OTC Markets Blog

Latest commentary on Market Structure, Compliance, Small Cap and Reg A+ issues, including insights on the news and trends that affect the public markets.


Tony Hodson

Senior Vice President Market Data OTC Markets Group

Q2 Community Bank Data: A Closer Look at What You’ll Find Outside of the Balance Sheet

As Q2 call report data becomes available, analysts are looking for indications of how the pandemic may be impacting allowances and delinquencies in community bank balance sheets.  However, considering COVID-19’s severe economic impacts didn’t begin until mid-March, what may be more telling at this juncture may be what is occurring off balance sheet.

Community Banking Q2 Data: A Closer Look at What You’ll Find Outside of the Balance Sheet


While it’s true that some banks have dramatically increased their allowances for credit losses, when the sector is split into “big banks” (assets > $3 Billion) and “community banks (assets < $3B), there is a marked difference in the change in allowances:

It’s hard to tell from these aggregated numbers, but there are likely several contributing factors at work here including:

  • the relatively conservative nature of community bank underwriting
  • a more personalized approach to community loan workouts
  • differences in loss accounting methodologies

The last point can’t be underestimated, as larger banks are more likely to have adopted CECL’s “expected loss” approach to allowances in lieu of most community banks’ “incurred loss” models.

Regardless of the driving factors related to the above chart, what is clear at this point is that allowances are not yet an indicator of COVID-19- related troubles at community banks.

Off-Balance Sheet Commitments

One area that may be more of a leading indicator for smaller banks is changes in “Unused Commitments,” which typically reside off the balance sheet.  These represent portions of credit lines that banks have previously committed to lending, but borrowers have not yet drawn. 

Consider, for example, a home equity line of credit (HELOC) with a $100,000 limit.  If the borrower has borrowed $25,000, the remaining $75,000 remains available to the borrower on demand and is accounted for off the balance sheet as an “unused” commitment.  Note, this is a particularly simple example, as HELOCs have some of the most straightforward mechanics pertaining to credit lines.  However, the analysis concept remains compelling:  when the economy is awash in trillions of dollars of fiscal and economic stimulus, signs of a credit crunch may be seen in the way borrowers tap into established credit lines at community banks.

In looking at the chart above, there is a marked downward trend in Total Unused Commitments.  While it’s difficult to draw a definitive conclusion about the underlying causes, it is reasonable to determine that several factors are driving this.  Chief among them, the data indicates that borrowers are using credit cards and HELOCs at increasing rates—to such as degree that some banks have temporarily stopped underwriting new HELOC accounts.

Given the significant amount of stimulus aid and other forms of relief currently being provided (e.g. loan deferrals and modifications), we are not yet likely to see “past dues” and” write-offs” reflected in bank data.  However, if unused commitments continue to ramp down and stimulus dries up, community banks could rapidly find themselves with a portfolio of troubled credit. Only time will tell, but given the fact that layoffs continue, and that the passage of further stimulus relief has stalled, Q3 and Q4 data may start to show more explicitly where borrowers are slipping through the cracks.

Are CRE Concentrations Still a Financial Crisis Prognosticator?

During the Great Recession, commercial real estate (CRE) lending practices were heavily scrutinized and considered to be a leading factor of economic downturn. As a result, bank concentrations in CRE are assumed to be a strong predictor of bank failures.

Over a decade later, rising bank CRE lending concentration levels accompanied by historically high CRE prices have many economists convinced that regulations need to be revisited so history doesn’t repeat itself. As they debate whether or not current CRE lending practices are an accurate prognosticator, recent Qaravan data tells a far more nuanced story. Continue reading “Are CRE Concentrations Still a Financial Crisis Prognosticator?”

Key Takeaways From Regulators’ Recent CECL Final Policy Statement

In late December, an interagency body of regulators closed the comment period for a set of proposed changes to the ever-evolving CECL standard.  Regulators have recently come back with their responses to industry comments in the form of the “Final Policy Statement for FASB ASC Topic 326” found here: Continue reading “Key Takeaways From Regulators’ Recent CECL Final Policy Statement”

CBLR: A win for most, but time for the rest to move on

In November, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, known as the community bank leverage ratio framework (CBLR), for qualifying community banking organizations. The final became effective on January 1, 2020.

Continue reading “CBLR: A win for most, but time for the rest to move on”

CECL is Coming: Here’s How Bank Stakeholders Can Anticipate Its Impact While Making Their Voices Heard

With the most sweeping re-casting of credit risk management in decades looming on the horizon, regulators, bank executives and the markets are bracing for the potential disruptive ramifications of this new set of credit loss accounting standards. In response to calls for a more cautious rollout, regulators have agreed to an implementation extension for most community banks. Continue reading “CECL is Coming: Here’s How Bank Stakeholders Can Anticipate Its Impact While Making Their Voices Heard”

By Putting UBPR and Call Reports Under the Microscope with Qaravan, Investors and Bank Stakeholders Can Gain Meaningful Insight Far Beyond Raw Data

The banking industry is unique in the amount of regulatory scrutiny it is subject to, much of which is in the form of self-reporting. Since legislation was passed in 1975 in response to the failure of two federally chartered institutions (United States National Bank and Franklin National Bank), every national bank, state bank, federal savings bank, federal savings association, and credit union is mandated by law to report highly standardized and detailed information about its operations to a central authority, the Federal Financial Institutions Examination Council (FFIEC).

Continue reading “By Putting UBPR and Call Reports Under the Microscope with Qaravan, Investors and Bank Stakeholders Can Gain Meaningful Insight Far Beyond Raw Data”

OTC Markets Group Top Performing Banks Report by Qaravan: 2Q 2019

Advanced Data Analysis Helps Connect the Dots to Highlight the Nation’s Top Performing Community Banks

Continue reading “OTC Markets Group Top Performing Banks Report by Qaravan: 2Q 2019”

CECL: Unpaved Road Ahead

The Genesis/Birth of CECL

After the 2008 financial crisis, much of the focus on the regulation of financial institutions shifted to mitigating systemic risk. This included an increased focus on stress testing and the recapitalization of institutions—both intended to help ensure solvency and insulate the global economy from further erosion. Continue reading “CECL: Unpaved Road Ahead”

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