Bank Analysis School eBook

CAPITAL GUIDE

CAPITAL ADEQUACY RATING CRITERIA • The level and quality of capital and the overall financial condition of the institution. • The ability of management to address emerging needs for additional capital. • The nature, trend, and volume of problem assets, and the adequacy of allowances for loan and lease losses and other valuation reserves. • Balance sheet composition, including the nature and amount of intangible assets, market risk, concentration risk, and risks associated with nontraditional activities. • Risk exposure represented by off-balance sheet activities. • The quality and strength of earnings, and the reasonableness of dividends. • Prospects and plans for growth, as well as past experience in managing growth. • Access to capital markets and other sources of capital, including support provided by a parent holding company.

PURPOSES OF CAPITAL 1. Absorb losses

2. Promote public confidence 3. Restrict excessive growth 4. Protect the FDIC insurance fund CAPITAL COMPOSITION

RATIO CALCULATIONS

Numerator Tier 1 Capital CET1 Capital Tier 1 Capital Total Capital

Denominator

Tier One Leverage Ratio and Community Bank Leverage Ratio~

Avg. Total Assets

Common Equity Tier 1 (CET1) Capital Ratio

Risk Weighted Assets Risk Weighted Assets Risk Weighted Assets

CET1: • Common stock and related surplus • Retained earnings • AOCI (rare because most banks opted out) • Less: Goodwill and other intangibles • Less: Deferred tax assets • Less: Various other threshold deductions (rare) Additional Tier 1: • Preferred stock and related surplus (rare) Tier 2: • Allowance for credit losses (up to 1.25% of risk weighted assets) SOURCES OF CAPITAL • Earnings retention (internal) • Shareholder capital injection or access to capital markets (external)

Tier 1 Capital Ratio Total Capital Ratio

PROMPT CORRECTIVE ACTION CATEGORIES / RATIO THRESHOLDS

Prompt Corrective Action Category

Tier 1 Leverage Ratio

CET1 Capital Ratio

Tier 1 Capital Ratio

Total Capital Ratio

Typically the 1 st threshold breached

Well Capitalized

5% 4%

6.5% 4.5%

8% 6%

10%

Adequately Capitalized*

8%

Under Capitalized

< 4% < 3%

< 4.5%

< 6% < 4%

< 8% < 6%

Significantly Undercapitalized Critically Undercapitalized

< 3%

Tangible equity/Total assets ≤ 2%