REGULATORY EXPECTATIONS:

CAPITAL MANAGEMENT Basel III, Planning, & Policies

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REGULATORY EXPECTATIONS:

CAPITAL MANAGEMENT (Basel III, Planning, & Policies)

Dave WicklundDirector of Educational and Advisory Services

dwicklund@plansmith.com

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Plansmith•BankersGPS

•Call Report Data•Updated Quarterly•Web-based System

•Financial Compass•Instrument-level Inputs•Monthly Updates•Client-hosted Software

•Budget Compass•Educational and Advisory Services

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Capital Management• Basel III

• Capital Planning

• Elements of a Capital Policy

• Capital Stress Testing

• Summary/Questions

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Basel III• Common Equity Tier 1 Capital (CET1) Ratio

• Revised Prompt Corrective Action Standards

• Capital Conservation Buffer

• Changes to Asset Risk Weighting

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Basel III-CET1 Risk Based Capital Ratio• Definition: Common Stock, Surplus, & RE

+/- Accum Other Comprehensive Inc.

- Goodwill, Intangibles(excluding MSAs),and DTA (from carryforwards)

+ Portion of DTA (from carryback) and MSAs; both subject to thresholds

• All as a percent of Risk Weighted Assets6

Basel III-Revised PCA Standards

**Applicable January 1, 2015**

ADEQUATELY CAPITALIZED WELL CAPITALIZED

Current 2015 Current 2015

Total RBC 8% 8% 10% 10%

Tier 1RBC 4% 6% 6% 8%

T1 Leverage 4% 4% 5% 5%

CET1 RBC NA 4.5% NA 6.5%

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Basel III-Capital Conservation Buffer• CET1 Equal to 2.50% of Risk Weighted Assets

• Phase-in Period (2016-2019)

• Regulatory Minimums (for PCA)

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Current New New + Buffer(full phase in)

Total RBC 8% 8% 10.5%

Tier 1 RBC 4% 6% 8.5%

CET1 RBC NA 4.5% 7%

2016 2017 2018 2019

0.625% 1.25% 1.875% 2.50%

Basel III-Capital Conservation Buffer• CET1 Equal to 2.5% of Risk Weighted Assets

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Basel III-Capital Conservation Buffer• Ramifications

Dividends

Payment of Discretionary Bonuses

Share Buybacks

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Basel III - Asset Risk Weighting• Changes

PD Loans – 150% (portion not guaranteed/secured)

High Volatility CRE – 150%

• No Change

1-4 Family Residential Mortgages

Other Loan Types (balloons, C&I, Consumer, some CRE)

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Basel III - Resources• Federal Reserve “New Capital Rule Community Bank

Guide” www.federalreserve.gov/bankinforeg/basel/files/

capital_rule_community_bank_guide_20130709.pdf

• FDIC “Expanded Community Bank Guide to the New Capital Rule for FDIC-Supervised Banks” www.ffiec.gov/regulations/capital/Community_Bank_Guide_Expanded.pdf

• Draft Call Report Guidance (RC-R) www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_20130809_draft_f_i.pdf

• FDIC Capital Estimation Tool www.fdic.gov/regulations/capital/Bank_Estimation_Tool.xlsm

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Capital Planning

Regulatory Guidance• OCC-2012-16: Guidance for Evaluating Capital

Planning and Adequacy

• FRB Community Bank Connections: “Capital

Planning: Not Just for Troubled Times”

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Capital Planning• Consider short and long-term needs

• Tailored based on institution

Risk Profile Asset Quality

Growth Plans

Earnings

Complexity

Charter/Corp. Structure (Mutual, Holding Company, etc.)

Operating Activities (lending, “non traditional”) 14

Capital Planning• Identify and Evaluate Risks

• Set and Assess Capital Goals

• Maintain Strategy to Ensure Capital AdequacyDevelop/Document Capital Options

Project Future Levels and Stress Test

• Ensure Process IntegrityBoard Oversight

(Policy Approval, Level Monitoring, Stress Testing Review)

Documentation 15

Capital Policy• Institution Background

• Risk Profile

• Capital Requirements

• Capital Alternatives

• Dividends

• Reporting Requirements and Policy Exceptions

• Policy Review16

Capital Policy-Risk Profile• Credit Risk

• Operational Risk

• Interest Rate Risk

• Liquidity Risk

• Compliance Risk

• Reputational Risk

• Strategic Risk17

Capital Policy-Capital Requirements• Assumptions

Growth

Loan Levels

Liquidity

Borrowings

Profitability

Economic Conditions

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Capital Policy-Capital Requirements• Limits

Tier 1 Leverage

Tier 1 Risk Based Capital

Total Risk Based Capital

CET1

Matrix above is an example only, not intended to be standards for all financial institutions19

Total RBC Tier 1 RBC CET 1 RBC Tier 1 Levg.

Green Zone - No action required >12.5% >10% >9% >8%

Yellow Zone - Action plan required 10.5%-12.5% 8.5%-10% 7%-9% 5%-8%

Red Zone - Capital improvement action required <10.5% <8.5% <7% <5%

Capital Policy - Capital Alternatives• Increase Earnings

• Holding Company Injection

• Sell Stock (if no holding company)

• Trust Preferred Stock ???

• Subordinated Debt

• Asset Management20

Summary/Questions• Guidance - Limited formal guidance; OCC and

FRB Publications and Examination Manuals

• Basel III – CET1, increased PCA thresholds

• Capital Planning – Dynamic process includes monitoring, projections, and stress testing

• Capital Policy - Risk Profile, Assumptions, Limits, Alternatives, and Dividends

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Plansmith’s Educational & Advisory Services• Model Assumption Development/Documentation• ALM Policy & CFP Review/Development• ALCO Assistance/Participation• Sensitivity Testing• Backtesting• Independent Review• Board and/or Senior Management Training• Capital Planning and Stress Testing

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THANK YOU FOR ATTENDING

REGULATORY EXPECTATIONS:CAPITAL PLANNING

Dave WicklundDirector of Educational and Advisory Services

dwicklund@plansmith.com

1.800.323.328123