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Tampa Bay banks report early signs of credit stress

By Christina Georgacopoulos at Tampa Bay Business Journal

August 21, 2023

A modest rise in loan delinquencies at banks in Tampa Bay last quarter points to early signs of economic distress as interest rates sit at the highest level in more than two decades.

Nearly half of banks based in Tampa Bay reported an increase in nonperforming assets for the quarter ended June 30, according to Illinois-based Hovde Group’s quarterly bank performance report. Among that group, total past due and nonperforming loans across all types increased by an average .07% last quarter and .12% over last year, according to financial statements compiled by the Tampa Bay Business Journal.

“Banks aren’t seeing a signficant change in delinquencies, but they are increasing,” according to Jack Barrett, the Florida market president for DFCU Financial and former CEO of Tampa-based First Citrus Bank.

Credit quality is expected to deteriorate further as higher interest rates mute economic growth while keeping debt service costs for businesses elevated, although the effect will be staggered since loans reprice at different time intervals, Barrett pointed out.

“Interest rates haven’t been this high since 2001, and we’ve had an inverted yield curve since October of last year. I would be surprised if a recession didn’t happen, although everyone is anticipating a soft one,” Barrett said.

Banks in Tampa Bay have steadily built reserves in recent quarters to cover loan losses as the economy enters the next phase of its cycle. Winter Haven-based SouthState, in particular, added $142 million to its more than $400 million in total reserves over the last year, despite only recording $4 million in charge-offs, according to the bank’s latest earnings report.

SouthState’s total past-due loans, including those in nonaccrual status, ticked up by a modest .12% last quarter, although almost 60% of the bank’s nonperforming loans were current on payments, SouthState Bank CFO William Matthews said during a recent earnings call with investors.

“We knew the historically low levels of NPAs and criticized and classified loans we’ve enjoyed the last few quarters were not sustainable,” Matthews said during the call.

Uncertainty looms over when the Federal Reserve will begin cutting rates, although

SouthState is forecasting a decrease in the first quarter of next year, Matthews said.

Cogent Bank Tampa Market President Wade Faircloth said the overwhelming sentiment is that “the Fed has done enough.”

“We’re hoping for a plateau on rates and that we’ll start to see them come down in the next six months,” he said.

Traditional manufacturers account for around half of Orlando-based Cogent Bank’s business in Tampa Bay while the other half are real estate investors and developers, which have experienced a considerable slowdown in demand, he said.

Loan growth at Cogent Bank is still significantly outpacing other local banks, however. In addition, the bank’s Tampa Bay deposits expanded by nearly 30% during the first six months of the year.

Banks on the whole are forecasting the slowdown in loan growth since the start of the year to continue due to both lower demand and increasing pressure on deposits, however. The cost of funds at banks in Tampa Bay rose 20 basis points last quarter, while the average yield on loans grew only .09%, according to the Hovde report.

Net interest margins, or the difference between interest income earned on loans and interest expense paid on deposits, decreased .23% on average for local banks, the report shows.

“The industry will experience more robust deposit interest rate expense in the second half of the year, but the loan side of their balance sheets won’t keep up,” according to DFCU’s Barrett. “That’s a recipe for reduced earnings.”