Garnet Capital Advisors Blog

October 6, 2017

Banks Are Lending: Paced by Community Banks

Excerpt:  The second quarter was strong at smaller banks, with C&I portfolios rising 3.4% versus the prior quarter. Some areas of the country were particularly strong. Loan growth in Wisconsin, for example, grew 5% in the second quarter over the year-prior period. The strength is expected to continue despite a projected increase in interest rates. The overall strength is also indicated by a recent report indicating that a decades-long rise in the loan-to-deposit ratio at smaller banks, to the 80% range, is likely the new normal, and not a risk to their safety or soundness.

Loan growth at community banks is rising, especially in certain sectors. Banks with from $1 billion to $10 billion in assets registered a median growth of 3.4% in their commercial and industrial (C&I) portfolios during the second quarter of 2017 versus the year’s first quarter, for example. The pace for community banks overall was 1.9% in the quarter, while loan growth at larger banks was muted. 

C&I portfolios are driving loan growth at community banks.

Multifamily lending growth was also relatively strong at community banks, at 1.5% for the quarter versus the previous quarter. 

Strong Pace for Community Banks in Second Half of Fiscal Year Projected

Not only was the pace strong for community banks in the second quarter, but analysts believe it will continue. An observer at Keefe Bruyette & Woods, for example, sees high single-digit growth for banks of this size throughout the second half of the year.

In some sectors of the country, growth was exceptionally strong across the board. In Wisconsin, for example, lending advanced 5% year over year. Total loans in Wisconsin during the first half of the year hit $80.3 billion versus nearly $77 billion in the year-prior period.

Banking observers pointed out that there is a good economic picture that can continue to drive loan growth, especially when coupled with an interest rate environment that, despite expected ongoing hikes in the Fed funds rate, is still low by historical standards. 

In fact, despite several hikes to the Fed funds rate, long-term rates have actually declined, according to the senior portfolio manager and investment managing director at U.S. Bank in Milwaukee, Joel Huffman.

Higher LTD ratios are a new normal in banking.

Higher LTD Ratios a “New Normal”

The expansive picture is not undercut by an overall long-term banking trend that at one time would have been thought of as a risk: the average high loan-to-deposit ratio (LTD). 

A report from the Federal Reserve Bank of Philadelphia points out that the average LTD ratio for smaller banks is currently 80% versus 60% several decades ago. (For larger banks, the ratio is 85%.) Does this signal rising risk?

The report’s conclusion is that the increase has occurred for long-term reasons which are likely to continue. This includes the growing size of smaller banks and banks’ access to Federal Home Loan Bank (FHLB) funds to supplement their core deposits. 

The authors conclude that LTD ratios in the range of 80% are likely the “new normal” going forward.

Let a Seasoned Loan Sale Advisor Help

Banks are now lending again at a pace expected to continue. They are looking for good loans. Garnet can help if your institution is looking to add high-quality short-term assets that contribute to insulating the bank from climbing long-term interest rates. Let a seasoned loan sale advisor make your portfolio stronger. Sign up for our newsletter today.