General Guidelines Regarding the Physical Possession Collateral Arrangement

    A member’s credit rating with the Seattle Bank determines that institution’s collateral arrangement. The Seattle Bank reviews each member’s credit rating on a quarterly basis, considering a number of factors in determining the member’s credit rating and, in turn, its collateral arrangement.

    Transferring to Physical Possession

    Although some of the factors considered differ between banks/thrifts and credit unions, a member’s asset quality, measured in terms of its nonperforming asset (NPA) ratio, capital, and overall internal rating score with the Seattle Bank are key factors that apply to all members. A member will be moved to the physical possession collateral arrangement if any of the criteria shown in Table 1 below are met.

    Table 1. Factors Resulting in a Physical Possession Collateral Arrangement

    Banks/ThriftsCredit Unions
    Nonperforming Asset (NPA) Ratio> 75%> 75%
    Total Risk Based Capital (TRBC)< 10%N/A
    Net WorthN/A< or = 5.5%
    Overall Internal Rating Score1(See table footnote)(See table footnote)

    1The Seattle Bank calculates a member’s overall rating score based on an analysis of the level and trend of a member’s financial performance. The Seattle Bank uses a proprietary financial-ratio driven model to assess the member’s financial results and the interrelationships among its capital, asset quality, earnings, reserves, and liquidity, based on the member’s current quarterly Call Report. Other available public information and a current Report of Examination are also considered.

    Determining Capital Adequacy / NPA Ratios

    An institution’s asset quality helps to determine the adequacy of its capital and reserves, access to additional liquidity, and earnings via provision expense. One of the ratios the Seattle Bank uses to monitor asset quality is an institution’s NPA ratio. The NPA ratio combines capital and asset quality characteristics, representing current asset-quality issues potentially threatening a member’s viability. The NPA ratio attempts to gauge the regulator’s view of: capital in light of asset quality; additional provisions impacting earnings and potentially capital (Part 337.6); and other issues or enforcement actions.

    The NPA ratios for banks, thrifts and credit unions are derived using the formulas described in the tables below.

    Table 2: Banks NPA = ((90 DPD + NA + OREO)/(T1 Capital + ALLL))*100

    Call Report Line Item
    Loans and Leases 90 Days Past Due (DPD) and AccruingRC-N Col. B 1-7
    Nonaccrual Loans and Leases (NA)RC-N Col. C 1-7
    Other Real Estate Owned (OREO)RC 7 (RCON2150)
    Tier 1 Capital (T1 Capital)RC-R 11 (RCON8274)
    Allowance for Loan and Lease Losses (ALLL)RC 4.c. (RCON3123)

    Table 3: Thrifts NPA = ((90 DPD + NA + OREO)/(T1 Capital + ALLL))*100

    Call Report Line Item
    Loans and Leases 90 DPD and AccruingPD20
    Nonaccrual Loans and LeasesPD30
    Other Real Estate Owned (SC405 + SC415 + SC425 + SC426 + SC428 + SC429)
    Tier 1 Capital CCR30
    Allowance for Loan and Lease Losses VA165

    Table 4: Credit Unions NPA = ((> 2 Mo Del. + OREO)/(NW + ALLL))*100

    5300 Report Line Item
    Loans Greater than 2 Months Delinquent(021B + 022B + 023B)
    Other Real Estate Owned (798A1 + 798A2 + 798A3)
    Net Worth997
    Allowance for Loan and Lease Losses719
    Transferring Off Physical Possession

    Every situation is unique, and when determining whether to maintain or remove a member from physical collateral possession, the Seattle Bank considers the overall level and trend of a member’s financial performance in addition to the following factors.

    • Quarter-over-quarter asset-quality improvement with the ability to sustain the NPA ratio below a baseline target of 50%.
    • Two consecutive quarters of sustainable positive net income through core earnings.
    • Capital levels at least 100 basis points above prompt corrective action (PCA) limits for a Well Capitalized Institution, with continued capital augmentation through core earnings.
    • Allowance for loan and lease losses (ALLL) to nonaccrual loans and loans 90+ days past due greater than 50%.

    Additionally, the Seattle Bank may request the following information:

    • The member’s specific quarter-over-quarter long-term projections of improved earnings and asset quality, including key benchmarks for each quarter (balance sheet and income statement ratios).
    • List of concentrations by asset class and the institution’s specific plan for decreasing overall concentrations with member-supplied, quarter-over-quarter benchmarks.

    Questions? Contact our Member Services Department (800.973.6223) or your Seattle Bank Relationship Manager.