The number of U.S. community banks eligible for a simpler regulatory capital reporting methodology declined for the fifth consecutive quarter.
In the second quarter, 1,693 banks with less than $10 billion in total assets qualified for and opted into the community bank leverage ratio, or CBLR, framework, down from 1,710 in the first quarter, according to S&P Global Market Intelligence data. Forty-one banks entered the framework in the second quarter, while 58 exited.
The majority of community banks choose not to participate or are not eligible to participate in the reporting methodology, 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. Peak adoption was in the third quarter of 2020, with 1,911 banks.
Except for companies in a grace period, qualifying criteria for the community bank leverage ratio, or CBLR, framework in the second 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.
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Banks operating in a grace period
There were 90 banks in a grace period in the second quarter, down from 161 in the previous quarter, because their leverage ratio was 9% or less. The jump in community banks placed in a grace period in the first quarter was due to the minimum leverage ratio threshold being raised to 9% in 2022 from 8.5% at year-end 2021.
One of those 90 companies subsequently has been acquired, and 69 of them were in a grace period for the second consecutive quarter.
Among the 20 CBLR banks with the lowest leverage ratios, 18 have been in a grace period for two quarters in a row. Only Swanton, Neb.-based First Tri-County Bank and Faribault, Minn.-based Reliance Bank had a leverage ratio greater than 9% at March 31.
Exits
In the second quarter, 14 banks had to exit the framework because their leverage ratio was at or below 9% after spending two quarters in a grace period. Another four banks were forced to exit because their leverage ratio was 8% or less.
Carbondale, Ill.-based Bank of Carbondale's leverage ratio was cut in half during the second quarter to 6.41%. It completed a sale to Marion, Ill.-based Midwest Community Bancshares Inc. on June 21.
