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Margin pressure, slow loan growth expected for Q3 community bank earnings

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Margin pressure, slow loan growth expected for Q3 community bank earnings

Squeezed net interest margins and weak loan growth are set to take center stage as community banks begin to report third-quarter earnings.

That combination will leave net interest income hard to come by and lead executives to be more conservative ahead of a possible economic downturn, analysts said. The quarter's results are expected to be "generally disappointing," Raymond James analysts wrote in a research note.

"We will see more NIM pressures, perhaps worse than what analysts have in their models," said William Wallace IV, an analyst for Raymond James, in an interview. NIM pressure has been a consistent theme as banks look ahead to more interest rate cuts at the Federal Reserve and watch for signals of a recession following the yield curve inversion.

Disappointing margins will feel like "deja vu" from last quarter, said Russell Gunther, an analyst for D.A. Davidson.

Analysts expect third-quarter NIMs to decrease from the prior quarter's reported figures for 15 of the 20 largest community banks where at least five analysts provided estimates, data collected by S&P Global Market Intelligence shows.

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Community banks are also likely to be "conservative" with loan growth amid recession concerns and ahead of the 2020 presidential election, analysts said.

"Management teams are not going to be putting their foot on the gas as it relates to loan growth," Wallace said. Instead, banks are pulling back "to avoid significant downside if we go into a recession," he said.

The uncertain outlook will create "inaction or avoidance attitudes" among community banks, according to D.A. Davidson analyst Kevin Reevey. He expects loan growth to vary by geographic region, with more growth in the Southeast and Southwest, and slower growth in the Midwest and Mid-Atlantic regions.

"It's going to really focus on the health of the various markets that the banks operate in and that their customers operate in," he said in an interview.

On the upside, lower interest rates usually encourage more mortgage and refinancing activity. The fees from mortgage banking will increase community banks' noninterest income, Reevey said. He also believes community banks will be more active on the share buyback front.

Analysts expect higher revenue compared to the second quarter for 15 of the 20 largest community banks that have at least five analyst estimates, according to S&P Global Market Intelligence data. Only seven of those 20 banks are estimated to report higher earnings per share.

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While large banks have begun to provide estimated costs for the current expected credit loss model, or CECL, analysts do not expect community banks to provide estimates during this quarter's earnings calls. Many community banks subject to the Jan. 1, 2020, implementation date will "give some color" on their prep work for the standard, but Reevey said banks have indicated they will not issue specific estimates.

"We'll have a little more clarity than we got in the second quarter, but I don't expect to see a lot of clarity yet," the analyst said. "It's probably going to be more directional than anything else."

Analysts expect community banks with a 2020 implementation date will give specific CECL estimates during the fourth quarter.