Given the precipitous decline in NYCB, many market observers are trying to gauge the extent of deterioration in ComRe books at Regional and Community Banks. Too many analysts are either focused on REIT performance measures or aggregate bank measures—neither of which provides reliable insight to banks’ balance sheets. REIT numbers don’t work because the underlying asset classes simply don’t compare, and bank aggregates don’t work because they are weighted-average statistics that really only reflect what’s going on at the largest banks. Also, remember the weighted average bank doesn’t fail: individual banks fail.

In our granular analysis, we look at what’s happening at each individual bank. This micro-level analysis feeds our reserving model, which in turn influences our earnings estimates. We summarize a rollup of this data here.

This analysis reflects a consistent cohort of 512 publicly traded banks since 2Q22.  As can be seen in Chart 1, The Underperforming Loan Ratios[1] of the median bank in our universe is still below the level observed in 2Q22; but for the banks in the 20^th worst performing percentile the underperforming loan ratio has risen to its highest level in 18 months as of 4Q23. Still, this is manageably low. The members of this group that existed at year-end 2009 (and survived to today), had a median Underperforming Loan Ratio 6 times the current levels.

Regarding the formation of underperforming assets[2] 4Q23 saw a meaningful increase in the formation of underperforming ComRe loans for the worst 20^th percentile of our cohort (See Chart 2). The action is still in the tales.

For more granularity in understanding the deterioration in ComRe Loans, the next series of charts provides a migration analysis of underperforming loan rates for the aggregate and each major component of ComRe: Owner-Occupied, Non-Owner Occupied, and Multi-Family Mortgage Loans. To read the charts understand that you are looking at the distribution of the annualized rate of formation for the loan categories at two distinct dates: 4Q22 and 4Q23. The shifting of the curves to the right indicates deterioration in underlying credit quality for our cohort banks.

[1] Refer to Cybiont’s Granular View of Bank Credit Quality – Cybiont Capital, LLC for complete definitions of these ratios. “Underperforming” loans is a earlier stage identification of problems than viewing “Nonperforming” loans.

[2] See previous footnote for definition. Formation accounts for growth in the “stock” of underperforming loans by also integrating chargeoffs of loans.