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Banking Outlook: Bankers Like the Prospects They See for 2018

Optimistic customers want loans to continue growing while rising interest rates mean better profits

By wmadministrator

Kentucky’s banking community is reflecting the optimism it feels from its clients, who had a strong 2017 and expect another good year in 2018. Economic fundamentals look strong, and there is demand for loans in nearly every category to fund ongoing business growth, construction and home buying. The economy is at last showing enough strength that the Federal Reserve is slowly increasing interest rates, which will help banks improve their margins. The state’s major urban areas of Louisville, Lexington and Northern Kentucky will outperform the state as a whole. The headwind could be a tight labor market, with many companies telling banks they are having difficulty finding workers with the skills they need.

“Individuals and businesses of all shapes and sizes are as optimistic as they have been since before 2008. In 2017, we saw the Federal Reserve continue to increase interest rates, indicating that our economy is heading in a positive direction. Recently, U.S. Bank announced investments to our employees as a result of the federal tax reform package. The investment includes a special $1,000 bonus for nearly 60,000 employees, the raising of minimum wage to $15 for all hourly employees and enhancements to employees’ health-care offerings for 2019.” William J. “Bill” Jones, Kentucky Market President, U.S. Bank

“Louisville’s economy is firing on all cylinders and we expect that to continue through 2018. This success is largely attributed to our large, diverse industrial base. Home prices are soaring and never dropped in Louisville as much as they did nationally. Job numbers are growing faster than the national average. Consumer finances and confidence are also helping Louisville’s auto-related manufacturers. The solid economic growth we see should span a spectrum of industries, including manufacturing, transportation, education, health care, finance and professional services. Despite the market’s volatile start to 2018, investors should continue focusing on long-term goals to develop portfolios that match their risk and return objectives.”  Chuck Denny, PNC Bank Regional President, Louisville

“City National Bank has a very bullish outlook for the local and national economy in 2018. The recent tax cut and proposed infrastructure spending should push an already growing economy forward in a meaningful way. Of particular note is the strength of Central Kentucky’s residential mortgage market and the high acceptance of City’s Champion Mortgage product, which should perform well as interest rates increase in the coming year. City is very optimistic about the 2018 economic outlook and anticipates another year of good performance from its Bluegrass region’s retail, mortgage and commercial divisions.”  — Bill Craycraft, Market President, City National Bank

“The U.S. economy’s underlying fundamentals support continued growth in 2018. Optimistic clients are increasing investments in building and/or acquiring land, equipment and personnel, in part as a result of tax reform. We expect Kentucky companies to push for solid growth this year, especially the manufacturing, construction, health care, automotive and technology sectors. On the consumer side, we see increasing confidence as a result of a strengthening labor market, wage growth and lower income-tax burdens, even against a backdrop of mild inflation. Anticipated interest-rate hikes will likely bolster the financial services industry, specifically banking. In 2018, BB&T will continue significant technology investments to enhance customer experience and reduce cyberrisk. We have capital for creditworthy borrowers to foster business growth and consultative advice to help clients achieve economic success and financial security.” — Thomas F. Eller Jr., Regional President, BB&T

“State and national conditions continued improving in 2017 and should stay on a path of growth in 2018. Improvement is evidenced by the Federal Reserve increasing interest rates and unwinding its balance sheet as the country saw decreased unemployment, increased business activity, and consumer spending and willingness to take on debt. Inflation and the sustainability of economic growth remain somewhat uncertain. The Tax Cut and Jobs Act’s impact will be determined as its changes are fully implemented. Kentucky’s economy exhibits strength in most regions; Eastern and Northeastern Kentucky remain weaker due to job losses and limited opportunities, but there could be significant positive change in these regions once several announcements regarding job creation and workforce retraining there begin.” — Jean Hale, Chairman President/CEO, Community Trust Bank

“Business and economic outlooks remain positive for Kentucky and the U.S. in 2018. While Kentucky’s growth has been slower than national trends, it is improving. For progress to continue, budget and pension issues must be addressed by the governor and General Assembly. Drivers of economic activity within the commonwealth continue to be the Central Kentucky markets of Lexington and Louisville, along with Northern Kentucky. Business investment and employment gains have been robust in these regions the past year. These improvements are leading to lending opportunities for commercial real estate and residential mortgages.” — Lloyd C. Hillard Jr., President/CEO, United Bank

“We expect Kentucky to grow at about the same rate as the national economy in 2018. However, Northern Kentucky, Louisville and Lexington should outperform the rest of the state, based on improvements in job growth and increases in wages. Uncertainty is still an issue for many families, as our legislators struggle with pension reform. We need to create more middle-income jobs across the state to improve household income for the majority of our citizens. Consumer spending is leading to growth in small business, especially in the service sector. We see modest housing growth, mostly from sales of existing homes. Rates will continue to be attractive for home buyers for at least another year.” — Luther Deaton Jr., Chairman, President and CEO, Central Bancshares

“2018 will be better than average for banking, which has been stymied in serving its communities by the regulatory dictates of Dodd-Frank the past few years. However, Sen. Mitch McConnell recently guided to Senate passage SB 2155, “The Economic Growth, Regulatory Relief and Consumer Protection Act,” a bipartisan bill that allows banks under $10 billion in assets to get back to lending in their communities. The reforms in the new Tax Cuts and Jobs Act lowered the tax rate and will promote growth both in small and large business loans. In turn, increased hiring and higher wages should stimulate the economy. We expect merger and acquisition strategies to increase in this new environment.” — Ballard Cassady, President/CEO, Kentucky Bankers Association

“The economy in Lexington and Central Kentucky continues to be robust. We expect more activity offering loans to assist businesses and their owners in capitalizing on opportunities created by the new tax reform. The low unemployment rate in Lexington and Central Kentucky will spur competition among businesses, with a tight labor market and favorable mix of jobs lifting wage growth. We are fortunate to have a diverse economy locally led by education, manufacturing and medical services. The University of Kentucky remains a force, contributing to Lexington’s stability and supporting economic growth. The potential to improve labor force participation among the younger population is higher than anywhere in Kentucky or nationally.” — John Gohmann, Regional President, Lexington, PNC Bank

“The national economy is expected to expand throughout 2018. Measures of inflation are increasing; driven in part by tight labor markets, strong growth and a weak dollar. Economic growth and inflation expectations suggest the Federal Reserve will raise short-term rates multiple times in 2018, increasing borrowing costs for consumers and businesses. Housing construction will be robust in 2018 as builders continue to quickly absorb new lots in Fayette County. Housing affordability will become more pronounced as prices continue to rise faster than wages. The land swap announced last year between UK and LFUCG is expected to provide much-needed commercial land supply for economic development.”  — Bill Alverson, CEO, Traditional Bank   

“Generally we see positive sentiment from clients regarding their outlook for 2018 and expect a broad-based expansion. However, we are hearing that it is tough to find workers across a number of sectors in our local economy, which is consistent with national discussions by business owners and companies. The tighter labor market is indicating we are near full employment, hinting that late-cycle business trends could start to emerge. For example, the Employment Cost Index rose at a 2.6 percent annual pace in the fourth quarter of 2017, its strongest reading since 2008. Core CPI increased 2.5 percent and an upward bias on wages and prices is moving the Federal Reserve to a less accommodative monetary policy.” — Scott Svengros, Market President Central Kentucky, Old National Bank

“I see strong loan demand for consumer, commercial and real estate loans driven by business expansion and the need for labor as revenues grow. Transportation and logistics, medical services, professional services, construction and manufacturing are all contributing to growth. The market is seeing projects in the urban core, with demand driving mixed-use commercial real-estate developments that provide retail, entertainment and housing. Housing inventory, particularly for first-time homebuyers, is limited, which has led to a seller’s market. I expect strong demand for housing during the balance of 2018, but this may ease if mortgage interest rates continue to rise. Some reservations: Record-low unemployment and continued economic expansion may lead to a labor shortage. Housing inventory might be limited by the lack of skilled labor to build new homes fast enough. Companies are looking to hire skilled employees to continue their growth, but are challenged to fill positions. Overall, these are good economic times.” — H. Lytle Thomas, President/CEO, Heritage Bank

“Optimism defines business leaders’ sentiments about 2018. The National Federation of Independent Business Index of Small Business Optimism is the highest it has been in the past decade. Stronger demand is fueling expectations for increased revenue growth, with the availability of skilled labor in Kentucky being the only drawback for even greater growth. Improved valuations and an active private-equity market are driving acquisition and selling opportunities. Our most frequent conversations have involved helping our clients finance their growth, including acquisition financing and assisting with their business transition strategies, such as sell-side advisory services, succession planning and wealth planning.” — Mike Ash, Kentucky Regional President, Fifth Third Bank

“Business owners are feeling better than they have in years, thanks to recent regulatory reform, corporate tax cuts and a steadily improving economy. Their optimism translates to business activity, which is why we’re seeing increased hiring, higher capital expenditures and rising wages. For businesses that can hire and retain talent in today’s tight labor market, there are growth opportunities. However, many businesses are nervous about finding the skilled workers they need to grow as older workers retire. We’ve found about 45 percent of our midsize-business executives are very concerned about it, as are 31 percent of small-business executives. That’s why we’ll continue our collaboration with the business community, education institutions and others to address workforce issues, because our businesses are raring to go.” — Paul Costel, Managing Director, Commercial Bank, JPMorgan Chase