A bumpy financial road is prompting local banks to tap the brakes on lending.
- Banks are still making loans. However, they may not be as aggressive in courting new business.
- Nor are companies eager to add debt, with interest rates still elevated and the economic outlook uncertain.
- A quarterly survey of bank loan officers by the Federal Reserve found weaker demand for both commercial and consumer loans in the fourth quarter of 2023.
- “There are certainly fewer borrowers out there,” said Eugene Draganosky, CEO and chair of Traditions Bank, based in York Township, York County.
Why is this happening: A mix of factors are prompting banks to tone down their lending.
- One is a factor known as the cost of funds – what banks pay to attract depositors. Deposits help to fund loans.
- As interest rates rose over the last two years, banks had to pay more for deposits, which raised the cost of funds and squeezed the profit from making loans.
- “Banks’ cost of funds has risen at Olympic ski-jump levels,” said Jeff Marsico, president of The Kafafian Group, a Bethlehem-based bank consulting firm.
- At the same time, higher interest rates can make borrowers look less creditworthy, since they have to spend more to carry debt.
- Banks, in turn, might ask borrowers to put up more equity, Marsico said.
- “It’s not like they’re not lending,” he said of banks. “They just might be choosier.”
What’s the impact: A slowdown in the pace of loan growth.
- Traditions decided to curtail lending in the second half of 2023, in part over concerns about profitability, Draganosky said.
- “It’s a function of what the industry as a whole is facing,” he said.
- Traditions also is seeing lower demand for loans, both from consumer and commercial borrowers.
- “A lot of companies seemed to be on the sidelines last year,” Draganosky said.
Are there others: Yes.
- Also tempering its pace is Harrisburg-based Mid Penn Bank, which recorded organic loan growth at an annualized rate of 10.5% for the last quarter of 2023, down from an annualized rate of 22.9% for the final three months of 2022, according to financial statements.
- “That’s not really slow,” said Rory Ritrievi, Mid Penn’s chair, president and CEO.
- The numbers do not include loans added through Mid Penn’s acquisition last year of New Jersey-based Brunswick Bank and Trust.
- Still, he acknowledged that the bank is taking steps to moderate loan growth
- “How we’ll slow it down a little bit is, we don’t prospect as hard for new customers,” Ritrievi said.
- Ephrata National Bank also is tweaking its approach to lending this year, according to Craig Rodenberger, chief marketing officer of the Lancaster County-based bank.
- “We’re just not as aggressively looking for deals as we might have in the past. We may not price as aggressively as we have in the past,” he said
- But, he added, “We’re not shutting off the spigot entirely.”
- Indeed, the bank is aiming to match last year’s loan growth of 14.2%, which was down from a torrid 29.3% in 2022, according to financial statements.
- The 2022 results stemmed from a sales incentive plan and strong lending goals in place at the time, Rodenberger said. “That exceeded our expectations, quite frankly.”
What’s next: Bankers have their eye on several trends.
- One is their ability to attract deposits at reasonable rates.
- If rates start to come down later this year, it may be less costly to attract deposits and fund loans.
- At the same time, depositors may decide to shift savings to higher-rate accounts lest they miss out as rates fall, bankers said.
What about the economy: It’s another wildcard.
- Bankers are optimistic but wary about the outlook for this year.
- The economic news has been good, Marsico said. But, he added, “The economic news was pretty good prior to the 2008 financial crisis, too, so banks are being cautious.”
