Pub. 12 2021 Issue 4

wvbankers.org 28 West Virginia Banker Checking In on the Banking Industry 2 020 was a year of challenges in many aspects of life, business, and the economy. The start of 2021 brought a close to a tumultuous year and opened the door to a year of economic recovery and hope for more normal times. In March 2020, the banking industry was rocked when the Fed funds rate was cut to zero at an unprecedented speed, and Treasury yields tumbled to all-time lows. Additionally, the massive influx of stimulus-related deposits that flowed into the banking system greatly changed the size and structure of balance sheets. As a former bank examiner, I am taking a chapter from my previous regulatory career by looking at the banking industry as it relates to the Uniform Financial Institutions Rating System and its six components, known as CAMELS. Capital – A wise person once told me that capital cures a lot of ills. While this statement is very true, not properly leveraging your capital may leave some additional earnings and shareholder returns on the table. Before the pandemic hit, leverage ratios were very strong, with only 14 banks on the “less than well-capitalized” list. For the most part, leverage ratios haven’t been stressed in the traditional sense with loan losses; however, many institutions have seen a reduction in their leverage ratios as asset growth has dramatically outpaced capital growth. Additional pressure on leverage ratios could continue. Asset Quality – This is likely the biggest unknown of all the components. When the COVID-19 pandemic forced many states to shut down to varying magnitudes, many businesses struggled, and millions lost their jobs. As we continue into the next year, the delta variant is pushing its way throughout the country, but in general, we haven’t seen massive asset quality problems materialize. Asset quality is likely to vary significantly from bank to bank and region to region. Some institutions have more exposure to the most hard-hit industries, while others have little to no exposure. We know that extensions, deferrals, and government stimulus have propped up some businesses and kept loans from going bust. Time will tell which businesses and customers will be able to get back on their feet and which won’t. Management – Management is easily the most subjective component of all the CAMELS components. Bank management has been extra busy with the many challenges being thrown their way due to the pandemic. Community By Dale Sheller, The Baker Group