Regional Banks Crash As More Credit "Cockroaches" Emerge
Just when the market was starting to finally freak out - with a one month delay - about the Tricolor and First Brands bankruptcy following yesterday's fingerpointing session between JPM's Jamie Dimon and various private credit firms in which both accused each other of harboring more credit "cockroaches", this morning the credit freak out went to 11 as two regional US banks crashed after they both disclosed problems with loans involving allegations of fraud (completely unrelated to Tricolor or First Brands), adding to concern that more cockroaches are indeed emerging in borrowers’ creditworthiness.
While those hits can be easily absorbed by the biggest US banks, the totals are more worrisome for regional lenders.
“If JPMorgan has a loan problem with Tricolor, it’s puny,” Mike Mayo, an analyst at Wells Fargo & Co., said in an interview.
“But if smaller banks have problems with these loans, it takes more of a hit.”
Shares of Zions Bancorp plunged 12% after it disclosed a $50 million charge-off for a loan underwritten by its wholly-owned subsidiary, California Bank & Trust, in San Diego.
Bloomberg reports that Zions said in a lawsuit that California Bank & Trust is owed the money from two investment funds tied to Andrew Stupin and Gerald Marcil, among other parties.
California Bank & Trust provided two revolving credit facilities to the borrowers in 2016 and 2017 totaling more than $60 million, to finance their purchase of distressed commercial mortgage loans, according to the lawsuit.
The terms gave the bank “first-priority, perfected security interest” in all collateral, including each mortgage loan purchased by the investment funds.
But after an investigation, the lender found that many of the notes and underlying properties were transferred to other entities.
And those properties have already been foreclosed on or were about to be, according to the lawsuit.
But it gets worse as Bloomberg points out that Western Alliance also lent money to the same investor group, for them to originate or buy mortgage loans, according to the bank’s lawsuit in August. The outstanding balance of that loan is $98.6 million.
Western Alliance found that the collateral was supposed to be backed by a first-priority lien, but that wasn’t the case.
It alleged that the borrower created fake title policies by omitting the senior liens.
At the same time, the borrower drained funds from accounts that acted as additional collateral, according to the lawsuit.
As of Aug. 18, the borrower held a little over $1,000 in their bank account at Western Alliance, while the required monthly average was $2 million, according to the lawsuit.
If that wasn't enough, Western Alliance also said it also has exposure to the collapse of auto-parts supplier First Brands Group.
But, and clearly nobody believed this, it doesn’t expect the issue to change its 2025 outlook. Yeah right...
Shares tumbled as much as 11% after the admission...
It will be ironic if WAL barely survived the 2023 banking crisis only to be destroyed because it failed to do due diligence on its clients a few years later.
“There have been a number of ‘one-off’ credit events that a number of banks have previewed going into the quarter,” Terry McEvoy, an analyst at Stephens Inc., said in an interview.
“They have not gone unnoticed by bank investors.”
The news slammed the broader regional index.
As Bloomberg notes, even if each of the credit event are isolated, banks taking losses from bad loans are making headlines more often in the past two months. After the bankruptcy of sub-prime auto lender Tricolor Holdings last month, JPMorgan wrote down $170 million and Fifth Third Bancorp wrote down as much as $200 million.
Meanwhile, the investment bank at the center of the entire First Brands saga, Jefferies, continues to get crushed, and at last check was down over 10%.
* * * NICE AND EASY
