Senior Loan Officer Opinion Survey
By: Stephen Rountree
The Federal Reserve recently published their July 2018 Senior Loan Officer Opinion Survey. The survey encompassed 72 domestic banks and 22 U.S. branches and agencies of foreign banks. The survey included a question regarding the “range over which their lending standards have varied from 2005 to the present, and where the level of standards on such loans currently resides, relative to the midpoint of that range”.
Overall, respondents indicated a continuation of underwriting standards for most loans. Of note, some respondents indicated they had eased their standards and terms on commercial and industrial (C&I) loans: “moderate net shares of banks increased the maximum maturity of loans, reduced the cost of credit lines and premiums charged on riskier loans, and eased loan covenants on such loans”. The reasoning for easing standards should be noted: “banks that reportedly eased standards or terms on C&I loans over the past three months cited increased competition from other lenders as a reason for easing”.
While we are currently operating, as based on the previous decade, within the ‘best of times’, competition should not be the driving force to lessen underwriting standards or allow exceptions to bank policy.
Quarterly Banking Profile
The most recent issue of the FDIC’s Quarterly Banking Profile reported continued improvements in industry performance. The QBP contained indicated increasing loan loss reserve provisions. Of note the 3% increase (year over year) was “due to higher net charge-offs, and a growing loan portfolio”. Encouragingly, charge-offs, have overall remained at ‘normal’ levels – 0.50%. Roughly 43% of all banks indicated a year over year increase in net charge offs. Loss reserves represented 110% of non-current loans.
As indicated by general past due data, it would appear industry asset quality continues to improve. Non-accruals and 90+ day past dues were 3.4% lower than the previous quarter. The following chart details various past due data as based on bank size as well as region:
- Current lending standards on all categories of C&I loans remained at levels that are at the easier ends of their respective ranges since 2005
- CRE lending standards for domestic banks, within most major categories, are reported at levels at the tighter ends of their ranges since 2005
- Banks reported that current lending standards are tighter than the midpoints on construction and land development loans and on loans secured by multifamily residential properties
Overall, respondents indicated a continuation of underwriting standards for most loans. Of note, some respondents indicated they had eased their standards and terms on commercial and industrial (C&I) loans: “moderate net shares of banks increased the maximum maturity of loans, reduced the cost of credit lines and premiums charged on riskier loans, and eased loan covenants on such loans”. The reasoning for easing standards should be noted: “banks that reportedly eased standards or terms on C&I loans over the past three months cited increased competition from other lenders as a reason for easing”.
While we are currently operating, as based on the previous decade, within the ‘best of times’, competition should not be the driving force to lessen underwriting standards or allow exceptions to bank policy.
Quarterly Banking Profile
The most recent issue of the FDIC’s Quarterly Banking Profile reported continued improvements in industry performance. The QBP contained indicated increasing loan loss reserve provisions. Of note the 3% increase (year over year) was “due to higher net charge-offs, and a growing loan portfolio”. Encouragingly, charge-offs, have overall remained at ‘normal’ levels – 0.50%. Roughly 43% of all banks indicated a year over year increase in net charge offs. Loss reserves represented 110% of non-current loans.
As indicated by general past due data, it would appear industry asset quality continues to improve. Non-accruals and 90+ day past dues were 3.4% lower than the previous quarter. The following chart details various past due data as based on bank size as well as region:
Trends in SHP & Co. client data seems to mirror that within the overall industry. Please refer to the newsletter’s graphs and asset quality details. The QBP reflects a 3% decline in the number of banks on the FDIC’s ‘Problem Bank List’ – currently 92% as compared to 95% previously.