Six months ago (JRN 39:42) we warned that commercial loans were spooking some banks and noted that, if the Federal Reserve decided to boost the Fed Funds another 75 basis points at its November 2nd meeting, things were going to get ‘scary’. (It was Halloween.)
Things did get scary. Not only did the Federal Reserve raise rates another 75 basis points at that November meeting, it has continued raising: 50 basis points in December and 25 basis points in each of the two meetings so far this year. With another meeting around the corner (May 3rd), likely to bring yet another quarter point increase, consumer and business spending are both starting to stall.
Consumer and business spending are the primary drivers of the U.S. economy. Without that money flowing, the wheels on our economic bus don’t go round and round, they hobble. Consumers adjust their spending habits and businesses feel the impact. As a result, banks with high investments in business lending could find themselves in a vulnerable position. That’s what we are going to look at today.
At year-end 2022, the 50 banks listed on page 5 each reported that over half of their loan portfolio is dedicated to commercial loans (commercial and industrial (C&I), commercial real estate (CRE) and/or multi-family residential). These 50 banks also each have a delinquency to total loan ratio of at least 1.5% and reported that 2.5% or more of their total commercial loans are 90 days or more delinquent.
Over 40% of these banks have been in this (or a similar) position for at least the past year, so this is clearly not new or urgent. But it is a concern, particularly if we head into a recession. (Oops, did we say that?)
One bank that we reported on last quarter, 2-Star BancCentral, N.A., Alva, OK, not only remains listed, but has the lowest Bauer’s Adjusted Capital Ratio (1.61%) and the highest Texas Ratio (117.19%) of all page 5 banks. At a time when its peers were increasing lending, BancCentral’s loan portfolio dropped almost 32%.
In fact, during calendar 2022, BancCentral lost 31.3% of its assets, 30.5% of its deposits and 44.6% of its net worth, as well. Unlike its peer banks, which rely heavily on real estate loans (36% CRE and 28% home loans), BancCentral has 35% of its loan portfolio in C&I, 20% in CRE, 14.5% in farmland and 10% in Construction & Land Development. Much of its portfolio, is under-performing and it is under-reserved with just enough to cover 25% of those delinquent loans.
Another issue facing BancCentral is a $19 million gap between the book and fair values of it’s investment portfolio. One bright spot: During 2022, BancCentral’s leverage capital ratio increased from 6.11% to 9.98%. At least its built a cushion.
When it comes to lacking a diversified loan portfolio, two banks listed on page 5 have almost all of their loans are tied up in Commercial Real Estate: 3½-Star Crown Bank, Elizabeth, NJ (86% CRE) and 3½-Star Noah Bank, Elkins Park, PA (90% CRE). That’s where the similarity ends, however.
Crown Bank is very well-capitalized, with a leverage CR of 24%. Not surprisingly, its total delinquent loan and CRE delinquency rates are very similar at 3.0 & and 3.2%, respectively. More surprising, it is still growing its CRE (16.9% in 2022). Another thing to keep an eye on at this bank is that while loans continue to grow (13% in 2022), deposits are shrinking (12%). That’s okay for now but will not be sustainable forever.
Conversely, Noah Bank is cutting back on both CRE (down 6.7%) and C&I (down 36.6%) over the year. Its leverage CR is 13.4%; Noah Bank also reports an impressive 4.1% interest margin on earning assets. But, its efficiency ratio is extremely high at 108%. Again, not sustainable in the long term.
3½-Star Industrial Bank, Washington, DC has 50% of its loan portfolio in CRE and 13% in C&I (even after 80% growth in C&I last year). Its capital ratios are good: leverage 16.13%, Bauer’s Adjusted 14.57% and Texas 13.2%. Commercial loans are slightly outperforming other loans at this bank, but... 3.23% of commercial loans 90 days or more past due; 4.05% of total loans are delinquent.
Industrial Bank has solid growth in loans, deposits and capital equity. Although, it reports a book value to fair value discrepancy of $31.6 million on its investments.
Another, 2-Star Spectra Bank, Fort Worth, TX has a loan portfolio consisting of: 76% CRE; 12% C&I; 9% construction/land development; and 3% everything else. Its loan to deposit ratio is fairly low at 53.8%. That’s good since loans are growing (31% during 2022) while deposits dropped 8%. Delinquent Commercial loans at Spectra are reported at over 6%.
Last one: 3½-Star State Exchange Bank, Lamont, OK has a better rounded loan distribution than some of the others we’ve seen, but still: 35% CRE and 20% C&I. Loans to deposits at State Exchange Bank are 105%, and 20.5% of those deposits are brokered. State Exchange Bank grew its loans by 24% in 2022, but its deposits only grew by 13.4%. With loans to insiders accounting for 26% of total equity, you would hope its delinquency to asset ratio would be better than 2.5%.