22 / 146
6
3% for institutions having the highest regulatory 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.
Pursuant to the adoption of final rules implementing the Basel Committee on Banking Supervision’s capital guidelines
for all U.S. banks and bank holding companies with more than $500 million in assets, minimum regulatory requirements
for both the quantity and quality of capital held by the Company and the Bank increased effective January 1, 2015.
Furthermore, a new capital class known as Common Equity Tier 1 capital was added, and most financial institutions
were given the option of a one-time election to continue to exclude accumulated other comprehensive income (“AOCI”)
from regulatory capital. Since the Company exercised its option to exclude AOCI with its first regulatory filings for
2015, our Common Equity Tier 1 capital includes common stock, additional paid-in capital, and retained earnings, less
the following: disallowed goodwill and intangibles, disallowed deferred tax assets, and any insufficient additional cap-
ital to cover the deductions. The definitions of Tier 1 and Tier 2 capital are essentially unchanged, although disallowed
amounts increased with the new rules. The final rules include new regulatory minimums of 4.5% for the common
equity Tier 1 capital to total risk weighted assets ratio (“Common Equity Tier 1 RBC Ratio”), 6.0% for the Tier 1 RBC
Ratio, 8.0% for the Total RBC Ratio, and 4.0% for the Leverage Ratio. 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 RBC Ratio to 7.0%, the Tier 1 RBC Ratio to 8.5%,
and the Total RBC 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 and
real estate loans, certain past-due or nonaccrual loans, and certain exposures related to securitizations. 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.
The 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 our capital levels at December 31, 2015 and 2014, the Company and the Bank would
have met 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 Condi-
tion and Results of Operation – Capital Resources. Risk-based capital ratio (“RBC”) requirements are discussed 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 capitalized” (Total
RBC Ratio of 10%; Tier 1 RBC Ratio of 8%; Common Equity Tier 1 RBC Ratio of 6.5%; and Leverage Ratio of 5%);
“adequately capitalized” (Total RBC Ratio of 8%; Tier 1 RBC Ratio of 6%; Common Equity Tier 1 RBC Ratio of
4.5%; and Leverage Ratio of 4%); “undercapitalized” (Total RBC Ratio of less than 8%; Tier 1 RBC Ratio of less than