What do the six letters actually measure?

Capital adequacy measures whether an institution has enough capital to absorb losses and support ongoing operations. Regulators evaluate this through several ratios, each with a minimum threshold for “well-capitalized” status under the Prompt Corrective Action framework.

Key metrics

• ·Tier 1 capital ratio — must exceed 8% to be well-capitalized
• ·Common equity Tier 1 (CET1) — must exceed 6.5%
• ·Total risk-based capital ratio — must exceed 10%
• ·Leverage ratio — must exceed 5%
• ·Capital conservation buffer — 2.5% above minimums to avoid distribution restrictions

Asset quality reflects the credit risk in an institution's loan portfolio and investment holdings. Examiners look at the volume of problem assets, the adequacy of loss reserves, and the pace of deterioration.

Key metrics

• ·CRE concentration — guidance threshold at 300% of (Tier 1 + ACL) per FIL-104-2006 / SR 07-01 (71 FR 74580)
• ·Construction & development — guidance threshold at 100% of (Tier 1 + ACL), same guidance
• ·Nonaccrual ratio — nonaccrual loans as a percentage of total loans
• ·Noncurrent asset ratio — noncurrent loans + OREO ÷ total assets
• ·ACL coverage — allowance for credit losses ÷ noncurrent loans
• ·Net charge-off rate — annualized charge-offs as a percentage of average loans

Management quality is the most qualitative CAMELS component — and the only one examiners cannot assess from call report data alone. Examiners evaluate board governance, strategic direction, risk management effectiveness and succession planning through interviews, document review and prior findings.

Key metrics

• ·Board oversight — evidence of active governance in board minutes
• ·Strategic plan — written, board-approved, reviewed at least annually
• ·Audit committee — independent charter, regular reporting from internal and external audit
• ·Succession plan — documented for key executive positions
• ·Management information systems — timely board reporting across all CAMELS areas
• ·Response to prior exam findings — documented corrective action
• ·Concentration risk policy — board-approved internal limits

Earnings quality measures whether an institution generates sufficient income to support operations, build capital and absorb losses. Examiners evaluate both the level and the trend.

Key metrics

• ·Return on assets — negative ROA is a breach; below 50bps is a warning
• ·Return on equity — evaluated relative to the peer group
• ·Net interest margin — interest income less interest expense ÷ earning assets
• ·Efficiency ratio — noninterest expense ÷ total revenue (lower is better)
• ·Provision coverage — provision expense relative to net charge-offs

Liquidity measures an institution's ability to meet obligations as they come due without unacceptable losses. Examiners focus on funding diversity, reliance on volatile sources, and the adequacy of contingency funding plans.

Key metrics

• ·Loan-to-deposit ratio — higher ratios indicate a less liquid balance sheet
• ·Estimated uninsured deposits ÷ total deposits
• ·Brokered deposits as a percentage of total deposits
• ·Wholesale funding dependency — FHLB + brokered + other wholesale ÷ total funding
• ·Core deposits ÷ total deposits

Sensitivity evaluates exposure to changes in interest rates, foreign exchange, commodity and equity prices. For most community banks, interest rate risk is the dominant concern.

Key metrics

• ·AFS unrealized gains and losses — reported signed, with the AOCI opt-out handled separately
• ·Fixed-rate concentration — loans and securities with fixed rates and extended maturities
• ·Repricing detail — rate-sensitive assets and liabilities across time buckets