Uncertainty over a U.S. trade war with China and other countries looms large, with fallout effects potentially severe for farmers and some manufacturers. Deposit costs are climbing and mortgage operations are stagnating in a rising interest rate environment.
But, while there are pockets of discontent, community bankers say that, broadly, their commercial clients are upbeat about their growth prospects for the remainder of 2018. Many of them are borrowing to invest in expansion efforts, fueling loan demand. And banks are comfortable extending credit amid strong economic conditions. These were early themes to emerge from second-quarter earnings season in July.
A case in point: Ohio-based United Community Financial Corp. reported that its overall loan book advanced nearly 13% over the past 12 months, led by commercial banking, and its second-quarter net charge-offs totaled just 1.3 basis points.
"We foresee very little in the way of net charge-offs over the remainder of the year," Gary Small, president and CEO of United Community, said during an earnings call.
On the heels of federal tax cuts, U.S. gross domestic product advanced 4.1% in the second quarter, the best showing since 2014. The jobless rate hovers around a healthy 4%. When the economy is on solid footing, borrowers typically have little trouble repaying loans. Credit costs, by extension, tend to prove minimal for banks.
Lenders active in home lending are seeing sluggishness in their mortgage books as interest rates climb following several Federal Reserve rate hikes. But many of these companies say broad economic momentum is helping them to diversify and grow loans elsewhere.
Seattle-based HomeStreet Inc., for one, grew commercial and consumer loans in the second quarter despite pressure on mortgages, said Chairman, President and CEO Mark Mason during a July earnings call. C&I loans advanced 6%, and the lender's nonperforming asset ratio declined to 14 basis points of total assets, the lowest level since 2006.
"Job creation, unemployment, commercial and residential development activity … and all other leading indicators of economic activity reflect strong economies in our primary markets," Mason said.
Deposit costs are rising, but many banks say they are able to offset that by charging higher rates on new loans, even amid pricing competition. And with loan volume strong, and expected to remain so in many markets, bankers are optimistic about continued gains.
"The market has gotten more competitive … but I will tell you that our pipeline is strong," Ronald Paul, chairman, president and CEO of Maryland-based Eagle Bancorp Inc., said on an earnings call in July. Paul said that, for the second half of 2018, "I see us being in the very, very high single-digit [percentage level] on the loan growth side."
But threats do lurk, particularly on the global trade front, economists say. U.S. President Donald Trump's administration has initiated trade skirmishes with several countries, including imposing new tariffs on certain imports from China, the world's second-largest economy. China responded in kind this summer.
If a trade war with China were to drag on for months, it could hammer farmers, particularly soybean producers who export large shares of their products to China. Automakers and certain other manufacturers also are concerned about declining exports and higher raw material costs, among other problems, said Raymond James Chief Economist Scott Brown.
"If this drags out and gets worse, the pain for some sectors could get severe," Brown said in an interview. "And it could spread across other areas of the economy if uncertainty paralyzes capital spending."
Soybean and other grain prices already were low heading into this summer. The trade battle has worsened that situation, from the view of farmers.
Ernest Goss, an economist at Creighton University who surveys bankers across the Midwest each month, said lenders active in markets where agriculture is prominent are worried. His July survey found that 78% of rural bank CEOs view the current trade skirmishes and rising tariffs as negative for their local economies.
"Not good": That is how Pete Haddeland, president and CEO of First National Bank Mahnomen Twin Valley in Minnesota summed it up in response to Goss' survey. "Grain prices are at, in some cases, 10-year lows."
Yet, broadly, business owners are looking past the trade matter because of the strong U.S. economic fundamentals generated in the second quarter, many small lenders say.
Jeff Olson, president and CEO of the Credit Union Association of the Dakotas, where soybeans are a large part of the agriculture economy, said most lenders he speaks with are paying close attention to trade but are taking a wait-and-see approach and are not yet reacting negatively.
"It seems to be a chess game, and we'll see who makes the next move," he said.