The Wall Street Journal
By: Victoria McGrane
May 24, 2012
Lending stumbled in the first quarter after nearly a year of growth, deepening questions about the recovery and confidence of borrowers and bankers.
Loan balances fell by more than $56 billion, or 0.8%, in the quarter ended March 31, according to the Federal Deposit Insurance Corp. The quarter-over-quarter decline marks a reversal from three consecutive quarters in which lending expanded.
The FDIC's Martin Gruenberg cites Europe as the biggest concern for U.S. banks and the economy.
While lending to larger commercial and industrial customers rose as it has for nearly two years, declines came in nearly all other types of loans, including those to small businesses.
"We're afraid to expand right now," said Dan Thystrup, who owns Adventureglass, a four-person company in North Webster, Ind., that builds fiberglass paddleboats in the shape of swans, ducks and dragons. Mr. Thystrup said his reasons for caution include sluggish demand and new environmental regulations.
Martin Gruenberg, the FDIC's acting chairman, said the loan pullback in the first quarter is "disappointing." Still, he added, "we should be cautious in drawing conclusions from just one quarter."
Overall, lending rose about 2% on a year-over-year basis in the first quarter.
James Chessen, chief economist for the American Bankers Association, said lending won't expand significantly until the housing market rebounds. "The housing market is still rotten and hasn't yet bottomed out," he said.
Despite the lending slowdown, the U.S, banking industry had profits of $35.3 billion in the first quarter, up 23% from a year earlier. The jump came largely from setting aside less cash to cover bad loans. Revenue rose about 3%, largely reflecting higher sales of loans by banks.
To be sure, banks kept lending more to larger companies. Commercial and industrial loans grew 2% from last year's fourth quarter. Auto lending rose 1.5% from the last quarter of 2011.
But those increases were offset by contraction in other categories, led by a 5.6% decline in credit-card loan balances.
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And despite some of the lowest mortgage rates on record, single-family residential mortgage origination fell 1% from the previous quarter, while home-equity lines of credit declined 2.2%, according to the FDIC.
Lending to small businesses slid, too, with small-business and farm-loan balances down $10.8 billion, or 1.6%.
Some small businesses are bucking the trend.
Israel Trevino and his brother recently got $30,000 in loans from a Texas bank to open a new restaurant in Centennial, Colo. They used the equipment at their original restaurant location as collateral.
They used the loan to cover basic expenses such as early inventory orders and payroll. The newest La Playa Mexican Cafe, which employs about 30 people and advertises "powerful margaritas," opened its doors May 17.
"It's going great," Mr. Trevino said.