June 15, 2024 / VOLUME NO. 318

Hidden Risks


Are community bankers overly optimistic? 


Nonperforming assets remain at historic lows. Inflation has come down. The economy has stayed strong, and unemployment is low. With so many positive indicators, bank leadership teams may be falling into the familiar trap of loving their own bank loans. 


That was a message from several speakers at Bank Director’s Bank Audit & Risk Conference this week in Chicago. While net charge-offs have been few and far between, bankers might be ignoring a growing risk inside commercial real estate portfolios. 


Much of the news headlines have focused on low occupancy levels in office buildings, as many workers continue to enjoy flexible or hybrid work arrangements. Some commercial buildings and skyscrapers have gone into foreclosure or developers have given the keys back to the lender, according to Jon Winick, CEO of Clark Street Capital, who presented at the conference. 


But the bread and butter of many community banks, owner-occupied commercial real estate, may also be in distress. Small businesses have been hit with rising inflation and higher interest rates on floating rate loans. Plus, banks and thrifts are exposed. They have $1.53 trillion in commercial real estate mortgages maturing from 2025 to 2029, according to the data firm Trepp.


Remarkably, community banks on average did not increase their allowance for credit losses over the past year through the first quarter of 2024, according to the QwickAnalytics Community Bank Index. The Federal Deposit Insurance Corp. reported that many banks in the first quarter of 2024 were reducing loan loss provisions, not raising them. 


David Ruffin, a principal at IntelliCredit, a division of QwickRate, says some bankers may not understand how long it takes for credit risk to work through their portfolios. Nonperforming loans tend to peak 18 to 24 months after the last rate hike, he said. 


During the great financial crisis, nonperforming loans didn’t peak until the third quarter of 2010, three years after housing prices began to fall, according to an analysis from BankRegData shared by Winick.  


Could bankers escape a slow-moving credit crisis? Possibly, if they underwrote their loans well, monitor those loans and move quickly when stress occurs to address the problem. For the industry in general, the economy needs to stay strong. But that’s no guarantee. 


• Naomi Snyder, editor-in-chief for Bank Director

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