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of less than 4%, or 3% if the institution receives the highest rating from its primary regulator); “significantly under-
capitalized” (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or
Leverage Ratio less than 3%); and “critically undercapitalized” (tangible equity to total assets less than 2%). A bank
may be treated as though it were in the next lower capital category if, after notice and the opportunity for a hearing,
the appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be
treated as “critically undercapitalized” unless its actual capital ratio warrants such treatment. As of December 31,
2014 and 2013, both the Company and the Bank were deemed to be well capitalized for regulatory capital purposes.
At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For
example, a bank is generally prohibited from paying management fees to any controlling persons or from making
capital distributions if to do so would make the bank “undercapitalized.” Asset growth and branching restrictions
apply to undercapitalized banks, which are required to submit written capital restoration plans meeting specified re-
quirements (including a guarantee by the parent holding company, if any). “Significantly undercapitalized” banks
are subject to broad regulatory authority, including among other things capital directives, forced mergers, restrictions
on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and prohibitions on pay-
ing bonuses or increasing compensation to senior executive officers without FDIC approval. Even more severe
restrictions apply to “critically undercapitalized” banks. Most importantly, except under limited circumstances, not
later than 90 days after an insured bank becomes critically undercapitalized the appropriate federal banking agency is
required to appoint a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to poten-
tial actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations
of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the issuance of cease and desist orders, termination of insurance of depo-
sits (in the case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital,
formal and informal agreements, or removal and prohibition orders against “institution-affiliated” parties.
Safety and Soundness Standards
The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all in-
sured depository institutions. Those guidelines relate to internal controls, information systems, internal audit sys-
tems, loan underwriting and documentation, compensation, and liquidity and interest rate exposure. In general, the
standards are designed to assist the federal banking agencies in identifying and addressing problems at insured
depository institutions before capital becomes impaired. If an institution fails to meet the requisite standards, the
appropriate federal banking agency may require the institution to submit a compliance plan and could institute
enforcement proceedings if an acceptable compliance plan is not submitted or adhered to.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The implementation and impact of legislation and regulations enacted since 2008 in response to the U.S. economic
downturn and financial industry instability continued in 2013 and 2014 as modest recovery returned to many
institutions in the banking sector. Certain provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”), which was enacted in 2010, are now effective and have been fully implemented,
including revisions in the deposit insurance assessment base for FDIC insurance and a permanent increase in
coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers to
interstate branching and required disclosure and shareholder advisory votes on executive compensation. Action in
2013 to implement the final Dodd-Frank provisions included (i) final new capital rules, (ii) a final rule to implement
the so called Volcker rule restrictions on certain proprietary trading and investment activities and (iii) final rules and
increased enforcement action by the Consumer Finance Protection Bureau (discussed further below in connection
with consumer protection).
Many aspects of Dodd-Frank are still subject to rulemaking and will take effect over several years, making it difficult
to anticipate the overall financial impact on the Company, its customers or the financial services industry more
generally. However, certain provisions of Dodd-Frank will significantly impact, or already are affecting, our
operations and expenses, including but not limited to changes in FDIC assessments, the permitted payment of interest
on demand deposits, and enhanced compliance requirements. Some of the rules and regulations promulgated or yet
