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rating, and 4% for all other institutions. Tier 1 capital is generally defined as the sum of core capital elements, less
goodwill and other intangible assets, accumulated other comprehensive income, disallowed deferred tax assets, and
certain other deductions. The following items are defined as core capital elements: (i) common shareholders’ equity;
(ii) qualifying non-cumulative perpetual preferred stock and related surplus (and, in the case of holding companies,
senior perpetual preferred stock issued to the U.S. Treasury Department pursuant to the Troubled Asset Relief
Program); (iii) minority interests in the equity accounts of consolidated subsidiaries; and (iv) “restricted” core capital
elements (which include qualifying trust preferred securities) up to 25% of all core capital elements. Tier 2 capital
includes the following supplemental capital elements: (i) allowance for loan and lease losses (but not more than
1.25% of an institution’s risk-weighted assets); (ii) perpetual preferred stock and related surplus not qualifying as
core capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments; and, (iv)
term subordinated debt and intermediate-term preferred stock and related surplus. The maximum amount of Tier 2
capital is capped at 100% of Tier 1 capital.
As of December 31, 2014 and 2013, the Bank’s and the consolidated Company’s regulatory capital ratios all far
exceeded regulatory requirements. See Part II, Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operation – Capital Resources.
In July 2013, the Federal Reserve and other federal banking agencies approved final rules implementing the Basel
Committee on Banking Supervision’s capital guidelines for all U.S. banks and bank holding companies with greater
than $500 million in assets. Under these final rules, minimum requirements for both the quantity and quality of
capital held by the Company and the Bank increased effective January 1, 2015. The rules include a new common
equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a
minimum leverage ratio of 4.0%. The final rules also require a common equity Tier 1 capital conservation buffer of
2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. The
capital buffer requirement will be phased in over three years beginning in 2016, and will effectively raise the
minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital
ratio to 10.5% on a fully phased-in basis. Institutions that do not maintain the required capital buffer will become
subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or
used for stock repurchases, and on the payment of discretionary bonuses to executive management.
The final rules also increase the required capital for certain categories of assets, including higher-risk construction
real estate loans, certain past-due or nonaccrual loans, and certain exposures related to securitizations. The final rules
adopt the same risk weightings for residential mortgages that existed under previous risk-based capital rules. Simi-
larly, the final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and
cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 capital of banking
organizations with total consolidated assets of less than $15 billion at December 31, 2009, subject to a limit of 25%
of Tier 1 capital. As all of the Company’s trust preferred securities were issued prior to that date, they will continue
to qualify as Tier 1 capital under the new rules.
These new minimum capital ratios became effective for us on January 1, 2015, and the capital buffers will be fully
phased in by January 1, 2019. Based on existing capital levels at December 31, 2014, the Company and the Bank
meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.
For more information on the Company’s capital, see Part II, Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operation – Capital Resources. Risk-based capital ratio requirements are dis-
cussed in greater detail in the following section.
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured
financial institutions, including but not limited to those that fall below one or more prescribed minimum capital
ratios. The federal banking agencies have by regulation defined the following five capital categories: “well capita-
lized” (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%);
“adequately capitalized” (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Lever-
age Ratio of 4%, or 3% if the institution receives the highest rating from its primary regulator); “undercapitalized”
(Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio
