23 / 146
7
6%; Common Equity Tier 1 RBC Ratio of less than 4.5%; or Leverage Ratio of less than 4%); “significantly undercap-
italized” (Total RBC Ratio of less than 6%; Tier 1 RBC Ratio of less than 4%; Common Equity Tier 1 RBC Ratio of
less than 3%; or Leverage Ratio less than 3%); and “critically undercapitalized” (tangible equity to total assets less than
or equal to 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, 2015 and 2014, 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 frommaking 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 requirements
(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 paying 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 potential
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 deposits (in the
case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and infor-
mal 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 insured
depository institutions. Those guidelines relate to internal controls, information systems, internal audit systems, 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
Legislation and regulations enacted and implemented since 2008 in response to the U.S. economic downturn and finan-
cial industry instability continue to impact most 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. Additional actions taken to implement Dodd-Frank provisions include (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).
Some aspects of Dodd-Frank are still subject to rulemaking and will take effect over several years, making it difficult
to anticipate the ultimate financial impact on the Company, its customers or the financial services industry more
generally. However, certain provisions of Dodd-Frank are already 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 to be promulgated under Dodd-Frank
will apply directly only to institutions much larger than ours, but could indirectly impact smaller banks, either due to