Garnet Capital Advisors Blog

The Federal Deposit Insurance Corp. recently released its Quarterly Banking Profile, and this report contained data indicating that loan origination could increase sharply in the near future.

Many types of lending increase
Several types of lending ticked higher during the first quarter of the year, according to FDIC figures reported on by American Banker. Residential loans for multifamily properties surged 3.4 percent to $271.7 billion. Construction and development loans rose 2 percent during the period, increasing $4.4 billion to reach $214 billion.

Credit lines extended for commercial and industrial projects gained 1 percent to reach $1.6 trillion, the media outlet reported. The total value of automobile loans also improved, rising 1.8 percent to reach $359.6 billion.

Hope of higher loan origination
In terms of specific signs showing that bank lending could accelerate soon, Martin Gruenberg, chairman of the FDIC, noted in an opening statement that this most recent quarter was the first one in three years that banks did not see their loan balances drop.

During the period, this measure of debt enjoyed a 12-month growth rate of 3.6 percent, the government official noted.

Community banks enjoyed even stronger performance, as they experienced a 12-month growth rate of 6.7 percent in the quarter.

"Community banks have benefited most over the past year from the steeper yield curve, as their average net interest margin was up 4 basis points from a year ago," Gruenberg said. "In contrast, larger banks have increased their portfolio of lower-yielding, short-term assets and they saw their margins decline."

Impact of higher interest rates could be fading
In addition, even though the earnings of banks dropped, government officials said that the major cause of this decline was losing steam, according to American Banker.

Figures contained in the FDIC report showed that financial institutions generated $37.2 billion in profit during the period. This figure was 7.6 percent less than the same time in 2013. However, community banks fared far better, as their earnings dropped 1.5 percent from the first quarter of last year. These smaller institutions reported that their net income was $4.4 billion in the first three months of the year.

The FDIC report noted that interest rates have impacted the financial success of many lenders in the nation. These benchmark borrowing costs started moving higher about halfway through 2013, as market participants responded to Federal Reserve statements about the tapering of its bond purchases.

Government officials pointed to signs that the effect of these rising borrowing costs could be on the decline, the media outlet reported. In addition, Gruenberg said that community banks have received tailwinds by focusing on financial instruments with longer maturities.

"Community banks have benefited most over the past year from the steeper yield curve, as their average net interest margin was up 4 basis points from a year ago," the FDIC chairman said. "In contrast, larger banks have increased their portfolio of lower-yielding, short-term assets and they saw their margins decline."