16 banks adopt community bank leverage ratio guidelines for first time in Q1

More banks adopted the community bank leverage ratio reporting guidelines in the first quarter, including 16 institutions that had never been part of the framework. There were 59 total community bank leverage ratio (CBLR) entries compared to 47 exits, 10 of which were banks that are no longer operating.

Needham Bank, with $3.72 billion in total assets at March 31, was the largest entry, according to S&P Global Market Intelligence data. The Massachusetts-based bank, which has a mutual holding company-nonstock ownership structure, was previously in the framework from the second quarter of 2020 through the first quarter of 2022.

Another nonstock MHC, First Federal Savings and Loan Association of Lakewood, was the largest exit. The Lakewood, Ohio-based institution held $2.59 billion in total assets at the end of March and had been a CBLR participant continually since the framework began in 2020.

The community bank leverage ratio framework, which debuted in the first quarter of 2020, is a simpler way of regulatory reporting permitted for well-capitalized community banks so that they are freed from the burden of calculating their risk-weighted assets.

Except for companies in a grace period, qualifying criteria in the first quarter of 2023 were 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.

First-time entries

Just two of the 16 first-time entries had more than $1 billion in total assets at March 31: Miami-based Banesco USA and Southfield, Mich.-based Sterling Bank and Trust FSB, a unit of Sterling Bancorp Inc. Both banks were more than 550 basis points above the leverage ratio threshold of 9%.

Four of the first-timers were established in the last four quarters and reported leverage ratios over 36%. Columbus, Ohio-based Adelphi Bank and Minneapolis-based Ceridian National Trust Bank, a unit of Ceridian HCM Holding Inc., began operations in the first quarter of 2023. Phoenix-based Western Alliance Trust Co. NA, a unit of Western Alliance Bancorp., was established in the fourth quarter of 2022, and Anchorage, Alaska-based Peak Trust Co. NA, which is a nondepository trust, was established in the second quarter of 2022.

Pikeville, Tenn.-based First Farmers and Commercial Bank entered the framework with a leverage ratio of 9.05%. From June 30, 2021, to Sept. 30, 2022, the bank's leverage ratio was under 9%.

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Banks in grace period

A total of 27 operating banks were in a grace period because of a deficient leverage ratio, including 12 for the second consecutive quarter. Three of the 27 institutions — York, Neb.-based Cornerstone Bank; Springfield, Mo.-based OakStar Bank; and Gorham, Maine-based Gorham Savings Bank, which is a non-stock MHC — held total assets in excess of $1 billion at March 31.

Cornerstone Bank, Florence, Ala.-based First Southern Bank and Parkston, SD-based Farmers State Bank were the only institutions in the group that increased their leverage ratios during the first quarter.

In addition, 11 other banks were in grace periods because of non-leverage ratio criteria. Ten reported total off-balance sheet exposure of more than 25% of total consolidated assets, and one bank reported trading assets plus trading liabilities totaling more than 5% of total consolidated assets.

Industry breakdown

As in previous periods, the majority of the community bank sector did not qualify for and opt into the CBLR in the first quarter. More than 2,000 community banks outside of the framework had a leverage ratio over 9% as of March 31, although some of them may not have qualified based on other criteria.