Loan-to-deposit ratio information released

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued late last month the host state loan-to-deposit ratios that they will use to determine compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. These ratios replace the prior year’s ratios, which were released on June 17, 2016.

In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Section 109 also prohibits branches of banks controlled by out-of-state bank holding companies from operating primarily for the purpose of deposit production.

Section 109 provides a process to test compliance with the statutory requirements. The first step in the process involves a loan-to-deposit ratio test that compares an out-of-state bank’s loan-to-deposit ratio in a host state to the average loan-to-deposit ratio in the host state.

A second step is conducted if a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.

A bank that fails both steps is in violation of section 109 and is subject to sanctions by the appropriate agency.

Due to the legislative intent against imposing regulatory burden, no additional data were
collected from institutions to implement section 109. However, since insufficient lending data  were available on a geographic basis to calculate the host state loan -to-deposit ratios directly, the agencies used a proxy to estimate the ratios.  Accordingly, the agencies calculated the host state loan-to-deposit ratios using data obtained from the Consolidated Reports of Condition and Income (call reports) and Summary of Deposits Surveys (summary of deposits), as of June 30, 2016. For each home state bank, the agencies calculated the percentage of the bank’s total deposits attributable to branches located in its home state (determined from the summary of deposits), and applied this percentage to the bank’s total domestic loans (determined from the call reports) to estimate the amount of loans attributable to the home state.  The host state loan-to-deposit ratio was then calculated by separately totaling the loans and deposits for the home state banks, and then dividing the sum of the loans by the sum of the deposits.

Section 109 directs the agencies to determine, from relevant sources, the host state loan-to-deposit ratios.  As discussed in the preamble to the joint final rule, Prohibition Against Use of Interstate Branches Primarily for Deposit Production (62 FR 47728, 47731, Sept. 10, 1997), implementing section 109, banks designated as wholesale or limited purpose banks under the Community Reinvestment Act were excluded from the host state loan-to-deposit calculation, recognizing that these banks could have very large loan portfolios, but few, if any, deposits.

The estimated host state loan-to-deposit ratios, and any changes in the way the ratios are calculated, will be publicized on an annual basis.