California's Q3 bank earnings: wider margins, thin loan growth

Third quarter earnings started landing in California last week. By this morning I'd read the releases from 6 banks: CVB Financial, TriCo Bancshares, Westamerica, Preferred Bank, Community West Bancshares and CBB Bancorp.

In July I wrote that Q2 earnings had turned and the hiring was moving. Q3 tells a narrower story.

5 of the 6 widened their margin. Only 2 grew loans by more than 1 percent in the quarter.

What the margins did

CVB's margin went from 3.72 percent to 3.89. CBB Bancorp's went from 3.22 to 3.40. Community West got to 4.65 percent, TriCo to 4.16 and Westamerica to 3.81, each up 4 to 9 basis points from June.

Preferred went the other way, from 3.73 to 3.49. Its net income slipped to $32.9 million from $33.5 million.

Net income rose at the other 5. CVB's jump, to $78.1 million from $48.3 million, needs a footnote. Q3 was its first full quarter with Heritage Bank of Commerce, which it closed on April 17, so I'd go easy on any Q2 comparison.

What the loan books did

CVB grew loans $105.0 million, or 0.87 percent. Community West grew $19.1 million, about half a percent. Westamerica's average loans fell 3.2 percent from Q2 (Westamerica runs a small loan book against a big deposit base; loans were 13.7 percent of deposits).

Preferred's loans held for investment dropped $41.0 million after it moved a $56.7 million loan into held for sale.

Then the 2 that grew. TriCo added $99.1 million, 5.4 percent annualized, while it prepares for its merger with First Hawaiian Bank. CBB Bancorp, a Los Angeles bank with about $1.5 billion in loans held for investment, grew total loans at a 16.1 percent annualized pace.

So most of the earnings came from spread. When a bank's margin climbs and its loan book sits still, it's earning more from the customers it already had.

What the credit lines did

Nonperforming totals rose from June at 5 of the 6. Most of the moves were small. (Westamerica's is tiny: $476,000.)

Community West's wasn't. Nonaccrual loans went from $19.8 million to $38.3 million, and the bank tied the increase to 2 relationships that hit 90 days past due.

Preferred's nonaccrual and 90-day past-due loans rose to $109.4 million from $98.9 million. CBB's nonperforming assets went to 1.70 percent of loans held for investment, up from 1.48.

I'd read these the way I'd read one late payment from a good client. Worth a phone call this week.

What I think it means for California hiring

Margin can carry earnings for a while. I don't think it carries them forever. When the margin stops widening, new loans are the lever that's left, and new loans come from producers.

That's the case I'd make to a CEO with a margin up 10 or 15 basis points and a flat book. The extra spread is the budget for the next relationship manager. A C&I banker who brings the operating accounts along with the loans adds to both lines at once.

Preferred says in its release that it's seeing a stronger pipeline going into Q4. Pipelines turn into loans when somebody's in the seat to close them.

On the cost side, salaries and benefits fell from Q2 at Preferred, and Westamerica said lower salaries partly offset its other expense increases. Trimming comp in a flat-loan quarter is normal. I'd watch which seats get trimmed. Cutting a producer to save a quarter's salary is the most expensive savings I know of.

And Community West's 2 relationships are a reminder that the credit seat counts as much as the production seat. A bank with a margin to protect needs someone who can work a problem credit before it turns into a charge-off.

What this data doesn't say

6 banks aren't a market. These are the ones that had reported by October 23. Several more report next week, including Bank of Marin on October 26.

They're very different banks. CVB carries about $12.1 billion in loans after its acquisition. Westamerica barely lends. Averaging them would be silly, so I didn't.

I only read the press releases. The earnings calls and the 10-Qs will say more, and a release tells you what management chose to lead with.

The releases don't all say how much of the margin move came from cheaper deposits and how much from loan yields. I'm not going to guess.

And none of these releases says a word about hiring. The hiring read is mine, built on 25 years of watching what banks do after quarters like this one.

What I'd watch next

Next week's reports. Put each bank's margin change next to its loan growth, the same way I did here.

If you're a relationship manager at a bank with a rising margin and a flat book, your production numbers are worth more right now than they were in June. Write them down.

If you're a credit officer, ask how many relationships moved onto the watch list this quarter. That number tells you what your next 6 months look like.

If you're hiring for a production or credit seat in California, let's talk.

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