Tangible Equity Two-Step for RC-O Line 5

rc-o line 5 Mar 25, 2023

For those who don’t already know, the Texas Two-Step is a simple dance that is perennially popular at country dances. It has the virtue of being learnable even by the clumsiest cowpoke with two left feet. Figuring and reporting Average Tangible Equity is like that. Once you get it down it’s easy.

The reason that the FDIC wants to know your bank’s Average Tangible Equity is to help them figure out how much to charge for deposit insurance. Premiums are no longer based on total deposits, but on total liabilities less tangible assets. They need the number to calculate the tab.

The mistakes we see sometimes are that banks either don’t follow the definition in the instructions on what constitutes tangible equity, or they use and averaging method that is incorrect. Now let’s get to the step-by-step dance instructions.

Step One

Calculate the tangible equity as of quarter end. The instructions say that it is the same definition as for Schedule RC-R Part line 26. Fortunately, Schedule RC-R Part I walks you through the calculation. Take a look at the adjustments made to capital on RC-R Part I and do the same calculation for Schedule RC-O line 5. It should be the same. You can also refer to the instructions for RC-O.

There is an “except as follows” section in the instructions that rarely applies. Unless your bank has another FDIC insured bank as a subsidiary, survived a merger or was acquired during the quarter you can ignore this.

Step Two

If your institution has not reported $1 billion or more in average assets for two consecutive quarters,

and your institution has reported quarter-end tangible equity previously, then you are all done. You can continue to report the quarter-end-tangible equity on RC-O line 5, get off the dance floor, and sit down by the punch bowl.

But if your have reported the Quarterly Average Tangible Equity previously, you must keep dancing. You must calculate the average by taking the average of Tangible Equity for each month-end during the quarter. If you do it any other way you will be stepping on your partner’s (FDIC’s) feet and suffer the embarrassment. Daily or weekly averaging methods will not do. There is no improvising with the Two Step!