More US banks reported tangible common equity ratios below 5% in the second quarter as high interest rates continued to wreak havoc on the fair value of their balance sheets.
In the second quarter, 28 US banks and thrifts posted negative adjusted tangible common equity (TCE) ratios, up from 21 in the first quarter and 18 in the second quarter of 2022, according to S&P Global Market Intelligence data. The number of US banks that posted TCE ratios in the range of between 0% to 1.99% and between 2% and 5% also rose sequentially.
However, despite the deterioration of some banks' TCE ratios, the industry is still in good shape, with a median TCE ratio of 9.01% at June 30.
The TCE ratio, which is tangible common equity divided by tangible assets, has come into greater focus recently as rising interest rates hurt the value of banks' bond books and put them underwater. Despite not being a regulatory ratio, regulators are paying closer attention to TCE because it captures the impact of accumulated other comprehensive income (AOCI).
AOCI includes changes in the market value of available-for-sale securities but is not included in regulatory capital ratios for any banks except global systemically important banks. However, under the Basel III endgame proposal, AOCI will be included in the regulatory capital for all banks with more than $100 billion of assets.
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Banks with negative tangible common equity ratios
Among the 28 banks with negative TCE ratios at June 30, Hennessey, Okla.-based Community State Bank posted the lowest adjusted TCE ratio in the second quarter at negative 10.77% — a 183-basis-point sequential decline.
Fayetteville, Texas-based Fayetteville Bank, a subsidiary of Industry Bancshares Inc., came in second with a negative 4.81% adjusted TCE ratio in the second quarter, a 151-basis-point decline from the previous quarter. The bank's second-quarter AOCI stood at a negative $112.3 million, a $6.6 million decline from the first quarter.
Shiner, Texas-based First National Bank of Shiner, which logged the lowest TCE ratio in the industry in the fourth quarter of 2022, fell to the No. 3 position in the second quarter with an adjusted TCE ratio of negative 4.08%, down 88 basis points from the previous quarter.
Only two banks on the list posted sequential improvements in their TCE ratios for the second quarter: Spur, Texas-based Spur Security Bank, and Alva, Okla.-based BancCentral NA.
Bond yields rise again after brief decline
A return to increases in US Treasury yields is putting pressure on banks' AOCI and adjusted TCE ratios. After increases through three consecutive quarters of 2022, long-term yields on the benchmark US Treasury notes declined at the end of the first quarter but started inching up again in the second quarter.
The yields across two-year to seven-year maturities, which encompass much of banks' bond portfolios, showed a sequential decline in the first quarter but increased in the second quarter.
The yield on the 30-year Treasury fell to 3.67% on March 31 from 3.97% at the end of the 2022 fourth quarter. However, 30-year Treasury yields went up to 3.85% on June 30 and 4.33% on Sept. 8.
The 20-year Treasury yield also showed a brief decline in the first quarter, falling to 3.81% at the end of the first quarter from 4.14% on Dec. 31, 2022. As of Sept. 8, the 20-year bond yield was 4.52%.
As a result, AOCI remains deeply in the red, sitting at negative $301.63 billion for the industry as a whole in the second quarter. That led to an aggregate decline in adjusted tangible common equity of $31.28 billion.
