If we’ve learned anything in the past year and a half, it’s that nothing is foolproof. Nor is anything 100% predictable. In much the same way that New York cabbies (and the institutions that financed them) had to deal with ride-share companies devaluing their prized Taxi Medallions, Commercial Real Estate (CRE) investors (and the institutions that finance them) are bracing for the possibility that many Americans may continue to work remotely.
In that event, leases may not be renewed when they expire. The result could be empty offices and empty storefronts. Fortunately, our nation’s banks started 2020 flush with capital and they set aside large amounts for loan losses… just in case. But, as we’ve seen, some banks have already begun pulling back those reserves. We hope, not prematurely, but we’re watching.
Each of the 50 community banks listed on page 7 has a high CRE loan concentration. Based on June 30, 2021 data, CRE loans represent more than 35% of total loans. In addition, total delinquent loans are greater than 1.5% of the entire loan portfolio and delinquent CRE loans are greater than 3.2% of total CRE. (Note: we raised the CRE delinquency for this list from 2.75% the last time we reported on these loans (JRN 38:04) to 3.20% today.)
In three quarters, the number of community banks that exceeded the 2.75% CRE delinquent mark rose to 65. That’s a 33% increase from the 49 we reported based on September 30, 2020 financial data. Here are just a few:
At June 30th 3½-Star Community State Bank, Starke, FL reported year-over-year loan growth of 20% but CRE loan growth of 61%. CRE loans now account for over 41% of its loan portfolio and 5.4% are delinquent. Compare that to 3.3% total delinquent loans, which while better, is still high. Loan loss reserves at Community State Bank represent less than 30% of delinquent loans. That’s why we have our eye on it.
It could be worse. 3½-Star First State Bank, Tahlequah, OK reported half the rate of CRE growth of Community State at 30.6%. But its CRE delinquencies of 12.9% are well above its 5.58% overall delinquency rate. Reserves to delinquencies at First State are similar at 33%.
Reserves to delinquent loans are just 33% at 5-Star Karnes County NB, TX, as well. (Remember, reserves should be sufficient to cover all delinquent loans in case of default.) And, CRE loans grew by 70.5% at Karnes during the 12 month period. While CRE delinquencies are a little high at 3.3%, it is not concerning to us because its entire loan portfolio only represents a small fraction (20%) of total assets. As a result, its delinquency to asset ratio is still under 1.4%.
The chart below shows how the nation’s banks are doing as a whole and also by region. Overall, CRE loans are performing much like they did 12 months ago, but it varies greatly by region. The northeast—led by New York—has been hit the worst so far. But this is far from over.
We will continue monitoring CRE as well as all other loans. We are not hoping for another shoe to drop, but we be tuned in if it does.