WHAT IS
SAFE AND SOUND?
Capital works as a bulwark against losses and provides protection for account holders during times of financial trouble for the bank. Therefore, a bank's level of capital is a valuable measurement of an institution's financial strength. When looking at safety and soundness, the higher the capital, the better.
On our test to measure the adequacy of a bank's capital, Penn Community Bank racked up 16 out of a possible 30 points, beating the national average of 13.13.
One important measure of this buffer is a bank's Tier 1 capital ratio. Penn Community Bank's Tier 1 capital ratio was 19.36 percent, exceeding the 6 percent level considered adequate by regulators, but below the national average of 25.65 percent. A higher capital ratio means the bank will be better able to stand up to economic challenges.
Overall, Penn Community Bank held equity amounting to 13.18 percent of its assets, which exceeded the national average of 12.03 percent.
This test is intended to estimate how the bank's loan loss reserves and overall capitalization could be affected by problem assets, such as unpaid mortgages.
A bank with lots of these kinds of assets could eventually be forced to use capital to cover losses, diminishing its cushion of equity. It also means that there are likely to be many assets that are in non-accrual status and no longer earning interest for the bank, diminishing earnings and elevating the risk of a future failure.
On Bankrate's test of asset quality, Penn Community Bank scored 40 out of a possible 40 points, exceeding the national average of 37.49 points.
The percentage of problem assets a bank holds compared to its total assets is a widely used indicator of asset quality.As of December 31, 2017, 0.48 percent of Penn Community Bank's loans were noncurrent -- in other words, they were more than 90 days past due or were in non-accrual status. That's below the national average of 1.01 percent.
Banks maintain a reserve known as an "allowance for loan and lease losses" to deal with troubled assets . Comparing the size of that reserve to the total amount of problematic loans can be a helpful indicator when evaluating a bank's ability to manage troubled assets. Unfortunately, the FDIC did not provide information on Penn Community Bank's loan loss allowance in its most recent filings.
How profitable a bank is has an effect on its safety and soundness. Earnings may be retained by the bank, boosting its capital buffer, or be used to address problematic loans, likely making the bank better able to withstand economic shocks. However, banks that are losing money are less able to do those things.
Penn Community Bank scored 8 out of a possible 30 on Bankrate's earnings test, lower than the national average of 15.12.
Return on equity, calculated by dividing net income (essentially, profit) by the total amount of equity, is one important way to measure a bank's earnings. The most recent annualized quarterly return on equity for Penn Community Bank was 3.23 percent, below the national average of 8.10 percent.
The bank earned net income of $8.3 million on total equity of $264.8 million for the twelve months ended December 31, 2017. The bank had an annualized return on average assets, or ROA, of 0.43 percent, below the 1 percent deemed satisfactory in accordance with industry standards and below the average for U.S. banks of 1.00 percent.
Bankrate.com's Safe & Sound Ratings provide a star rating system to evaluate the current financial status of financial institutions. The information gathered about banks, credit unions and thrifts is updated as set forth in the Terms of Use of Safe & Sound Ratings and Reports. The Safe & Sound Ratings information is grouped by categories of banks, thrifts and credit unions.
Bankrate.com evaluates the financial condition of institutions and assigns a one- to five-star rating for each with five stars representing the highest rating. Institutions with satisfactory performance will generally receive a rating of three or more stars. The majority of institutions fall into the three- to four-star range. An institution with an "NR" rating may be too new to rate or may have limited the publicly available information in their regulatory filings. The "NR" is not an indication of financial strength or weakness. The Safe & Sound rating is believed to be reliable, but the information is not guaranteed. In addition, events since the information was collected may have altered the institution's financial condition.