US banks reported their lowest aggregate level of total assets in nearly two years as many backed off growth.
The industry reported $23.465 trillion in total assets in the second quarter, the lowest aggregate level since the third quarter of 2021. Since the start of 2022, the industry as a whole posted quarter-over-quarter declines in total assets in four of the six quarters.
In the second quarter, the industry posted a 1.1% decline in total assets sequentially, and banks with between $10 billion and $100 billion in assets saw the most pronounced decline.
The shift to shrinking balance sheets followed recent commentary from banks stating that growth is currently not a priority for a variety of reasons, including the high cost of funding, the potential downturn of credit quality metrics and looming changes to how risk-weighted assets (RWAs) are computed.
"It doesn't hurt to shrink a little bit and be lean and mean," Home BancShares Inc. Chairman, President and CEO Johnny Allison said on the company's second-quarter earnings call. "It's not the time to stretch. It is the time to be careful."
Home Bancshares reported $22.12 billion in assets at June 30, down 1.7% from $22.52 billion in the linked quarter and 8.8% from $24.25 billion one year ago. The company has consistently posted quarter-over-quarter declines in total assets for the past four quarters. It could grow if it wanted to, but is choosing to be conservative with its underwriting, multiple executives said.
"There's nothing wrong with keeping your head down," Allison said.
Midsize banks
Banks with between $10 billion and $100 billion in assets experienced the steepest sequential decline in assets. These banks had an aggregate of $3.320 trillion in total assets in the second quarter, down 6.3% from $3.545 trillion in the first quarter and down 5.6% from $3.516 trillion in the year-ago period.
PacWest Bancorp is among those with the largest quarter-over-quarter decline in total assets at 13.5%. After getting caught in the crosshairs of the bank failures in March, the bank set out to shrink to health, but has since announced a tie-up with Banc of California Inc.
First Foundation Inc. is actively working on shrinking its balance sheet, particularly on the lending side, to bring down its loan-to-deposit ratio, which stood at 97.95% at June 30, down from 106.15% at March 31. The company's total assets declined 5.7% sequentially.
First Foundation has cut back on multifamily lending to the point where it is nearly "nonexistent," and is instead focused on lending in areas such as equipment finance, Small Business Administration, and commercial and industrial, Vice Chairman, President and CEO Scott Kavanaugh said during the company's second-quarter earnings call.
"Anything else, we're just not really looking to do at this time," Kavanaugh said. "So the answer is [loan balances are] going to continue to shrink. We're hyper-focused on the loans-to-deposit ratio."
Eastern Bankshares Inc.'s total assets declined 5.0% quarter over quarter after it reduced its wholesale funding by $1 billion during the second quarter.
"While we expect the challenging environment to continue and potentially become more so over the next few quarters, we have taken steps to ensure that we are well prepared," Eastern Bankshares Chairman and CEO Robert Rivers said on the company's July 28 earnings call.
Large banks
Banks with more than $100 billion in assets had a less dramatic decline in total assets quarter over quarter. These banks posted an aggregate $16.714 trillion in assets in the second quarter, down 0.4% from $16.779 trillion in the prior quarter and down 0.8% from $16.853 trillion in the second quarter of 2022.
Some large banks are looking to shrink their RWAs as new capital rules that would change the way RWAs are calculated loom.
KeyCorp shrunk its RWAs by 1.5% quarter over quarter as part of its goal of shedding $10 billion of RWAs.
"We will continue to prioritize full relationships and exit non-relationship business and nonstrategic assets," KeyCorp Chairman, President and CEO Christopher Gorman said at a Sept. 12 investor conference. "Obviously, the number of businesses that are not returning at our hurdle levels just went up given that the amount of capital has gone up and cost of capital has gone up."
Among banks with over $100 billion in assets that posted quarter-over-quarter declines in assets, U.S. Bancorp had the largest sequential decline in RWAs. The company is working on optimizing its RWAs to meet its common equity Tier 1 ratio goal of between 8.5% to 9%, including accumulated other comprehensive income, Chairman, President and CEO Andy Cecere said Sept. 13.
"I think we and all banks are being very mindful of returns and RWA optimization," Cecere said.
