As many U.S. banks prepare to present at financial conferences this month, they are releasing presentations with updated financials that show loan deferral rates have declined between the end of the second quarter on June 30 and the end of August. When the coronavirus pandemic hit the economy in March, many banks allowed customers to skip payments on loans for a few months; the payments were then due at the end of the deferment period or tacked on to the end of the loan.
The dip in deferral rates shouldn't come as a huge surprise considering the economy is doing much better, but it's nonetheless good news for banks because loan deferrals have made it incredibly difficult for investors to analyze bank stocks. Let's take a look at some of the banks that have released information.
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Updated deferral information
Although I am just examining a handful of banks, the group represents a broad spectrum of community and regional institutions. The banks range from the $4.3 billion asset First Internet Bancorp (INBK 0.94%), which operates in several different parts of the country, to the $17 billion asset Independent Financial Group (IBTX +0.00%) based in Texas. As you can see in the table below, some banks have really brought down deferrals in just a few months' time.
| Bank | Loan Deferrals 6/30 | Loan Deferrals 8/31 |
|---|---|---|
| Central Pacific Financial Corp. (CPF +0.22%) | 11.6% | 9% |
| First Internet Bancorp | 18.6% | 1.6% |
| First Hawaiian (FHB +0.61%) | 22% | 6.3%* |
| German American Bancorp (GABC +0.75%) | 10.4% | 2.9% |
| Independent Bank Group | 6% | 4% |
| ServisFirst Bancshares (SFBS 0.65%) | 3.7% | 0.7% |
Source: Bank conference presentations. * = as of 7/21.
Some banks, such as German American, First Internet, and First Hawaiian, saw large drops in their deferral rates. First Internet said in its presentation that it saw a huge decline in August on deferrals on single tenant loans, which are loans to property owners who lease real estate to single tenants for a long period of time. Between July 17 and Aug. 28, First Internet saw total deferral volume on single tenant loans drop from more than $276 million to just under $28 million. First Internet also saw big declines in deferral rates in its healthcare financing portfolio and small business loans between June and August. Remaining borrowers on deferral are set to resume payments this month, the bank said in its presentation.
First Hawaiian initially saw 14% of its commercial loans on deferral become criticized assets, which doesn't necessarily mean the loan is past due, but that there is some danger of going into default. But between June 30 and July 21, the bank saw 95% of its remaining commercial borrowers on deferral either return to making payments or tell the bank they will return to making payments once the deferral period is up. Meanwhile, German American saw sharp declines on deferrals in most loan categories, including residential mortgage, commercial and industrial, and commercial real estate .
What categories are still seeing high deferrals?
Not surprisingly, hotels and lodging is a category still dealing with high deferral rates. German American still had more than 33% of its lodging and hotel portfolio in deferral as of Aug. 31; Independent Bank Group had more than 26% of its hotel portfolio on its second deferral period; and ServisFirst Bancshares had more than 15% of its hotel and motel portfolio in deferral as of Aug. 31.
Again, this is probably not a huge surprise, considering Americans are traveling less and staying in hotels less due to concerns about the coronavirus. According to the hotel occupancy tracker STR, the U.S. hotel occupancy rate reached just over 48% for the week ending Aug. 29, up from a low of 22% in April, but still down nearly 28% from the same week in 2019. Other categories seeing higher rates of deferrals are other usual suspects, including retail and restaurants, and then it varies a little bank to bank.
Continue to watch deferrals
While it is good news that deferrals are trending downward at a number of banks, it is still important for investors to watch the remaining deferrals carefully. Depending on what happens with government intervention and the coronavirus, a number of them could still turn into criticized assets, which could force banks to build reserves again, depending on how much they have been accounting for deferrals.
On the other hand, if the U.S. has seen the worst of the coronavirus -- knock on wood -- more loans on deferral could return to being healthy borrowers. That would remove some of the mystery for investors and hopefully allow bank stocks to recover.
