Sometimes you have to really think about something before it sinks in because it sounds so unusual. Take for instance the oldest known animal life on earth - the mighty sponge. This amazing animal lives all over the world and there are some 10k known species, so it is plenty adaptable. For further edification, it has also lived roughly 75mm years longer than land plants, 250mm years longer than insects, 520mm years longer than flowers and 649mm years more than the first humans ever showed up (according to the Discovery Channel). So, the next time you are cleaning dishes in your sink, behold the humble yet interesting sponge in your hand covered in soapy water. Oh yea, we are also pretty sure the green scrubby thing on the top in this picture isn't entirely sponge-related. Sponges are successful because they have adapted to changing conditions and the same certainly holds true for community bankers.
We took a look at information compiled by the Federal Reserve Bank of San Francisco from 2Q Preliminary Call Reports to see what we could garner. While the data was focused only on the 12th FRB District, it is important to note that in broad terms, the industry mix mirrors that of the rest of the nation, so the data is worth a look for all bankers trying to monitor trends and risks. The 12th District includes 9 states (AK, AZ, CA, HI, ID, NV, OR, UT, WA) plus American Samoa, Guam and the Commonwealth of the Northern Mariana Islands (we have not been there yet, but hear it is nice this time of year). The 12th District is also the largest of all FRB districts and it accounts for roughly 35% of the country's geographic area, 20% of the population, generates 21% of total personal income and is responsible for 21% of the country's exports.
Looking at 2Q loan origination in the district, contraction continued at a -5.6% annualized rate. While that was slightly better than the 1Q annualized drop of -6.1%, the data shows banks have been shrinking loan portfolios since approximately the 3Q of 2009 to preserve capital. In all, total loans outstanding for this region are down 7% from the peak.
Another cut of the data by CAMELS rating classification, finds 4 & 5 rated banks sharply reduced loans (quarterly annualized loan growth rates) during 2Q by -22%, 3 rated banks shrank loans outstanding by 7% annualized, but 1 & 2 rated banks grew loans by 5%. By sector, the growth came in multifamily (+8%), credit card (+5%), nonfarm nonresidential CRE (+3%) and home equity (+2%). Of note, the report also warned that the only major loan categories still weakening were multifamily and nonfarm nonresidential, so this good news story also has a potentially darker side to it (so bankers should take note of that).
In an alternative "stressed" view utilizing a 2Y adverse case Supervisory Capital Assessment Program (SCAP) stressed loss rate analysis by sector, net charge off rates were projected to be the best/lowest in 1-4 family and C&I lending (best categories identified under this test to originate loans) and the worst/highest in credit cards, construction/land development and multifamily (increase diligence and care in these sectors to avoid potential future issues). While the SCAP test is only one type of analysis and obviously regional factors, along with differences in bank underwriting (plus many other factors) can make a huge difference in actual loss rates; it does provide a rough estimation of where additional issues could surface by lending sector sometime down the road.
While this data was preliminary, it does show areas of stress remain in the industry, but banks also appear to be slowly recovering and some sectors are doing better than others. Based on this preliminary 2Q data, bankers seeking to grow assets, but worried about future risk exposures, may want to consider allocating at least some lending dollars to the single family and C&I sectors (while still being extra careful about dollars lent in credit cards, construction and multifamily).
Finally, as with the sponge, adapting to change is now the new normal for community bankers these days. Ever-changing conditions have forced both the sponge and community bankers to continue to adapt to survive and thrive.