KBRA Financial Intelligence

Bank NIMs Compress; C&D Loans Concentrated in the Largest U.S. Banks

Welcome to the June 2024 edition of KFI Insights! This month’s newsletter highlights:

1. Top banks with the largest net interest margin (NIM) changes

2. Construction & development (C&D) loan concentration in the largest U.S. banks

3. Federal Reserve research that demonstrates the resiliency of the U.S. banking system

4. Recent M&A activity indicates that credit unions continue to acquire banks

Banks With the Largest NIM Changes

The U.S. banking system continues to feel the impact of the Federal Reserve’s interest rate hikes. A significant majority (83%) of banks with assets exceeding $1 billion experienced year-over-year (YoY) NIM compression between 1Q 2023 and 1Q 2024, according to data compiled by KBRA Financial Intelligence (KFI). During this period, the average and median NIM for these banks decreased by about 30 basis points (bps) and 26 bps, respectively, while the Fed increased interest rates 68 bps to 5.33% from 4.65%.

KFI Pro subscribers can find a bank’s NIM by using KCALLNIMTE for the tax-equivalent value or KCALLNIA for the nontax-equivalent value in the Excel add-in tool.

Concentration of C&D Loans in the Largest U.S. Banks

The heightened risk associated with C&D loans during periods of rising interest rates primarily stems from increased borrowing costs. This trend is exacerbated as borrowers face challenges in meeting debt obligations amid elevated financing expenses. As of 1Q 2024, C&D loans constitute less than 3.5% of individual loan portfolios at the top 10 largest U.S. banks, yet collectively these banks account for 18.3% of the total U.S. bank C&D loans. Goldman Sachs Bank USA reported the highest C&D delinquency rate for the period at 4.98%, significantly surpassing the peer group average of 1.59%, according to data compiled by KFI.

KFI Pro subscribers can use KCALLCDTL to examine a bank’s C&D loan concentration or KCALLDLCD to examine C&D loan delinquencies in the Excel add-in tool.

The Fed Examines Resiliency of U.S. Banking System

The Federal Reserve’s exploratory analysis published last month concluded that the U.S. banking system is capable of withstanding significant economic and financial stresses, although individual banks’ resilience varies based on their specific asset and funding compositions. The analysis included two funding stress scenarios and two market shock scenarios.

The funding stress scenarios tested the impact of rapid deposit repricing during severe and moderate global recessions with rising interest rates and inflation. The results indicated that the banking system could withstand such stresses while still maintaining sufficient CET1 capital ratios, with 10.0% under the severe global recession scenario and 11.6% under the moderate global recession scenario.

The market shock scenarios examined the effects of sudden financial market dislocations on the eight U.S. G-SIBs, particularly focusing on hedge fund counterparty defaults. These shocks resulted in trading losses between 1.0% and 1.2% of the banks’ risk-weighted assets, demonstrating the banks’ ability to endure significant market volatility.

Enhanced Loans & Leases GAAP Data Coming Soon to KFI!

KFI is pleased to announce that more robust data will soon be available in our GAAP financials section. This will grant KFI Pro users with access to more granular loan categories such as health care, government, and student loans, among others.

Recent M&A

The trend of credit unions acquiring banks has been on the rise since the beginning of 2024, with deals being announced each month thus far. This trend is expected to continue as credit unions seek to expand their geographic footprints and enhance their lending capabilities, while small banks look for buyers to cope with regulatory and digital banking expenses.

ELGA Credit Union (KFI Score: B) announced plans to acquire Marine Bank & Trust Company (KFI Score: B), a wholly owned subsidiary of Marine Bancorp of Florida, Inc., in an all-cash transaction, according to a June 4 press release. Subject to the terms of the agreement, shareholders of Marine Bank will receive $43.75 in cash for each share owned. The deal is expected to close in early 2025.

• ELGA Credit Union is a $1.5 billion CU in Grand Blanc, Michigan, with 96,535 current members as of March 31, 2024.

• Headquartered in Vero Beach, Florida, Marine Bank & Trust Company is a $666 million bank as of March 31, 2024.

Apple Federal Credit Union (KFI Score: B) and NextMark Credit Union (KFI Score: B) announced a joint decision to merge, according to a June 12 press release. The deal is expected to close in late 2024.

• Apple Federal Credit Union is a $4.5 billion CU in Fairfax, Virginia, with 245,392 members as of March 31, 2024.

• NextMark Credit Union is a $532 million CU in Fairfax with 16,672 members as of March 31, 2024.

In Case You Missed It

Follow KFI’s blog for our latest research, data analytics, and product updates. Read our insight pieces on 10,000 banks, credit unions, and more. Some of our recent analysis highlights include:

• Credit union membership increased to 141.6 million members in 1Q 2024, with shares & deposits and loans & leases increasing at a 9.9% compound annual growth rate (CAGR) over the past five years, driven primarily by large credit unions with assets over $5 billion.

• 1Q 2024 showed a slight decline in loan growth, partly due to a decline in credit card lending, as well as stabilization in bank delinquencies.

• 1Q2024 KFI CU scores were released for 4,600+ credit unions, with decreases (782) outpacing increases (577).

• The Independent Community Bankers of America (ICBA) published its list of top-performing banks of 2024. A lender must have a KFI Score of C or higher to be considered for ranking. See the full list of banks here.

Van Hesser’s 3 Things in Credit

Follow KBRA’s weekly podcast and newsletter 3 Things in Credit, hosted by our Chief Strategist, Van Hesser. In case you miss the weekly podcast, we’ll have the transcripts posted to the blog.

June 21: Bulls’ Run, Politics of Rates, and Aviation

June 14: Visibility, Financial Conditions, and Tech Impact

June 7: Bank Risk, Corporate vs. ABS Spreads, and ECB’s Rate Cut