Seven CEOs of the largest banks in the United States appeared before Congress on Wednesday, telling lawmakers that they have raised capital, are more diverse and more resilient than before the financial crisis. (April 1


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Two banks failed in October, the first collapsing since the start of the coronavirus pandemic.

Banking experts say they will not be the last.

At least 50 of the country’s more than 5,000 banks are considered problematic, according to Bauer Financial, a company in Coral Gables, Florida that monitors the health of financial institutions.

This means that they have high levels of non-performing loans and do not have enough capital to protect them if most of their loans fail or if the economy deteriorates.

The most troubled banks have high levels of bad loans and other assets relative to their total capital, a measure known as the “Texas ratio” and one of the most important indicators used by analysts to determine the bank’s long-term viability.

Not all of these banks will go bankrupt, experts say, and there is much disagreement over how many of them will fall before the Covid-19 crisis is over.

“I’d say 10 or less,” said Christopher Marinak, a banking analyst and research director at Janney Montgomery Scott LLC, a financial consulting firm in Atlanta. “And many of these banks will be small.” So it will be very different from 2008 in 2012, when nearly 500 banks went bankrupt.

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But Jason Wanslet, a mortgage foreclosure specialist and partner at Kelley Kronenberg, is more pessimistic.

From vacant storefronts and office buildings to the inability of tenants to pay rent due to financial difficulties, he sees the pandemic having far greater consequences for the economy – one that will lead to far more foreclosures, bankruptcies and bank failures than many they think.

“We are preparing for what could be close to the 2008 housing crisis,” Wanslet said. “And commercial loans, my God. There will be a huge number of defaults on commercial properties.”

Loans for hotels and retail are already declining in record numbers, and office loans could be the next shoe to drop out, Wanslet said. Many small businesses are still struggling, especially in areas of the country that depend on tourism or the oil and gas industry.

“It may take 12 to 18 months before we get a real idea of ​​the damage,” Wanslet said.

Two troubled banks

Apart from being small, the two banks, which failed in October, have little in common.

Florida’s first city bank in Fort Walton Beach, with $ 135 million in assets, has struggled with bad loans since the last recession. The need to set aside additional capital for loan loss provisions to deal with Covid’s problems simply pushes it out of the way.

The state-owned Almena Bank, with $ 70 million in assets, was different. The Bank of Kansas has been hit hard by bad agricultural loans over the past few years from falling commodity prices caused by a severe harvest and a trade war between the United States and China.

Of the 10 banks considered most concerned by Bauer Financial, six have similar stories to First City. They have been weighed down by loan problems for more than 10 years.

The other four are more like Almena – affected by the stunning agricultural economy, where agricultural loan arrears peaked in eight years in March and repayment rates continue to decline until this summer, according to the Kansas City Federal Reserve.

Two of the most troubled banks have also been hampered by fraud by their CEOs.

Mary Beyer Halsey, a former CEO of Cecil Bank in Elkton, Maryland, has pleaded guilty to a number of federal charges, including bank fraud, in a real estate scheme that cost the bank about $ 145,000 to lose.

Halsey has left the bank since 2013, but was sentenced to two years in prison earlier this month.

Meanwhile, just a year and a half ago, Aaron Johnson resigned as CEO of Farmers Bank in Carnegie, Oklahoma, after being sued by three shareholders who claimed he fraudulently sold them $ 1.5 million in bank shares. , which have already been pledged as collateral for another loan.

Both Cecil Bank and Farmers Bank, which had the highest Texas odds in the country at the end of June, are now under new management and executives are confident they will be able to get through this rocky period.

“We have all the new shareholders and new capital,” said Clint Stone, the new CEO of Farmers Bank. But he declined to say how much the bank had collected.

“This will be in our call report in December,” Stone said, referring to periodic financial health reports that banks must submit to regulators.

Terry Spiro, president and CEO of Cecil Bank, was more expansive.

Responsible for the bank after leaving Halsey in late 2013, Spiro said he had fought long and hard to free Cecil Bank from troubled loans accumulated during the real estate boom in the mid-2000s. And while Tecil Bank’s ratio in Texas may seem high at about 180 percent, Spiro said it’s much lower now than it was in 2017 before a $ 30 million capital injection.

“Exactly on the eve of receiving this money, our ratio in Texas was 998%,” Spiro said. “Working in a bank in this situation is like being an emergency doctor and making sure your patient doesn’t die at the table.”

Spiro acknowledged that Covid has put additional stress on community banks. That’s because they’re not as diverse as the big banks, she said. They are more dependent on commercial real estate and small business loans, which have been hit hard by the crisis.

Spiro added that banks have no problem receiving deposits, but currently there are not many profitable places to invest these deposits, Bonds and securities do not pay much interest and the demand for loans is minimal.

But Cecil Bank still has real estate that it has sold at a profit, and its ratio in Texas is moving in the right direction.

“This is the lowest since I’ve been here,” Spiro said.

Weathering of the storm

Other bankers, whose institutions are at the top of Bauer’s troubled list, also expressed optimism in the face of difficult times.

Evelyn Smalls, president and CEO of the United Bank of Philadelphia, said fresh capital in the third quarter allowed her bank to reduce its Texas ratio from 125 percent to 74 percent.

Founded in 1992, the bank is one of dozens owned by black financial institutions in the country. It is focused on lending business within the city and often receives capital infusions from the local government, including $ 3.5 million from the city of Philadelphia and $ 1.5 million from the Philadelphia Industrial Development Corporation in May 2019.

Smalls said childcare loans are a particularly pleasant place in terms of pandemic lending, as health care and other key workers desperately need a safe place for their children.

“We feel we can survive the storm,” Smalls said.

Community Bank & Trust CEO William Stump Jr. feels the same way.

His Lagrange bank, Georgia, had the third highest ratio in Texas in the country at the end of June. But Stump said plans are under way to sell the Alabama bank to its holding company and raise $ 7 million in new capital – moves that will increase tier 1 capital to nearly $ 16 million.

“After more than 10 years of defense (unwinding bad loans and selling real estate), we will be offended again,” Stump said.

As for Kovid Slam, he said he had not seen much growth in bad loans and that the economy in his region of Georgia remained quite strong.

At the Nantahala Bank & Trust in Franklin, North Carolina, CEO Tim Hubbs said the Covid pandemic had actually benefited his bank, which had suffered a hangover with bad loans from the Great Recession.

Located in the mountains near Asheville, Franklin attracts an influx of people who want to migrate permanently from major cities, and tourists who are just looking for a vacation.

“The people who were buying property and our pipeline for new loans have grown,” Hubbs said. “We don’t have enough housing and we’ve sold a lot of our exclusive real estate.”

Bank failures depend on recovery

Matt Anderson, managing director of Trepp LLC, which monitors commercial real estate markets, said the final number of bank failures would depend on whether the economy continues to recover.

A good sign, he said, is that banks have not spent as much money on loan loss reserves in the third quarter as in the first two quarters of the year, which means they see loan problems as manageable.

But Anderson said another indicator of how well banks are doing will emerge at the end of the fourth quarter. This is because the CARE Act allowed banks to defer the classification of loans as overdue for 180 days, and these 180 days increase in the fourth quarter.

“Banks treat these loans as if they’re still doing well,” Anderson said. “According to our estimates, 70% of hotel loans have received deferrals, and 40% to 50% of retail properties have received deferrals.”

The office sector is another mystery, Anderson said. It is not clear how many office owners will overdue their loans if and when tenants decide not to renew their leases.

“There’s a lot of sublet space on the market,” Anderson said. “For homeowners, this is the worst thing on offer there, because renters are just trying to reduce their losses. They’re not trying to make money. So it’s having a depressing effect on rents.”

Then there is small business.

“They have much less access to capital, and we’ve already seen a wave of small business stop,” Anderson said. “If we have a new wave of small business going bankrupt, it will put pressure on the banks.”

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