After the announcement that Citizens Bank had failed last week, I got the following message from a subscriber.
“There are a lot more bank failures coming from bad trucking loans. Citizens Bank is just the first domino to fall. I've been in transportation for 18 years and I've never seen anything close to what the industry is going through now. Everyone in transportation is suffering. As the transportation failures pile up, bank failures will follow. Everyone is upside down on equipment loans. Shipping costs will skyrocket after the transportation washout coming in the next 6 months.”
When I talk about the catalysts for a credit event, this is exactly what I’m talking about. So many people focus on things, such as GDP growth and the unemployment rate, and think everything is just fine. They don’t look under the surface at the signs that are signaling trouble. Not just trouble, but potentially major trouble.
For the record, the fact that Citizens Bank failed due to trucking loan exposure isn’t speculation. The FDIC and Iowa Division of Banking have targeted the bank’s commercial trucking loan portfolio as the culprit in its insolvency.
As is usually the case in situations such as these, there are a lot of moving parts. Exposure to the declining trucking industry may be the root cause of the Citizens Bank failure, but poor management had a big hand in it too. The IBOB’s investigation apparently uncovered significant loan losses that had not been previously identified by the bank (whether that was intentional or unintentional, I’m not sure, but it’s not a good look either way). It also seemed to question why a small bank with just $66 million in total assets was making so many large, speculative loans within a single industry.
While this isn’t the same situation that got Silicon Valley Bank and Signature Bank into trouble, the overarching theme is the same - the bank’s management teams got a little too cavalier with the risk they were taking in the pursuit of better returns, only to get burned in the end when conditions went south.
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