Second-Quarter Bank Earnings: Large Banks Re-Assessing Loss Reserves

Second-quarter earnings from the largest banks were crushed – again – by loss provisioning, as the further weakening of the economy caused banks to re-assess their loss reserves. Total revenues rose slightly, despite a drop in net interest income. Bank earnings will face growth challenges in the coming months. More loss provisioning could ultimately be needed to deal with the coronavirus downturn and reduced interest margins are pushing interest income lower.

Aggregate earnings for the four banks decreased by -74.4% from the second quarter 2019. All of the banks experienced sharp drops. Wells Fargo posted a net loss for the quarter, after a thin profit in the previous quarter.
Total revenues for the four banks inched up by 0.8% from Q2 2019. Net interest income fell by -9.8% from Q2 2019. The flat yield curve and dampened loan volume have caused net interest margins to plunge. More on that below.

Noninterest income rose by 13.7% from Q2 2019, with JP Morgan and Citigroup posting double-digit gains in investment banking and trading revenues.

Loss provisions surged by 614% year-over-year, as the banks boosted loss reserves in anticipation of future defaults and charge-offs. Some credit quality deterioration has occurred in the second quarter – especially in oil and gas lending – but most of the increase in loss provisioning stems from expected impacts on defaults and from the weakened economy. More on loss provisions and reserves below.

Non-interest expense rose by 3.4% from Q2 2019, with additional COVID-19-related personnel and technology expenses contributing to the increase.
Loss Provisions – COVID-19 Impacts Take Another Bite
The pace of loss provisions rose further in the second quarter, after soaring in the first quarter. The adoption of the CECL standard on 1/1/20 drove part of the increase, but most of the loss provisioning since the beginning of the year has been driven by the weakened economy and expectations of future loan losses.

In the first half of 2020, the banks’ loss provisions totaled $56.3 billion, on par with the total for the previous three years combined. The banks cited high unemployment rates and weakened economic activity overall as reasons for the increases in loss provisions.

Net Interest Margins – Steeper Than a Slide

Interest margins plunged in Q2 2020, after a slide that started in early 2019. Lower interest margins have translated into weaker earnings for banks since net interest income is a function of interest margins and loan origination growth.

The flat yield curve is preventing a return to the higher net interest margins seen in 2018.

Interest margins will likely take another hit, as credit quality deteriorates and skipped loan payments result in growth in nonperforming loans.
The largest banks derive around 50-60% of their revenues from net interest income. Smaller banks derive a significantly higher share of their revenues from net interest income, so the weakness in interest margins will weigh more heavily on smaller banks.

Looking Ahead – More Questions Than Answers

The weakened economy has already taken a toll on banks’ revenues and earnings, but the true impact is yet to be felt. COVID-19-related loan defaults and losses have not yet materialized in any meaningful way, so the banks’ loss provisioning has so far been in anticipation of future losses. While the loss provisioning in the first half of 2020 has been substantial, only time will tell whether it has been sufficient to absorb future losses.

Revenues eked out a small gain in Q2 due to a spike in trading and investment banking revenue. These could prove to be volatile sources of income for banks, so it is hard to know how much they will contribute in the balance of 2020. Any increases in interest income will be dependent on economic bullishness taking hold in the bond market and creating a steeper yield curve.

In the meantime, banks will probably be adopting a defensive posture in order to conserve capital.

PSB Reports Second Quarter 2020 Earnings of $3.2 Million or $0.72 Per Share

Earnings Supported By Record Mortgage Refinancings; Total Assets Exceed $1.0 Billion

WAUSAU, Wis. — PSB Holdings, Inc. (“PSB”) (OTCQX: PSBQ), the holding company for Peoples State Bank serving North Central and Southeastern Wisconsin, reported second quarter earnings ending June 30, 2020 of $0.72 per share on net income of $3.19 million, compared to earnings of $0.36 per share on net income of $1.61 million during the March 31, 2020 quarter, and $0.57 per share on earnings of $2.57 million during the second quarter a year ago.  Second quarter earnings benefitted from record mortgage refinance income and lower compensation and benefit expenses related to expense deferrals on the origination of Paycheck Protection Program (“PPP”) loans offset in part by higher loan loss provisions and a lower net interest margin. 

“We are pleased with the success of our operations during the first full quarter of the COVID-19 pandemic.  During the quarter, we were able to generate record 1st mortgage originations of $84.2 million, originate over $116.4 million in PPP loans and provide loan accommodations on $143 million of loans despite many staff members working remotely.  Meanwhile, we continued our outreach to borrowers to determine their financial health and adjust our risk-weighting accordingly. Though the balance of our “Watch Risk” loans increased during the quarter, we are currently seeing a large portion of these borrowers making payments or agreeing to return to payments in the third quarter.  We maintained the same loan loss provision during the quarter as in the previous quarter and continued strong core operating income that supported an increase in our reserve ratio to 1.32% of gross loans less our PPP loans,” stated Scott Cattanach, President and CEO.

First Merchants Corporation Announces Second Quarter 2020 Earnings Per Share

MUNCIE, Ind. — First Merchants Corporation (NASDAQ – FRME) has reported second quarter 2020 net income of $33 million compared to $41.1 million during the same period in 2019. Earnings per share for the period totaled $.62 per share compared to the second quarter of 2019 result of $.83 per share. Year-to-date net income totaled $67.3 million compared to $79.9 million during the six months ended June 30, 2019. Year-to-date earnings per share totaled $1.24 compared to $1.61 during the same period in 2019.

Michael C. Rechin, President and Chief Executive Officer, stated, “Our financial results for the second quarter 2020 combine stressed economic conditions and net interest margin pressure with the opportunity to provide our clients access to the SBA’s Payroll Protection Program. Our bankers really leaned into the PPP offering on behalf of businesses throughout our markets because it fits our culture and strategy as a largely commercial bank. Several thousand borrowers looked to the bank to assist their efforts in employee retention in a most challenging time. In the near-term, the magnitude of our participation grew our balance sheet substantially in loans and deposits. The funding affords borrowers time to weather the COVID-19 initiated recession.” Rechin also added, “Despite the reopening of Midwest economies and reducing unemployment, we recorded a $22 million provision reflecting our uncertain economic environment. With stay at home orders in place through much of the quarter, our technology proved to be a key point of service delivery for our clients. The results we achieved in pre-tax, pre-provision earnings, capital growth and efficiency remain at top quartile performance levels.”

Sturgis Bancorp, Inc. Declares Quarterly Cash Dividend

STURGIS, Mich. — Sturgis Bancorp, Inc. (OTCQX: STBI) announced that its Board of Directors has declared a cash dividend of $0.16 per common share, payable September 15, 2020 to stockholders of record August 14, 2020. This declaration continues the quarterly dividend at the highest level in the Company’s history, in recognition of strong earnings.

Third Century Bancorp Releases Earnings for the Quarter and Six-Months Ended June 30, 2020

FRANKLIN, Ind., — Third Century Bancorp (“Company”), the holding company for Mutual Savings Bank (“Bank”), announced it had a record level of net income of$475,000 for the quarter ended June 30, 2020, or $0.40 per basic and diluted share, compared to net income of $240,000 for the quarter ended June 30, 2019, or $0.20 per basic and diluted share. For the six ­months ended June 30, 2020, the Company recorded net income of $928,000, or $0.78 per basic and diluted share, compared to net income of $443,000 for the six-months ended June 30, 2019, or $0.38 per basic and diluted share. For the quarter ended June 30, 2020, net income increased $235,000, or 97.92%, to $475,000 as compared to $240,000 for the same period in the prior year. The increase in net income for the three-month period ended June 30, 2020 was driven primarily as result of the $691,000, or 228.05%, increase in non-interest income. The increase in non-interest income was driven primarily by a $405,000 or 294.58%, increase in gains on the sale of loans, along with related loan fees. This increase was partially offset by a $307,000, or 22.10% increase in non-interest expense in the quarter ended June 30, 2020 as compared to the same quarter in the prior year. The increase in non-interest expense was due to an increase in overhead expenses. Net interest income decreased by $2,000, or 0.13% for the quarter ended June 30, 2020, to $1,449,000 as compared to $1,451,000 for the same period in the prior year.

CNB Community Bancorp, Inc. Reports Record Second Quarter 2020 Results

HILLSDALE, Mich., – CNB Community Bancorp, Inc. (OTC: CNBB), the parent company ofCounty National Bank, announced earnings for the three and six months ended June 30, 2020. Earnings during thesecond quarter of 2020 totaled $2.8 million, an increase of $438,000 or 16.7% compared to the $2.4 million earned during the three months ended June 30, 2019. Basic earnings per share for CNB Community Bancorp, Inc. (the“Company”) increased to $1.33 during the three months ended June 30, 2020, up $0.19 from
John R. Waldron, President and Chief Executive Officer of CNB Community Bancorp, Inc. and County National Bank,stated, “The last three months have tested all of us, yet I consistently see individuals, businesses, towns and communitiesprove their resilience. At County National Bank, our staff continues to maintain a safe work environment and displays a strong work ethic. The combined efforts of our customers and employees will continue to move us all forward.Although we have challenges ahead, I am pleased that we have all stayed the course and that CNB is reporting record earnings for the second quarter of 2020.”

OTC Introduces Y9 Bank Holding Company Corporate Data

NEW YORK — OTC Markets Group Inc. (OTCQX: OTCM), operator of financial markets for 10,000 U.S. and global securities, introduced Bank Holding Company corporate data, commonly referred to as “Y9” data, to its otcmarkets.com website. This latest enhancement provides more robust, comprehensive financial reports for the vast majority of the 550 U.S. community banks trading on the OTCQX, OTCQB, and Pink markets.
Banks and bank holding companies are required by law to submit this data to the Federal Reserve. Bank Holding Company data was originally intended to provide federal regulators with their examination and offsite supervision duties. However, by making this data publicly available, regulators are also providing the investor community with a consolidated level of financial disclosure for publicly traded bank holding companies and their subsidiary commercial bank and non-bank entities. This data can prove valuable to investors, as it often contains details of corporate-level financing activity that are not directly attributed to an operating subsidiary. 

“As we continue to integrate Qaravan and OTC data sets, we recognize the need to provide a more detailed, holistic representations of publicly traded banks beyond their corporate structure,” said Matthew Fuchs, Executive Vice President of Market Data and Strategy at OTC Markets Group. “Broadening the scope and availability of our community bank data sets provides investors with additional disclosures and context to provide a greater level of transparency for our OTCQX, OTCQB and Pink markets.”
Following the introduction of Corporate Structure data and optimization of Call Reports with interactive historical data trend charts, Bank Holding Company (Y9) reports are the latest data set to be integrated into the otcmarkets.com website. Five years of historical bank holding company reports are now accessible through the security’s individual quote page, under the “Filings and Disclosure” information tab. This data will also be made available through Canari®, OTC Markets Groups’ web-based compliance interface.

M&T Bank Corporation Announces 2nd Quarter Results

BUFFALO, N.Y. — M&T Bank Corporation (“M&T”) (NYSE: MTB) reported its results of operations for the quarter ended June 30, 2020.

Diluted earnings per common share measured in accordance with generally accepted accounting principles (“GAAP”) were $1.74 in the second quarter of 2020, compared with $3.34 in the year-earlier quarter and $1.93 in the initial 2020 quarter. GAAP-basis net income in the recent quarter was $241 million, compared with $473 million in the second quarter of 2019 and $269 million in the first quarter of 2020. GAAP-basis net income for the second quarter of 2020 expressed as an annualized rate of return on average assets and average common shareholders’ equity was .71% and 6.13%, respectively, compared with 1.60% and 12.68%, respectively, in the corresponding 2019 period and .90% and 7.00%, respectively, in the initial quarter of 2020.

Commenting on M&T’s second quarter results, Darren J. King, Executive Vice President and Chief Financial Officer, noted, “While the low interest rate environment resulted in a decline in our net interest income, it also led to a 13% improvement in mortgage banking revenue compared with the first quarter. During the quarter we added to our provision for credit losses and at the same time grew our Common Equity Tier 1 ratio to 9.51%. M&T’s conservatively positioned balance sheet continues to be strong, with substantial liquidity and sufficient capital to meet the needs of our customers and communities.”

Oxford Bank Corporation Announces Second Quarter 2020 Operating Results

OXFORD, Mich. — Oxford Bank Corporation (“the Company”) (OTC Bulletin Board: OXBC), the holding company for Oxford Bank (“the Bank”), announced profitable operating results for the second quarter and year-to-date period ending June 30, 2020.

The Company’s quarterly consolidated earnings for the three months ended June 30, 2020, were $1,769,000, or $0.77 per weighted average share compared to $1,191,000, or $0.52 per weighted average share for the same period one year ago. Year-to-date consolidated earnings were $3,156,000 or $1.38 per weighted average share for the six months ended June 30, 2020 compared to $2,106,000 or $0.92 per weighted average share for the six months ended June 30, 2019.

“As we look forward to the remainder of 2020 and 2021 there are no doubt big challenges looming, but uncertainty is too high to quantify adequately today. Like many small business-oriented banks, we are not seeing issues yet because of the government programs to help borrowers. However, we do expect to see issues late 2020 and 2021 so the Bank will continue to provision at a heightened level.”

Lakeland Financial Reports 2nd Quarter 2020 Performance

WARSAW, Ind., — Lakeland Financial Corporation (Nasdaq Global Select/LKFN), parent company of Lake City Bank, reported quarterly net income of $19.7 million for the three months ended June 30, 2020, a decrease of 9% versus $21.7 million for the second quarter of 2019. Diluted earnings per share decreased 9% to $0.77 for the second quarter of 2020, versus $0.85 for the second quarter of 2019. On a linked quarter basis, net income increased $2.4 million, or 14%, from the first quarter of 2020, in which the company had net income of $17.3 million, or $0.67, diluted earnings per share. Pretax pre-provision earnings1 were $29.6 million for the second quarter of 2020, an increase of 6%, or $1.7 million, as compared to the second quarter of 2019. On a linked quarter basis, pretax pre-provision earnings increased 8%, or $2.1 million, from $27.5 million for the first quarter of 2020.

The company further reported net income of $37.0 million for the six months ended June 30, 2020 versus $43.4 million for the comparable period of 2019, a decrease of 15%. Diluted earnings per share also decreased 15% to $1.44 for the six months ended June 30, 2020 versus $1.69 for the comparable period of 2019. Pretax pre-provision earnings1 were $57.2 million for the six months ended June 30 2020, versus $55.2 million for the comparable period of 2019, an increase of 4%, or $2.0 million.

David M. Findlay, President and Chief Executive Officer commented, “The Lake City Bank team has done a tremendous job in managing through this unprecedented period. The strength of our financial performance is evident in our operating performance as demonstrated by the healthy growth of pretax pre-provision earnings. Yet the real strength of our performance is the most intangible one, our team’s positive attitude and ‘get it done’ mindset that has defined our COVID-19 pandemic response. At every step during this crisis, the culture of efficient execution that we have developed over the past two decades has driven our team’s actions.”

Boenning & Scattergood Midwest Regional Bank & Thrift Review

WEST CONSHOHOCKEN, Pa., — There were 193 bank and thrift M&A deals announced in the U.S. over the last 12 months (“LTM”)ended 06/30/20, a 20.6% decrease from the LTM period ended 06/30/19. On a quarter-over-quarter basis (“QoQ”), deal volume was down with 10 announced deals for the quarter ended 06/30/20 compared to 37 in the prior quarter ended 03/31/20.In the Midwest, deal volume was lower on an LTM basis with 78 announced deals for LTM 06/30/20 compared to 102 for the LTM period ended 06/30/19, and lower on a QoQ basis with 5 announced deals for the quarter ended 06/30/20 compared to 15 in the prior quarter ended 03/31/20.For LTM 06/30/20 Midwest deals, the median deal value-to-LTM earnings. multiple was 16.6x and the median deal value to tangible book value (“TBV”)multiple was 156.0%, compared to 16.7x and 155.7%, respectively, on a national basis for the same time period.For the 12 months ended 06/30/20, the SNL Midwest Bank Index was down 27.9% and the SNL Midwest Thrift Index was down 21.7%, compared to the SNL U.S. Bank & Thrift Index, which declined 25.5% over the same time period.At 6/30/20, banks and thrifts in the Midwest traded at median price-to-LTM EPS and price to TBV per share multiples of 10.7x and 98.6%, respectively, compared to national medians of 10.6x and 96.4%, respectively.

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