Wall Street is hyperventilating this week about the collapse of Silicon Valley Bank and the question of whether other mid-sized banks might soon follow suit — and whenever financial analysts start hyperventilating, Calcbench is happy to hold the paper bag for you. Let’s go through the data.
First, a quick summary of what happened to Silicon Valley Bank ($SVB). The bank spent years issuing loans at low interest rates. Then, more recently, it had to start offering higher interest rates on savings accounts, to remain competitive in a world where the Federal Reserve had been raising rates.
So the value of those assets (the loans) couldn’t keep pace with the costs of servicing SVB’s liabilities (the savings accounts). That means the bank was under-capitalized. Customers saw that state of affairs and got scared. They began pulling out their savings. This made SVB even weaker, until the bank failed on Friday.
The assets at the heart of this debacle are known as held-to-maturity securities: assets (say, mortgages or mortgage-backed securities) that a bank holds quarter after quarter. Lots of banks have them. The banks disclose the value of these securities in their quarterly reports, and the securities count as assets a bank can use to satisfy its capital reserve requirements.
So, the obvious question for financial analysts: Which other banks carry lots of “HTM” securities, relative to their total assets? And what do the banks say about the underlying value of those securities, and the risks to that value?
Figure 1, below, gives us a sense of things. It lists numerous mid-sized banks and compares HTM securities to total assets as of year-end 2022. Notice that in relative terms, SVB (may it rest in peace!) had the highest portion of HTM securities to total assets.
To be clear, just because a bank is on this list, that does not automatically mean the bank is in jeopardy. Many banks hedge their interest rate risks to avoid falling into the trap that took down SVB. But if you want a sense of where to begin looking for potential risk, an analysis such as what’s in Figure 1 is a logical place to start.
Next question: What do these banks actually say about their HTM securities? Analysts can research that detail by going to each bank’s risk disclosures. For example, we used our Company in Detail page to research the disclosures from Prosperity Bancshares ($PB), which said the following:
The company’s dependence on loans secured by real estate subjects it to risks relating to fluctuations in the real estate market that could adversely affect its financial condition, results of operations and cash flows.
Approximately 79.9 percent of the company’s total loans as of Dec. 31, 2022, consisted of loans included in the real estate loan portfolio, with 29.2 percent in commercial real estate (including farmland and multifamily residential), 35.8 percent in residential real estate (including home equity) and 14.9 percent in construction, land development and other land loans. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in the company’s primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estate owned by the company…
Then an analyst can start asking further questions, of either the bank’s investor relations team or the world at large. For example, where are Prosperity’s major markets? How far along are those 14.9 percent of loans for construction projects and land development?
Or, for the world at large, how solid is the real estate market? In 2008, we had a surplus of residential development collide with rising unemployment, leading to the global financial crisis back then. Those two forces don’t seem present today, but perhaps we do have a surplus of commercial real estate.
Calcbench doesn’t know the answers to those questions. We can, however, provide the data that will help to bring your questions into sharper focus. Then you can build models and gather other data as necessary to find the answers yourself.
For the record, we also looked at the growth in HTM securities for the 11 banks we cited above. The result is Figure 2, below.
Umm, wow. That’s a big spike in 2021, and there are more mid-sized banks out there than the 11 we cited. Plan — and analyze — accordingly.