Tariffs threaten US banks' already-stressed transportation portfolios

US banks exposed to the transportation industry face potential credit fallout as tariffs threaten the already turbulent industry.

Transportation was already facing headwinds over the past few years because of declining demand, rising costs and stagnant freight rates. These factors contributed to one bank's failure in late 2023. Now, the possibility of tariffs and a recession is threatening that industry even more, bank executives said on first-quarter earnings calls.

There is "already existing weakness within the transportation sector. If we were to hit a recession, they're the ones who have already been in recession for the last couple of years and would, I think, be the ones to feel it most significantly, but we've already factored in a great deal of softness in that segment of the portfolio today," First Business Financial Services Inc. Chief Credit Officer Bradley Quade said on the company's first-quarter earnings call.

First Business Financial stopped lending to the transportation sector in the first quarter of 2023 and is letting its current portfolio run off. It has experienced some "isolated weakness" in recent quarters, contributing to an uptick in nonperforming assets and charge-offs, executives said on the company's year-end 2024 earnings call.

Similarly, SmartFinancial Inc. has pulled back on lending to the trucking sector as it has become more selective on those credits, President and CEO Billy Carroll said on the company's first-quarter earnings call.

The company hopes for fewer net charge-offs than last year, but tariffs could lead to some, "depending on the longevity, duration, size and such of the tariffs and how those might impact just the supply chain and smaller transportation operators," Chief Credit Officer Rhett Jordan said.

Triumph Financial Inc. reported a net loss in the first quarter as freight headwinds intensified.

"Over three years ago, we watched the downcycle begin and have watched it last longer than anyone expected," Vice Chairman, President and CEO Aaron Graft wrote in the company's earnings release. "Now, that seasonality and cyclicality have converged with uncertainty around trade policy and recession fears, our enterprise valuation has been affected. We will not blame the freight market and trade policy for our results, nor will we let them dissuade us from our strategic vision."

Given the ongoing freight recession, Triumph has been working through nonperforming assets in its equipment finance portfolio and is about 40% of the way through that process. The company's nonperforming loans to total loan ratio was 1.56% in the first quarter, up from 0.21% in the second quarter of 2023, according to S&P Global Market Intelligence data.

Though tariffs have the potential to exacerbate the ongoing freight recession, the company does not expect its credit quality to take any further hits, Triumph's executives said on its first-quarter earnings call.

"The majority of those loans were originated and have seasoned at a time in which it's been really hard in freight. Can tariffs make it even worse? Maybe," Graft said. "We can't tell you quarter-to-quarter exactly when and what will happen, but I, ... firmly believe that credit will not be something that is a material topic of conversation for this institution towards the back half of this year."

A close watch

With the outlook for a further downturn in the transportation industry, banks with exposure are keeping a close eye on their portfolios.

"Credit administration is all over that like a wet blanket. And they're hearing that people are not doing very much, but are very uneasy about it," Brookline Bancorp Inc. Chairman and CEO Paul Perrault said when asked about the company's equipment finance portfolio. "It is having a dampening effect on everything as we go forward, but there's nothing tangible yet."

Pinnacle Financial Partners Inc. is also monitoring its trucking book, which is part of its $700 million transportation portfolio.

"The truckers are probably going to be the most stressed right now just because of the supply chain impact that they have. And right now, so far, so good as to what we're feeling as a bank, banking those particular trucking firms, but we've got our eye out on them," CFO Harold Carpenter Jr. said on the company's earnings call.

Regions Financial Corp. expects its full-year net charge-offs to fall toward the high end of its provided range between 40 basis points to 50 basis points of average loans as it works through its "portfolios of interest," CFO David Turner Jr. said during the company's first-quarter earnings call.

Later in the call, President, Chairman and CEO John Turner Jr. listed office, senior housing and transportation as sectors that could contribute to the uptick.

Several other banks also listed transportation as an area of potential concern when asked by analysts which portfolios they are keeping an eye on, such as Texas Capital Bancshares Inc., Synovus Financial Corp., Banner Corp., Northwest Bancshares Inc. and Zions Bancorp. NA.