Commercial loan demand finally picks up
William Demchak, president and CEO of PNC Financial Services Group
If there has been one consistent theme in banks’ fourth-quarter earnings results it’s that commercial-and-industrial lending is finally showing signs of a comeback.

C&I lending had slumped since corporate tax rates were slashed in late 2017 as part a federal tax overhaul — companies were saving so much in taxes that they didn’t need to take out loans — but bankers say that demand for loans began to pick up early in the fourth quarter and really accelerated in December.

The result: Regional banking companies such as Fifth Third Bancorp, SunTrust Banks, Zions Bancorp., Regions Financial and M&T Bank reported C&I loan growth in the mid-to-high single digits and executives said on fourth-quarter earnings calls that they expect the momentum to continue in 2019. East West Bancorp, Associated Banc-Corp and Signature Bank all said that their C&I portfolios expanded by around 12%.

It was an even stronger quarter for smaller banks, with institutions holding less than $20 billion of assets reporting an average increase in loan balances — driven largely by C&I lending — of 9.2% year over year, according to data compiled by FIG Partners.

Still, some bankers and industry experts are preaching caution.

Zions said in a slide presentation that competition from nonbank commercial lenders is increasing and could suppress loan growth this year.

There are plenty of rumblings, too, that some loan growth at some banks may be a result of the fact that they are relaxing standards in order to win deals. Old National Bancorp Chairman and CEO Robert Jones said on an earnings call that while structure and pricing are by and large “logical,” he is seeing “pockets of silliness” from some competitors.

Some large banks, including PNC Financial Services Group and JPMorgan Chase, are increasing reserves for loan losses partly to account for anticipated loan growth but also out of concern that credit quality could weaken.

Delinquencies and charge-offs are at or near historic lows but, as PNC Chairman and CEO William Demchak (above) said on the company’s fourth-quarter earnings call, “Things can’t stay this low forever.”
Deposit competition intensifies
Joseph DePaolo, president and CEO of Signature Bank
Robust demand for new loans is obviously good news for banks, but finding cheap deposits to fund those loans is arguably banks’ greatest challenge these days.

With interest rates rising, all banks are being forced to raise rates on savings products to attract and retain deposits, and the result is that funding costs in the fourth quarter increased by an average of 39 basis points from a year earlier, according to an analysis of earnings reports compiled by Sandler O’Neill & Partners.

Even so, deposit growth at many banks is unable to keep pace with loan growth, in part because customers are moving at least some of their money to online-only banks that are paying market-leading rates. SunTrust reported a 6% increase in loans year over year but only a 1% increase in deposits. It was a similar story at U.S. Bancorp.

Joseph DePaolo, the CEO of Signature Bank in New York, likened the deposit battle to “a steel-cage match.”

“I haven’t seen it this competitive in my lifetime,” DePaolo (above) said on the bank’s earnings call.

Historically, Signature’s strategy for adding deposits has been to hire teams of bankers in the New York metropolitan market with established customer relationships. To accelerate deposit growth at a time of increasing competition, it set up shop in San Francisco in mid-2017 and began hiring banking teams on the West Coast.

U.S. Bank is also eyeing new markets. Now freed from consent order that it had tied up capital and constrained its expansion plans, the company is ready to speed up its plan to add branches in markets in Texas and the Southeast, where it has no branches but many borrowers.

It plans to target consumers who may have a mortgage, car loan or credit card with U.S. Bank.
Beware of leveraged lending
Keith Cargill, CEO of Texas Capital Bancshares.
Leveraged lending poses a quandary for banks. It’s high-risk because borrowers tend not to have investment-grade ratings, but it’s potentially high-reward because the loans offer higher yields than other commercial loans and their floating rates tend to reset quickly when rates rise. Indeed, as demand for traditional commercial loans began to slow over the last couple of years, many turned to leveraged lending to help pick up the slack.

Now one bank is tapping the brakes.

Texas Capital Bancshares said Wednesday that while it is not exiting the business of leveraged lending, it plans to stop making new leveraged loans for the next year or two because credit quality is beginning to weaken.
In the fourth quarter, the bank increased its provision for loan losses to $35 million from just $2 million a year earlier, after charging off tens of millions of dollars of leveraged loans to companies in the health care, fast food and energy industries.

In an earnings call with analysts, Texas Capital CEO Keith Cargill (above) said that weakness in leveraged lending “began to rear its ugly head in the second quarter” and that the company would stop originating new leveraged loans “until the cycle runs its course.”

Now that C&I lending has rebounded, will other banks, similarly wary of leveraged lending, follow suit?
Fee income falls flat
Huntington CEO Stephen Steinour
We’re still only about halfway through bank earnings season, but the fee-income trends aren’t looking good.

In its analysis of 150 bank earnings reports, Sandler O’Neill found that fee income in the fourth quarter was down 0.6% from the third quarter and up just 1.8% year over. Median fee revenue among big banks has fallen while it’s been essentially flat at small banks, Sandler concluded.

One big reason fee income has been flat is that banks aren’t generating as much income from mortgage banking as they have in the past, as rising interest rates have slowed both refinancing and purchase activity.

Meanwhile, for a variety of reasons, sales of home loans on the secondary market are fetching lower premiums than they were in previous quarters, further suppressing banks’ fee income. At Huntington Bancshares, mortgage banking income was down 30% year over year because premiums on the sales of 30-year-fixed loans sold on the secondary market had declined by 61 basis points, to 1.74%.

It’s a similar story with Small Business Administration loans. With secondary buyers paying lower premiums, banks are opting to hold more SBA loans on their books, and that’s hurting fee income. At the $15.3 billion-asset Hope Bancorp in Los Angeles, noninterest income fell 14% year over year primarily because of an 81% decline on fees from sales of SBA loans.

Still, noninterest income tends to ebb and flow, so bankers are by no means panicking about lackluster fee growth. Fifth Third has bought several fee-based businesses in recent years and Chairman and CEO Greg Carmichael told American Banker that he is on the prowl for more.

And at Huntington, the decline in mortgage income was at least partly offset by the $4 million in revenue it generated from its subsidiary Hutchinson, Shockey and Erley, a Chicago-based municipal bond underwriter it acquired in August

“That $4 million was very, very helpful,” Chairman and CEO Stephen Steinour (above) said.
No slowing investments in digital
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Look for regional banks to continue spending heavily on tech upgrades in 2019.

BB&T, which has already spent roughly a $1 billion in recent years on a new data center, a new lending system and significant upgrades to its mobile banking, plowed roughly two-thirds of its savings from branch closings and job cuts in 2018 into technology projects, and executives told analysts to expect more of the same in 2019.

Chairman and CEO Kelly King said that the company expects to take roughly $100 million of restructuring charges year tied to branch closures and consolidation of office space.

“We’re investing a substantial amount of that [savings] in our digital platform and other … investments that allow us to innovate for the future, which is critical to our success,” King said.

Zions Bancorp. is in the midst of a multiyear replacement of its core operating system, and Chairman and CEO Harris Simmons (above) told analysts on its fourth-quarter call that all of its loan systems will be converted to the new modern platform within the first half of the year.

The Salt Lake City company is also rolling out digital mortgage and business loan applications this year, and early next year it will replace its mobile banking system, with a goal of improving the digital experience for 600,000 retail customers and 125,000 small-business customers and help it better compete with larger banks.

“Our new offering will position us well relative to our major competitors and close a number of gaps that exist today,” Simmons said.