Please ensure Javascript is enabled for purposes of website accessibility

Loan Deferrals at Banks Continue to Decline

By Bram Berkowitz – Sep 13, 2020 at 6:44AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some banks have seen deferrals come down significantly between the end of the second quarter and the end of August.

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.

The front entrance of a generic bank

Image source: Getty Images.

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 -2.73%), which operates in several different parts of the country, to the $17 billion asset Independent Financial Group (IBTX 0.42%) 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 -1.02%) 11.6% 9%
First Internet Bancorp  18.6% 1.6%
First Hawaiian (FHB -0.66%) 22% 6.3%*
German American Bancorp (GABC -0.19%) 10.4% 2.9%
Independent Bank Group 6% 4%
ServisFirst Bancshares (SFBS -0.39%) 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.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of Central Pacific Financial and First Internet Bancorp. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

First Internet Bancorp Stock Quote
First Internet Bancorp
$33.83 (-2.73%) $0.95
First Hawaiian, Inc. Stock Quote
First Hawaiian, Inc.
$25.59 (-0.66%) $0.17
German American Bancorp Stock Quote
German American Bancorp
$36.97 (-0.19%) $0.07
Central Pacific Financial Stock Quote
Central Pacific Financial
$21.29 (-1.02%) $0.22
ServisFirst Bancshares Stock Quote
ServisFirst Bancshares
$84.00 (-0.39%) $0.33
Independent Bank Group Stock Quote
Independent Bank Group
$65.06 (0.42%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.