Declines in Loan Values Are Widespread Among Banks

Nearly every publicly traded bank in the country is sitting on loans that have declined in value since they were made. The culprit is rising interest rates, which also slashed the value of banks’ other big asset, their holdings of securities. 

The overall market-value losses on securities are well known because they are tallied up industrywide by banking regulators. The scale of market-value losses on loans made by publicly traded banks has to be tallied from banks’ securities filings.

“Fair values of loans and securities are not qualitatively different,” said Tom Linsmeier, an accounting professor at the University of Wisconsin and former member of the Financial Accounting Standards Board. “They measure the same amount: the price at which the asset can be sold in an orderly transaction in the market today.”

First Republic’s balance sheet showed $166.1 billion of loans as of Dec. 31, at amortized cost. A footnote said their fair-market value was $143.9 billion. The $22.2 billion difference was greater than First Republic’s $17.4 billion of total equity, or assets minus liabilities. 

The bank was seen by investors as risky because most of its loans at year-end were home mortgages with fixed or hybrid rates, meaning their low rates would stay fixed for one to 10 years. It also had $4.8 billion in unrealized losses on bonds. About 68% of its deposits were uninsured at year-end, meaning they exceeded Federal Deposit Insurance Corp. limits, which created greater flight risk. In that respect, it was similar to Silicon Valley Bank, which estimated that 88% of its deposits were uninsured. 

First Republic bought itself time last month after a group of 11 banks led by

JPMorgan Chase

deposited $30 billion to halt the run. While the deposits helped liquidity, they didn’t boost First Republic’s capital. A First Republic spokesman declined to comment.

While First Republic is an extreme example, it isn’t alone. Among 435 publicly traded U.S. banks listed on major exchanges, 97% of them reported that their loans’ market value was less than their balance-sheet amount as of Dec. 31, according to data provided by S&P Global Market Intelligence.

Combined, they had $242 billion of unrealized losses on their loans, defined as the difference between the loans’ fair values and carrying amounts. That 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.

A year earlier, the same banks said their loans’ fair value exceeded their carrying amount by $96 billion, the data show. The same group showed $299 billion of unrealized losses on held-to-maturity securities as of Dec. 31. Those losses aren’t included on companies’ balance sheets.

The unrealized losses on loans and securities likely fell at many banks in recent weeks as Treasury yields declined. The lower yields signal that investors think the economy is slowing. If they are right, then borrowers could start to fall behind on their loans, adding to losses on bank balance sheets.

Banks reporting large fair-value discounts on their loans could face earnings or liquidity pressure. They could face pressure to pay higher rates for deposits and other funding sources, while yields on fixed-rate loans they own stay low. “If liquidity issues arise for these banks, they may need either to issue additional debt capital at higher interest rates or to sell those loans to become more liquid,” Mr. Linsmeier said.

The 435 banks in The Wall Street Journal’s sample included 100 where the combined unrealized losses on loans and held-to-maturity securities were equivalent to 50% or more of their total equity.

Bank of Hawaii Corp.

in its most recent annual report said it had $985 million of unrealized losses on loans and $799 million of unrealized losses on held-to-maturity securities, as of Dec. 31. The combined $1.8 billion total exceeded Bank of Hawaii’s $1.3 billion of total equity. The company estimated that 52% of its deposits were uninsured at year-end. A Bank of Hawaii spokeswoman declined to comment.

Bank of Hawaii fair-value losses vs. total equity, quarterly

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Phoenix-based

Western Alliance Bancorp.

reported $3.9 billion and $177 million of unrealized losses on loans and held-to-maturity securities, respectively, as of Dec. 31. By comparison, the company had $5.4 billion of total equity. Western Alliance estimated that 55% of its deposits were uninsured at year-end.

Western Alliance this week filed disclosures showing updated fair-value and deposit figures. Unrealized losses for loans and held-to-maturity securities had declined to $2.9 billion and $139 million, respectively, as of March 31. Deposits were $47.6 billion, down 11% since Dec. 31, while the uninsured-deposit ratio fell to 32%.

Dale Gibbons,

Western Alliance’s chief financial officer, in an email said, “Western Alliance has access to significant liquidity from a variety of sources, including pledging loans to secure credit facilities, which mitigates need to sell assets and realize adverse asset marks.” He said the company doesn’t need to raise capital.

CVB Financial Corp.

, based in Ontario, Calif., reported $919 million and $399 million of unrealized losses on loans and held-to-maturity securities, respectively, as of Dec. 31. Combined, those were equivalent to 68% of its total equity, and they exceeded its tangible common equity. CVB estimated 65% of its deposits were uninsured at year-end.

CVB’s chief executive officer,

David Brager,

said the bank’s deposit relationships remain strong and often span decades. “We haven’t had significant relationships that have expressed concern,” he said. He noted the bank has grown slowly and doesn’t have any large industry concentrations comparable to Silicon Valley Bank’s tech-heavy focus.

CVB’s chief financial officer, Allen Nicholson, said “most likely those unrealized losses have diminished somewhat” since year-end, because rates declined.

Systemically important banks have an advantage over smaller banks, because they are widely perceived as too big to fail and implicitly backed by the government. Consequently, they may continue to attract low-cost deposits and retain uninsured deposits at the expense of smaller competitors, even if their disclosures show they have large capital holes on a fair-value basis.

Write to Jonathan Weil at [email protected]

Nearly every publicly traded bank in the country is sitting on loans that have declined in value since they were made. The culprit is rising interest rates, which also slashed the value of banks’ other big asset, their holdings of securities. 

The overall market-value losses on securities are well known because they are tallied up industrywide by banking regulators. The scale of market-value losses on loans made by publicly traded banks has to be tallied from banks’ securities filings.

“Fair values of loans and securities are not qualitatively different,” said Tom Linsmeier, an accounting professor at the University of Wisconsin and former member of the Financial Accounting Standards Board. “They measure the same amount: the price at which the asset can be sold in an orderly transaction in the market today.”

First Republic’s balance sheet showed $166.1 billion of loans as of Dec. 31, at amortized cost. A footnote said their fair-market value was $143.9 billion. The $22.2 billion difference was greater than First Republic’s $17.4 billion of total equity, or assets minus liabilities. 

The bank was seen by investors as risky because most of its loans at year-end were home mortgages with fixed or hybrid rates, meaning their low rates would stay fixed for one to 10 years. It also had $4.8 billion in unrealized losses on bonds. About 68% of its deposits were uninsured at year-end, meaning they exceeded Federal Deposit Insurance Corp. limits, which created greater flight risk. In that respect, it was similar to Silicon Valley Bank, which estimated that 88% of its deposits were uninsured. 

First Republic bought itself time last month after a group of 11 banks led by

JPMorgan Chase

deposited $30 billion to halt the run. While the deposits helped liquidity, they didn’t boost First Republic’s capital. A First Republic spokesman declined to comment.

While First Republic is an extreme example, it isn’t alone. Among 435 publicly traded U.S. banks listed on major exchanges, 97% of them reported that their loans’ market value was less than their balance-sheet amount as of Dec. 31, according to data provided by S&P Global Market Intelligence.

Combined, they had $242 billion of unrealized losses on their loans, defined as the difference between the loans’ fair values and carrying amounts. That 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.

A year earlier, the same banks said their loans’ fair value exceeded their carrying amount by $96 billion, the data show. The same group showed $299 billion of unrealized losses on held-to-maturity securities as of Dec. 31. Those losses aren’t included on companies’ balance sheets.

The unrealized losses on loans and securities likely fell at many banks in recent weeks as Treasury yields declined. The lower yields signal that investors think the economy is slowing. If they are right, then borrowers could start to fall behind on their loans, adding to losses on bank balance sheets.

Banks reporting large fair-value discounts on their loans could face earnings or liquidity pressure. They could face pressure to pay higher rates for deposits and other funding sources, while yields on fixed-rate loans they own stay low. “If liquidity issues arise for these banks, they may need either to issue additional debt capital at higher interest rates or to sell those loans to become more liquid,” Mr. Linsmeier said.

The 435 banks in The Wall Street Journal’s sample included 100 where the combined unrealized losses on loans and held-to-maturity securities were equivalent to 50% or more of their total equity.

Bank of Hawaii Corp.

in its most recent annual report said it had $985 million of unrealized losses on loans and $799 million of unrealized losses on held-to-maturity securities, as of Dec. 31. The combined $1.8 billion total exceeded Bank of Hawaii’s $1.3 billion of total equity. The company estimated that 52% of its deposits were uninsured at year-end. A Bank of Hawaii spokeswoman declined to comment.

Bank of Hawaii fair-value losses vs. total equity, quarterly

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Losses on held-to-maturity securities

Phoenix-based

Western Alliance Bancorp.

reported $3.9 billion and $177 million of unrealized losses on loans and held-to-maturity securities, respectively, as of Dec. 31. By comparison, the company had $5.4 billion of total equity. Western Alliance estimated that 55% of its deposits were uninsured at year-end.

Western Alliance this week filed disclosures showing updated fair-value and deposit figures. Unrealized losses for loans and held-to-maturity securities had declined to $2.9 billion and $139 million, respectively, as of March 31. Deposits were $47.6 billion, down 11% since Dec. 31, while the uninsured-deposit ratio fell to 32%.

Dale Gibbons,

Western Alliance’s chief financial officer, in an email said, “Western Alliance has access to significant liquidity from a variety of sources, including pledging loans to secure credit facilities, which mitigates need to sell assets and realize adverse asset marks.” He said the company doesn’t need to raise capital.

CVB Financial Corp.

, based in Ontario, Calif., reported $919 million and $399 million of unrealized losses on loans and held-to-maturity securities, respectively, as of Dec. 31. Combined, those were equivalent to 68% of its total equity, and they exceeded its tangible common equity. CVB estimated 65% of its deposits were uninsured at year-end.

CVB’s chief executive officer,

David Brager,

said the bank’s deposit relationships remain strong and often span decades. “We haven’t had significant relationships that have expressed concern,” he said. He noted the bank has grown slowly and doesn’t have any large industry concentrations comparable to Silicon Valley Bank’s tech-heavy focus.

CVB’s chief financial officer, Allen Nicholson, said “most likely those unrealized losses have diminished somewhat” since year-end, because rates declined.

Systemically important banks have an advantage over smaller banks, because they are widely perceived as too big to fail and implicitly backed by the government. Consequently, they may continue to attract low-cost deposits and retain uninsured deposits at the expense of smaller competitors, even if their disclosures show they have large capital holes on a fair-value basis.

Write to Jonathan Weil at [email protected]