The image above depicts the growth in loans, loan loss reserves, and problem loans at our nation's banks during the 12 month period ended March 31, 2025. Noncurrent loans grew more than three times the rate of both total loans and loan loss reserves.

We listed 51 banks, however, that are really ramping up reserves. (They can be found on page 5 of this week's Jumbo Rate News.)

As delinquencies continue to climb, a continued increase in reserves is prudent. In this week's issue, we look at those leading the way.

U.S. Banks Bolstering Loan Loss Reserves

Once again, there was no change in the Fed Funds rate this week. After dropping a full percentage point in 2024, rates have held steady (between 4.25% and 4.50%) for the last eight months. This means there will be no relief in loan rates.

While inflation has come down, it still outpaces household income, and has for years. So, even though we are now well into an expansion (began April 2020), consumers are still concerned about their economic outlook. We’d say they have good reason… and we’re not alone.

According to a recent report by William M. Rodgers III, V.P. of Community Development Research at the Federal Reserve Bank of St. Louis, more than 50% of U.S. households have little or no discretionary income. Worse yet, this has been the case for years. It turns into a snowball effect. His conclusions summed it like so:

“A persistent lack of discretionary income likely diminished the economic resiliency of this large share of households and exacerbated the impact of recent inflation. To make ends meet, many U.S. households increased their debt during the current economic expansion, with delinquency rates rising.”

We’ve reported on those rising delinquency rates several times. The most recent was just last week (JRN 42:28) with “Troubled Commercial Loans are on the Rise”.

Commercial loans may be leading the way, but there is no shortage of loans falling behind. This week, we want to commend banks that are preparing for the possibility of this leading to a rise in charge-offs.

To that end, the 51 banks listed on page 5 each reported an increase in loans between March 31, 2024 and March 31, 2025. In some instances, the loan growth was slight, but in others, loan growth exceeded 100%.

In all 51, however, the reserves set aside for loan losses grew more rapidly than the growth in loans outstanding. While widely varied, the increased reserves for the banks listed on page 5 are all quite impressive. They range from 47% at 2-Star Maxwell State Bank, Maxwell, IA (15930) all the way up to 1849% at 4-Star TBO Bank, Orrick, MO (10597).

For comparison, the FDIC’s first quarter 2025 Quarterly Banking Profile reported “tepid” year-over-year aggregate industry loan growth at just 3%. Quarterly provisions for loan losses and loan loss reserves, on the other hand, were up 9.1%.

At the close of calendar 2023, the industry coverage ratio (the ratio of the allowance for credit losses to noncurrent loans) was above 203%. Consistent declines have brought it down to 177.5% as of March 31, 2025. As delinquencies continue to climb, a continued increase in reserves is prudent. Let’s look at some of the banks leading the way.

Established less than two years ago (October 2023), 3½-Star Zenith Bank & Trust, Scottsdale, AZ (59318) is one of just 14 banks headquartered in Arizona (JRN 41:10). As a de novo, it is simply preparing for the possibility of loans turning sour in the future. It actually has zero on its books now.

 JRN listee 3½-Star Newtek Bank, NA, Miami, FL (18734), as we mentioned in (JRN 41:47), is now an online only bank. You may have also noticed it listed on page 5 of last week’s issue because of a notable increase in troubled commercial loans. While we are pleased to report that its reserves for loan losses are also increasing, the pace is not keeping up with its delinquencies. Even with 87% year over year growth, it will have to step up the pace of its loss provisioning.

 4-Star Peoples Savings Bank, Indianola, IA (34973) considers itself an agricultural bank, but the majority of its loans are actually commercial. Its delinquent loans peaked at $11.8 million on September 30, 2024 and have been under $9 million the two subsequent quarters. (A sneak peek at June 30th data indicates that number will come down even further.)  At March 31, 2025, it had enough in reserves to cover nearly 88% of delinquent loans. We expect that to be over 100% when June numbers are released.

Aside from commercial lending specialists (63%), agricultural banks have the greatest presence on page 5 with 11 (21.6% of the total). 4-Star Longview Community Bank, Mount Pulaski, IL (11319) is one such bank, proud to be investing in rural Illinois.

But there’s another reason Longview Community Bank is growing its reserves. On March 10, 2025, Longview merged with its affiliate, Bank of Gibson City, another local Ag bank. The combination added $600,000 in delinquent loans to Longview. Bank of Gibson also brought $1.6 million in short term past dues with it, which coincided with a $1.3 million increase in Longiew’s short term past dues.

An increase in short-term past due loans is not always a precursor to higher delinquency rates, but it often is. Longview Community Bank was wise to up its reserves before that happens. It may have to continue to do so.

 We have looked at commercial lenders and Ag banks preparing for troubled loans, now lets look at a consumer lender: 4-Star Toyota Financial SB, Henderson, NV (57542). The automobile lender has been a perfect example of short-term NOT becoming long-term headaches. Short-term past dues have fluctuated wildly, however and Toyota seems to be preparing for the worst. Kudos!