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Community banks expected to offer CECL color during Q4'19 earnings

While analysts will continue to be interested in community banks' net interest margins, they will also be on the lookout for earnings-season disclosures related to the current expected credit loss standard.

Analysts expect community banks to follow in the footsteps of large banks that offered insight in 2019 on the potential day-one impact from CECL. On core operations, analysts predict lower NIMs for community banks when they report 2019 fourth-quarter earnings while industry headwinds have left investors "rightly cautious," one analyst said.

Community banks were able to get a "better handle" on CECL's potential impacts during 2019 by running parallel tests and reviewing disclosures from larger banks, Kevin Reevey, a senior research analyst at Elizabeth Park Capital Management, said in an interview.

During earnings conference calls and in annual reports, community banks will likely offer hard numbers on CECL's day-one effect on loan loss reserves and capital, Russell Gunther, a managing director at D.A. Davidson, said in an interview.

Banks could also disclose a "day-two impact," showing how CECL will affect loan loss provisioning on a go-forward basis.

"The guidance from the large banks offered more clarity, so I expect CECL color both from a day-one impact and a day-two impact as it relates to future levels of provisions," Terry McEvoy, a managing director at Stephens, said in an interview.

While most CECL disclosures from community banks will be new information, margin pressure concerns will be a familiar trend. Shrinking margins have been a central theme for community bank earnings since the Federal Reserve began lowering interest rates in July 2019.

Though the Fed has signaled a pause in rate cuts, the decline in the London interbank offered rate during the 2019 fourth quarter will have a significantly negative impact on margins for most banks, Gunther said. The decline in Libor will outweigh banks' abilities to reduce deposit costs, Keefe Bruyette & Woods analysts wrote in a research note.

Analysts expect 2019 fourth-quarter NIMs to decrease from the prior-quarter's figures for 19 of the 20 largest community banks where at least five analysts provided estimates, according to S&P Global Market Intelligence data.

However, assuming the Fed remains on pause, "the worst is behind us from a NIM compression standpoint," Reevey said. As community banks continue to lower their deposit costs, NIM compression should stabilize in the second half of 2020, D.A. Davidson's Gunther said.

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Analysts also have bleak expectations for EPS growth among community banks in the 2019 fourth quarter. D.A. Davidson analysts expect half of the 125 banks in their coverage space to report negative EPS growth year over year, Gunther said.

KBW analysts wrote that they expect most small- to mid-cap banks to report flat EPS growth year over year in the 2019 fourth quarter.

Analysts expect lower revenue compared to the third quarter for 13 of the 20 largest community banks that have at least five analyst estimates, according to S&P Global Market Intelligence data. On earnings, only three of those 20 banks are estimated to report higher EPS from the linked quarter.

"After the fourth quarter, you go into the first quarter of 2020, which is a very seasonally soft and challenging quarter for banks, and you layer on top of that volatility from CECL implementation," Gunther said. "All of a sudden we are looking at a group that has a couple of quarters of tough headwinds ahead of it. That is what has investors rightly cautious."

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