-mI","jetpack_sharing_enabled":true,"jetpack-related-posts":[],"_links":{"self":[{"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/posts\/1408","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/albanknews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1408"}],"version-history":[{"count":1,"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/posts\/1408\/revisions"}],"predecessor-version":[{"id":1410,"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/posts\/1408\/revisions\/1410"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/albanknews.com\/index.php?rest_route=\/wp\/v2\/media\/860"}],"wp:attachment":[{"href":"https:\/\/albanknews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1408"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/albanknews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1408"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/albanknews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1408"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}