Fewer US community banks qualify for leverage ratio framework in Q1

With the community bank leverage ratio framework threshold raised in the first quarter, the number of U.S. community banks eligible for a simpler regulatory capital reporting methodology declined sequentially.

Except for companies in a grace period, qualifying criteria for the community bank leverage ratio, or CBLR, framework in the first quarter of 2022 comprised total consolidated assets less than $10 billion, a leverage ratio greater than 9%, being a non-advanced approaches institution, trading assets plus trading liabilities representing 5% or less of total consolidated assets, and off-balance sheet exposures comprising 25% or less of total consolidated assets.

Companies that previously qualified for and opted into the CBLR are offered a two-quarter grace period for all of the qualifying criteria as long as their leverage ratio is no more than 1 percentage point below the requirement.

In the first quarter, 1,710 banks with less than $10 billion in total assets qualified for and opted into the community bank leverage ratio, or CBLR, framework, down from 1,757 in the fourth quarter of 2021, according to S&P Global Market Intelligence data.

Most community banks operate outside of this optional framework, which is meant to serve as a streamlined measure of capital adequacy for participating banks by removing the requirement to report risk-based capital ratios. Nearly 1,200 community banks came up short of the framework threshold at March 31 and were not eligible for the CBLR treatment, up from 805 at the end of last year.

Banks required to exit CBLR

Banks need to maintain a certain leverage ratio, among other criteria, to qualify for the CBLR framework. The threshold was a minimum leverage ratio of 8.5% at year-end 2021 but was raised to 9% in 2022.

In the first quarter, 23 banks were required to exit the framework because they either reported a leverage ratio of equal to or below 8% or failed to exceed the required limit of 9% after a two-quarter grace period. In total, 84 banks, including one historical bank, exited the CBLR.

Grace period

A significantly large number of community banks were placed in a grace period in the first quarter because of the raised threshold. A total of 161 banks were in a grace period at March 31, more than three times higher than at Dec. 31, 2021.

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Livingston, Tenn.-based First National Bank of Tennessee, with $1.28 billion in total assets, recorded a leverage ratio of 8.01%, the lowest among its peers in the grace period. This is also the bank's second quarter in a grace period, along with Kahoka, Mo.-based Kahoka State Bank.

CBLR entries

Meanwhile, 50 banks entered the framework, including Maspeth, N.Y.-based Maspeth Federal Savings and Loan Association, which had a leverage ratio of 31.27% at March 31.

The largest bank by asset size to opt into CBLR during the quarter was Cross River Bank, with total assets of $8.88 billion. The Fort Lee, N.J.-based institution posted a leverage ratio of 14.33%.