Basel III Capital Rules and Community Banks

Transcription

1 2013 CliftonLarsonAllen LLP Basel III Capital Rules and Community Banks CLAconnect.com Jerry Felicelli, CPA, Principal Neil Falken, CPA, Principal Financial Institutions CliftonLarsonAllen LLP

2 Overview Common Equity Tier 1 Capital (CET1) ratio created Prompt Corrective Action (PCA) thresholds revised Capital Conservation Buffer created Risk weights for various assets changed 2

3 Common Equity Tier 1 (CET1) Capital Ratio 3

4 Common Equity Tier 1 (CET1) Capital Ratio Definition Common stock plus related surplus net of treasury stock plus retained earnings +/- accumulated other comprehensive income (AOCI) + qualifying CET1 minority interest +/- deductions Goodwill Other intangibles (other than goodwill and mortgage servicing rights) Deferred tax assets that arise from net operating loss and tax credit carry forwards, net of any valuation allowances 4

5 Common Equity Tier 1 (CET1) Capital Ratio +/- threshold-based deductions (>10% individually or >15% aggregate of CET1 Capital) Non-significant investments in the capital of unconsolidated financial institutions that exceed 10% threshold Mortgage servicing rights (MSAs) that exceed 10% threshold Net deferred tax assets, net of related valuation allowances that exceed 10% threshold (elimination of 12 month recognition period for DTA disallowance) 5

6 Additional Tier 1 Capital Trust preferred securities (TruPS) Holding companies with assets less than $15 billion in total consolidated assets as of December 31, 2009 or organized as a mutual as of May 19, 2010 are allowed to grandfather into tier 1 capital. TRuPS issued before May 19, 2010 are subject to a maximum of 25% of tier 1 capital. 6

7 Transition Period of Some CET1 Deductions Calendar Year % of the Deductions from CET1 Capital % % % 2018 and thereafter 100% 7

8 Common Equity Tier 1 (CET1) Capital Ratio Items to Consider Opt-out election for Accumulated Other Comprehensive Income (AOCI) One-time election made on March 31, 2015 with the call report filing for community banks and the FR Y-9C (if applicable). Note: FR Y-9SP not applicable since opt-out will not apply to the bank holding companies under $500M. Calculate and understand CET1 components and thresholds during 2014 before new rules take effect in

9 Prompt Corrective Action 9

10 Prompt Corrective Action (PCA) Total riskbased capital Tier 1 riskbased capital Common equity tier 1 risk-based capital Tier 1 leverage capital Adequately Capitalized Well Capitalized 2013 and 2014 Starting in and 2014 Starting in % 8.0% 10.0% 10.0% 4.0% 6.0% 6.0% 8.0% N/A 4.5% N/A 6.5% 4.0% 4.0% 5.0% 5.0% 10

11 Prompt Corrective Action Items to Consider Higher capital requirements Banks will be required to hold higher quality of capital with greater emphasis on tangible common equity Must meet the FDIC s PCA capital ratios beginning January 1,

12 Capital Conservation Buffer 12

13 Capital Conservation Buffer Phase-in Requirement N/A 0.625% 1.25% 1.875% 2.5% Total riskbased capital with buffer Tier 1 riskbased capital with buffer Common equity tier 1 risk-based with buffer N/A 8.625% 9.25% 9.875% 10.5% N/A 6.625% 7.25% 7.875% 8.5% 4.5% 5.125% 5.75% 6.375% 7.0% 13

14 Maximum Payout Ratio Capital Conservation Buffer (based on RWA) Greater than 2.5% No limitation Less than or equal to 2.5% and greater than 1.875% 60% Less than or equal to 1.875% and greater than 1.25% Less than or equal to 1.25% and greater than 0.625% 40% 20% Less than or equal to 0.625% 0% 14

15 Capital Conservation Buffer Items to Consider Banks will look for ways to avoid limitations on capital distributions and restrictions Potentially choosing to hold substantial excess capital over well capitalized levels S-Corp banks will need to factor any restrictions on distributions to shareholders for tax payments into their capital planning Possible limitations on payments of discretionary bonuses 15

16 Risk Weighting 16

17 Risk Weights for Various Assets Changed What changed in risk weights Past-due loans to 150% for portion that is not guaranteed or secured High volatility commercial real estate (HVCRE) exposures to 150%. HVCRE means a credit facility that finances or has financed the acquisition, development, or construction (ADC) of real property unless the facility finances: 1-4 family residential properties, community development, farmland CRE projects with: LTV ratio less than or equal to maximum supervisory LTV ratio Borrower contributes at least 15% of appraised as completed value in cash or marketable assets Borrower contributed capital is contractually required to remain throughout the project life 17

18 Risk Weights for Various Assets Changed What did NOT change in risk weights 1-4 family residential mortgage risk weighting remains the same with both 50% and 100% risk weighting No change for balloon and interest only mortgages Owner-occupied CRE loans C&I loans Consumer and credit card loans BOLI general account BOLI will continue to be risk weighted at 100% Federal Reserve Bank stock still 0% risk weight Federal Home Loan Bank stock still 20% risk weight 18

19 RC-R Regulatory Capital Draft RC-R Regulatory Capital schedule has been released aft_f_i.pdf Download it and fill it out with your bank s numbers 19

20 RC-R Regulatory Capital Page 1 20

21 RC-R Regulatory Capital Page 1 (cont.) 21

22 RC-R Regulatory Capital Page 2 22

23 RC-R Regulatory Capital Page 2 (cont.) 23

24 RC-R Regulatory Capital Page 3 24

25 RC-R Regulatory Capital Page 3 (cont.) 25

26 Next Steps Become familiar with Call Report schedules and instructions Visit regulatory websites for updates 26

27 John Wayne Quote: If everything isn t black and white, I say, Why the hell not? 27

28 Questions? 28

29 2013 CliftonLarsonAllen LLP Neil Falken, CPA Principal CLAconnect.com twitter.com/ CLA_banks facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 29