Bank Loan Values Are Declining Across The Board

Two bank runs for two different reasons. 

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The core problem that led to Silicon Valley Bank collapsing last month was a massive hole in the portfolio of bonds that it held. The reason why depositors began fleeing First Republic Bank FRC 4.39% soon afterward was mainly because of what they perceived to be a hole in the loan book of the bank.

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In almost every publicly traded bank in the country, there are loans that have declined in value since they were made since the loans were originally made. Increasing interest rates are the culprit, which slashed the value of banks' other big assets, their holdings of securities, as well. 

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Since they are totaled up across the banking industry by banking regulators, the overall market-value losses on securities are well known. It is necessary to total up the market-value losses on loans issued by publicly traded banks by consulting their securities filings.

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Tom Linsmeier, a former member of the Financial Accounting Standards Board and a professor of accounting at the University of Wisconsin, asserted that the fair values of loans and securities are not fundamentally different. "They measure the same thing: the price at which the asset can be sold on the market today in a lawful transaction."

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In terms of its balance sheet, First Republic showed as of Dec. 31, a total amount of $166.1 billion in loans at amortized costs. In a footnote, it was stated that their fair-market value was $143.9 billion. It was more than First Republic's total equity, or the sum of assets minus liabilities, of $17.4 billion that made the $22.2 billion difference between the two. 

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By the end of last year, most of the bank's loan portfolio was home mortgages, which had fixed or hybrid rates, which meant their low rates would remain fixed for a period of one to ten years. This was seen as a risk by investors because most of its loans were home mortgages. There were also $4.8 billion in unrealized losses on bonds that were carried by the company. There were about 68% of its deposits were uninsured at the end of the year, which means that the deposits exceeded the FDIC's limits, which increased the risk of flight. It was similar in that respect to Silicon Valley Bank, which estimated that 88% of its deposits did not have any insurance protection. 

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After a group of 11 banks led by JPMorgan Chase deposited $30 billion into First Republic last month, the bank was able to buy itself sometime from the run. In addition to providing liquidity, First Republic was not able to boost its capital due to the deposits. First Republic's spokesman declined to comment on the matter.

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First Republic may be an extreme example, but it is not the only one. It is estimated that 97% of the 435 publicly traded U.S. banks listed on the major exchanges reported that their loans' market value was less than their balance-sheet value as of December 31, according to data provided by S&P Global Market Intelligence.

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In total, they have an unrealized loss of $242 billion on their loans, which is defined as the difference between the fair value of the loans and the carrying value of the loans. The amount was equivalent to 14% of their total equity and 21% of their tangible common equity, which is a widely used measure of net worth that excludes preferred stock and intangible assets such as trademarks and trademarks.

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There was a $96 billion difference between the fair value of the loans of the same banks a year earlier and the carrying amount, according to the data. On Dec. 31, the same group of companies reported $299 billion of unrealized losses on their held-to-maturity securities. The losses incurred by companies are not included in the balance sheets of the companies.

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Since Treasury yields have declined in recent weeks, it is probable that unrealized losses on loans and securities have fallen at many banks. Investors perceive a slowdown in the economy based on the lower yields on bond prices. They point out that borrowers could start to default on their loans if they are right, which would add to the losses on the bank's balance sheet if they are right.

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It may pose a risk to earnings or liquidity for banks reporting large fair-value discounts on their loans. While yields on the fixed-rate loans they own remain low, they may be forced to pay higher rates for deposits and other funding sources, which could mean they pay higher rates for deposits. "It is possible that these banks may need to either issue additional debt capital at higher interest rates in order to become more liquid or sell their loans in order to become more liquid in the event that liquidity issues arise," said Mr. Linsmeier.

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As part of the sample of 435 banks selected by Trade Algo, there are 100 banks where the combined unrealized losses on loans and held-to-maturity securities are equal to 50% or more of their total equity.

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Based on its most recent annual report, Bank of Hawaii Corp. reported that it had $985 million of unrealized losses as of the end of the year on loans, as well as $799 million on held-to-maturity securities. A total of $1.8 billion was raised, which was more than the $1.3 billion of equity that was raised by Bank of Hawaii. Approximately 52% of the company's deposits were uninsured at the end of the year, according to the company. Despite repeated requests for comment, a Bank of Hawaii spokeswoman declined to do so.

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Western Alliance Bancorp, based in Phoenix, reported unrealized losses of $3.9 billion and $177 million on loans and held-to-maturity securities as of Dec. 31, indicating that it had lost $3.9 billion and $177 million, respectively. Comparatively, the company had equity totaling $5.4 billion at the end of the year. It is estimated that 55% of Western Alliance's deposits are uninsured as of the end of the year.

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This week, Western Alliance filed disclosures showing updated figures for fair value and deposits. During the month of March, the unrealized losses on loans and securities held to maturity declined to $2.9 billion and $139 million, respectively, from $3.3 billion in the previous month. In terms of deposits, there were $47.5 billion, down 11% since Dec. 31, while the percentage of uninsured deposits fell to 32%.

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Western Alliance's chief financial officer, Dale Gibbons, stated in an email to me that Western Alliance had access to significant liquidity from a variety of sources, including pledging loans to secure credit facilities, which mitigated the need to sell assets and realize adverse asset marks. According to him, the company does not require capital raising.

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According to CVB Financial Corp., a company headquartered in Ontario, Calif., as of December 31, 2008, the company reported unrealized losses of $919 million on loans and $399 million on securities held to maturity. This total investment accounted for 68% of the equity of the company, which is greater than its tangible common equity, which also accounted for 68% of the equity. At the end of the year, it was estimated that approximately 65% of the CVB's deposits were uninsured.

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CVB's chief executive officer, David Brager, said the bank maintains strong relationships with its customers that often span decades and are often on a long-term basis. "None of our significant relationships have expressed concern about the way that we operate," he said. Despite the bank's slow growth, he noted that it doesn't have any large industry concentrations similar to Silicon Valley Bank in terms of its tech-heavy focus.

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Allen Nicholson, CVB's chief financial officer, said in a statement that "most likely those unrealized losses have diminished somewhat" since year-end, as a result of the decline in interest rates.

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Due to their perceived size and implied government support, systemically important banks have an advantage over smaller banks since they are widely believed to be too big to fail.

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Therefore, they may continue to attract low-cost deposits and retain uninsured deposits at the expense of smaller competitors, even if their disclosures show that they have significant capital holes on a fair-value basis on the basis of their disclosures.