Third quarter bank data and star-ratings have now been updated both in JRN and at bauerfinancial.com. (Credit union data and ratings will be out in the next week or two.) The FDIC put a positive spin on the bank data, and with good reason. The banking industry entered into the pandemic very strong and, as a result, has been able to stave off what could otherwise have been a disaster.
Rather than compare 2021 just to 2020, though, we want to also see how the industry looks compared to pre-pandemic conditions. To do that, we looked at the third quarter Quarterly Banking Profiles (QBP) for the past three years (see chart).
The QBP states that net income was up $18.4 billion from a year ago, but that was due in large part to a $19.7 billion decline in loan loss provision expense. Net income of $216 billion for the first nine months of 2021 compares to $180 billion in 2019.
But how do loan levels and loan loss provisions measure up to pre-covid levels? And, after three consecutive quarters of negative provisions, are banks still cushioned for a worst case scenario? The ratios below suggest that yes, they are.
The first ratio, leverage capital ratio, is down 82 basis points from two years ago. But that’s okay. At 8.86%, it is up from last year as well as from a quarter ago. And, it is well above the regulatory requirement of 5% for well-capitalized banks.
The next ratio, net loans and leases to deposits, however, is very low… and dropping. It hasn’t been lack of effort. Loan balances have actually been climbing, just not as fast as deposits. That could be about to change.
Federal Reserve Chairman Jerome Powell has begun suggesting that interest rates will start rising late next year to put a kibosh on inflation. While that may be a little late (in our opinion) it will serve to further boost loan demand in the next several months.
The remaining three rows on the chart below pertain to the quality of existing loans. As you can see, nonperforming loans are now below half of a percent. Loan loss reserves, in spite of declining, are well above the ratios we saw two years ago in relation to both total loans and delinquent loans.
That all bodes well. The key now is to continue to adhere to strict lending standards so it all stays that way. On page 7 we have a list of 50 banks that have total loans and leases to deposits (LTD) of at least 85% and also have a delinquency to asset ratio of 2% or greater. (The chart on below refers to net loans, which will always be lower.)
We have often said that the optimal LTD is between 80% and 90%, and it is. At this level, you know the bank is lending sufficiently to meet the needs of its community yet not so much that it may have trouble meeting other obligations in the event of the unexpected, say a pandemic. With LTDs exceeding 90%, we would hope to see delinquencies below 1%.
That is not the case for these 50 banks. Yet, many are well rated and some are even included on JRN’s rate pages. We are keeping a close eye on their loan quality, but we keep a close eye on everything else, too.
3-Star California Pacific Bank, San Francisco, CA has a 126% LTD AND its nonperforming assets are almost 10% of total assets. That sounds like it should be on Bauer’s Troubled and Problematic Report. But a leverage capital ratio of 44.9% (and rising) serves as shock absorbers for the bumps in the road. 3½-Star First Credit Bank, West Hollywood CA is in a similar situation.
2-Star GN Bank, Chicago, conversely, is operating under a cease and desist order from the OCC that requires much higher capital ratios than the majority of the industry. The order, signed in September 2020, also addresses the bank’s credit risk management and loan loss reserves, both of which still need improvement.
Then there’s 5-Star TIAA FSB, Jacksonville, FL, which has a different business model than most banks. With its beginnings as a retirement system for teachers, TIAA FSB now serves a plethora of non-profits. It is one of just eight non-community banks listed on page 7.