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Community banks report mixed Q4 NIM before rate-hike benefit

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Community banks report mixed Q4 NIM before rate-hike benefit

Community banks had mixed net interest margin expansion during the fourth quarter of 2016.

Brian Martin, vice president and research analyst at FIG Partners, said the Federal Reserve's 25-basis-point key interest rate hike in December occurred too late in the quarter to translate into higher margins, but that some institutions benefited from other factors.

"Depending on what your balance sheet looked like for some of these banks, the movement was a little bit different," he added.

Martin noted that many banks have loans tied to LIBOR, which moved ahead of the Fed rate. Others benefited from transactions that "skewed the margin." To understand how banks are performing on an "apples-to-apples" basis, he said it's important to compare GAAP net interest margin to core margin.

"If you buy someone and you take a discount on that bank," Martin said, "it accretes back over time, and each quarter you get accretion. When loans prepay, the benefit from that accretion goes up a little bit every quarter. If a bank has not done a deal or has not bought somebody, their margin is what it is."

According to S&P Global Market Intelligence data, larger community banks, or those with $5 billion to $10 billion in assets, reported a median net interest margin of 3.61%, up year over year.

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Conway, Ark.-based Home BancShares Inc., a bank with $9.81 billion in assets, led the category with a net interest margin of 4.77%. Without accretion, the company reported core net interest margin of 4.31%, and organic loan growth of $275 million.

The company continued its buying spree in the fourth quarter, and benefited from past deals. On Home BancShares' fourth-quarter earnings call, executives said they will continue to be aggressive on the M&A front in 2017 and 2018, especially as the bank prepares to cross the $10-billion-in-assets threshold. That, along with stringent interest rates, is a "nuance" that helps the company keep up its margin, Martin said.

"There's a benefit from accretion in your number every quarter," he added, "and that number fluctuates based on what the number of payoffs were. Needless to say, it gets a little convoluted for banks that have bought someone, such as a bank like Home."

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Toano, Va.-based C&F Financial Corp. reported net interest margin of 6.23% for the quarter, which was down year over year, but the highest of community banks in the $1 billion to $5 billion asset class.

In the company's earnings release, President Tom Cherry said the company uses an interest rate swap program that "provides more flexible pricing structures for our larger borrowers while protecting the bank from exposure to rising interest rates." He said that C&F Financial benefited from higher loan origination in 2016, but that its consumer finance segment struggled with lower loan yields and higher charge-off activity.

Mount Laurel, N.J.-based Marlin Business Services Corp., which is not a traditional community bank, reported the highest net interest margin, at 8.41%, among banks below $1 billion in assets.

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Martin said community banks will be able to take advantage of the December rate hike during the the first quarter of 2017, which will have the biggest impact on asset-sensitive institutions with loans tied to the prime rate. In December, the Federal Open Market Committee projected up to three rate hikes in 2017.

"You'll get the benefit initially on the rates going up," he said, "and they don't have to move their deposit rates just yet. They can lag a little bit there, and it gives them a little bit of a benefit, at least in the short term."

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