Most economic signals these days can be read two ways, so it's no surprise that a recent survey of community bank executives leaves just a little bit of doubt about the level of enthusiasm in their lending outlooks.
Sixty-two percent of banks expected loan demand to increase over the next year, up from 59% last quarter, according to a survey of more than 200 banks, nearly all of them with assets of less than $10 billion. It was conducted by Promontory Interfinancial Network, a provider of balance-sheet and liquidity-management products.
"We've had a continuous level of economic recovery, and we have a lot of pent-up demand," said Steven Reider, founder and president of Bancography. "Some corporations that were reluctant to borrow, now that the recovery has taken hold, have the confidence to borrow for expanding their operations."
Additionally, expectations of increases in funding costs and deposit competition fell to their lowest levels since the survey was started at the beginning of 2015.
"Confidence is up," said Darien Bates, director of content marketing strategy at Promontory. "Banks are still struggling with their net interest margins, but there is not the perception that loans will dry up. They are optimistic about loan demand."
That said, there's a sense deeper in the numbers that growth will slacken compared with this year.
Of the bank chief executives, presidents and chief financial officers who responded to the survey from July 21 to Aug. 4, 114 at banks with assets of $10 billion or below said they had seen a "moderate increase" in loan demand in the past 12 months and 28 had seen "a significant increase" in the same period.
When asked about the next 12 months, 122 predicted a "moderate increase" and nine predicted a "significant increase."
So Promontory took that to mean these executives anticipate loan demand continuing to speed up, but not quite as fast as before.
Factors such as global economics or the presidential election could be making them pause just a bit.
For instance, 60% of respondents thought the situation with the European Union would moderately worsen banking conditions in the U.S.
And roughly 40% of respondents said that the results of the Hillary Clinton vs. Donald Trump election will worsen the environment for banking. That number is up from just 7% a year ago.
"As the election has gotten closer, there's a general feeling that the two options are a real risk," Bates said. "The election is creating more questions than answers."
Bankers are likely assuming that Clinton, the Democratic nominee, will not take steps to lighten banking regulations adopted during the Obama administration while Trump's plans are "still a question in everyone's mind," said Lynn David, chief executive of Community Bank Consulting Services.
Many bankers may decide to simply vote for candidates in other races while sitting out the presidential race, he said. "I am getting the sense that neither presidential candidate is someone bankers want to say in one year or four years, 'Yes, I voted for them,' " David said.
It is important to note, too, that loan demand varies significantly based on region of the country, David said. Earlier this month the Federal Reserve Board released a report that showed that demand for business and consumer credit grew at a moderate pace overall but still varied widely by geography.
"The banks I work with continue to be cautiously optimistic," said David, who mainly works with institutions in the Midwest. "The Midwest is still a little slow. Real estate has crept up over the last five to seven years, but it hasn't turned around like some other areas."
Banks that operate in markets that are heavily dependent on oil are also feeling the squeeze. Uncertainty is having a negative effect on commercial loan demand for Regions Financial in Birmingham, Ala., said Chairman and Chief Executive Grayson Hall during a recent investor presentation. The $125.3 billion-asset company is seeing "healthy and steady demand for loan growth" in its consumer lending with balances up in every category, Hall said.
But the company is taking a careful approach to certain types of commercial loans, including investor real estate. Regions is "continuing to experience some softness in our commercial lending pipelines as customer sentiment in some areas continues to reflect less optimism and more uncertainty in the economy, and we have yet to see small-business owners fully return to the market with confidence to invest and expand," Hall said.
More than three-quarters of banks with less than $1 billion of assets said they were relying on commercial real estate to help drive loan growth. Heavy concentrations in CRE credits are drawing scrutiny from regulators, who have warned of potential weaknesses in this area.
There is more awareness around the need to diversify away from CRE, and some banks are working to expand their commercial and industrial loan portfolios, Reider said. Still, there are other banks content to build their CRE portfolios, despite facing criticism from analysts and others about the practice, he said.
Overall, banks have plenty of reason to be upbeat, Reider said. He pointed to several factors, including an unemployment rate hovering around 5% and a recent report from the Census Bureau that real median household income had risen the most in decades.
Webster Financial in Waterbury, Conn., is one of those producing strong loan growth and expects to continue to do so, executives said during a recent investor presentation. Last year the $25.1 billion-asset company posted record net interest income through higher loan balances that more than offset spread compression, Chief Financial Officer Glenn MacInnes said during the presentation. Demand was led by commercial credits, which had a compounded annual growth rate of 14%.
Two primary drivers — targeted geographic expansion into contiguous metro markets and the continued building of specialty business lines — are responsible for the loan growth, said John Ciulla, Webster's president.
"We've been able to sort of grow with a measured approach into markets outside of Connecticut, which are growing more quickly, and maintain good credit quality," Ciulla said.