Mortgage Loans Remain Bright Spot, Mostly

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Mortgage Loans Remain Bright Spot, Mostly

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Loan balances at our nation’s banks grew $62.7 billion (0.6%) during the third quarter 2021. The majority of that growth ($41.3 billion) was in the form of residential (1-4 family) mortgages. However, mortgage loans are down almost a full percent from a year ago.

When broken out, community banks showed an even sharper year-over-year drop in mortgage loan balances of 1.4%, but they are up from second quarter as well.

With talk of interest rates beginning to climb perhaps as early as March, we expect that trend to continue into the new year. People who have not yet done so, will try to lock in low rates while they can.

The percent of 1-4 family homes that are 30-89 days past due is 0.61%. That’s down from 0.90% a year earlier, but the smallest banks, those with less than $100 million in assets, reported a much higher (1.04%) of residential mortgages are past due 30-89 days.

It is interesting, though, that as we get to more serious delinquencies,  (90 days or more noncurrent), it is the Big Banks, those with assets of $10 Billion or greater, that have the most nonperformers. All size groups under the $10 billion asset threshold reported nonperforming (90 days or more + those no longer accruing) of less than 1.0%, whereas the Big Banks reported well over 2.0%.

Residential delinquencies are of particular concern if the bank’s loan portfolio is not well-diversified. The 54 banks listed on page 7 each have at least 50% of total loans invested in residential real estate. They also reported that at least 2.25% of those residential real estate loans are 90 days or more delinquent.

In most cases, other loans are performing well enough to make up for these less-than-stellar home loans when it comes to the overall delinquency rate. But there are three notable exceptions that we’ll discuss here. All three have less than $100 million in assets.

2-Star Bank of Louisiana, New Orleans was established in 1958 and serves local residents through five branch offices in Eastern Louisiana. The bank has seen more than its share of ups and downs over the years. More downs than ups.

In fact, it has been on Bauer’s Troubled and Problematic Bank Report since 2015 (rated 2-Stars or below). This is not the first time either. In 1989 and the early 1990s it made regular appearances as well. By the turn of the century it was much better, but as we all know, the New Orleans area has seen more than its share of nature’s wrath this century, including several costly hurricanes: Dennis, Katrina, and Rita (all hit in 2005); Gustav (2008); and Isaac (2012) to name just a few.

Challenges from Mother Nature notwithstanding, Bank of Louisiana is under-lending. (Its loan to deposit ratio is just 50.5%.) And it is over-invested in real estate and construction loans with over 91% of its loan portfolio tied up in these categories. Worse yet, they are not performing well. In fact, only 12 U.S. banks have a Texas Ratio higher than Bank of Louisiana’s 53%.

Meanwhile, on the western side of Louisiana, 2-Star Beauregard FSB, Deridder, LA has a very similar story. The differences are that 1) Beauregard has a 63.6% loan to deposit ratio and 2) 81% (instead of 91%) of those loans are in real estate and construction. Between those two details, aided with benefit of better underwriting, Beauregard’s Texas Ratio is much more appealing at just 11.5%.

And that brings us to 1-Star Columbia S&LA, Milwaukee. Columbia is a tiny bank (total assets less than $30 million) that has been in operation since 1924. Its troubles began in 2008 during the Great Recession.

Loans to deposits at Columbia are 70.7% but it has little in the way of diversity. Since it is a thrift institution, it is not surprising that most of its loans are in residential real estate: 62% to be exact; another 36% is commercial real estate; and the remaining 2% is consumer loans. With a Texas Ratio of 50.7%, Columbia just bests Bank of Louisiana’s 53%.

For comparison purposes, a year ago (third quarter 2020 data), 81 banks would have qualified for the list on page 7 instead of 54. Two years ago, there would have been 92.

Also a year ago, 27 banks had a Texas Ratio greater than 53% and two years ago, 35 banks  did. So, there has been definite and quantifiable improvement in both banks that specialize in single family home loans as well as overall loan quality.

WARNING: Fictitious banks are popping up around the country. There have been two already this year. Bauer only rates federally-insured institutions. Read December Article.

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