NEW YORK (
) -- Although the general trend for first-quarter bank earnings reports has been for slowing loan growth, FIG Partners analyst John Rodis says "for most banks the outlook is definitely improving for the second quarter."
There's been plenty of coverage of the overall first-quarter earnings trend, with the large regional and money center banks placing a big emphasis on expense cuts, as regulatory compliance costs increase and as most banks continue to see pressure to their net interest margins.
The general feeling among analysts is that earnings quality has declined for many banks. "Of the banks that beat
consensus earnings estimates on expense, many pointed to one-offs, which portend higher expense levels outside of the banks with formal initiatives," JPMorgan Chase analyst Steven Alexopoulos wrote in a note to clients on Wednesday. Alexopoulos added that "on the revenue outlook, the most resounding message on the conference calls was that loan pricing competition seemed to increase in 1Q."
The net interest margin (NIM) is the spread between a bank's average yield on loans and investment securities, and its average cost for deposits and borrowings. The
has kept the short-term federal funds rate in a range of zero to 0.25% since the end of 2008, meaning that most banks have already seen the bulk of the benefit on the cost side. Since September, the Fed has been making monthly purchases of $85 billion in long-term securities, in an effort to hold long-term rates as well. This means that most banks are continuing to see their assets reprice, and their net interest margins decline.
The statement on Wednesday from the
didn't provide any comfort to bankers, as the committee said it was prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."
Also see: Mortgage Principal Reductions Back in Focus >>
The language in previous statements didn't include the words "increase or reduce," and with several recent indicators of slowing U.S. economic growth, including a
on Wednesday from Automatic Data Processing, the FOMC may decide next month to bump up the Fed's securities purchases, thus increasing the economic stimulus.
For the 17 small-to-medium-sized banks he covers, Rodis said the median sequential decline in net interest income was 2.9%, following a much smaller decline of 0.16% in the fourth quarter.
Rodis followed the earnings reports by lowering his 2014 earnings estimates for nine, raising estimates for two, and leaving estimates for 2014 unchanged for the remaining six.
Investors of course don't like to see earnings estimates cut for the coming year, since that can place a drag on stock prices.
"For the majority of the banks I cover, loan growth was lower than expected," Rodis says. "I would say that the outlook was that pipelines were building from March into April, and that we will see better trends in the second, third and fourth quarters."
With little to drive increases to 2014 earnings estimates and expected declines in credit related costs "factored in" for most companies, Rodis has neutral "market perform" ratings on most of the banks he covers.
One bank he still rates "market perform" is
Old National Bancorp
of Evansville, Indiana. The shares closed at $11.76 Wednesday, declining 3.5% for the day. The shares are down slightly year-to-date, and Rodis says the "This is a very high quality bank," and that "the recent sell-off is a little overdone."
Old National on Monday reported first-quarter earnings of $23.9 million, or 24 cents a share, which Rodis says "was right in line with my estimate," but a bit below consensus. The bank's first-quarter return on average assets (ROA) was 1.01% and its return on average common equity was 8.00%.
Old National's shares trade for 1.4 times tangible book value and for 11.0 times Rodis's 2014 earnings estimate of $1.07 a share. That is the lowest forward price-to-earnings ratio for the bank stocks he covers. Rodis is slightly ahead of the 2014 consensus EPS estimate among analysts polled by
, which is $1.05. His price target for the shares is $13.
Here are the three small and mid-sized bank stocks with "outperform" ratings from Rodis, ordered by ascending upside to his price targets:
3. Lakeland Financial
of Warsaw, Ind., closed at $26.36 Wednesday, returning 3% this year, following a 3% return during 2012. The shares trade for 1.4 times tangible book value, and for 11.6 times the consensus 2014 earnings estimate of $2.28 a share, among analysts polled by
. The consensus 2013 EPS estimate is $2.22.
Based on a quarterly payout of 19 cents, the shares have a dividend yield of 2.88%.
Lakeland Financial had $2.9 billion in total assets as of March 31. The company on April 25 reported first-quarter net of $9.3 million, or 56 cents a share, increasing from $8.6 million, or 53 cents a share, in the fourth quarter, and $8.6 million, or 53 cents a share in the first quarter of 2012.
A major factor in the earnings improvement was a decline in the provision for loan losses to zero in the first quarter from $1.25 million the previous quarter and $799 thousand a year earlier. The provision for loan losses is the amount added to loan loss reserves each quarter. It directly affects pretax earnings. Lakeland still had plenty of loan loss reserves, which covered 2.25% of total loans and 233.86% of nonperforming loans, as of March 31.
Lakeland reported first-quarter net interest income of $21.3 million, increasing from $20.9 million in the fourth quarter but declining from $22.5 million in the first quarter of 2012. The first-quarter net interest margin was 3.17%, expanding from 3.10% the previous quarter, but contracting from 3.41% a year earlier, in line with the industry trend.
Average loans increased 2% in the first quarter from the fourth quarter, to $2.26 billion.
The company's first-quarter ROA was a solid 1.27% and its return on average equity was 12.37%.
Rodis wrote in a note to clients following the earnings announcement that "the better than expected results were primarily driven by higher net interest income, as the NIM was better than expected, and higher fee income aided by interest rate swap and investment brokerage fees."
Rodis' price target for Lakeland's share is $30, and he estimates the company will earn $2.17 a share this year, with EPS rising to $2.30 in 2014.
Interested in more on Lakeland Financial? See TheStreet Ratings' report card for this stock.
2. Southwest Bancorp
of Stillwater, Okla., closed at $12.86 Wednesday, returning 15% this year, following an 88% return during 2012. The shares trade just above tangible book value, and for 16.8 times the consensus 2014 EPS estimate of 77 cents. The consensus 2013 EPS estimate is 59 cents.
Southwest Bancorp had $2.1 billion in total assets as of March 31. The company on April 24 reported first-quarter net income available to common shareholders of $2.4 million, or 12 cents a share, compared to $972 thousand, or 5 cents a share, in the fourth quarter and $4.2 million, or 21 cents a share, in the first quarter of 2012.
Net interest income decline to $15.6 million in the first quarter from $17.3 million the previous quarter and $20.8 million a year earlier. The net interest margin narrowed to 3.16% in the first quarter from 3.41% in the fourth quarter and 3.82% in the first quarter of 2012. The company said its core loan portfolio declined sequentially by $49.4 million, or 4%, during the first quarter.
On a brighter note, the provision for loan losses declined to 498 thousand in the first quarter from $3.1 million in the fourth quarter and $1.7 million in the first quarter of 2012.
Southwest Bancorp's first-quarter ROA was 0.46% and its return on average tangible common equity was 3.90%.
Southwest CEO Mark Funke said in the earnings release that "2013 will continue to be a positive rebuilding year for Southwest," and that "during the first quarter several new talented bankers were added into key commercial lending, treasury management, and mortgage positions, building a base for future revenue generation and more diversification in the loan portfolio."
Rodis said in a note following Southwest's earnings announcement that "while the 1Q13 results were below our estimate
of 15 cents, the turnaround story at OKSB continues."
The analyst said Southwest's new management team had completed 70% of its review of the loan portfolio, was looking to consolidate its two bank charters, and was also planning "to redeem its higher costing trust preferred in September; and lowering operating expenses when possible."
Rodis estimates the company will earn 55 cents a share this year, with earnings increasing to 70 cents a share in 2014.
"Our $15 target assumes OKSB shares trade closer to 115% of
tangible book value 1-year out," Rodis wrote, adding that "at this level this would still be a discount to other regional banks."
Interested in more on Southwest Bancorp? See TheStreet Ratings' report card for this stock.
1. Mercantile Bank Corp.
Mercantile Bank Corp.
of Grand Rapids, Mich., closed at $16.50 Wednesday, returning 1% this year, following a 70% return during 2012. The shares trade just below tangible book value, and for 12.0 times the consensus 2014 EPS estimate of $1.37. The consensus 2013 EPS estimate is $1.54.
Based on a quarterly payout of 11 cents, the shares have a dividend yield of 2.67%.
The company had $1.4 billion in total assets as of March 31 and on April 16 reported first-quarter net income attributable to common shareholders of $4.4 million, or 50 cents a share, increasing from $3.0 million, or 35 cents a share, in the fourth quarter, and $2.6 million, or 28 cents a share, in the first quarter of 2012.
The company transferred $1.5 million from loan loss reserves during the first quarter, directly boosting pre-tax earnings. This compared to a provision for loan losses of $300,000 the previous quarter. During the first quarter of 2012, the company's provision for loan losses was zero.
The earnings improvement also reflected a decline in noninterest expense to $8.6 million in the first quarter from $9.2 million the previous quarter and $9.7 million a year earlier, as the company saw a decline in expenses related to the resolution of nonperforming loans and disposal of repossessed assets.
Mercantile Bank Corp's first-quarter ROA was a strong 1.28%, and its return on average equity was 12.07%.
Rodis in a note on April 16 said Mercantile Bank Corp. had a "solid quarter," and that the company's core results of 50 cents a share, including 11 cents for the negative provision for loan losses, beat his EPS estimate of 35 cents.
Rodis's price target for Mercantile Bank Corp.'s shares is $20, and he estimates the company will earn $1.47 a share this year, with earnings declining to $1.34 a share in 2014. "Fundamentally, the Company continues to show nice improvement as
nonperforming assets continue to fall and the loan portfolio appears to be stabilizing," he wrote.
Rodis added that his price target assumes the shares will trade "closer to 110-115% of our TBV estimate one-year out (~ $17.75/share)."
Interested in more on Mercantile Bank Corp.? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.