Local banks get a fresh reminder that loans still can go bad

Loans can go bad, remember?

Local business banks are seeing some commercial loans blow up for the first time since their balance sheets were wiped clean following the housing bust and Great Recession. Investors aren’t waiting around for explanations before punishing the stocks of banks with even a hint of credit worries.

The good news for now is that there are no discernible trends explaining the loan busts. They’re happening to companies for myriad reasons, bankers say, and by and large loan quality remains solid by historical standards. But, with investor pressure to show loan growth still intense, some banks inevitably will fall prey to doing things they shouldn’t. It will have to wait until the next recession, when bad lending practices always get exposed, to see which ones.

Three prominent local banks that specialize in lending to midsize businesses—Rosemont-based Wintrust Financial, Chicago-based MB Financial and CIBC Bank U.S.A.—all showed meaningfully higher levels of bad loans in the third quarter compared with the previous year.

“There’s no bubble out there that we see,” Wintrust CEO Edward Wehmer says in an interview. “Credit couldn’t get any better, and you’re just seeing a return to normalcy.”

Wehmer said essentially the same thing to analysts in Wintrust’s third-quarter earnings call, but it didn’t prevent investors from slicing nearly 14 percent off the stock in the five days after the quarterly report. Wintrust since has recovered some and now is about 7 percent off its pre-earnings level.

Likewise, loan charge-offs at MB Financial jumped to $32 million from $6 million the quarter before. The bank in its earnings report blamed “one loan relationship” that went bad. Still, apart from the one big loan that blew up, MB Financial’s underlying loan quality is deteriorating as well. Bad loans at the end of the third quarter were $74 million, up from $51 million the year before. Potential problem loans—borrowers that are stressed but not yet past due—rose to $245 million from $161 million.

CEO Mitch Feiger didn’t respond to a request for comment.

Executives at Cincinnati-based Fifth Third Bancorp, which expects to close early next year on its pending acquisition of MB Financial, didn’t sound alarmed. In Fifth Third’s earnings call, Treasurer James Leonard described it as “just one credit (that) appears to be more of an isolated idiosyncratic event, which does not taint the rest of the portfolio.”