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2024 CFO Conference

May 15, 2024

Little Rock

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ACB urges farm bill passage with key priorities

ICBA and ACB, along with 40 other state community banking associations, urged the House to advance a new farm bill with key recommendations to support rural lenders and their farm and ranch customers.

With action on a farm bill expected in the House this spring, the groups urged House members to ensure the next farm bill:

• Raises USDA guaranteed loan limits.
• Includes the bipartisan USDA Express Loan Act (H.R. 5877) to speed up approval times for USDA loans.
• Excludes proposals to expand Farm Credit System nonfarm business lending authority.
• Ensures any FCS exemption from the Consumer Financial Protection Bureau’s 1071 rule applies equally to community banks.

We continue urging you to use ICBA's Be Heard grassroots action center to contact your members of Congress and urge passage of the farm bill with these policy priorities.

Source: ACB; ICBA

Banks set to report soft lending and firming deposits for Q1

Loan growth at US banks stayed weak in the first quarter while deposits resumed year-over-year expansion as banks prepared to report financial results for the period.

Loans across domestically chartered banks rose 0.8% from Dec. 27, 2023, to March 27, extending a trend of anemic growth that has persisted for several quarters amid high interest rates and tighter standards, according to the latest weekly, seasonally adjusted data from the Federal Reserve. Loans were down 0.5% without seasonal adjustment, and commercial and industrial loans declined on either basis.

The weakness poses a risk to optimism about a rebound in net interest income later this year. Projections for a turnaround in lending "will have to start materializing soon," Piper Sandler analyst R. Scott Siefers said in a note April 7. "Our concern is that pushed-out rate cut expectations (which will not help the cost to borrow) and lingering geopolitical concerns could keep customers on the sidelines for new credit."

However, deposit trends continued to improve, with domestic banks showing seasonally adjusted growth of 1.1%, and returning to year-over-year growth during the week that ended March 13 for the first time since late 2022. Deposit pressures have eased after what appears to be the Fed's final rate increase for the cycle in July 2023.

Source: S&P Global Market Intelligence

CD concentration highest in decade

Certificate of deposit balances at US banks jumped by more than a trillion in 2023, with concentration reaching its highest level in about 10 years amid growing rates in the market.

In aggregate, certificate of deposit (CD) balances at US banks climbed to $2.870 trillion in the fourth quarter of 2023, up 6.9% from the previous quarter and 68.0% year over year, S&P Global Market Intelligence data shows. While the CD balances continued to rise, the rate of growth has slowed since increasing 24.8% in the first quarter of 2023.

The CD concentration rose to 15.3% at the end of 2023, the highest level since the second quarter of 2013, with total deposits increasing 1.4% during the period after declining for six consecutive quarters.

The CD concentration dropped to 6.3% at the end of the first quarter of 2022 as deposits from the pandemic stimulus pushed the noninterest-bearing deposits concentration to 28.9% at the end of 2021 when the rates were low. The Federal Reserve's rapid increase in rates to curb inflation helped bring the noninterest-bearing deposits concentration down to 21.8% as of Dec. 31, 2023, the lowest in the last decade, as customers began moving their money more aggressively into higher interest paying accounts.

Source: S&P Global Market Intelligence

Community banker confidence improves

Community bankers are slightly more confident in future economic conditions but still have concerns, especially about regulatory burden, according to the latest Community Bank Sentiment Index from the Conference of State Bank Supervisors.

The CBSI increased by 6 points in the first quarter to 98 points, its highest level in two years. This is the third consecutive quarterly increase, though the index remains below the neutral level of 100 points.

Source: Conference of State Bank Supervisors

Banks will trade liquidity pressures for higher credit costs

Liquidity pressures should ease in 2024, but bank managers will face a new headwind in the form of higher credit costs, resulting in a modest hit to earnings, according to the 2024 US Bank Market Report.

Deposits remain firmly in focus, even with interest rates expected to fall in the second half of 2024. Customers continue to shift funds into higher-cost products and demand higher rates for their funds, while regulators are encouraging banks to hold more liquidity, leading to pressure on net interest margins. That pressure will eventually subside but will be replaced by higher credit costs, particularly as banks begin to recognize losses on their commercial real estate portfolios and reserve for future problems. Still, much of that reserve build will occur in 2024, allowing US bank earnings to rebound strongly in 2025 and 2026 as provisions for loan losses decline and become a much smaller headwind to earnings.

Credit costs remain historically low for the banking industry, and institutions continue to see minimal stress in their borrowing base. However, borrowers will begin to feel the impact of substantially higher rates, particularly in the commercial real estate (CRE) segment, resulting in higher credit losses.

While we do not expect considerable deterioration in credit quality, we anticipate greater delinquencies and charge-offs in the future. Banks have tried to prepare for slippage by tightening lending standards and building reserves for loan losses. We expect relatively slow loan growth in 2024 as institutions approach new originations more cautiously. Rising funding costs could also give some banks pause to grow their balance sheets notably, but many banks are also putting less cash to work in the bond market as they seek to remain liquid. We also expect banks to continue to build reserves as they work to shore up their balance sheets to clear any potential hurdles ahead.

Source: S&P Global Market Intelligence

Commercial real estate reserves spike

Banks have jacked up commercial real estate credit loss allowance ratios by nearly a third over the past year as they start absorbing losses on office loans and contend with emerging questions about the multifamily sector.

Reserves to commercial real estate (CRE) loans were 1.56% across the industry in the fourth quarter of 2023, 4 basis points higher than the previous quarter and 33 basis points higher than the year prior, according to data from S&P Global Market Intelligence. Those were the biggest increases by far across individual loan categories for which regulatory data is available, with the overall credit loss reserve ratio on the same basis down 1 basis point from the previous quarter and up 11 basis points from the prior year to 1.81%.

New York Community Bancorp Inc.'s recent troubles, which included a large reserve build driven by loans backed by office and multifamily properties, reignited concerns about CRE exposure. The KBW Nasdaq Regional Banking Index fell 6.7% in the first quarter this year, though the KBW Nasdaq Bank Index, which comprises large-cap names, gained 8.2%. Large banks have substantial CRE portfolios, though they generally make up much smaller proportions of their loan portfolios than at small banks.

After the reserve builds, however, many banks have expressed confidence that they are prepared for write-offs headed their way, and that strains in multifamily will come nowhere close to the pain in the office sector. "I think we will eventually use the reserve, not replenish the reserve as we go through this," Wells Fargo & Co. CFO Michael Santomassimo said in February.

Source: S&P Global Market Intelligence

"Creep of Consolidation"

Consumer Financial Protection Bureau Director Rohit Chopra flagged the impacts of the "creep of consolidation" across the banking sector on the lives of community members, in a speech at a National Community Reinvestment Coalition conference.

Chopra urged banks to seek M&A deals that fill the needs of the community members they serve, rather than only aiming to meet regulatory requirements, and touted the FDIC's proposed revisions to the Bank Merger Act, which would require banks to prove the benefits of a merged entity for the broader community.

"The community should be better served by the combined institution, not just shown that it won't be worse," Chopra said. "We have to have answers to the questions: Does the merger address the gap or unmet need in the community? Will the merger improve the product services and delivery channels the community already has or doesn't have now? In other words, is there any benefit at all?"

Federal Reserve Vice Chair for Supervision Michael Barr said in remarks at the same conference that the Fed is not planning a similar merger proposal.

"We have, I think, a pretty robust process that follows our existing guidelines in this area," Barr said. "We are working with the other bank agencies and the Justice Department to see whether those should be updated, but that's work that we're thinking about on an interagency basis rather than just us doing something."

Source: CFPB; FDIC; Federal Reserve

Agencies release call report materials

Federal regulators released materials for submitting first-quarter call reports, which are due by Sunday, May 5.

• There are no new data items for the FFIEC 031, FFIEC 041, or FFIEC 051 call reports for this quarter.
• The agencies are implementing revisions to several call report schedules to reflect the Financial Accounting Standards Board’s update on measuring credit losses.
• The supplemental instructions include an entry on the FDIC’s special assessment final rule.

Source: FDIC

Small-biz optimism index lowest since 2012

The NFIB Small Business Optimism Index decreased by 0.9 in March to 88.5, the lowest level since December 2012. This is the 27th consecutive month below the 50-year average of 98, with inflation ranking as the top business problem.

Source: National Federation of Independent Business