Regional Banks Vow ‘One-Offs’ Truly Were Blips and Not Omens

A Western Alliance branch in Phoenix.

(Bloomberg) -- Regional banks that reported earnings this month have a unified message about their recent back-to-back credit hits from bankruptcies and alleged frauds: It’s not 2023 all over again.

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While not dismissing the seriousness of loans that suddenly went sour and double-pledging of assets, bankers and analysts portray the incidents as one-off blips in narrow corners of the economy, not signs of broader systemic problems.

“We feel comfortable with our asset quality. We think it remains stable from here,” Western Alliance Bancorp Chief Executive Officer Kenneth Vecchione said on an analyst call on Wednesday.

Shares of regional lenders have steadied since losing $100 billion of market value in a single day earlier this month as news about bad loans unfurled. At that time, investors were spooked by alleged fraud associated with a borrower group in commercial real estate that affected both Western Alliance and Zions Bancorp, two roughly $90 billion regional banks large enough to matter to the system. The bankruptcies of Tricolor Holdings and First Brands Group added to the negative tone.

On a call with analysts Friday morning, Flagstar Bank NA executives assured investors that the lender has no exposure to any of the names that caused trouble in the quarter.

“Obviously we’re pleased about that,” Chief Financial Officer Lee Smith said.

The request for clarification comes as the Hicksville, New York-based regional bank has been hiring and making more commercial loans in a bid to balance out an oversize presence in real estate that once put Flagstar in crisis zone. Flagstar prefers borrowers that it has a direct relationship with, as opposed to purchasing loan participations in companies it doesn’t know, Chief Executive Officer Joseph Otting said.

“We have a pretty high standard of what our expectations are if we’re going to get involved in a credit,” he said on the call.

Investors have been concerned in part because of scars from the 2023 banking crisis, when several large regional lenders suffered deposit runs that quickly eroded their financial health, said Gregory Lyons, a corporate partner at Debevoise & Plimpton. The issues this time are much more limited and cushioned by reserve buffers, he said.

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No Drumbeat

“You didn’t have the drumbeat that you had in 2023,” Lyons said in an interview. “I also think there is fundamentally an underlying confidence in the sector that didn’t exist in 2023.”

Unlike deposit runs that can unfold overnight, credit hits don’t often threaten banks’ financial health immediately because they hold cushions of reserves. Banks ideally have ample time and room on balance sheets to cope with the damage.

First Citizens BancShares Inc., a regional lender based in Raleigh, North Carolina, saw a few bad loans in the quarter that made its earnings numbers lumpy, including a $82 million charge-off as a result of the bankruptcy of auto-parts maker First Brands. It also sees stress among customers in equipment finance, although with signs of improvement, said Chief Financial Officer Craig Nix.

“While we continue to monitor these portfolios, we don’t see further trends that would signal wider credit quality concerns and believe we are well-reserved,” Nix said on an investor call on Thursday.

Fresh Reviews

Profits of Western Alliance and Zions in the third quarter also came in better than analysts’ expectations despite the hiccups. As for future results, the recent setbacks have prompted several banks to do a fresh round of reviews of their loan portfolios to identity any similar issues.

Fifth Third Bancorp, which faced as much as $200 million in charge-offs due to its connection with the collapsed subprime auto lender Tricolor Holdings, conducted a “house-to-house search” through its loan collateral for other discrepancies, and found only two more issues out of 120,000 vehicles, the bank’s chief credit officer, Greg Schroeck, said on an earnings call last week.

That’s not to say the banking industry has wiped its slate clean of credit risks. Pressure continues to build across the economy, with persistent inflation squeezing low-income consumers and tariff negotiations adding uncertainty at every stage of the supply chain.

Amerant Bancorp, a $10 billion community bank in Florida, pushed back its earnings call to next week, saying it needed more time to “complete its customer-review process.” It sparked concerns around possible credit issues, and the shares dropped by more than 4% on Thursday.

“Obviously we have no idea on whether this additional time needed to review means a negative development or not, but given the bank’s recent history around credit, it’s hard not to be concerned,” Piper Sandler & Co. analyst Stephen Scouten wrote in a note on Wednesday.

Bankruptcy Bites

An active investor in fintech companies, Amerant invested $2.5 million in trade-finance specialist Raistone Financial Corp. in 2021. Raistone was hurt by First Brands’ bankruptcy, telling employees that it relied on the company for more than 80% of its revenue, Bloomberg News reported. Amerant didn’t immediately respond to a request for comment.

Firms entangled in the mess say they aren’t letting any of the wayward debtors off the hook. Fifth Third said it’s going to pursue the two potentially duplicated car loans it found. The CEO of Jefferies Financial Group Inc. told stockholders that his investment bank is frustrated that “we don’t know exactly what happened with First Brands,” but it’s not simply swallowing the potential loss.

“We’re going to work around the clock to get the money that we believe we are owed,” CEO Richard Handler said during his firm’s investor day. “We’re going to be relentless in our pursuit of what we know is our money.”

(Updates with comments from Flagstar and Jefferies executives, details on Amerant’s investment in Raistone starting in fifth paragraph.)

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