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Monday, Sep 26, 2022
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Bank Is Aiming for a Better Balance After Failing Big Stress Test

The results of the biggest banks’ stress testing are in, and everyone passed except for Zions Bancorporation.

The Salt Lake City-based parent company to California Bank & Trust, which is the largest commercial bank in San Diego, came up short on capital when measured against a hypothetical set of circumstances devised by the Federal Reserve Bank.

This is the second year of the stress testing done as a result of the Dodd-Frank banking reform law. Last year, one other lender failed to pass — Ally Financial Inc.

The purpose behind the testing is to determine how the nation’s largest banks would perform should the economy take a nosedive similar to the one that started in late 2007 and didn’t stabilize until early 2009.

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In September 2008, many banks were so battered by bad loans and severely marked-down investments that if not for the massive infusion of hundreds of billions by the Treasury Department, many probably would have failed.

The scenario presented for the recently completed stress test was formidable: unemployment rising above 11 percent, housing prices falling 25 percent and the stock market falling 50 percent. Pretty ugly, but the good news is 29 of the 30 lenders still had sufficient capital after the nine-quarter test period that ran from fourth quarter 2013 through fourth quarter 2015.

Even though the collective loan losses under those conditions were an aggregate $366 billion, every bank had a minimum Tier 1 common capital ratio above the minimum set by the Fed of 5 percent — except Zions, which limped in with a Tier 1 ratio of 3.6 percent.

Among the local megabanks that passed — and their respective Tier 1 ratios — were Northern Trust Corp., 11.4 percent; U.S. Bank, 8.3 percent; Wells Fargo Bank, 8.2 percent; Union Bank, 8.1 percent; Bank of America, 6.1 percent; and JPMorgan Chase, 6.7 percent.

On the day the Fed released the test results, Zions said in a news release that its capital ratios were worse than it anticipated mainly because of three factors: higher commercial real estate losses, greater risk-weighted assets and lower pre-tax revenue.

Zions, which had $56 billion in total assets and had net earnings of $294 million in 2013, said the stress test occurred before it sold some of its collateralized debt obligations, which would have substantially reduced its risk.

Zions said it plans to resubmit a capital plan to the Fed and anticipates the plan will contain actions that will further reduce its risk or increase its common equity capital or both so that it meets or exceeds the minimum capital ratios required under the stress test scenario.

So what does this mean for CB&T, which makes up about a fifth of Zions? Nothing, said a few local bankers.

Just because the parent bank came up short on the stress test doesn’t mean the subsidiary bank is similarly challenged, said Alan Lane, CEO at Silvergate Bank, which is relatively tiny, compared with Zions, with only $640 million in assets.

In fact, CB&T reported it held Tier 1 leverage capital of 10.75 percent, or more than double the minimum 5 percent required by regulators to be classified as well-capitalized.

But those ratios aren’t affected by a hypothetical meltdown of the nation’s economy. Although that kind of testing isn’t required of any bank with less than $50 billion in assets, it could very well take effect sometime down the line, Lane said.

The regulators now say they want these stress tests to apply to only the biggest banks because these companies have the biggest impact on the economy, Lane said. Yet, in the past, regulations that were initially aimed at the biggest banks eventually were adopted for the entire industry as “best practices” and applied to every bank, no matter the size, he said.

It’d be just one more cost that community banks would have to absorb, and for those small banks that couldn’t meet the minimum capital standards, it would be a certain deathblow.

• • •

Silvergate Names Chief Banking Officer: Silvergate Bank hired Dino D’Auria, a 25-year San Diego commercial banker, as its chief banking officer and executive vice president.

D’Auria replaces Karen Brassfield, who retired as Silvergate’s chief banking officer at the end of last year. He’ll be responsible for leading the bank’s business banking initiative, which includes a stronger emphasis on lending to small businesses. D’Auria will also oversee the branch network, central operations, cash management, human resources and information technology.

• • •

BofI stock falls: BofI Holding Co., the parent of BofI Federal Bank, has been one of the highest flyers in the market in recent years, racking up a total return last year of 182 percent, but in mid-March shares took a big dive, falling 18 percent in a week from its high of about $106 down to about $86. And the stock was still declining as of March 27 when it closed at $76.84, down $1.63 or 2.1 percent from the previous day’s closing price.

The $3 billion bank didn’t release any news, but the speculation was a negative report from a blogger on the website Seeking Alpha caused some damage. The report from the blogger, who revealed that he was shorting the stock, said BofI’s (Nasdaq: BOFI) market price was overvalued at five times its book value and 32 times its trailing earnings per share in 2013.

He also wrote that the Internet bank could be badly hurt if interest rates rise.

The bank declined to comment on the stories or the stock’s swoon.

Send news about locally based financial institutions to Mike Allen via email at mallen@sdbj.com. He can be reached at 858-277-6359.

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