After a year of belt-tightening, loan balances at our nation’s banks grew slightly ($33.2 billion or 0.3%) during the second quarter of 2021. In spite of banks’ eagerness to lend, loan balances remain well below (1.2%) the levels of the previous June. Not only are banks eager for more earning assets, 76% of all banks reported an increase in unused loan commitments.
The uptick in second quarter borrowing came primarily from consumers. Credit card balances are up $30.9 billion (4.1%) and auto loan balances increased $18.9 billion (3.8%) in the second quarter. Credit card loan balances remain 2% below their June 2020 level, but surprisingly all loans to individuals increased 3.1% over the 12 months.
Home equity lines decreased 14.4% during the year but we suspect much of that has been refinanced to take advantage of the low rate environment. The rest is being paid down as consumers remain wary of excess debt. In spite of increased home values and a buying frenzy in many parts of the country, residential mortgage loan balances (1-4 family) were down 1.6% from last June.
Other Real Estate Owned (i.e. repossessed) at our banks is down 17.4% from a year ago as loan quality has been steadily improving. Loans past due 30-89 days decreased by 18.2% and 90 days or more past due dropped by 7.3% during the year.
The net charge-off rate is at a record low of 0.27% after declining for the fourth consecutive quarter. That’s 30 basis points lower than last quarter. Credit card charge-offs led the way dropping $3.3 billion (39.8%) followed by Commercial and Industrial Loan charge-offs, which decreased by $2.9 billion (or 69.7%). These two categories accounted for more than 75% of the decline which was widespread across the states. Over half of the nation’s banks reported decreased charge-offs.
As a result of this improved loan quality, loss provisions were again negative (second quarter in a row). After reducing provision expense by $73 billion, the industry reported net income of $70.4 billion. We have said before that we believe these reversals may be premature, but nonetheless, as a result almost 96% of our nation’s banks are profitable.
Total industry assets grew just 1% in the second quarter but were up 7.8% for the year. The total sits just shy of $22.8 trillion at June 30, 2021. Over the course of the year, 117 banks were merged into other banks. Some of those can be found on page 7 among the 50 community banks with more than 59% asset growth during the 12 month period ending June 30, 2021. The first three were featured in last week’s issue as having corresponding high increases in deposits.
Had we not limited our list to community banks, you would have found 5-Star Silvergate Bank, La Jolla, CA, (which is not a community bank) between Barwick and Park. We do want to mention it though, because it is an interesting lesson in timing. At June 30, 2020 Silvergate Bank was a $2.3 billion bank, not small by any means, but 12 months later, in the midst of a pandemic, it grew 425% - not through acquisitions. Its growth is attributed to the rising popularity of digital currency and a strategic partnership with Facebook. This is definitely not your grandfather’s bank.
Digital currencies can be highly volatile, but a newer breed, often referred to as stablecoins, aims to change that. Stablecoins are assets that are backed by something that is “ideally” stable (i.e. the dollar or gold). Silvergate’s role is to facilitate the transactions and charge a fee for doing so. The bank will make money whether the coins themselves do well or not.
The timing was perfect. Any other bank wanting to enter the stablecoin market will being playing catch-up as Silvergate will be the exclusive dealer of what soon will be the Diem, Facebook’s U.S. dollar-backed stablecoin (formerly Facebook’s Libra).
On page 7, we also eliminated banks that were established in 2019 or later, since they are expected to face rapid growth. Given that, we have to go all the way down to 3-Star United Trust Bank, Palos Heights, IL to get to a community bank that grew organically in the past year. It is a turn-around story. Rated Zero-Stars for over 5 years and on Bauer’s Troubled and Undercapitalized (T&P) Report for 10, United Trust Bank had been teetering on the brink of extinction for years.
Established in 2000, United Trust was issued its first enforcement action just a year later. That action was terminated and replaced twice since then. It still operates under an agreement, but one much less severe than the others. The bank is now allowed to grow, provided it does so judiciously. While it still operates through just one office, United Trust has more than doubled in size, and more importantly, has grown stronger along the way. It is no longer on that dreaded T&P List.