Q1 2019 - Strong Economic Growth?

The U.S. economy grew at an annualized rate of 3.2% in the first quarter of 2019, according to the “advance” estimate.

While aggregate growth rate looked strong, the components raise some questions. 

Let’s look at some of these components and their contribution to this quarter’s GDP growth. 

Net Exports contributed a full one (1) percentage point to GDP growth, or over 31 percent of this quarter’s GDP growth. Exports were up $23 billion, while imports actually declined by $33 billion. This is unusual and probably not sustainable.

The change in inventories contributed seven-tenths of a percentage point to GDP growth, or over 21 percent of this quarter’s GDP growth.  The magnitude of the change In inventories- $31 billion - is not out of the ordinary. But inventories will fluctuate as business sees trends in sales. This level of contribution to GDP growth may not continue.

Two areas that were down quarter over quarter were business investment in equipment and structures. These areas resulted in nominal negative contribution to GDP growth this quarter. Are there important signals here regarding business view of the future economy? Does business not see “second curve” growth in sales to confidently expand plant and equipment? In fact, the 5.4% decline QoQ in durable goods could support that less than optimistic view.

Two sectors showing solid growth this quarter were in government. State & local government spending was up 3.9% and contributed four-tenths of one percent to GDP growth. And federal defense spending was up 4.1% and contributed two-tenths of one percent to GDP growth.

It is difficult to see the case for +3% GDP growth going forward without business investment rising. 

While continued economic growth is expected, it may be a more moderate 2% to 2.5%. The current economic cycle is expected to continue its growth and become the longest sustained growth cycle in recent history in July!

Your Summer Strategic Planning Session - Ready for Slowing Economy?

March Madness is upon us. NCAA Basketball - not the political scene in Washington, D.C.!

Over the next several months, you should be identifying key issues that may be impacting your bank over the next five years. You may have several key topics for review, including regulatory environment, 2020 election, technology and FinTech developments and the economic environment.

Let’s identify key issues of focus relating to the economic environment in this review.


As you discuss the economy and the possible direction during your upcoming 5-year planning cycle, it is worth noting the age of our current national economic expansion.

By the start of 2020, the economic expansion will have been 126 months in duration. This is a record expansion cycle.

There is no reason to suggest that a true recession with negative GDP growth will occur, but it is reasonable to expect growth to continue to slow. Likewise, this is a national perspective - what is more important is your reading of your local economy.


Signals supporting a “slow growth” economy:

  • No component of economy poised for standout growth.

  • Job growth has been slowing.

  • Global economies slowing.

  • 2020 U.S. election.

  • Specific industries within your local economy.


  1. The Fed has raised interest rates with the short-end rising.

  2. But the strong dollar and slowing global economies has pushed long-term yields downward.

  3. The yield curve is now flat or even showing an inverted mid-range.

  4. How long will this flat yield curve continue?

So as you begin to evaluate the next five years of your strategic planning, you need to give focus to the economy - nationally and, more importantly, locally.

  • If there is a slow growth economy and a continued flat yield curve environment, what will be the impact on your bank’s performance?

  • Will your net interest margins be pressured?

  • Will loan demand slow or even falter?

  • Will you see any deterioration in credit quality?

  • What will be impact on your capital levels and dividends for shareholders?

These are all important issues relating to the impact of a slowing U.S. and local economy. This should be one of the key topics discussed this summer at your strategic planning session.

Good luck!

Year-end Update on Banking Industry Consolidation

Throughout 2018, the consolidation of the banking industry has continued. Bankers executed one element of their strategic planning. Some bought. Some sold. Some started new. Was your bank’s strategic planning ready?

As one reviews the results of 2018, there are several take-aways:

  1. The decades-long consolidation of the banking industry continues.

  2. The pace of consolidation has only slightly slowed.

  3. Community banks - in both rural and metropolitan markets - are key participants.

  4. All banks - including Community Banks - should assess the M&A environment and impact on their bank annually in their strategic planning program.

For 2018, the banking industry saw a net reduction in commercial banks totaling 264, or approximately 5 percent. There were no bank failures during the year. Eight de novo banks were up and running. And 272 banks were consolidated through mergers or other activities according to the FDIC data.

The recent trend in consolidation is comparable to the trends since 1990. Since 1990, the number of banks has dropped by nearly 9,800, or 64%. While the decline in the number of banking charters is slightly lower - 264 in 2018 compared to an annual average of 355 banks, the pace as a percentage is slightly higher -  4.7% in 2018 compared to average of 3.6%.

Bank merger activity is substantially lower on average than was occurring during the seventeen years leading up to the Great Recession of 2008. And significantly lower than the peak period of 1993 through 1998 when annual bank mergers totaled 600 to 700. However, 2018 saw an uptick in bank merger activity to 259.

And, as consistent with prior timeframes, this past year, smaller Community Banks continued to show a net reduction. One reason simply being that nearly 97 percent of all banks are Community Banks so this is the natural pool for available bank merger activity. While the large bank mergers receive the national headlines, community bankers continue to deploy bank acquisitions as a critical component of their strategic planning.

And from a urban / rural perspective, community banks across all markets - larger metropolitan areas to smaller rural markets - are involved in the continued merger and acquisition activity across the U.S.

Banking industry consolidation has been going on since the 1970’s. This trend continued throughout 2018 and is expected to continue on over the next decade and longer.

As a Community Bank, bank merger and acquisition planning should be an important component of your annual strategic planning. You do not need to be a buyer. And, most certainly, you do not need to be a seller. In any given year, less than 5 percent of banks actually complete an M&A action. However, you do need to understand where your bank stands so that if an opportunity does arise, you are prepared to take action.

Establish time on your 2019 planning calendar to evaluate the banking merger environment and what your bank’s role should be over the next few years. This may be some of the most valuable planning time that your bank board and management team spend!

Bank Lending - 2018 Year-end 2-Minute Drill? Or Signal on 2019?

Data and estimates by the Federal Reserve staff in the H.8 “Selected Assets and Liabilities of Commercial Banks in the United States” show rise in bank lending in recent weeks.

The loan growth was moderate and may be seasonal or some window-dressing by corporations rather than a renewal of the strong loan growth that was experienced throughout much of 2018.

For the largest 25 banks, there was a pick up in C&I lending.

For Community Banks and other Regional Banks, there was more broad-based activity, in particular, consumer lending.

As 2018 ends and 2019 in nearly upon us, let’s do a quick review of lending activity during 2018 and current views on what these trends may suggest for 2019:

  • Community Banks and Other Regional Banks: YoY total loan growth was 8.1%. C&I and consumer lending were strongest at over 11%. Commercial real estate and residential real estate loans solidly rose at over ~7% or more.

  • Large Banks (Top 25):YoY total loan growth was more modest at 2.8%. C&I lending was the primary source of growth - nearly 8%. Consumer lending was up only 2.3%. Both commercial real estate and residential real estate loans were either flat or down for the latest 52-weeks.

  • 2019 Perspective: With most economists forecasting slower growth for the U.S. economy in 2019 - but still growing solidly, the expectation for lending books should be more moderate growth throughout 2019 when compared to 2018.

For more information on banking and economics, visit BankingStrategist.

Banks as Vital Infrastructure for Rural Communities

On December 5th, Federal Reserve Bank Vice Chairman for Supervision, Randal K. Quarles, gave a speech at the Stanford Institute for Economic Policy Research titledBanks as Vital Infrastructure for Rural Communities of the West”. While his speech focused on the western states, the fundamental points are relevant to community banks and rural markets across the U.S. The following are some of the key points from his speech:

What was said regarding importance of Community Banks to rural markets:

  • In any community, access to credit is essential for economic growth. In any community, but especially in rural communities, small businesses are key drivers of growth. Small businesses heavily rely on banks for funding, and community banks, those with less than $10 billion in assets, account for a disproportionate share of bank lending to small businesses.

  • But across the country, the number of community banks has fallen by half over the past 20 years, mostly due to consolidation.

  • Faster and more efficient electronic payments hold some promise to bridge these gaps, eventually, and the Federal Reserve is working hard on this and making significant progress.

  • But one thing that technology cannot do is replace the knowledge and perspective of a local banker who is part of the community. Relationship-based lending that is the hallmark of community banking can stem losses during downturns, since community banks may be able to work with borrowers to avoid losses. Research has shown that small business lending at smaller banks declined less severely than at large banks during the last recession.

  • Community banks face considerable competition. One of the reasons that community banks continue to succeed in many places is their understanding of their customers' needs and opportunities to invest in families and businesses. The loss of this relationship, for a community, means that needs will go unmet, and opportunities will be lost.

Smaller, rural markets are predominantly served by Community Banks as shown in this graphic. It is Community Banks that are headquartered in counties with populations of less than 50,000.

But, as the Fed indicates in the speech, there continues to be a decline in the number of banks serving these smaller, rural markets.

What is Federal Reserve and other regulators doing to help Community Banks:

  • Recent regulatory focus has been aimed at streamlining regulations and reducing the regulatory burden on smaller and regional banks.

  • Proposed a community bank leverage ratio that is designed to simplify significantly the standards banks must abide by for holding capital. As a result, qualifying community banks will only need to calculate and meet a single measure of capital adequacy, rather than multiple measures.

  • Proposed a reduction in the burden of reporting requirements for community banks.

  • For a subset of the smallest banks - those with less than $5 billion in total assets - regulators have also lengthened the amount of time between supervisory examinations and expanded eligibility of small bank holding companies that qualify for an exemption to the Federal Reserve's capital rules, a policy that was designed to promote local ownership of small banks and to help maintain banks in rural areas.

This trend - decline in number of community banks - is expected to continue. Actions such as these regulatory relief measures are important steps toward slowing that decline. But it will take a concerted effort by community bankers, their communities, community bank trade groups such as the Independent Community Bankers of America (ICBA) and bank regulators to identify the additional actions necessary to slow this declining trend. Community banks play such a critical role in supporting rural markets and their economies.

For further information and data on trends in community banks, go to tab titled: Community Banks: Number by State and Asset Size.