Changing Habits, Closing Stores

Changing Habits, Closing Stores

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As the nation's bank rating firm, it's Bauer's job to stay on top of things like Commercial Real Estate (CRE). While not automatically a sign of impending trouble, too much of anything (i.e. concentration in one type, growth, bad loans, etc.) must be monitored carefully (JRN 37:15).

It may sound surprising, but some CRE is performing quite well. Warehouses, for one, are thriving. Grocery stores and other essential businesses, Home Depot and Lowe's come to mind, have fared very well. And don't forget all that new computer hardware and software people needed to work and study from home. Those sectors all benefitted-financially-from COVID.

Retail stores, on the other hand, are getting a kick in the pants. One of the first retailers to call it quits this year was Pier 1. Reportedly, the chain had hoped to reorganize-sell some stores and keep the others running. But by mid-February, it was decided that all (nearly 1,000) Pier 1 stores would be liquidated.

That was pre-shutdown. From March forward, a number of stores that were already struggling, like J.C.Penney and Tuesday Morning, which had already been forced to close stores, closed more. The shelter at home mandate also meant work-out at home causing 24-Hour Fitness and Gold's Gym to seek bankruptcy protection and shut some of their locations.

These are just a few of the larger bankruptcy closings. I'm sure there were a lot of smaller retailers with similar stories. There is also a long list of retailers not in bankruptcy that have seen fit to trim stores. Starbucks is on this list. After years of continuous and rapid growth, the restaurant chain announced it will close 400 stores. You may have to walk two blocks now to get to a Starbucks instead of just one.

It's just another sign of the times. People are not going out as much. Period. The shift had already begun pre-COVID. (When was the last time you left your house to rent a movie?) Many stores were already looking to shed brick and mortar locations to focus on internet sales. The virus sped up the process. A lot. It also changed the priorities for a lot of people (i.e. more casual clothes than office attire).

All of these shifts will factor into how CRE and other commercial loans perform. Another important factor, that is impossible to guess at, is how long will the pandemic last? All of that to say, we promised to keep you up to date on the status of CRE loans at our nation's banks, and we will.

In addition to having at least one-quarter of total loans invested in Commercial Real Estate (CRE), the 52 banks listed on page 7 have all witnessed greater than 10% growth in CRE loans over the 12 months ended June 30, 2020. They have also each reported delinquent CRE loans (90 days or more past due) in excess of 2.25% of the CRE portfolio AND at least 1.5% of their entire loan portfolio is 90 days or more past due.

Looking at the Bauer's Adjusted CR on this list, there are very few under 4%. One, 3-Star Industrial Bank, Washington, DC, purchased the failed Zero-Star City National Bank of New Jersey last November. In addition to being significantly undercapitalized, City NB of NJ had a big pile of bad loans. It will take Industrial a little time to resolve those, but it is making good progress.

Conversely, 3-Star Enterprise Bank, Allison Park, PA, has been battling with loan quality for a while. Sixty-four percent of its loans are invested in CRE, which is about twice as much as its peer group. However, less than half of its CRE is high-risk. The rest is either owner-occupied or secured by multifamily (5 or more) residential property. Both of which are much less risky than retail CRE.

There are two others with a Bauer's Adjusted CR under 5%, but the fact is, the cracks are just not showing up yet. Where there is concern, most banks are increasing their loss provisions already.

In the case of 2-Star First NB &T, Vinita, OK. A July OCC Enforcement Action is making it do so. In addition to increasing its loan loss allowances, the OCC action requires new underwriting standards, better loan and liquidity risk management and higher capital ratios. We are happy to see regulators on top of the situation.

We're not saying that problems with CRE won't materialize, in fact its hard to imagine they won't. They just haven't yet.

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