For most community banks, the first quarter of 2016 proved anothertough one for margins.
S&P Global Market Intelligence analyzed banks with less than$10 billion in assets that had reported earnings for the quarter ended March 31as of April 29. Among banks with less than $1 billion in assets the median net interestmargin was 3.56%, up 1 basis point from a year earlier. For banks with $1 billionto $5 billion in assets the median NIM was 3.52%, down 4 basis points year overyear. The largest banks in the analysis, with between $5 billion and $10 billionin assets, reported median NIM of 3.59% and 1 basis point of margin compressioncompared to last year.
"The December rate hike helped on margin, but 25 basis pointsdidn't cure everything," said Keefe Bruyette & Woods analyst ChristopherMcGratty. "A lot of banks have interest rate floors on their balance sheets,"he added.
McGratty called margins "decent" in the first quarter,but noted that the bar was set "pretty low." He was unsurprised to seelimited NIM expansion given the current environment of intense competition, historicallylow short-term rates and a flattened yield curve.
Lee Kyriacou, director of research at Novantas, pointed to the"counterintuitive" fact that margins have historically tended to fallwhen rates rise. But he said that scenario might not play out as dramatically inthe current environment since the loan book has essentially "been run downto current low rates."
"Unlike other rising rate environments, it may be this timethat NIM doesn't decline as much," he said. "You're starting finally inthe last quarter or two to see an increase in NIM."
Kyriacou said that banks with assets that reprice more quicklywill do better in the rising rate environment, and larger banks are generally betterpositioned for increasing rates because more of their assets have variable ratesor are repricing in less than a year.
Some banks, like Dubuque, Iowa-based Heartland Financial USA Inc., bucked the trend of margincompression. The bank's NIM rose 32 basis points year over year. Management attributedthe improvement to acquisitions, enhancement in asset yields and better fundingcosts. During an earnings call, executives also highlighted the bank's net interestincome, which has gradually increased for the past 14 quarters.
"Our success in maintaining margin above many of our peersis a result of continuous pricing discipline on both sides of the balance sheet,"Chairman and CEO Lynn Fuller said.
CFO Bryan McKeag said the bank's first-quarter NIM was influencedby the amortization of purchase accounting discounts and the Fed's interest ratehike in December 2015, which boosted loan and investment yields. "We estimatethat the rate increase had a 4-basis point to 5-basis-point lift on the net interestmargin this quarter," McKeag said.
Other banks, like De Witt, N.Y.-based Community Bank System Inc., experienced margin compressiondespite their pricing discipline.
"Proactive and disciplined management of deposit fundingcosts continued to have a positive effect on margin results, but have generallynot been able to fully offset declining asset yields," CFO Scott Kingsley saidduring the bank's recent earnings call. "Although we essentially reported netinterest margin results consistent with the fourth quarter of 2015, we continueto expect net interest margin challenges to outweigh opportunities for the balanceof 2016."
Hamilton, N.J.-based FirstBank, a company with less than $1 billion in assets, sawa year-over-year NIM decrease of 55 basis points. President and CEO Patrick Ryansaid that a "sizeable" subordinated debt offering that counted as tier2 capital was one factor in the bank's declining margin. The offering caused overallinterest expense to increase, he noted. "We decided that doing a subordinateddebt deal, which would obviously have the impact of decreasing our margin, was betterthan dealing with the dilutive impact of issuing new shares," Ryan said.
The executive also pointed to competition in the low interestrate environment, which he said keeps banks like his from being able to lower thecost of funds. "I think we're living the reality that most banks are,"Ryan said. "Our margins are lower than we'd like them to be and we're tryingto manage costs or noninterest expense the best we can to deal with that reality."
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