The coronavirus pandemic has had an outsized effect on the banking sector, as lenders brace for loan losses brought on by the economic shutdown. As of Wednesday's close, the KRE regional bank index had declined by more than 40% since Feb. 20, when the market really began to drop. Likewise, the First Trust Nasdaq ABA Community Bank Index Fund has lost about 37% since then.
But there are some smaller and regional bank stocks that could do well during an economic downturn. The banks you will want to look for are those that have a smaller percentage of their assets tied up in loans, because all banks are expecting loan losses to start to stack up during the next few quarters. The banks below have a relatively small loan-to-asset ratio compared to their peers, or make more revenue from non-interest income sources such as fees from trading activity, investment management, or other sources.
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Silvergate Capital
Amazingly, the stock price at Silvergate Capital (SI 2.50%), the holding company of Silvergate Bank, is only down about 10% from the beginning of 2020, an incredible accomplishment considering what the economy has been through. Based in La Jolla, California, Silvergate is a $2.1 billion asset bank that specializes in developing solutions for many of the largest U.S. digital currency exchanges and investors. The strategy has brought in a swarm of non-interest-bearing deposits, which help bring down a bank's total funding costs long term, and an increase in non-interest income, a revenue source the company plans to focus on growing in the future. The bank also has more than $892 million of its portfolio invested in more liquid securities.
SVB Financial Group
SVB Financial Group (SIVB.Q -50.00%), the holding company for Silicon Valley Bank, is a niche player, mostly serving the high-tech and start-up industries, as well as those in the private markets, such as private equity and venture capital. The connection to these industries does pose some concern because the bank's performance will be somewhat tied to the private markets, but the bank appears to have diversified its balance sheet prudently. Its loan portfolio is only $33 billion of its $71 billion in assets. It holds more than $29 billion of its assets in its investment securities portfolio, which is largely composed of less risky and more liquid U.S. Treasury bills and mortgage-backed securities. This composition should enable it to be less impacted by loan losses going forward.
Westamerica Bancorporation
Westamerica Bancorporation (WABC 0.82%), the parent company of Westamerica Bank, recorded a 13.7% drop in net income on an annual basis in the first quarter. Like other banks, the company took a credit provision (money that banks set aside and add to their total reserves to cover future loan losses) of $4.3 million due to the economic impact of COVID-19. The bank also had to increase its total reserves by another $2 million due to its decision to adopt the new current expected credit losses (CECL) accounting method, which requires banks to forecast losses on the life of a loan as soon as that loan is originated. But I still think the company could perform well through an economic downturn. Total loans only make up about $1.1 billion of its $5.6 billion in total assets. The bank has a total investment security portfolio of $3.85 billion, more than $1.8 billion of which is invested in commercial paper -- short-term debt issued to companies with high credit ratings to cover expenses such as payroll and inventory. While this market has come under pressure as of late, the Federal Reserve's decision to provide liquidity by setting up a credit facility to buy commercial paper has calmed the market a bit and offers some assurances.
Century Bancorp
Profits at the $5.5 billion asset Century Bancorp (CNBKA), the holding company of Century Bank and Trust, grew 2.6% year over year in the first quarter during a time when profit increases at banks were few and far between. The bank also managed to do this while nearly tripling its credit provision to account for loan losses that could be coming. Century's loan volume at the end of the first quarter only accounted for less than half of the bank's total assets, while more than 42% of Century's assets are invested in securities -- largely mortgage-backed securities.
UMB Financial
UMB Financial (UMBF 0.21%), the holding company of the $23.8 billion asset UMB Bank based in Kansas City, Missouri, has four main lines of business: commercial banking, institutional banking, personal banking, and healthcare services. UMB has done a good job over the years of making non-interest revenue a significant portion of total revenues -- they represented almost 39% of total revenue at the end of 2019. The majority of UMB's non-interest income is derived from trust and securities processing fees earned on personal and corporate trust accounts, custody of securities services, trust investments and wealth management services, and mutual fund assets servicing. These are all lines of business that may not be as heavily impacted by the coronavirus as other assets such as loans.
