Pandemic impacts are subsiding but geopolitical strains are rising. It’s a good thing Bauer projects negative trends forward when assigning its star-ratings. The FDIC’s acting chairman, Martin Gruenburg, has even voiced concerns about the future. When remarking Tuesday on how well U.S. banks did in the fourth quarter of ’21, he added this caveat:
“rising interest rates and geopolitical uncertainty could negatively affect bank profitability, credit quality, and loan growth going forward.” (3/1/22)
Fortunately, most U.S. banks have strong capital levels to help cushion the bumps that are likely heading their way. Only one bank is currently less than “Adequately Capitalized” by regulatory standards (see page 2) and the “FDIC’s Problem Bank List” is down to 44. Bauer’s Troubled and Problematic Bank Report (banks rated 2-Stars or below) dropped as well—to 48 based on year-end data.
The decreased number of banks on these lists can be attributed, at least in part, to the shrinking number of banks period. While no banks failed during the fourth quarter, 75 were lost (72 merged into other banks, two merged into credit unions and one ceased operations altogether). No new banks were chartered in the fourth quarter.
With the industry shrinking, it is no wonder problem banks are shrinking as well. Yet, total industry assets continue to rise, averaging over 2% growth per quarter. Loans increased in almost every major category. Home equity lines of credit (HELOCs which generally have variable rates) and Commercial & Industrial loans, both bucked that trend.
One thing we have been concerned about is the reversal of loan loss provisions, which declined by $4 billion or 123% during calendar ’21. But we do tend to be very cautious. Noncurrent loans as well as net charge-offs continue to decline. And, allowances for loan losses (as a percent of loans) still remains well above pre-pandemic levels at 1.58% now compared to 1.18% two years ago (Q4’2019).
Even so, with so much uncertainty, we would like to see banks hold on to the reserves they have left.
As we mentioned, only one U.S. bank is currently considered to be less than Adequately Capitalized by regulatory standards. That dubious distinction goes to Zero-Star Community Bank & Trust—West GA, LaGrange, GA. Community B&T had been operating under a consent order since 2012 that, among other things:
- limited its asset growth;
- prohibited it from accepting new or renewing existing brokered deposits; and
- Required minimum capital ratios (CRs) of: 8% leverage and 10% total risk-based.
Those ratios, in particular, have remained elusive. After (perhaps too) many years, a Prompt Corrective Action (PCA) was signed (November 2021). New terms (effective October 20, 2021) now call for the reduction of Community B&T’s total assets:
- by 10% within 30 days;
- by 15% within 60 days; and
- by 20% within 120 days.
While we do not have the month by month detail, during the 90 day period between September 30 and December 31, 2021, Community B&T managed to reduce its assets by $6.643 million (only 7.2%). And, it is still nowhere near the required CRs.
Community B&T is not the only problematic bank unable to meet its designated capital ratio targets. With just a handful of exceptions, most of the banks on Bauer’s Troubled & Problematic Report are operating under at least one enforcement action. While none are as severe as Community B&T’s PCA, many also require higher capital ratios than what is standard.
These three in particular remain quite far from their target ratios:
In January 2021, the OCC told Zero-Star Sidney FS&LA, NE it needed to obtain a leverage CR of 9% and total risk-based CR of 12%. That’s a far cry from the 4.175% and 8.441% it reported at year-end 2021.
Similarly, in November 2021, the OCC required 2-Star BancCentral N.A., Alva, OK to reach a leverage CR of 9% and total risk-based CR of 13%. At year-end, those ratios were just 6.108% and 9.105%, respectively.
And, back in December 2020, the FDIC ordered 2-Star Spectra Bank, Ft. Worth, TX to get its leverage CR up to 9% and its total risk-based CR to 13%. It has met its new risk-based requirement for three straight quarters, but its year-end leverage CR is below 5.50%.
Rest assured, we are watching them all… very carefully.
(BOLO: New Credit Union Star Ratings will be out soon.)