Midwestern Bank Scores Fall the Most on Declining Asset Quality

Midwestern banks received the most KFI Score reductions in Q1 2023 on declining asset quality and increases in funding costs, according to data compiled by KBRA Financial Intelligence (KFI). A total of 322 Midwestern banks and bank holding companies (BHC) were lowered based on KFI’s methodology which measures default risk by analyzing asset quality, capital adequacy, and other key performance metrics. This was more than in any other U.S. region.

Midwestern banks saw their KFI Scores decline in part because of an increase in nonperforming loans (NPL) to total loans, which climbed 0.3% to 0.95% in the period. Compression in net interest margin (NIM) to 3.18% from 3.34% also pushed the assessments lower.

Peoples Bank, a $2 billion lender in Indiana, was impacted by both factors in the period. The bank had its KFI Score lowered to C+ from B after its NPL jumped to 1.37% from 0.67% and its NIM shrank 61 basis points (bps) to 2.95%.

Overall, KFI Scores fell broadly in Q1 2023 to the lowest aggregate level in two years. Banks may face further declines in their KFI Scores as the Federal Reserve maintains an aggressive monetary policy to curb inflation. Prior to Q1, KFI Scores had generally been improving on a strengthening economy following the pandemic. — With Anela Kobilic, Qinze Wang, and An Ngo.

Federal Reserve Holds Interest Rates Steady, Signals More Hikes

The Federal Reserve left interest rates steady Wednesday for the first time in 15 months to gauge the impact of its most aggressive monetary policy in four decades. The Fed left its benchmark rate from 5 to 5.25%, while signaling that it may raise interest rates at its next meeting in July. The pause is the first since the Fed started raising rates from near zero in March 2022. Fed chair Jerome Powell struck a more hawkish tone in a press conference following Wednesday’s decision.

``The full effects of our tightening have yet to be felt," Powell said. ``Not a single person on the committee wrote down a rate cut this year nor do I think it is at all likely to be appropriate.’’

First Quarter Earnings Review

Bank Update:

• Bank deposits declined a record $472 billion (-2.5%) in the first quarter, the largest decrease since the FDIC began collecting such data in 1984, according to the FDIC’s 1Q report.

• NIM declined 7 bps to 3.31% but is still above the pre-pandemic average of 3.25%.

• FDIC Chairman Martin Gruenberg said banks "face significant downside risks from the effects of inflation, rising market interest rates, slower economic growth, and geopolitical uncertainty."

Credit Union Update:

• Credit Union lending and assets showed strong growth in 1Q23, rising 17.6% and 4.4% respectively year over year, according to NCUA’s 1Q report.

• While credit unions remain well capitalized, "warning signs are also flashing on the horizon, like the rise in home equity lines of credit, increases in credit card balances, and higher delinquency rates,’’ said NCUA Chairman Todd M. Harper

KFI Upgrade

We’re pleased to announce a series of platform upgrades, improving users’ ability to analyze GAAP, regulatory financial reports, and more for publicly traded U.S. financial institutions.

• Enhanced functionality and structured data for SEC-reporting lenders with custom views.

• Standardized data across bank regulatory filings, allowing users to seamlessly build templates with our Excel add-in.

Coming Soon: KFI is expanding our SEC-reporting coverage on banks.

3 Things in Credit

Follow Van Hesser’s 3 Things in Credit podcast. From the June 9 episode:

"One thing we learned about the pandemic era is that companies over-earned. All of that stimulus and monetary accommodation led to supercharged economic growth and, in turn, excess profits …. So, given that strong starting point, we shouldn’t be all that concerned about the earnings recession we find ourselves in.’’