Schuster Comment: Ratios

Robert Schuster’s Comment

Submitted on 2012/02/07 at 1:14 pm

Today a lead article at The was headlined “155 Banks On The Brink” and and Citizens was one of the155. This piqued my curiosity about how bad are the numbers as published. We first need to define the capitalization categories and I have copied them from The below.

Then we can look at the numbers and determine what category we fall into. We should also look at how close we are to jumping into the next best category.

These are the numbers and stats:

39th from the best at 3.93% Tier 1 Leverage Ratio ( undercapitalized )

31st from the best at 5.91% Tier 1 Risk based Capital Ratio ( adequately capitalized )

32nd from the best at 7.18% Total Risk based Capital Ratio ( undercapitalized )

43rd from the best 11.06% Non Performing Assets ( top 1/3 percentile )

3rd from the highest 1,032,000,000 Total Assets ( FDIC could close 25 of the lowest asset banks for what it would cost to close Citizens )

In order to put this in perspective keep in mind that undercapitalized is the middle category, not the bottom.

As bad as it is to be included in the group of 155 undercapitalized banks, I believe that the numbers paint a better picture than the headlines portray.

Does this mean that we should not pursue changes in the governance of Citizens,no.

In spite of those who post all negative’s on Citizen’s I believe there is hope to turn this ship around and I put my money on PNBC. And yes I am long PNBC.

Copy and Paste from

When we speak of banks that are “well-capitalized” or “undercapitalized,” we are using strictly-defined regulatory terms.

More from Philip van Doorn

There are five regulator-defined capital categories used to describe an institution’s capital strength: well capitalized, adequately capitalized,

under capitalized, significantly undercapitalized and critically undercapitalized.

Each capital category has minimum requirements for the following three ratios:

Tier-1 leverage ratio: This is an institution’s core capital (total equity capital with adjustments for unrealized gains and losses on securities,

deferred tax benefits, non-qualifying preferred stock and other items) divided by its average total assets.
Tier-1 risk-based capital Ratio: Since this ratio uses risk-weighted assets as the denominator, it is usually higher than the tier-1 capital ratio.

Bank assets are weighted by risk on Schedule RC-R of the Call Report. For example, cash is weighed 0% risk. Performing single-family mortgages

have a 50% risk-weighting. Nonperforming loans will have higher risk-weightings. All securities and loans have risk-weightings defined by several factors,

including the issuer and agency ratings.
Risk-adjusted capital ratio: This is the ratio of total risk-based capital to total risk-weighted assets. Risk-based capital is (roughly) tier-1 capital plus

loan loss reserves. This is the ratio that most commonly slips below the minimum for an institution to be considered well capitalized under regulatory guidelines.

Capital Ratios and Regulatory Capital Categories

Taking those categories into account, the following are the criteria for determining a bank’s capital health:

Well Capitalized

Core capital to adjusted tangible assets as least 5%
Core capital to risk-weighted assets at least 6%
Risk-adjusted capital ratio at least 10%

Adequately Capitalized

Core capital to adjusted tangible assets at least 4%
Core capital to risk-weighted assets at least 4%
Risk-adjusted capital ratio at least 8%


Core capital to adjusted tangible assets less than 4%
Core capital to risk-weighted assets less than 4%
Risk-adjusted capital ratio less than 8%

Significantly Undercapitalized

Core capital to adjusted tangible assets less than 3%
Core capital to risk-weighted assets less than 3%
Risk-adjusted capital ratio at least less than 6%

Critically Undercapitalized

Tangible equity ratio less than 2%

The tangible equity ratio is an institution’s tier-1 capital, plus non-qualifying preferred stock. For all the institutions on our list,the tangible equity ratio

equals the tier-1leverage ratio.

The vast majority of institutions are well capitalized, and many greatly exceed the minimum requirements for a well-capitalized institution.

Out of 8,459 domestic banks and thrifts reporting as of Sept. 30, 2008, all were well capitalized except for 161 institutions.

Even slipping to adequately capitalized is something that institutions try very hard to avoid.