For only the second time in the last 12 quarters, total loans and leases contracted across the US banking industry in the first quarter.

As of March 31, US commercial banks, savings banks, and savings and loan associations held $12.417 trillion of total loans and leases, representing a sequential decrease of $34.77 billion, or 0.3%, according to regulatory data compiled by S&P Global Market Intelligence.

Negative loan growth, along with a persistently rising cost of funds, caused downward pressure on the industry's aggregate net interest margin in the quarter.

Asset transformation

Prior to the first quarter, loans also fell in the first quarter of 2023. The other declines this decade were from the third quarter of 2020 through the first quarter of 2021.

Seasonality could have played a pivotal role in the first-quarter 2024 downturn as consumer loans, particularly the credit card segment, weighed on the overall balance. Banks reduced credit card loans by $35.69 billion and other consumer loans by $14.29 billion. Other loan types with decreases included agricultural production ($2.85 billion), one- to four-family construction in domestic offices ($1.92 billion) and one- to four-family revolving home equity lines in domestic offices ($1.30 billion).

On the other hand, banks targeted commercial loans as a growth area. Despite many top lenders pulling back from the office sector, total commercial real estate loans in domestic offices rose by $11.07 billion. Some of the banks with the highest multifamily loan concentrations cut their exposure in the first quarter, but total balances in domestic offices in the sector were up $9.14 billion. Additionally, banks grew total commercial and industrial loans by more than $7 billion.

Each of the primary banking subsidiaries of the Big 4 banks reported quarterly loan contraction. Total loans and leases at Citibank NA and Wells Fargo Bank NA fell by more than 1%, while JPMorgan Chase Bank NA and Bank of America NA had decreases of less than 1%.

The loan growth trend at smaller institutions was mixed, but sentiment may be improving. In a recent S&P Global Market Intelligence survey, which was primarily completed by executives at community banks, a greater percentage of respondents relative to previous surveys expect an increase in loans during the next 12 months.

As loans shrank during the first quarter, other asset buckets more than filled the void. Available-for-sale securities, on a fair value basis, rose more than $95 billion. Cash and equivalents went up about $66 billion. Another growth category was total trading assets, which increased $176 billion.

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Funding transformation

Just as in the break-through fourth quarter of 2023, banks were able to accumulate more non-brokered deposits, which tend to be stickier and less costly relative to those that are brokered. Growth was 1.3% in the first quarter, up from the 0.9% pace in the 2023 fourth quarter. Outliers included Phoenix-based Western Alliance Bank on one side, up 16.3%, and Hicksville, NY-based New York Community Bancorp Inc. unit Flagstar Bank NA on the other side, down 17.2%.

In the wholesale funding categories, most of the largest banks reduced their reliance on brokered deposits, and the aggregate for the industry was a reduction of 0.8%. Total borrowings were up 2.3% across the industry, but if JPMorgan Chase Bank were removed from the analysis, then the aggregate would have changed to a decline of 1.7%.

Margin compression

The aggregate bank net interest margin on a fully taxable equivalent basis took a hit from both sides of the income statement, falling to 3.10% from 3.19% in the last quarter of 2023. The change in balance sheet composition contributed to a lower yield on earning assets, which dropped to 5.61% from 5.62% quarter over quarter. And the cost of funds was up 8 basis points, representing the eighth consecutive quarterly increase.

Of the banks with greater than $200 billion in total assets at March 31, just two experienced margin expansion in the first quarter: Bank of America, up 1 basis point, and Charles Schwab Bank SSB, up 9 basis points. In the regional banking space, standouts included Tupelo, Miss.-based Cadence Bank and Green Bay, Wis.-based Associated Bank NA, with increases of 18 basis points and 11 basis points, respectively.