Introduction

Asset Quality Shows “Modest Deterioration”

Asset Quality Shows “Modest Deterioration”

On Thursday (9/7/23), the FDIC finally released its Quarterly Banking Profile (QBP) detailing the banking industry at the close of the second quarter 2023.

In the FDIC reported that “Asset quality metrics remained favorable despite modest deterioration.”

As an industry that may be true, but we listed 51 banks with high delinquencies (represented by a nonperforming asset ratio of at least 2.3%) that also have insufficient reserves,  (enough to cover only 80%, or less), of those nonperforming loans.

Bauer's Historical Bank Generator Report provides side-by-side financial data for 5 quarters of your choice (compare year-ends or historical year-over-year quarters) on any FDIC-Insured U.S. bank. This report includes balance sheet and income statement data (including provisions for loan losses) as well as a number of key ratios and peer comparisons (including nonperforming assets).

Asset Quality Metrics Show “Modest Deterioration”

On Thursday (9/7/23), the FDIC finally released its Quarterly Banking Profile (QBP) detailing the banking industry at the close of the second quarter 2023.

Some of the items the FDIC highlighted that we will be looking at more closely in coming weeks were:

  • a decrease in net income;
  • an increase in unrealized losses on securities; and
  • a fifth consecutive quarterly drop in deposits.

What we want to focus on this week, however, is loan quality. The FDIC reported that “Asset quality metrics remained favorable despite modest deterioration.” That is something we want to address right away.

Total assets decreased at our nation’s banks both during the second quarter and during the year. Yet, loans (which represented the largest portion of assets) increased. Of particular concern were credit card loans, which were up $45 billion (4.6%) during the quarter and $124.4 billion (13.8%) during the 12 months ending June 30th.

That is a sure indicator that consumers are struggling to keep up. An even surer sign is that the noncurrent loan rate is starting to creep up, (although at 0.76%, it is still well below the pre-pandemic average of 1.28%). Net charge-offs, on the other hand, are back up to pre-pandemic levels.

To be clear, not all banks are showing deterioration in their loan portfolios. But, we are watching the 51 banks listed on page 5 of this week’s JRN very carefully.

In addition to being rated 3½-Stars or lower, each bank listed has high delinquencies (represented by a nonperforming asset ratio of at least 2.3%) and has insufficient reserves,  (enough to cover only 80%, or less), of those nonperforming loans.

Most of the page 5 banks are small, community banks with no credit card loans at all. Yet, they are noteworthy for other loans. 3-Star Eastern Savings Bank, FSB, Hunt Valley, MD, is one such bank. Eastern SB has no credit card loans and barely any consumer loans. Its specialty is residential real estate. In fact, Eastern SB has been featured several times in JRN for having “residential real estate loans to watch” (most recently in JRN 40:25).

With delinquent loans of $16.813 million (over 70% of which is residential real estate), Eastern SB’s nonperforming asset ratio is 6.07%. What’s more, Eastern Savings Bank  has only enough in reserves to cover 20.4% of those loans.

Eastern SB just closed one of its branches, permanently (Lutherville branch closed 8/31/23). It now operates through four locations in greater Baltimore. Its future is intimately tied to the residential real estate market of that area.

Eastern SB has a lot going for it, too. Its capital levels are strong (leverage CR 26.7%); it is profitable (and has been throughout the pandemic); and it has an impressive interest margin (5.7% of earning assets—JRN 40:13).

Another small community bank without any credit card loans is 3-Star First Bank & TC of Murphysboro, IL. This bank more than makes up for its lack of credit card loans with an abundance of auto loans. Total consumer loans represent just under 10% of total loans (well above the 6.7% of its peers).

In this case however, Commercial Real Estate (CRE) is what we really have to watch. First B&T’s CRE represents 34.5% of total loans as opposed to 15.9% of its peer group (see JRN 40:23). And, almost 80% of First B&T’s nonperforming loans come from CRE.

Now let’s look at a non-community bank that made the list on page 5: 3-Star Carter Bank & Trust, Martinsville, VA. Established at the end of 2006 with the acquisition of ten banks simultaneously, Carter Bank is by far the youngest bank we will focus on today. It is also by far the largest. With nearly 70 branch offices in Virginia and North Carolina, Carter Bank boasts $4.378 billion in total assets.

The second quarter was anything but kind to Carter Bank. In that one quarter, its delinquent loans skyrocketed from a manageable $8.4 million to over $310 million. That brought its Bauer’s adjusted capital ratio down to 2.9% and its delinquency to assets ratio up to 7.1%. What’s more, it only has enough in reserves to cover about 30% of those loans. For reference, the following compares Carter Bank with its peer group:

Asset Quality at 6/30/2023

Carter Bank & Trust

Peer Group
Repossessed Assets as a percent of Net Worth

1.00%

0.15%

90+PastDue & Nonaccruals as a percent of Net Worth

91.68%

4.89%

Nonperforming Assets as a percent of Total Assets

7.17%

0.53%

Delinquent Loans as a percent of Total Loans

9.33%

0.75%

More than half of Carter Bank’s loans (53%) are CRE with another 13.5% in construction and land development. About 75% of its delinquent loans are also in those two categories. The rest is spread out. The point is, this is anything but “modest deterioration”.

Fortunately, there are relatively few banks in a similar situation. In fact, most banks (91%) are still recommended by Bauer.

You can be sure we will watch out for the rest.

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