The federal government shutdown's toll on an already challenged financial services industry was evident in the latest American Banker Index of Banking Activity.

The October index was 54.6, down from 55.8 in September. It was the monthly index's fifth straight decrease and its lowest mark since January.

The shutdown, which lasted 16 days in October, caused delays in processing U.S. Small Business Administration loans and verifying income for mortgage originations.

Bankers are worried that Washington's refusal to find a definitive solution to budget and debt ceiling issues will continue to spook potential borrowers. Lawmakers kicked the can down the road, authorizing government spending until Jan. 15 and raising the debt ceiling through Feb. 7.

"It creates hesitancy," John Asbury, head of business services at Regions Financial, said at a conference last month in Boston. "I'm sure we'll begin hearing about the next debate and people are going to be concerned about whether we end up shutting the government down again."

Consumer loan applications fell in October to a sub-index reading of 49.7, marking its first decline in consecutive months since the index began in June 2012. Approvals for consumer loans also fell for the second straight month, to a 49.4 reading. A summer spike in long-term interest rates dampened refinancings.

Commercial lending continues to expand, though at a slower pace. The reading for applications was 53.4, while approvals came in at 52.8. Pricing trends for commercial loans were less favorable for banks; October's 49.8 reading indicated that rates on new originations were lower than those from a month earlier.

Index readings above 50 indicate a monthly expansion of activity, and readings below 50 point to contraction. For contrary indicators, such as the components that track loan delinquencies and loan-rejection rates, a reading above 50 is considered evidence of deterioration in business activity. The further from 50 a reading is, the stronger the indicated change.

Bankers are relying on increased commercial lending to counter downward pressure on yields — and net interest margins. Still, some bankers stress that the most creditworthy prospects are not applying for loans.

"We're seeing more caution from strong borrowers," Frank Gavigan, chief executive of Premier Commercial Bank in Greensboro, N.C., said during a presentation to business owners last month. "Those businesses aren't borrowing — they are paying us off."

"The environment remains challenging, particularly with respect to interest rates," Tayfun Tuzun, chief financial officer at Fifth Third Bancorp, said during last month's Boston conference. "Our loan production and resulting balance sheet growth have helped to offset margin compression and generate relatively stable net interest income results."

A need for loan growth is pushing banks in certain markets to relax standards, bankers say.

"In places like Chicago, the competition over the last six to nine months has gotten quite fierce," Phillip Flynn, CEO of Associated Banc-Corp said during the Boston conference. "That has manifested itself with structures that are loosening very rapidly and pricing that doesn't pay you for taking that risk."

Banks continued to hire, as evidenced by October's 50.7 reading. And bankers' overall view of market conditions, based on a 52.9 reading, remained positive.

The IBA is a product of American Banker's monthly surveys of bank executives. The diffusion index is published in partnership with VantageScore Solutions. The latest installment was based on 277 responses.

The IBA's composite index is a simple average of readings on a range of indicators based on responses to survey questions on topics that include volume and pricing trends in commercial and consumer lending, loan balances outstanding and deposit-account activity.

Respondents are also asked to weigh in on staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every effort is made to ensure that the breakdown of companies included in the executive panel is representative of the industry.

The values for individual components of the index are equal to the percentage of responses indicating increased activity plus one-half of those indicating "no change."

Component scores are then averaged to arrive at a composite. When calculating the composite, contrary indicators such as delinquencies are scored inversely — the component figure is subtracted from 100.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.