Bank Loan Growth Weakening.

For the latest Federal Reserve H.8 reporting, banking industry loan growth weakening across industry.

Excluding seasonal credit card growth (would appear to be a good holiday season as credit card growth strong), loans at top 25 banks were actually estimated down from 4 weeks ago and up only 0.6% from one year ago. For Community Banks and all others, loans were up +2% annualized from 4 weeks ago and +7% growth from one year ago.

Is this a seasonal pause or sign of economic cycle slowdown? This expansion is heading into its 103rd month and nearing the second longest in U.S. history. 2018 results will provide answer.

On the deposit front, moderate growth (+4%) continued for both the top 25 banks and for Community Banks and all others. And all banks have lessened their use of borrowed funds at year-end approaches.

It is also noteworthy that the top 25 banks keep over 12 percent of their assets in cash balances compared to only 7 percent for Community Banks and others. This relates to the Liquidity Coverage Ratio that large banks must meet. 

Follow our banking data and analysis at our Bank Analytics and Banking Dashboard sites.

Recent M&A Activity and Impact Community Banks

The topic of "too many banks" has been in the news recently. So let's look at what has happened to the number of banks in the U.S. over the past twelve months.

The banking industry continues its ongoing transformation. Consolidation through mergers and acquisitions is occurring. On a rare occasion new banks are chartered. And a few banks have failed.

Community Banks remain key participants in the industry evolution. For this blog discussion, we will use $10 billion in total assets as the limit for defining a Community Bank. This makes the analysis easier, but size alone is not the best means to define a "Community Bank".

Today, there are 5,737 banks in the U.S. and 5,612 are Community Banks under $10 billion in total assets. Over the past 12 months, there have been 3 new banks started, 7 banks have failed and there have been some 240 bank mergers and acquisitions. The total number of banks dropped 4 percent over the last twelve months.

The chart below shows net change in the number of banks by bank size segmented by total assets.

All of the net reduction in aggregate numbers of banks occurred in Community Banks with total assets of less than $500 million. This was a net reduction of 285 banks, or 6 percent. There was net growth totaling 30, or 2 percent, for Community Banks between $500 million and $10 billion in total assets. This increase was due to some combination of organic growth and acquisitions (and net of 2 bank failures).

Over the past twelve months, there has been a net decrease in the number of banks by 244. The net reduction in number of banking organizations was concentrated across 12 states where the number of bank charters dropped by 145. Illinois had the largest decrease in banks at 21. Six other states - Kansas, Florida, Wisconsin, Texas, Missouri and Kentucky - had declines of 10 or more.

Community Banks continue to flourish and serve local markets - many small and rural communities- across the U.S. While there was a decrease in the number of Community Banks over the past twelve months, there remain over 5,600. The table below shows the top 10 states with Community Banks segmented by bank asset size. Several states have sizable concentrations of Community Banks with less than $500 million in total assets, including Illinois, Texas, Iowa, Minnesota, Wisconsin, Missouri, Oklahoma and Kansas.

As you progress through the table upward in total assets from “< $100M”, you will notice the “green” year-over-year growth rates showing up across many of these states. This shows the dynamic growth that is occurring across Community Banks. They are successfully executing on their strategic plans. Community Banks are achieving growth organically in loans and deposits through sales and service. And Community Banks are showing their expertise and merger readiness in carrying out their acquisition plans. 

While their numbers may be down from one year ago, Community Banks continue to grow, prosper and serve their customers. 

Mediocre Year for Your NFL Teams, But IL, IN, MI & WI Banks Doing Well!

Bears, Colts, Lions & Packers having tough years? Your banks in Illinois, Indiana, Michigan & Wisconsin are performing well - experience paying off; no reported injuries; no rebuilding year here!

With third quarter FDIC call reporting complete, profitability is solid, loan and deposit growth continues, loan quality indicators holding up, capital ratios are strong and most banks have fortress balance sheets. Banks in Illinois, Indiana, Michigan and Wisconsin executing well on their strategic playbook this year!

And loan and deposit growth has been solid across Community Banks of all sizes. Performance of the banks has tracked with the economic performance of these states. No "Hail Mary" passes. Just sticking to the playbook: conservative play calling on the offense and a fortress defense in capital and risk management.

For more information on the community banking industry, click to Midwest Bank Performance Dashboard. For information on the economies in Illinois, Indiana, Michigan and Wisconsin, click on Economic Dashboard. And for additional updates on the Community Bank performance, click on Banking Industry Dashboards.

Rising Housing Prices - Econ 101 Supply & Demand Factors Out of Whack?

Below is our monthly Housing and Mortgage Finance Dashboard (click on image for PDF version). The Dashboard provides a near-term comparison (change from 3-months and 1-year ago) and longer term perspective (change from peak and trough since 2000) on the state of the U.S. housing sector.

The longer term historical perspective: housing sector recovered significantly from the depths of the Great Recession but remains well below pre-crisis levels.

The recent performance: housing sector has generally been solid with some recent mixed results in housing starts and home sales, but may be hitting plateau.

There is one area within the housing sector that has not slowed - home prices.  The median home price is up over 6 percent from one year ago and within one percent of the pre-crisis peak. Home price increases across the U.S. vary dramatically by market - ranging from 3% to nearly 13%. Econ 101 tells us that this is all caused by supply and demand factors - and these are out-of-balance.

This table shows the HPI for each of the three sale price tiers for these metropolitan markets. Data is compiled by S&P Case Shiller and was sourced via FRB St. Louis FRED economic data service. Let’s focus on the tier identified as “Low Tier HPI”, which is the lowest one-third of home sales by price.

This table shows the more dramatic uptick in home prices in the lowest price tier and clearly reflects a serious imbalance between available supply of homes and the demand for these more entry level homes.

Perhaps a visual aid in the form of a graph will more readily show this point. This graph for the Portland area shows the three tiers: Low (Green), Mid (Blue), High (Red) and U.S. median (Black). Note the severe steepness and height of the Low Price Tier line. In simple terms, housing demand factors are significantly out of line with housing supply factors in this home sales price segment.

Demand factors are primarily driven by national influences. Mortgage interest rates are driven by macro and national factors. Mortgage loan down payment requirements are influenced by Fannie, Freddie and FHA guidance. Similarly FICO and loan-to-income requirements typically are more national in scope. And historically, national tax policy has influenced demand for housing with tax deductibility of interest and state & local property taxes. Population change and migration have both national and local influences. Perhaps, the most important demand factor is job growth (or lack of growth).

Supply factors are more local - builder capacity in each local market, labor and materials availability and local zoning and permit requirements. Supply of homes for sale is a factor. In some local markets, this is impacted by homes with negative equity that do not go on the market. Supply factors will further vary or be more constrained in smaller towns and rural markets compared to metropolitan markets. Even bank capital regulations and proposed regulations can influence supply.

This imbalance in supply and demand factors shows up significantly in the lower home price tiers reported by S&P Case Shiller. All of these MSAs have year-over-year price increases above the U.S. median of +6% for all homes. Seven of these MSAs have double digit price appreciation. Las Vegas was over 16%; Tampa was over 14% and Seattle was over 13%.

Four MSAs are now significantly higher than their pre-crisis peak in housing prices. Seattle is 11 percent above its prior peak. Boston is more than 15 percent above its peak. Portland is nearly 35 percent above its previous peak. And Denver home prices for this price tier has soared 70 percent higher than its peak.

The current housing market has a different feel to it compared to the market just prior to the collapse in housing prices in 2007 or so. There does not appear to be any poorly structured or underwritten mortgage lending (non-QM) exacerbating demand (nor setting stage for collapse if economy falters and unemployment jumps). Economy remains solid. No eminent housing bubble is foreseen.

This is not a short-run issue that will go away; it is a longer-term issue. If housing supply imbalance is the critical path, this may be the most difficult to resolve. Over the long term, bringing housing supply across the large number of local markets into balance with housing demand is paramount.

This will require leadership at the regional and local levels - and at the federal / national levels. It will require a new or renewed U.S. vision on housing policy.

For our analytical reporting on the housing and mortgage finance sectors, go to this link: Housing and Mortgage Finance. For a PDF version of our monthly report, click on Regional Housing Price Trends.

Community Banks Continue Showing Solid Loan Growth & Loan Quality.

Community Banks continue to show solid, but moderating loan growth as implied in Federal Reserve H.8 weekly report. Loan portfolios up nearly 5 percent annualized compared to the top 25 largest banks showing only +1 percent annualized over latest 4 weeks.

Residential mortgage portfolios up 9 percent annualized at small banks while largest banks have shown modest decline. Similar story for construction and commercial real estate loans - down at largest banks while up at all other banks.

Deposits growth continues across industry with both largest banks and all other banks showing equivalent of 8 percent annualized growth.

And as we continue late in the U.S. economic cycle - now at 102 months in length, loan quality remains solid across the banking industry as of Q3 FDIC call report cycle. Loan charge off ratio at largest 25 banks was 51 bps compared to 18 bps at community banks and all other banks. Similarly +30 day delinquency ratio remains relatively low with community banks and other banks showing 1.33% compared to 1.93% for largest 25 banks.

As 2018 nears, do your operating plans suggest a more modest growth environment for lending? Do you anticipate continued moderate growth in deposits? And do you see loan quality holding through the year?