THE BAD Despite those promising economic indicators, other data signals potential challenges ahead. ɨ A December 2023 study by renowned academics for the National Bureau of Economic Research indicated that about 44% of banks’ office loans are underwater (equity-to-loan value) with vacancies soaring. The study noted that a 10% default rate on broader commercial real estate (CRE) loans would result in about $80B in bank losses. Some fear that the drag of higher rates on the 1–4 family housing sector has created a multifamily housing bubble. ɨ The research group MSCI Real Capital Analytics reported last summer that the community and regional bank share of the U.S. CRE market had exploded from 17% to 27% just since the pandemic. While the smaller banks have increased their CRE loans, investors and larger institutions have shed CRE exposures due to credit quality concerns and heightened regulatory scrutiny. ɨ Weaknesses in the trucking sector were at the heart of a recent Midwest bank failure—the first credit quality focused closure in quite a while. ɨ There’s a growing dichotomy between consumers living paycheck-to-paycheck (and running up credit card levels to historic heights) and those with strong balance sheets and investment resources. While this issue may be primarily affecting the credit union industry, it could impact bank performance as well. ɨ The below chart of historical data from the QwickAnalytics® National Performance Trends Report (based on the proprietary QwickAnalytics Community Bank Index (QCBI) of true community banks) clearly indicates an approximate two-year lag between the end of rate hikes and the peak of non-performing loans (NPLs). This may be the most telling data supporting the continuing need for credit risk management vigilance! History Shows Non-Performing Loans Peak Two Years After Fed Rate Cuts ? Research Metrics $58,557,142 $43,917,856.725 $29,278,571.45 $14,639,286.175 $0.9 03/31/2007 09/30/2007 03/31/2008 09/30/2008 03/31/2009 09/30/2009 03/31/2010 09/30/2010 03/31/2011 09/30/2011 03/31/2012 09/30/2012 03/31/2013 09/30/2013 03/31/2014 09/30/2014 03/31/2015 09/30/2015 03/31/2016 09/30/2016 03/31/2017 09/30/2017 03/31/2018 09/30/2018 03/31/2019 09/30/2019 03/31/2020 09/30/2020 03/31/2021 09/30/2021 03/31/2022 09/30/2022 03/31/2023 09/30/2023 6.00% 4.50% 3.00% 1.49% 0.01% FRED Economic Data QCBI NPLs Projected NPLs Federal Funds Effective Rate 10,754,928 14,613,576 18,550,679 24,587,889 30,154,602 34,532,478 42,486,978 51,301,309 58,402,729 51,402,488 48,929,139 44,750,382 42,129,148 38,311,451 35,007,473 30,090,735 25,747,102 22,378,231 19,173,253 16,848,384 15,236,346 13,382,470 12,968,852 14,969,017 12,535,854 10,094,415 4.5 5.26 0.51 0.18 0.16 0.16 0.08 0.08 0.07 0.09 0.11 0.1 0.14 0.14 0.36 0.4 0.7 0.95 1.74 2.22 2.4 1.26 0.06 0.09 0.07 0.08 0.77 3.65 2.19 4.52 4.99 5.26 0.14 0.13 0.19 THE FED-ORCHESTRATED “SOFT LANDING” IS, OF COURSE, WHAT OUR INDUSTRY DESIRES, BUT HISTORY CLEARLY WARNS THAT IT CAN TAKE YEARS BEFORE THE EFFECTS OF MACRO EVENTS SUCH AS PANDEMICS, RATE SHOCKS AND RAMPANT INFLATION ACTUALLY SHOW UP IN LOWER CREDIT QUALITY. EVEN AS THESE TRIGGERING EVENTS SUBSIDE OR ABATE, THE LESSON IS CLEAR: WE SHOULDN’T LET OUR GUARD DOWN YET. 19 feature
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