Don’t Bank On It: A Troubled Community Bank in New Jersey

With this article, we continue our new series, “Don’t Bank On It,” which we intend to write for the foreseeable future. Those of you who have been following our public banking articles know that we have been highlighting the major existential issues currently sitting on many bank balance sheets.

In this series, we focus on the existential issues found on one specific bank’s balance sheet. We also challenge readers to figure out which bank we are covering in each article.

Our next highlighted bank is a publicly listed US community bank with roughly $3B in assets. It operates mainly in New Jersey and looks like a traditional conservative local bank. While its balance sheet is dominated by CRE (which is problematic in and of itself), a remarkably large share of its loan book already consists of problem loans, and these problem loans exceed its equity.

Extremely high exposure to CRE

Commercial and multifamily loans amount to almost 80% of the bank’s total loan book. They are also almost 7x the bank’s equity. Needless to say, with such leverage, even a modest loan loss could seriously hit capital.

Problem loans already exceed its equity

As of Q2, the bank’s problem loans, or criticized and classified loans under its own definition, were as high as 14% of the total credit portfolio. More importantly, these loans account for roughly 130% of the bank’s equity. Current loan-loss reserves are very small, at just under 2% of gross loans, suggesting that a severe enough cleanup could consume a very large share of the bank’s equity.

Problem loans could increase given the ongoing credit review

A new CEO recently took over and began a comprehensive re-evaluation of the bank’s credit portfolios with independent consultants. Notably, according to the Q2 disclosures, the review is described as being in the early stages. As such, problem loans could increase further, as the bank’s credit book apparently remains something of a black box even for its own management.

Capital is too low for this cleanup

As of Q2, the bank’s capital ratio was just 20 bps above the regulatory requirement. Needless to say, such a thin capital cushion leaves little room for error even for a bank with a strong balance sheet, let alone this bank given the problems discussed above.

Can you recognize this bank? If not, come to StockWaves at ElliottWaveTrader.net to identify it and view not only the fundamentals report but the Elliott Wave analysis to assist in making investing decisions.