Is community banks' loan growth too much of a good thing?
Community banks are booking loans at a faster clip than their bigger competitors.
Total loans at publicly traded banks with assets of less than $20 billion rose 9.2% in the fourth quarter from a year earlier, based on Jan. 18 data compiled by FIG Partners. Publicly traded banks above that threshold have reported a 2.7% increase in loans.
Organic loan growth at small banks has "been very good," said Christopher McGratty, an analyst at Keefe, Bruyette & Woods. He said the results should help address investors' worries about the partial government shutdown, a potential recession, trade disputes and rising interest rates.
At the same time, those risk factors create a need to pay more attention to pricing and structure.
“Most banks have indicated for some time now that underwriting standards have loosened, but I think, for the most part, memories of the prior recession are still relatively fresh," said Joe Fenech, an analyst at Hovde Group. "I’m not seeing terms and conditions approach what we saw in the years leading up to the 2008 recession.”
Bankers are hopeful that the industry remembers what happened a decade ago.
While Old National Bancorp has witnessed some "pockets of silliness" from competitors, Robert Jones, the Evansville, Ind., company's chairman and CEO, said during a Tuesday conference call to discuss quarterly results that "for the most part, structure and pricing is logical."
With that in mind, a number of community banks have steered guidance to mid-single-digit loan growth this year.
That's the view of executives at Independent Bank in Rockland, Mass., where total loans rose by 8.7% from a year earlier, to $6.8 billion, spurred by gains in commercial and industrial loans, small-business lending and residential mortgages. Net charge-offs totaled $142,000 in the quarter.
“Loan and deposit growth, barring significant competitive changes, should be in line with the recent experience of mid-single-digit growth and generally consistent with economic growth,” Robert Cozzone, Independent's chief financial officer, said during a Jan. 18 conference call to discuss quarterly results.
To be sure, Cozzone introduced a number of caveats.
"We are well aware that none of this comes easy and the bar keeps getting raised given the many challenges facing our industry," Cozzone said. "Competition for loans remains intense. ... New entrants such as the fintechs are encroaching. The pace of technology changes are relentless and the macro environment is a bit uncertain."
Executives at the $19.7 billion-asset Old National noted that its loan growth was hampered by a large number of payoffs and commercial real estate loans being refinanced in the secondary market. Overall, total loans rose by 10%, to $12.2 billion, largely reflecting the November acquisition of KleinBank, which had $1 billion in loans when the deal closed.
Bankers, by and large, continue to crow about credit quality, though most are looking at certain segments for potential cracks. CRE appears to be the main area of concern, though it depends on the type of project.
Old National is keeping an eye on senior housing, retail and certain multifamily segments, Jones said.
Another area to watch is loan yields, as competition heats up for deposits and potentially puts pressure on net interest margins. This will only draw more attention to loan structure.
About 60% of the $7 billion in loans at Eagle Bancorp in Bethesda, Md., have variable rates, CEO Ronald Paul said during a Jan. 17 earnings call. He cautioned that the $8.4 billion-asset company's ability to increase loan yields faces pressure from an "increasingly competitive" environment.
"We are also strategically shifting the mix of the loan portfolio over time to increase the percentage of income-producing CRE loans and C&I loans," Paul said during the call. "We are moving towards the strategic portfolio composition we believe will maintain the correct balance of yield, credit quality and duration."
Paul Davis contributed to this report.