Question

The management at Sage National Bank located in Key West, Florida, is calculating the key capital adequacy ratios for its third-quarter reports. At quarter-end, the bank’s total assets are $90 million and its total risk-weighted assets including off-balance-sheet items are $80 million. Tier 1 capital items sum to $4 million, while Tier 2 capital items total $2.5 million. Calculate Sage National’s leverage ratio, total capital-to-total assets, core capital-to-total risk-weighted assets, and total capital-to-total risk-weighted assets. Does Sage National meet the requirement stipulated for a bank to qualify as adequately capitalized? In which of the five capital adequacy categories created by U.S. federal regulators for PCA purposes does Sage National fall? Is Sage National subject to any regulatory restrictions given its capital adequacy category?

Answer 1

Total assets = $90 million

Total risk-weighted assets including off-balance-sheet items = $80 million

Tier 1 capital = $4 million

Tier 2 capital = $2.5 million

Leverage ratio = Tier 1 capital/ Total asset = $4 million/$90 million = 0.0444 or 4.44%

Total capital to total assets ratio = (Tier 1 capital + Tier 2 capital)/ Total assets = ($4 million + $2.5 million)/$90 million = 0.0722 or 7.22%

Core capital to total risk weighted assets = Tier 1 capital/ Risk weighted assets including off balance-sheet items = $4 million/$80 million = 0.05 or 5%

Total capital to total risk weighted assets = (Tier 1 capital + Tier 2 capital)/ Risk weighted assets including off balance-sheet items = ($4 million + $2.5 million)/$80 million = 0.08125 or 8.125%

Yes, Sage National bank meets the requirement of having a minimum ratio of total capital to risk weighted assets of at least 8 percent, a ratio of Tier 1 capital to risk weighted assets of at least 4 percent, and a leverage ratio of at least 4 percent stipulated for a bank to qualify as adequately capitalized. Sage National Bank falls in "adequately capitalized" category among the five capital adequacy categories created by U.S. federal regulators for PCA purpose. Sage National Bank is subject to a regulatory restriction of not accepting broker-placed deposits without regulatory approval.