US banks' aggregate loan-to-deposit ratio — a tool used to measure bank liquidity — climbed for the fifth consecutive quarter with loans slightly ticking up and deposit outflows slowing.

The ratio was 66.0% in the second quarter, compared with 65.2% in the first quarter and 60.2% in the second quarter of 2022, according to S&P Global Market Intelligence data. The second-quarter ratio inched closer but continued to stay below the pre-pandemic ratio of 72.4% in the fourth quarter of 2019.

Through the liquidity crunch

Deposit outflows slowed in the second quarter, but deposit costs rose as banks defended their funding. Total deposits at banks were $18.644 trillion, down only 0.5% quarter over quarter after plunging 2.5% sequentially in the first quarter, in which dozens of banks booked deposit declines in excess of 5% amid a liquidity crunch that erupted in March.

In their mid-third-quarter updates, several large banks confirmed that "deposit pressures have passed their crescendo," Piper Sandler analyst R. Scott Siefers said.

"As we had hoped, numerous management teams pointed to a more rational competitive environment in the deposit world," the analyst wrote in a Sept. 15 note. "To be sure, higher-for-longer rates will keep funding costs pressured. But hopefully we can close the book on deposit fears representing 'the issue' on which large bank investors are most focused."

As high interest rates wore down credit demand, total loans at banks grew only 0.7% quarter over quarter to $12.299 trillion.

Banks reported weaker demand and tighter lending standards for several loan types in the second quarter, according to the results of the Federal Reserve's July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. Also, a recent S&P Global Market Intelligence survey found that bankers' outlook for loan growth has soured.

Based on several big banks' mid-third-quarter updates, loan growth is obviously slowing, with the exception of the credit card segment, Siefers said in the same note. The slowdown appears to be "due both to supply and demand dynamics," he wrote.

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Largest decreases

Of the 20 banks with the largest year-over-year decrease in their loan-to-deposit ratios during the second quarter, 12 reported increases in total loans and all logged deposit growth. SoFi Technologies Inc. led the group as its loan-to-deposit ratio dropped 156.1 percentage points to 145.2%.

New York Community Bancorp Inc., the acquirer of substantially all the deposits and certain loan portfolios of failed Signature Bank, nabbed a spot on the list with a ratio of 96.6%, down 21.1 percentage points year over year. The Hicksville, NY-based company's loans jumped 76.1% and deposits rose 114.6%.

West Reading, Pa.-based Customers Bancorp Inc., the buyer of a $631 million loan portfolio of the former Signature Bank from the Federal Deposit Insurance Corp., booked a 14.9-percentage point drop in its loan-to-deposit ratio to 77.4%. The company's loans slumped 11.2%, while deposits climbed 5.9%.

Largest increases

All of the 20 banks with the largest year-over-year increases in their loan-to-deposit ratios posted loan growth. Among these banks, 16 recorded deposit declines.

Sioux Falls, SD-based United National Corp. topped the list with a 69.9 percentage point jump in its loan-to-deposit ratio to 183.5%.

Two banks that completed a bank merger deal in the last 12 months were included in the ranking.

Tacoma, Wash.-based Columbia Banking System Inc., which merged with Umpqua Holdings Corp. on Feb. 28, logged a ratio of 91.2%, up 28.1 percentage points year over year.

Easthampton, Mass.-based Hometown Financial Group MHC's ratio climbed 23.3 percentage points to 103.6%. The company's unit, Hometown Financial Group Inc., acquired Randolph Bancorp Inc. on Oct. 7, 2022.