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A new analysis from investment bank Keefe, Bruyette & Woods shows that small- and mid-cap stock banks in the Northeast had similar credit quality during the first quarter as other SMID banks in the broader group that KBW analyzes.
KBW said banks in the Northeast operated in some of the states most impacted by the coronavirus pandemic. The analysis included about 50 banks in New England, New York, Pennsylvania and New Jersey,
“COVID-19 related indicators such as risky loan segments, loan deferrals, and PPP participation were all essentially in line with the broader universe,” KBW analyst Collyn Gilbert wrote in the report.
Metrics analyzed in the report included loans exposed to industries most affected during the coronavirus crisis. CRE loan portfolios were deemed the most risky, including loans tied to hotels, restaurants, travel and leisure, and retail. The five banks with the most exposure to risky loan segments included Massachusetts-based Berkshire Bank, which operates in Connecticut.
Berkshire’s loan exposure to retail was 11 percent. The median exposure to retail was 7 percent for Northeast banks and 6 percent for KBW’s small- and mid-cap universe. Other Connecticut banks in the analysis included People’s United, which had 11 percent exposure to retail, Webster Bank with 5 percent, and Bankwell Bank with 20 percent.
In addition to the categories at risk, Berkshire Bank identified 8 percent of its loan portfolio in an “other” category, including loans tied to leisure, recreation and amusement. Gilbert said their performance could lag when regional economies begin opening back up.
Overall, 25 percent of Berkshire Bank’s loans were considered risky, with People’s United, Webster and Bankwell at 14 percent, 11 percent and 20 percent, respectively.
KBW also looked at loan deferral trends when reviewing credit quality, though Gilbert pointed out that deferrals under the CARES Act are not characterized as troubled debt restructuring.
“Tracking the performance of these deferred loans, especially those at the top and bottom ends of these ranges, will be key in assessing both broader economic risks, as well as the individual company risks tied to these borrowers,” Gilbert said.
The median for Northeast banks was 12 percent of loans in deferral, with KBW’s full SMID universe at 11 percent. People’s United had deferrals on 7 percent of its loans, while Webster had 11 percent, Bankwell had 15 percent and Berkshire had 14 percent.
The Paycheck Protection Program is another indicator that KBW is watching. Gilbert pointed out several possible outcomes from participating in the PPP, including providing – at least initially – a layer of credit insurance for many commercial borrowers, increasing provisions and reserves from income generated from accelerated payoffs, expanding customer bases, and showing banks’ operational and processing strengths.
“However, with all opportunities come risk, so we will pay close attention to the performance of these PPP loans, and monitor the timing and magnitude of forgiveness of these loans during 2Q20 and 3Q20,” Gilbert said.
She added that many banks anticipate about 80 to 85 percent of PPP loans would be forgiven.
People’s United Bank was ranked third in terms of the total amount of PPP loans disbursed at $2.1 billion at the time of KBW’s analysis, an amount representing 5 percent of its first quarter loans. KBW showed Webster Bank with $1 billion disbursed, Berkshire Bank with $650 million in PPP loans and Bankwell Bank with $60 million.
People’s United in a press release on May 28 released its most recent PPP numbers, reporting more than 16,000 PPP loans for over $2.5 billion.
