This hurricane season will undoubtedly have lasting effects on the people, businesses and banks operating in the Southeastern United States. Our hearts and prayers are with them.

For the most part, residential real estate had been holding up quite well in the Southeast. You may be surprised to learn, however, that it is showing signs of stress in the central states.

Of the 50 banks we have listed on page 5 of this week's JRN that we are watching closely due to delinquencies in their residential real estate portfolios; 36% are headquartered in the Central Region of the United States.

Residential Real Estate Faltering in the Heartland

Last week it was Hurricane Helene; this week Milton. We have no words to express how deeply we feel for those in their paths. Somehow, we were spared here in Southeast Florida, but our hearts and minds are with our neighbors to the north.

This hurricane season will undoubtedly have lasting effects on the people, businesses and banks operating in the affected Southeast states. That will be reflected in subsequent quarters. For today, we have to focus on the numbers as they were reported on June 30th.

Based on that second quarter data, we have 50 banks we are watching closely in regards to their respective residential real estate loans. (They are listed on page 5.) In addition to having a Bauer Star-Rating of less than 4-Stars, residential real estate loans make up at least 30% of total loans and at least 1.1% of those residential real estate loans are  in some form of delinquency status.

What we found interesting with this list is the number of banks located in the Chicago region. In just one quarter (since JRN 41:25)  four new Illinois banks were added, bringing the total number of Central Banks up to 18. That’s 36% of the total.

The most recent Beige Book (published in August) does not give any indication that things are improving in Chicago, so we could have even more new Central banks in the coming quarters. The four Illinois bank additions today are:

3½-Star Central State Bank, Clayton, IL was originally established in 1928 as Clayton State Bank to serve the needs of the small town of Clayton. It not only survived the Great Depression, it thrived. In 1991, as it continued to grow, it became Central State Bank. Today it operates through four branch offices, two in Adams County and two in Pike County.

At June 30, 2024, Central State Bank reported total assets of $172.875 million (7.6% higher than a year ago). Its leverage capital ratio (CR) of 16.60% is well above the 11.83% of its peer group. However,  so are its nonperforming loans:

Asset Quality Measure	Central State Bank	Peer Group
Repos / NW	2.06%	0.39%
Nonperforming Loans / NW	15.94%	4.17%
Texas Ratio	17.12%	4.21%

Roughly 32% ($42.2 million) of Central State Bank’s loans are secured by residential real estate.  Of those,  $1.834 million are no longer accruing and another $1.06 million in 30-89 days past due. Interestingly, none are reported as 90 days or more past due and still accruing.

The next new Illinois addition is the diminutive 2-Star Chesterfield State Bank, Chesterfield, IL. Established in 1898, Chesterfield has assets of just $23.826 million. Nearly $18 million (75%) of that is in the form of loans. Over 1/3rd of those loans are for single family homes.

Past due first and second liens include $33,000 nonaccrual, $108,000 90 days or more delinquent and still accruing, plus another $257,000 that are 30-60 days past due. Over 1.9% of Chesterfield’s loans are to insiders. That may not seem like a lot, but it’s more than 17% of its net worth. (The peer group average is less than 8%.)

Regulators have taken notice, too. Chesterfield is operating under an FDIC enforcement action since July that prohibits it from making any more loans to “classified borrowers”. The agreement also requires a 9% leverage CR, which is higher than the 8.72% it reported on June 30th.

Asset Quality Measure	Chesterfield State Bank	Peer Group
Repos / NW	0.00%	0.45%
Nonperforming Loans / NW	11.31%	4.71%
Texas Ratio	10.33%	4.69%

The next new addition to page 5 is 3½-Star Federal Savings Bank, Chicago, IL which was originally established in 2000 as Generations Bank. The current Federal Savings Bank name was adopted in 2011. Federal Savings Bank has total assets of $1.183 billion and a leverage CR of 12.78% (well above its peer group’s 10.73%). Its nonperformers are also well above its peer group. Over 80% of Federal SB’s loans are residential real estate and 1.67% of those are in arrears.

Asset Quality Measure	Federal Savings Bank	Peer Group
Nonperforming Loans / NW	7.85%	4.12%
Texas Ratio	11.10%	4.18%

Finally, 2-Star GN Bank, Chicago, IL is  a minority depository, established in 1934 to serve the underserved South Side of Chicago. GN Bank is shrinking, losing nearly 5% of its assets and over 25% of its loans in the past year. GN Bank’s are now just $64.7 million. GN Bank is also operating under a regulatory enforcement action that prescribes minimum CRs. It exceeds them with a leverage CR of 14.36%. Asset quality measures, however, are not quite so stellar.

Asset Quality Measure	GN Bank	Peer Group
Nonperforming Loans / NW	14.77%	4.71%
Texas Ratio	13.75%	4.69%