C&I Lending Down 13% in Spite of PPP

C&I Lending Down 13% in Spite of PPP

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A year ago (JRN 37:40), we took exception with United Bank of Philadelphia because 87% of its loan portfolio was tied to the success of small businesses (56% in Commercial Real Estate (CRE), 26% in Commercial & Industrial (C&I) + 5% in Construction/Land Development).

Worse yet, the quality of those loans was dubious, to say the least. United Bank’s Bauer’s Adjusted Capital Ratio (CR) was negative (-2%) and its delinquencies to assets ratio exceeded 7%.

United Bank’s woes did not go unnoticed by regulators. It was operating under a consent order since 2012, that was modified and strengthened (significantly) in 2018. As a result, the bank has managed to scratch its way back up to a 2-Star rating, an accomplishment not seen by United since 2014. Yet, it remains on Bauer's Troubled and Problematic Report, as it has since 2011.

It still has most of its eggs in the small business basket. In fact, as of June 30, 2021, the percent of United Bank’s loans that are dependent on small business has increased to 90%. However, a good chunk of those loans can be attributed to the Paycheck Protection Program (PPP). And, perhaps more important, the quality of those loans has shown significant improvement. In the past year, United Bank’s leverage CR has increased from 5.2% to 9.4%; its Bauer’s Adjusted CR has turned positive (over 5%) and its delinquencies to assets ratio has improved from 7.2% to 4.3%, which is still high, but a big improvement.

United Bank is listed on page 7 along with 50 other community banks that, while many banks were losing C&I loans, reported greater than a 25% increase during the 12 months ending June 30, 2021. (Banks established in 2016 or later were excluded from the list since rapid growth is expected in the first several years of a de novo’s life.)

In some instances, the C&I loan growth was clearly due to PPP. The first bank listed, for example, 5-Star Samson Banking Company, AL had a 130% increase in PPP volume during that 12 month period; all C&I Loans grew 84%. In terms of dollars, PPP was responsible for $5.7 million of Samson’s $6.5 million increase in total loans. Not to mention, the quality of Samson’s loan portfolio is pristine.

2-Star Gateway Bank, FSB, Oakland, CA is another. Gateway is an Asian-American Minority Depository Institution, championed in JRN 38:03 for its work in getting PPP funds out to its community. Of the $35 million in loan growth Gateway reported during the 12 month period, $20 million was in PPP. At June 30, 2021, Gateway reported 672 PPP loans outstanding for a total of $37.682 million.

That being said, Gateway has other issues that need attention. It has been operating under a supervisory order from the Office of the Comptroller of the Currency (OCC) since 2011, which replaced one issued by the now defunct Office of Thrift Supervision (OTS) in 2009. The 2011 order was strengthened last November as the OCC took a harder line on such things as the Bank Secrecy Act (BSA).

Then there are other banks, like 5-Star SouthernTrust Bank, Marion, IL, which didn’t jump on the PPP wagon in the very beginning as it was in the middle of an acquisition. On July 18, 2020, the then $63 million asset SouthernTrust and the $126 million asset South Porte Bank, Marion, IL were combined. South Porte’s assets included $105 million in loans, of which, $21.3 million were PPP (488 loans). It wasn’t until the first quarter of 2021 that SouthernTrust began growing its PPP organically. And it did so with gusto. At March 31st, SouthernTrust Bank reported 1,421 PPP loans totaling over $46 million.

Then there’s Zero-Star Cecil Bank, Elkton, MD, which has had problems dating back to the Great Recession. It dropped to a 2-Star rating in 2009 and it’s been downhill since. In fact, Cecil’s parent, Cecil Bancorp, filed for Chapter 11 bankruptcy protection in 2017. As a result, the Treasury’s Troubled Assets Repurchase Program (TARP) stock was sold to outside investors.

In the past year, C&I loans at Cecil Bank increased 137%, and none of it was PPP. A year ago, Cecil Bank had slightly more than 30% of its loan portfolio in each: residential real estate, CRE and C&I loans. Today, that mix has changed dramatically. Now it has 55% in C&I (without the benefit of PPP), 23% in CRE and 20% in residential real estate.

That 55% is a risk, especially given Cecil Bank’s historically subpar underwriting, which has caused it to be under several enforcement actions. However, Cecil’s former CEO pled guilty to bank fraud in 2020 and the bank announced in August that it has secured an additional $10 million in capital so 9/30 data should show a marked improvement.
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