KBRA Financial Intelligence

Navigating CRE Risks in Bank Portfolios and the FDIC’s Latest Remarks on Banking Regulation

Welcome to the KFI Monthly Insights. In this edition, we highlight the following key topics:

• Select regional banks surpass commercial real estate (CRE) regulatory guidelines

• FDIC Vice Chair Travis Hill’s latest remarks on brokered deposits and the Basel 3 Endgame proposal

• Bank M&A activity ramps up after the slowest year in recent history

CRE Exposure at Regional Banks

The Federal Deposit Insurance Corporation (FDIC) details regulatory guidelines to help banks manage CRE concentrations. However, adherence to these standards varies among banks of different asset sizes. The thresholds recommended by the FDIC include:

• Construction and development (C&D) loans represent 100% of tier 1 capital and allowance for loan and lease losses (ALLL)

• Total CRE loans (excluding owner-occupied) represent 300% of tier 1 capital and ALLL, and the CRE portfolio increase is at least 50% over a three-year period

According to data compiled by KBRA Financial Intelligence (KFI), 15% of the 985 regional banks that have filed their 2Q 2024 call reports (defined as having total assets between $1 billion and $100 billion) surpass at least one of the regulatory thresholds while 4% of the 985 regional banks exceed both regulatory criteria. Some examples of regional banks include:

• SouthState Bank, N.A., with over 50% of its loan portfolio in CRE, primarily in nonfarm, nonresidential loans. However, SouthState adheres to both regulatory standards and does not surpass the recommended thresholds.

• Valley National Bank, which presents a more complex picture, with over 60% of its portfolio in CRE. Despite only having 7% of its portfolio in C&D loans, the bank exceeds the regulatory threshold for total CRE loans with 440% of tier 1 capital and ALLL, and a three-year CRE loan growth rate of 63%.

• Simmons Bank, also with over 60% of its loan portfolio concentrated in CRE loans. However, C&D loans constitute a more substantial portion, at 18% of its total loan book. Despite C&D loans making up less than one-quarter of the bank’s total loans, Simmons does surpass the 100% threshold for C&D loans relative to tier 1 capital and ALLL, with C&D loans representing 110% of these measures.

• Bank OZK, with the largest CRE concentration risk in its loan book for regional banks so far this quarter. Over 75% of the bank’s portfolio is concentrated in CRE loans—primarily in C&D, which contributes 40% of its total loan book. Bank OZK exceeds all regulatory thresholds, with C&D representing 218% of tier 1 capital and ALLL, total CRE loans at 397% of tier 1 capital and ALLL, and a three-year CRE loan growth rate of 56%.

KFI Pro subscribers can perform a comprehensive analysis on a bank’s risk exposure with our new CRE template located in the Template Library.

FDIC Vice Chair Travis Hill on Brokered Deposits and Capital

In recent remarks, the FDIC’s Travis Hill offered a critical assessment of key regulatory frameworks, specifically addressing shortcomings in the treatment of brokered deposits and advocating for substantial revisions to the Basel 3 Endgame proposal.

Hill scrutinized the brokered deposits framework established in 1989, highlighting its inadequacy in today’s banking environment. Brokered deposits, which are facilitated by intermediaries or “deposit brokers,” face higher insurance assessments and regulatory restrictions. However, Hill pointed out that this framework fails to address the real risks associated with modern deposit arrangements. The failure of Silicon Valley Bank (SVB) underscored these limitations—despite SVB’s heavy reliance on uninsured deposits, none were classified as brokered. This discrepancy revealed that the current regulation does not effectively categorize or manage risks. Hill suggested replacing the outdated framework with a more flexible system, such as a growth cap, to better align with contemporary banking practices and liquidity needs.

Vice Chair Hill also critiqued the Basel 3 Endgame proposal, focusing on its complexities and the need for substantial revisions. The proposal aims to overhaul capital requirements but has been criticized for its lack of practical application and understanding of real-world impacts on banks. The failure of SVB and others have demonstrated the proposal’s limitations and the need for a more comprehensive approach. Hill advocated for a re-proposal that incorporates broad, material feedback as well as address the implications of the proposed changes on various banking sectors. He argued against re-proposing only parts of the rule, stressing the importance of a unified approach by all three banking agencies (FDIC, OCC, Federal Reserve) to avoid confusion and ensure effective implementation. Additionally, he opposed the reversal of capital simplifications and suggested maintaining a more tailored approach to capital regulation for different bank categories.

Recent M&A

Renasant Corporation (NYSE: RNST) (KFI Score: B), the $17 billion lender in Tupelo, Mississippi, announced a merger with The First Bancshares, Inc. (NYSE: FBMS) (KFI Score: B), the $8 billion lender in Hattiesburg, Mississippi, for $37.09 per share in an all-stock deal valued at $1.2 billion, according to a July 29 press release. The merger is expected to close in the first half of 2025.

WesBanco, Inc. (NASDAQ: WSBC) (KFI Score: B), the $18 billion lender in Wheeling, West Virginia, announced a merger with Premier Financial Corp. (NASDAQ: PFC) (KFI Score: B), the $9 billion lender in Defiance, Ohio, for approximately $959 million to become the eighth largest bank in Ohio, based on deposit market share. Concurrently, WesBanco announced $200 million in capital commitments in support of the merger, which is expected to close in 1Q 2025, according to a July 26 press release.

ChoiceOne Financial Services (NASDAQ: COFS), the holding company for ChoiceOne Bank (KFI Score: B) based in Sparta, Michigan, announced a merger with The State Bank (KFI Score: B) based in Fenton, Michigan, for $40.18 per share in an all-stock deal valued at approximately $180.4 million, according to a July 25 press release. The merger is expected to close in 1Q 2025.

Time Bank (KFI Score: B+) of Park Ridge, Illinois will acquire Northwest Bank & Trust Company (KFI Score: B) based in Davenport, Iowa, for an undisclosed price, according to a July 24 press release. The acquisition, which is expected to close in the fourth quarter, will create an almost $700 million lender.

ACNB Corporation (NASDAQ: ACNB), the Gettysburg, Pennsylvania-based holding company for ACNB Bank (KFI Score: B+) agreed to purchase York, Pennsylvania-based Traditions Bank (OTCPink: TRBK) (KFI Score: B) for $26.43 per share in an all-stock deal valued at approximately $73.5 million, according to a July 24 press release. The transaction is expected to close in 1Q 2025.

In Case You Missed It

Follow KFI’s blog for our latest research, data analytics, and product updates. Some of our recent product update highlights include:

• Expanded GAAP data to include comprehensive loan portfolio details with a detailed breakdown of past-due accounts. This enhancement offers a granular view of loan performance and potential default risks, improving the accuracy of credit risk assessments. By providing deeper insights into overdue accounts and bank lending practices, this expanded data supports investors, lenders, and analysts in making more informed business decisions.

• The release of a new KFI Excel add-in version to enhance the Pro user experience with improved search functionality for data items and companies. The result is a more intuitive way to find needed data, allowing users to build customized templates more quickly.

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.

July 12: Second Half Themes, Earnings Expectations, and Goldilocks Challenged

July 19: Darkening Credit Markets, Updated Forecasts, and Citigroup’s Consumer Results

July 26: Rate Cuts, Hot GDP, and Two Economies’ Delinquencies

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