Margin Woes, Lending to Dominate 4Q Conference Calls for Small Banks

The fourth quarter is historically a cleanup moment for banks, when executives address lingering credit issues, pay off debt or lay off employees — and the moves will get extra scrutiny this year.

Investors and analysts will seek to determine whether banks are adequately prepared for what is expected to be a tumultuous 2013. Bankers will also have to show how they dealt with the special dramas of last quarter, such as the damage from Hurricane Sandy and fallout from the fiscal-cliff fight in Washington.

American Banker wanted to gauge analysts' outlook for community banks. We queried Frank Barkocy at Mendon Capital Advisors, David Bishop at Stifel Nicolaus, Jeff Davis at Mercer Capital and Chris McGratty at KBW to find out what they will be looking among thousands of financial reports. This is an edited excerpt of their responses.

What trends could define fourth-quarter results? What are your expectations for community banks?

CHRIS MCGRATTY: Margin outlook, growth expectations and capital management. Our stance is that the margin environment will remain challenging. We expect 90% of the banks we cover to exhibit margin compression in 2013 and 2014. 

We want to know if loan demand has changed materially over the last three months, particularly given uncertainty related to the fiscal cliff. We also want to hear about banks' ability to return capital to shareholders. As for M&A, are we finally at a point where the consolidation cycle accelerates?

DAVID BISHOP: A key focal point will be loan growth. That will be front and center given the challenges in the community banking space with the interest rate environment. We expect median margin compression of 10 basis points for our coverage group.

 We did a survey of half our banks in December to take the pulse of their frontline staff and clients. We were looking for a change of borrowing sentiment, but we didn't see much of a sea change. There may be a seasonal slowdown, but the banks that were forecasting growth were still expecting clients to move forward.

Are there any business lines that could surpass expectations or disappoint investors?

FRANK BARKOCY: The mortgage area is likely to remain an area of strength, while commercial loans will remain soft.

BISHOP: We're hearing that things are very competitive on a price perspective, particularly for A credits. [Commercial and industrial and commercial real estate] lines could see some seasonal weakness. That being said, health care and energy in Texas will continue to drive growth, and we're starting to see some traction in parts of Florida such as Tampa and Jacksonville.

MCGRATTY: Excluding mortgage, a key is whether C&I demand can hit expectations, especially given commentary that fiscal uncertainty may have postponed capital expenditure decisions in the second half of last year.

What can community banks do this year to improve their long-term position?

JEFF DAVIS: Admit that many branches are not needed given the rapid adoption of digital money. There should be aggressive closures as the industry slowly recognizes that the old operating model is giving way to a new one.

MCGRATTY: Expense plans are becoming more commonplace and we have already seen instances where banks are announcing a second round of cost cutting to combat the challenging revenue environment. 

Investors like these initiatives as they are viewed as a low-risk method to grow earnings per share. Active liability management was a common theme in 2012. There are some banks that still have levers to pull in 2013, although broadly speaking the majority of this was accomplished last year.

BISHOP: Synovus (SNV) comes to mind in terms of its bulk loan sale during the quarter. But for the most part, credit leverage has played out. There are some outliers but not many earnings levers remain on that front among the 19 banks that I cover.

BARKOCY: If we see the fourth quarter as a clean-up quarter, it is equally important that banks avoid taking on risky assets again.

What do you think bankers will say about the so-called fiscal cliff compromise? What kind of guidance would you expect?

MCGRATTY: I believe the rhetoric surrounding the fiscal cliff will be that it created an added layer of uncertainty with borrowers heading into yearend and that, while it's good that a compromise was reached, there are still looming issues that remain.  My guess is that management teams will be cautious to provide forward guidance as it's still too soon to gauge the final impact of the fiscal cliff.

DAVIS: I don't think the fiscal cliff matters that much to the banks, though small business is petrified of what Obamacare means for them. Guidance will either explicitly or implicitly point to earnings per share at the low end of — if not below —Street estimates for 2013 before factoring in the harvesting of bond gains.

I don't think this will crush stocks, given relatively modest valuations, but it will take some of the sizzle off the stocks that has existed since midyear.

BISHOP: In talking to management teams, there are projects that were mothballed until something was resolved. There is some demand that isn't reflected in the numbers and is muting the loan growth numbers and restraining some of the growth. Unfortunately that should be status quo for now.