Bank failures can increase if businesses cannot recover quickly
Two banks went bankrupt in October, the first to collapse since the start of the coronavirus pandemic.
Banking experts say they won’t be the last.
At least 50 of the nation’s more than 5,000 banks are considered to be in trouble, according to Bauer Financial, a Coral Gables, Florida, company that monitors the health of financial institutions.
This means they have high levels of NPLs and not enough capital set aside to protect them if more of their loans go bad or the economy deteriorates.
The most troubled banks have high levels of bad loans and other assets relative to their total available capital, a measure known as “Texan report“and one of the most important metrics used by analysts to determine a bank’s long-term viability.
According to experts, not all of these banks will go bankrupt and there is a lot of disagreement over how many banks will go bankrupt before the end of the Covid-19 crisis.
“I would say 10 or less,” says Christopher Marinac, banking analyst and research director at Janney Montgomery Scott LLC, a financial advisory firm in Atlanta. “And a lot of these banks will be small.” So it will be very different from 2008 to 2012, when nearly 500 banks went bankrupt.
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But Jason Vanslette, mortgage foreclosure specialist and partner at law firm Kelley Kronenberg, is more pessimistic.
From storefronts and vacant office buildings to tenants’ inability to pay rent due to financial hardship, he sees the pandemic having a much bigger impact on the economy – which will lead to many more foreclosures, bankruptcies and bank failures than many realize.
“We are preparing for what could be approaching a housing crisis in 2008,” said Vanslette. “And commercial loans, my God. There’s going to be a huge amount of defaults on commercial properties.”
Hotel and retail loans are already bad in record numbers, and office loans could be the next shoe to drop, Vanslette said. Many small businesses are still struggling, especially in areas of the country that depend on tourism or the oil and gas industry.
“It could take 12 to 18 months before we have a real idea of the damage,” Vanslette said.
Two troubled banks
Besides being tiny, the two banks that went bankrupt in October don’t have much in common.
First City Bank of Florida in Fort Walton Beach, with its $ 135 million in assets, has been struggling with lending issues since the last recession. Having to set aside extra capital for loan loss provisions in order to deal with COVID-19 issues just pushed him over the edge.
Almena State Bank, with $ 70 million in assets, was different. The Kansas bank has been hit hard by bad agricultural lending in recent years as commodity prices drop due to good harvests and the trade war between the United States and China.
Of the 10 banks rated the most in trouble by Bauer Financial, six have similar stories to First City. They have been weighed down by credit problems for over 10 years.
The other four are more like Almena – affected by the declining economy in agricultural states, where delinquencies on farm loans peaked in eight years in March and repayment rates continued to decline until this summer , according to the Kansas City Federal Reserve.
Two of the most troubled banks have also been devastated by fraud by their CEOs.
Mary Beyer Halsey, former CEO of Cecil Bank in Elkton, Maryland, pleaded guilty in July to several federal charges, including bank fraud, in a real estate scheme that cost the bank approximately $ 145,000.
Halsey has been out of the bank since 2013, but she was sentenced to two years in prison earlier this month.
Meanwhile, just a year and a half ago, Aaron Johnson resigned as CEO of Farmers Bank in Carnegie, Oklahoma, after being sued by three shareholders who claimed he fraudulently sold them for $ 1.5 million in bank shares who had already been pledged as collateral to secure another loan.
Cecil Bank and Farmers Bank, which had the highest Texas ratios in the country at the end of June, are now under new management, and executives are confident they will get through this difficult time.
“We all have new shareholders and new capital,” said Clint Stone, the new CEO of Farmers Bank. But he declined to say how much the bank raised.
“It will be in our December appeal report,” Stone said, referring to the periodic financial health reports that banks are required to file with regulators.
Terrie Spiro, President and CEO of Cecil Bank, was more expansive.
In charge of the bank since Halsey left in late 2013, Spiro said she had fought long and hard to rid Cecil Bank of the problem loans accumulated during the housing boom of the mid-2000s. And while the ratio Texas of Cecil Bank may seem high at around 180%, Spiro said it’s much lower now than it was in 2017 before a $ 30 million capital injection.
“Just on the eve of getting this money, our Texas ratio was 998%,” Spiro said. “Working in a bank in this situation is like being an emergency room doctor and making sure your patient doesn’t die on the table.”
Spiro acknowledged that the virus has put additional stress on community banks. That’s because they’re not as diverse as the big banks, she said. They are more dependent on commercial real estate and loans to small businesses which have been hit hard by the crisis.
Spiro added that banks have no problem getting deposits, but there aren’t many profitable places to invest those deposits at the moment. Bonds and securities do not earn much interest and the demand for loans is minimal.
But Cecil Bank still has real estate that it sells at a profit, and its Texas ratio is moving in the right direction.
“It’s the lowest since I’ve been here,” Spiro said.
Weather the storm
Other bankers whose institutions are at the top of Bauer’s list of problems have also expressed optimism about difficult times.
Evelyn Smalls, chief executive officer of United Bank of Philadelphia, said new capital in the third quarter enabled her bank to reduce its Texas ratio from 125% to 74%.
Founded in 1992, the bank is one of dozens of black-owned financial institutions in the country. It focuses on providing loans to businesses in the downtown area and has often received capital injections from the local government, including $ 3.5 million from the City of Philadelphia and $ 1.5 million from the Philadelphia Industrial Development Corp. in May 2019.
Smalls said daycare loans were particularly good in terms of pandemic loans, as health care and other essential workers desperately sought a safe place for their children.
“We think we can weather the storm,” Smalls said.
Community Bank & Trust CEO William Stump Jr. feels the same.
Its bank in Lagrange, Georgia had the third highest Texas ratio in the country at the end of June. But Stump said plans are underway to sell Alabama Bank of its holding company and raise $ 7 million in new capital – moves that will raise Level 1 capital to nearly $ 16 million.
“After more than 10 years of playing defense (resolving bad debts and selling real estate) we will be back on offense,” Stump said.
Regarding the pandemic, Slump said he hasn’t seen a big increase in bad debts and that the economy in his region of Georgia remains quite strong.
At Nantahala Bank & Trust in Franklin, North Carolina, CEO Tim Hubbs said the Covid pandemic has actually benefited his bank, which has been suffering from a bad debt hangover since the Great Recession.
Located in the mountains near Asheville, Franklin attracts an influx of people wishing to permanently migrate from big cities and tourists looking for a break,
“The people who bought a property and our pipeline of new loans has grown,” Hubbs said. “We don’t have enough housing and we have sold a lot of our exceptional properties.”
Bank failures depend on recovery
Matt Anderson, managing director of Trepp LLC, which tracks commercial real estate markets, said the final number of bank failures will depend on the continued economic recovery.
A good sign, he said, is that banks did not put as much money aside in their loan loss reserves in the third quarter as they did in the first two quarters of the year. which means that they view the loan problems as manageable.
But Anderson said another indicator of banks’ performance will emerge at the end of the fourth quarter. That’s because the CARES Act allowed banks to defer the classification of delinquent loans by 180 days, and that 180 days is up in the fourth quarter.
“The banks treated these loans as if they were still performing,” Anderson said. “According to our estimates, 70% of hotel loans have been deferred and 40% to 50% of commercial properties have been deferred.”
The office sector is another mystery, Anderson said. It’s unclear how many office space owners will default on their loans if and when tenants decide not to renew leases.
“There’s a lot of sublet space that’s being marketed,” Anderson said. “For landlords it’s the worst thing ever because people who sublet premises are just trying to cut their losses. They’re not trying to make money. So it has a depressing effect on it. the rents.”
Then there are the small businesses.
“They have a lot less access to capital and we’ve already seen a wave of small businesses shut down,” Anderson said. “If we have another wave of small businesses sinking, it will put pressure on the banks. “