This week we examine some of the reasons that many banks are currently reducing their asset size.

As the title suggests, the primary reasons include 1) divestiture of commercial loans, CRE in particular; 2) regulatory enforcement actions; and 3) exiting the crypto and/or Fintech businesses.

Any of these can, by itself, lower a bank's assets, but we found that many banks are experiencing two or more at the same time.

Commercial Loans, Enforcement Actions and Crypto, Oh My

We have been reporting recently on banks that are growing their assets  - either organically or by way of mergers and acquisitions. This  week our focus is on another set of banks, those with shrinking assets. (The 50 community banks that lost the highest percent of total assets during the 12 months ended June 30, 2024 are listed on page 5 of this week's Jumbo Rate News.)

As we examined the banks (which are listed in descending order by percent of assets lost), it did not take long to notice commonalities.

Among the top five “losers”: all have been noted in JRN for being heavily invested in commercial loans; four of the five are operating under regulatory enforcement actions; and three of the five have been involved in either the Crypto or Fintech industries. Let’s start from the top.

Zero-Star Transact Bank, N.A., Denver, CO has been on Bauer’s Troubled & Problematic Bank Report (T&P) (rated 2-Stars or less) since Q4 2020. Transact Bank has an unusual modus operandi as 100% of its loan portfolio is in Commercial Real Estate (CRE). That itself put Transact Bank on our May ’24 list of “Banks with Commercial Loans to Watch” (JRN 41:18).

None of its loans are reported as past due but, it is reducing its loan volume (as well as all of its other assets) at a very rapid pace. Today it is down to less than $6.8 million in total assets. Of that, just $2.5 million is loans.

Transact Bank has been operating under enforcement actions since 2016. Its latest (dated March 29, 2021) found that Transact Bank never fully complied with either its 2016 or 2019 agreements and was therefore given this one, last ditch effort, to redeem itself.

In the three and a half years since, we haven’t seen much (if any) improvement. Not only is Transact Bank posting losses quarter after quarter, in the past year it has been shedding: 46.3% of assets; 59% of equity; and 52% of deposits. Today, Transact seems more focused on Fintech activities than banking.

2-Star Vast Bank, N.A., Tulsa, OK, was also listed in that May issue for its Commercial Loan concentration, which consist of 44.8% CRE and 21.8% Commercial & Industrial (C&I), including multi-family. That accounts for over 65% of total loans.

Vast Bank has been operating under an enforcement action since the fourth quarter of 2023. A steep and sudden drop in net worth (from $83 million to $17 million) dropped its leverage capital ratio (CR) to just 2.47%. Its regulatory capital classification became “significantly undercapitalized” and its Bauer star-rating  dropped to “ZERO”.

To get back on the right track, Vast Bank needed to shed assets quickly, so it shuttered its crypto operations completely. Assets dropped 25% in one quarter and have continued to slide ever since.

The next bank, 2-Star Eastern National Bank, Miami, FL, is a little bit different. It is heavily invested in Commercial loans (61% of total loans), and it is operating under an enforcement action (since 2018). It has been a fixture on Bauer’s T&P Report even longer than Transact Bank. Perhaps the most significant strike against Eastern NB, however, is none of the above.

Eastern NB lost 27% of its assets and 28% of its deposits after a lawsuit was brought on by some minority shareholders. The plaintiffs claim the bank has ties with the Maduro government in Venezuela. Without getting into the nuts and bolts of the lawsuit, we can confirm that part of the enforcement actions against Eastern NB pertained to money laundering and the Bank Secrecy Act.

There’s an old saying that “any press is good press”. Not in this case. The lawsuit was seemingly enough for many customers to cease doing business with this bank.

4-Star First Security Bank, Sleepy Eye, MN is the only one of the highest asset losers NOT currently operating under an enforcement action. It used to be more heavily invested in commercial loans than it is now (see JRN 40:23) but started pulling back on commerce early this year in favor of agriculture loans.

First Security Bank’s assets shrank 24% over the 12 month period, and for good reason. It unloaded a large amount of volatile, available-for-sale securities. That move brought its star-rating up from 3½-Stars to 4-Stars in the first quarter 2024. First Security Bank, Sleepy Eye, MN, is the largest of four sister banks that operate in IA, MN and ND. All are now recommended by Bauer (rated 4 or 5-Stars).

Finally, 4-Star United Texas Bank, Dallas, TX, recently got slapped with an enforcement action for its servicing of crypto customers in addition to deficiencies in its anti-money laundering protocols. It also has the majority of its loans (over 85%) in commercial loans, mostly CRE.

United Texas Bank bills itself as a “boutique commercial bank”, so commercial loans come with the territory. While its assets decreased by $317 million during the 12-month period, only about $25 million was a decrease in loans. Another $145 million was securities and the rest was a mixture of “other” miscellaneous assets.

If we continue down the list, we will likely find banks shedding assets after an acquisition. But at this time, the most common threads seem to be: commercial loans, enforcement actions and divesting from crypto or Fintech.