San Antonio banks weather the coronavirus pandemic

Expecting borrowers to default on business and home loans in droves, San Antonio banks quickly set aside millions for potential loan losses.

Yet with 2020 now in the history books, bankers say the situation isn’t nearly as bleak as they had been bracing for at the start of the pandemic.

“Like most banks, (we) really geared up for that shoe to drop, and it hasn’t,” said Jeff Sinnott, Vantage Bank Texas’ CEO and president. “There will be headwinds, and there will definitely be customers who are facing challenges. But we don’t see, I guess, the type of disruption that we expected in March and early April.”

Others agree and offer various reasons why 2020 turned out better than expected.

The Coronavirus Aid, Relief and Economic Security, or CARES Act, propped up the nation’s economy by creating $2 trillion in funding to extend unemployment benefits to millions of Americans who filed jobless claims. The measure also sent out $1,200 in direct payments to most adults.

The CARES Act also created about $659 billion in loans and grants for small businesses under the Paycheck Protection Program. More than $2.2 billion went to San Antonio businesses and nonprofits, federal data show.

Five of the seven San Antonio-based banks made a combined $4.1 billion in PPP loans, contributing to double-digit percentage gains in the loan portfolios for four. Frost Bank, which operates in the major cities throughout the state, accounted for about $3.3 billion of the amount.

Banks also offered financial accommodations to customers, including loan deferrals and fee waivers, said San Antonio attorney Bruce E. Toppin III, who represents banks in corporate and regulatory matters.

“That’s helped to keep a lot of businesses afloat,” he said.

Some also have gotten an assist with rent abatement — deferring rent to the end of a lease — from landlords.

Bankruptcy lawyers predicted financially ailing businesses and consumers would stream into bankruptcy court in 2020 as the pandemic worsened, but that didn’t happen. With about a week left in December, consumer and business bankruptcies in the San Antonio region were off by nearly a third compared with all of 2019.

Mortgage foreclosures trigger a lot of consumer bankruptcies, but foreclosure auctions have been halted since March by orders of Bexar County Judge Nelson Wolff to prevent the virus’s spread.

Some bankers credit their customers’ ability to adjust to the “new normal” created by the pandemic for their upbeat assessment.

“The resiliency with our customers, their ability to make some changes or modifications or pivot a bit has been impressive,” Sinnott said.

“The deterioration in our loan portfolio was worse in June, July, August,” said John LaField, Jefferson Bank’s senior executive vice president of commercial lending. “I think a lot of it’s PPP, and a lot of it’s adjusting overhead and expenditures to get to a point of where you can make it work as a business owner.”

The banks’ performances serve as a testament to the way they were “thoughtful about underwriting loans,” Toppin said. Banks understood their customers’ businesses and made “good, sound loans,” as opposed to chasing after any loan they could make.

“Early on there certainly was a lot of concern about loan losses and just credit quality and borrowers’ ability to repay,” he said. “Certainly that’s still an issue, but it’s subsided somewhat as banks have recognized their borrowers are resilient and have been able to do what they need to do to continue to bring in income.”

It wasn’t all rosy for banks in 2020, however. The bottom line at some took a hit because of the increased reserves for losses from the pandemic, as well the Federal Reserve Board cutting interest rates to net zero.

That contributed to declines in net-interest margin, which measures the difference between what they pay customers and what they receives on loans, for all San Antonio banks.

Whether much of the expected troubles were just pushed off to 2021 remains to be seen. The latest survey by the National Federation of Business, released in mid-December, found 1 in 4 small-business owners reported they will have to close their doors in the next six months if current economic conditions don’t improve. Another 22 percent expect they will not be able to operate beyond seven months to a year.

It may not be as dire in Texas, though.

“I see a very bright 2021,” said J. Bruce Bugg Jr., chairman of the Bank of San Antonio. “Once we get the vaccines readily administered throughout the population, there’s a lot of pent-up demand.

“Texas is the state where you want to be if you’re a business.”

Below is a look at the individual performance of the seven San Antonio-based banks, from largest to smallest.

USAA Bank

USAA Federal Savings Bank, the largest San Antonio-based bank with about $103 billion in assets as of Sept. 30, lost $103 million in the first nine months of the year versus an $800 million profit in the same period in 2019.

It’s the only local bank to finish in the red in the first three quarters.

The bank’s total loans fell almost 10 percent to $43.6 billion, but deposits climbed 15.7 percent to $88.1 billion.

“Consumers are not spending as much as they did pre-COVID, including eating out less, decreased travel and other reasons,” USAA spokesman Matt Hartwig said in an email.

Lower interest rates and an almost doubling of its loan-loss provision to more than $1 billion contributed to the red ink. It also invested in “modernizing” the bank by upgrading or replacing legacy systems with new technology and platforms to better serve its members and strengthening its risk-management capabilities.

As of mid-December, Hartwig said, USAA assisted more than 250,000 members with more than $400 million in payment relief on their credit cards, consumer loans and home loans.

Still, it was a tough year for the bank. Federal banking regulators in October hit the bank with a $85 million fine because its controls and information technology systems did not comply with certain guidelines. The bank also failed to implement and maintain a risk management program sufficient for a bank its size.

That same month, the bank received a failing grade from the same regulators over evidence of “discriminatory or illegal credit practices.”

Frost Bank

The largest regional bank based in San Antonio, with $40.2 billion in assets, posted $251.2 million in net income in the first nine months of 2020, a nearly 28 percent decline from the year-earlier period.

At the end of September, it reported a nearly $224 million provision for loan losses due to the pandemic, up from $25.4 million at the same point in 2019. That and a nearly half-percentage point decline in its net-interest margin contributed to the smaller bottom line.

It had $18.2 billion in total loans and $33.8 billion in total deposits on Sept. 30, both up about 24 percent from a year ago.

“While all this other stuff was going on, we were continuing our two-year project to expand in the Houston market,” Frost spokesman Bill Day said of plans to open 20 branches. “I think we have all but three of those locations now. So the expense related to that has pretty much already gone away. Now we’re just focused on getting that finished up and getting those banks to profitability.”

Frost expects to keep a close eye on expenses as interest rates remain low in 2021. In October, Frost announced the 11 members of its executive team would take 10 percent pay cuts.

Broadway Bank

Broadway Bank earned $25.3 million in net income in the first nine months of 2020, down about $11.24 million from the same period in 2019. Much of the drop was related to a $6.8 million provision for loan losses.

PPP lending accounted for its loan growth, rising $373 million to $2.6 billion. Deposits rose 21 percent to just under $4 billion at the bank, which had $4.6 billion in assets as of Sept. 30.

The pandemic has created greater adoption of the bank’s digital channels, CEO and President David Bohne said.

“Thirty-five percent of the new accounts being opened in checking and savings, and even our auto lending, are being done online,” he said. “We expect that adoption to continue in the future.”

The bank has been looking at its physical branch operations over the last two years, with a shift at the bank taking on “more of an adviser role as opposed to just transactions,” Bohne said.

Vantage Bank Texas

An expansion into the Dallas-Fort Worth market propelled loan and deposit growth at Vantage Bank Texas, which had about $2.5 billion in assets on Sept. 30.

It reported almost $2 billion in loans and $2.2 billion in deposits as of Sept. 30, both up more than 27 percent from the previous year.

“We’ve actually tightened our credit practices and still have achieved this growth,” Sinnott said of the loan growth.

Sinnott took over as CEO and president in March, just as the virus was taking hold. He also credited the 2018 merger with McAllen’s Inter National Bank with increasing Vantage’s lending limit.

“We’re able to talk with some big developers and be a part of some of those initiatives and projects,” he said.

Net income for the first nine months of 2020 remained flat at about $18.1 million even with a doubling of the provision for loan losses to $9.3 million.

Jefferson Bank

Jefferson Bank topped $2 billion in assets in 2020. Loans increased 8.8 percent to almost $1.5 billion, while deposits rose about 16 percent to just under $2 billion. PPP loans accounted for loan growth, by and large.

“Almost all, except a few of the residential mortgage loans that we’ve put on deferral — (where) we’ve deferred the payments — they’ve returned to payment,” LaField said.

He attributed the rise in deposits to business owners and consumers unsure of what to do with their money.

The bank’s net income of $17.7 million in the first nine months of 2020 was down about 4 percent from the same period in 2019.

The Bank of San Antonio

The Bank of San Antonio registered gains in loans and deposits of nearly 30 percent in the first nine months, pushing total loans to $876.1 million and total deposits to $930.5 million.

Loans increased almost $210 million in the first nine months of 2020, with about $40 million to $50 million coming in non-PPP loans, Bugg said.

The bank had more than $1 billion in assets on Sept. 30. In October, the bank completed its merger with two affiliated banks, Texas Hill Country Bank and the Bank of Austin. They now operate under one bank charter. The three banks have about $1.6 billion in assets, though each continues to operate under its own name.

Bugg also serves as chairman of Texas Partners Bank and the Bank of San Antonio.

The Bank of San Antonio earned $1.9 million in the first three quarters of 2020, down from $7.7 million. That was largely due to a roughly $10 million provision for loan losses the bank took related to fraud it says it uncovered at its subsidiary, Texas Express Funding. The firm’s ex-president and four others were indicted.

Crockett National Bank

Crockett National Bank’s loans and deposits only increased slightly in the first three quarters of 2020. But its net income still soared 68.6 percent to $20.9 million in the period.

“The banks had a very solid year,” CEO Todd Huckabee said. “Our mortgage company has had a very strong year. That has to do with decreased home loan rates. That has caused a flurry of increases in refinances. Our mortgage company has just had a tremendous amount of business.”

The bank, with $691 million in assets, took a $1 million provision for loan losses in March, but it took the unusual step of reversing that in October, he said.

“We’ve taken a conservative stance underwriting our loans over time,” he said, adding the bank studied whether borrowers could survive tough times before extending loans to them. “The storm arrived and commercial (borrowers) withstood the storm.”