Don’t Bank On It: Mid-Atlantic Regional Bank

Don’t Bank On It:  Mid-Atlantic Regional Bank

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

In this series, we will highlight existential issues found on a specific bank’s balance sheet. But we are also challenging readers to figure out which bank we are covering in each article.

Our second highlighted bank is a publicly listed U.S. regional bank with roughly $10B in assets and a concentrated Mid-Atlantic operating footprint. The bank generated positive earnings in the most recent reported quarter, with quarterly net interest income in the low tens of millions and positive diluted EPS. The holding company has a sub-$1B market capitalization.

Extremely high CRE exposure relative to equity

Based on third-party bank-risk screening data, this bank appears to have one of the highest commercial real estate exposures among larger U.S. banks. The screen shows total CRE exposure above five times equity, putting the loan book in a category that looks extremely risky even in a normal market environment, let alone a major crisis. Even a moderate loss rate on the CRE portfolio could create a meaningful hit to equity.

Income-producing CRE in a weak geographic region

Having CRE exposure above five times equity is already a major red flag, suggesting that the business model may be difficult to sustain under stress. However, this bank’s CRE book is heavily focused on income-producing and office CRE, which currently looks among the most vulnerable areas from an asset-quality perspective. In addition, the bank operates in a region that faces some of the more serious CRE issues compared with other footprints. This creates a very dangerous combination: extremely high CRE exposure relative to equity, a focus on income-producing and office CRE, and a weak geographic footprint where commercial real estate prices are under significant pressure.

Asset quality is already visibly deteriorating

If you follow our banking work, you know that many U.S. banks have significant exposure to CRE, and that this exposure is likely to come under pressure during the upcoming refinancing wall. However, this bank is already showing meaningful credit deterioration. In the latest quarter, nonperforming assets increased to roughly 1.3% of total assets, and nonperforming loans were close to 1.9% of total loans. Annualized quarterly net charge-offs also moved higher, reaching roughly the mid-1% area of average loans. The bank also reports a large pool of substandard and special mention loans, including loans held for sale.

Balance-sheet contraction, falling deposits and not enough capital

The funding picture is not strong. Total deposits declined in the latest quarter and were down year over year. Total loans also declined, driven mainly by lower income-producing real estate balances. This means the bank is de-risking, but the process can pressure revenue, franchise value and operating leverage.

Capital is not the obvious weak point. The problem is that the asset side is so risky that the bank would need a much higher-than-normal capital buffer to make the risk profile look comfortable.

Conclusion

This bank combines several weaknesses: very high CRE exposure relative to equity, a concentrated footprint in a troubled market, already-visible asset-quality deterioration, elevated charge-offs, a large criticized-loan pipeline, and a shrinking balance sheet.

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.