Can banks really make enough loans to counter margin pressure?
A large number of banks are trying to defend their margins by making more loans.
The median loan portfolio at small and midsize banks covered by Keefe, Bruyette & Woods grew by 5% in the second quarter, the investment bank estimated in a recent client note. That would be an acceleration from the 4% growth in the first quarter.
Several management teams have vowed to push for even more lending to offset margin pressure from rate cuts. The median net interest margin for small and midsize banks covered by KBW compressed by 4 basis points in the second quarter.
Bankers have warned that floating-rate loans will reset faster than deposits. Refinancing activity has also picked up, boosting volume but suppressing loan yields.
“We’re going to work to offset compression with asset growth,” Craig Dahl, CEO of the $47 billion-asset TCF Financial in Detroit, said in an interview. TCF recently completed a merger with Chemical Financial.
Pinnacle Financial Partners in Nashville, Tenn., will also look to generate more loans while it negotiates reset levels with important commercial depositors, said Harold Carpenter, the $26.5 billion-asset company’s chief financial officer.
“We anticipate loan growth to be low double digits for the remainder of the year based on current pipelines,” Carpenter said during Pinnacle’s recent earnings call.
Industry experts will be watching third-quarter results to see how banks manage their margins.
Expect a broad press for higher loan volume, Nathan Race, an analyst at Piper Jaffray, wrote in a recent note to clients, adding that banks that produce “above average” loan growth stand the best chance of preserving their margins.
Old Second Bancorp in Aurora, Ill., intends to be in that group.
Each rate cut could clip 3 to 5 basis points off of Old Second’s margin, Chief Financial Officer Bradley Adams said during the $2.6 billion-asset company’s second-quarter earnings call.
“Loan growth will become much more important for us with the outlook for short-term rates having changed, but we believe we have a significant opportunity in front of us on the growth side,” Adams said.
Banks will need to balance adding more loans while keeping an eye out for potential credit cracks, industry observers said.
“The competition is intense, and you don’t want to get caught up in that and start making loans that are going to come back and hurt you later,” said James Bradshaw, an analyst at Bridge City Capital.
The economy is still growing and default rates remain low. Those factors, and a lack of other tools to bolster margins, make a decision “drive volume … a reasonable strategy,” Bradshaw added.
ConnectOne Bancorp in Englewood Cliffs, N.J., is passing on some lower-yielding multifamily loans amid a push for more commercial-and-industrial relationships. The $6.1 billion-asset company’s margin narrowed by 4 basis points during the second quarter, to 3.30% on June 30.
“I believe competitive pressures will persist, but we do see positive signs and are taking steps to maintain our margin,” Frank Sorrentino, ConnectOne’s chairman and CEO, said during his company’s earnings call.
While competition is “fierce,” Kevin Cummings, chairman and CEO of the $27.1 billion-asset Investors Bancorp in Short Hills, N.J., said demand is strong enough for the banking industry to make more loans.
“Our pipeline is strong, and that’s positive,” Cumming said in an interview. “Everyone is looking for business assets. … People are looking to diversify their portfolios and get more of that core middle market client.”
“We're very confident we can offset [margin pressure] with growth and the pipelines we have and grow net interest income,” David Dykstra, chief operating officer of Wintrust Financial in Rosemont, Ill., said during his company’s quarterly call.
Increased lending efforts should help the $33.6 billion-asset Wintrust “be prepared for when the yield curve gets more favorable,” Dykstra added.