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SERVING COMMUNITY BANKS SINCE 1968
ATLANTA CHICAGO RALEIGH SAN FRANCISCO TAMPA
Private and Confidential
PROPOSED BASEL III CAPITAL RULES:WHAT DOES IT MEAN TO YOU?
IMPACT ON COMMUNITY BANKS
October 2012
- 2 -Monroe Securities, Inc.
Private and Confidential
WHAT HAS HAPPENED?
Federal banking agencies have endorsed the recommendations of BASEL III and have proposed rules to apply them to ALL US banks
Comment period ended October 22nd
While there are many rules that will not apply to community banks, two categories WILL apply to community banks:
1. Regulatory Capital Rules (involving new definitions and minimum requirements)
2. New “standardized” approach to assessing risk weightings for certain asset classes (including, importantly, residential mortgages)
These will apply to All US banks and savings associations All bank holding companies over $500mm in assets
Only Small BHC are exempt from these ratios
These proposed rules are being vigorously lobbied against, and have had a few high-profile detractors, so the final outcome is still uncertain.
- 3 -Monroe Securities, Inc.
Private and Confidential
WHY DO YOU CARE? No matter the final outcome, these rules are more complex and will be
more difficult to administer
Primary observations on what will change: Higher overall minimum capital ratios Increased common equity requirements, including a new ratio
(“Common Equity Tier 1 Capital/Total RBC”) Higher risk weightings for commercial RE and most mortgages
Much greater complexity around calculations Higher volatility of regulatory capital (more market-based inputs) New constraints on dividends, buybacks and executive compensation
Limited by new concept of “capital buffer” above minimal ratios Currently includes tax distributions for Sub-S banks
TRUPs being phased-out as Tier 1 Capital for all banks, over 10 years beginning in 2013
The new rules will be phased in over time Most capital rules begin in 2013 with full effect beginning in 2015 The new risk weightings being in 2015
- 4 -Monroe Securities, Inc.
Private and Confidential
WHY DO YOU CARE?
Fundamental Question: What will the long-term impact on the industry be for attracting
the new capital that will be required to fund these new rules?
Old RuleCAPITAL IS KING
New RuleCOMMON
EQUITYIS KING
Private and Confidential
Monroe Securities, Inc.- 5 -
BASEL III REGULATORY CAPITAL RULES
BASEL III REGULATORY CAPITAL RULES
- 6 -Monroe Securities, Inc.
Private and Confidential
PROPOSED REGULATORY CAPITAL CHANGES
The new rules as proposed would:
1.Revise the definitions of regulatory capital components and related calculations.
2.Add a new “Common Equity Tier 1 Risk-Based Capital” ratio.
3.Incorporate the revised regulatory capital requirements into the Prompt Corrective Action (PCA) framework.
4.Implement a new Capital Conservation Buffer that limits certain capital actions, such as paying dividends, repurchasing stock and paying bonuses to employees.
5.Provide a transition period for several aspects of the proposed rules.
Regulatory
Capital
- 7 -Monroe Securities, Inc.
Private and Confidential
NEW CAPITAL DEFINITIONS: THREE COMPONENTS
Common Equity Tier 1
AdditionalTier 1
Tier 2
Regulatory
Capital
(1) Common Equity Tier 1 Capital + Qualifying common stock instruments + Retained earnings +/- Accumulated other comprehensive income + Qualifying Common Equity Tier 1 minority interest - Regulatory deductions from Common Equity Tier 1 Capital +/- Regulatory adjustments to Common Equity Tier 1 Capital - Common Equity Tier 1 Capital deductions per the corresponding deduction approach - Threshold deductions = Common Equity Tier 1 Capital (2) Additional Tier 1 Capital + Additional Tier 1 Capital instruments + Tier 1 minority interest that is not included in Common Equity Tier 1 Capital + Non-qualifying Tier 1 Capital instruments subject to the transition phase-out and SBLF related instruments - Investments in a banking organization’s own additional Tier 1 Capital instruments - Additional Tier 1 Capital deductions per the corresponding deduction approach = Additional Tier 1 Capital (3) Tier 2 Capital + Tier 2 Capital instruments + Total Capital minority interest that is not included in Tier 1 Capital + ALLL - Investments in a banking organization’s own Tier 2 Capital instruments - Tier 2 Capital deductions per the corresponding deduction approach + Non-qualifying Tier 2 Capital instruments subject to transition phase-out and SBLF related instruments = Tier 2 Capital Total Capital = Equity Tier 1 + Additional Tier 1 + Tier 2
- 8 -Monroe Securities, Inc.
Private and Confidential
NEW CAPITAL RATIO: COMMON EQUITY TIER 1 CAPITALRegulator
yCapital
Common Stock +
Retained Earnings
Accumulated Other
Comprehensive Income
Qualifying Minority Interest
Adjustment &
Deductions
Common Equity Tier 1
Accumulated OtherComprehensive Income
Net unrealized gains/losses on available-for-sale securities
Current treatment: available-for-sale equity securities losses included in Tier 1 and portion of gains included in Tier 2.
Proposed treatment: net unrealized gains/losses on available-for-sale debt and equity securities included in Common Equity Tier 1.
Adjustments & Deductions
Detailed on next page
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Private and Confidential
DEFINITION: ADJUSTMENTS AND DEDUCTIONSAdjustments & Deductions
Deductions
Goodwill
Deferred Tax Assets (Carryforwards)
Other Intangibles (except for mortgage servicing assets)
Gain on Sale of Securitization Exposure
Non-significant (<10%) investments in another financial institution’s capital instruments exceeding a threshold
Adjustments
Unrealized gain/loss on cash flow hedges
Threshold Deductions
Deduct Amounts > 10%(individually) or > 15% (aggregate)of Common Equity Tier 1 Capital:
Mortgage Servicing Assets
Deferred Tax Assets related to temporary timing differences
Significant (>10%) investments in another financial institution’s common stock
(Amounts not deducted are generally subject to 250% Risk Weight.)
Regulatory
Capital
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Private and Confidential
COMMON EQUITY TIER 1 RBC RATIORegulator
yCapital
Common Equity Tier 1
Capital
Total Risk-weighted Assets
Common Equity Tier 1
RBC Ratio
Creates a new risk-based capital measure.
Purpose: To ensure institutions “hold high-quality regulatory capital that is available to absorb losses.”
Private and Confidential
Monroe Securities, Inc.- 11 -
DEFINITION: ADDITIONAL TIER 1 CAPITALDEFINITION: ADDITIONAL TIER 1 CAPITAL
Noncumulative Perpetual Preferred
Stock
Small Business Lending Fund* (Bank Issued)
Troubled Asset Relief Program*
(Bank Issued)
Certain Investments in
Another Financial
Institution’s Capital
Instruments
Additional Tier 1
Additional Tier 1
*Only if original bank issuance qualified as Tier 1 Capital.
Regulatory
Capital
NOTE:Trust Preferred Securities are subject to phase out from BHC Tier 1 Capital
over 9 years
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Private and Confidential
DEFINITION: TIER 2 CAPITAL
Allowance for Loan
and Lease Losses
Cumulative Preferred
Stock/ Subordinated
Debt
Certain Investments in Another Financial
Institution’s Tier 2 Capital Instruments
Tier 2 Capital
Allowance for Loan and Lease Losses:
- Limited to 1.25% of risk- weighted assets
Would eliminate existing limits on the following:
-Subordinated debt
- Limited-life preferred stock
- Amount of Tier 2 included in Total Capital
Regulatory
Capital
- 13 -Monroe Securities, Inc.
Private and Confidential
NEW REGULATORY RATIO MINIMUMS
Current %
Proposed %
Well Capitalized > 5.0 > 6.5 > 6.0 > 8.0 > 10.0Adequately Capitalized > 4.0 > 4.5 > 4.0 > 6.0 > 8.0
Undercapitalized < 4.0 < 4.5 < 4.0 < 6.0 < 8.0Significantly Undercapitalized < 3.0 < 3.0 < 3.0 < 4.0 < 6.0Critically Undercapitalized Tangible Equity/Total Assets < 2%
Tier 1 RBCPrompt Corrective Action Categories
and Ratios
Tier 1 Leverage
%
Common Equity Tier
1 RBC (Proposed)
%
Total RBC %
New Common Equity Tier 1 RBC ratio.
Tangible Equity Capital would equal the revised Tier 1 Capital plus non-Tier 1 perpetual preferred stock.
Regulatory
Capital
Private and Confidential
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NEW CAPITAL CONSERVATION BUFFERNEW CAPITAL CONSERVATION BUFFER
Maximum Payout Amount as % of Eligible Retained Income
60%
40%
20%
0%
No Buffer Limit
Size of Buffer
Greater than 2.5%
> 1.875% to 2.500%
> 1.250% to 1.875%
> 0.625% to 1.250%
< 0.625%
Types of payments that would be restricted if a bank does not satisfy the capital conservation buffer requirement:
— Dividends—Share buybacks—Discretionary payments on Tier 1 instruments—Discretionary bonus payments to senior management
Eligible Retained Income: Would be defined as the most recent four quarters of net income less any capital distributions and certain discretionary payments.
Agencies maintain the supervisory authority to impose further restrictions and/or require capital commensurate with the bank’s risk profile.
Regulatory
Capital
Private and Confidential
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RESTRICTIONS WILL APPLY UPON LOWEST MEASUREMENTRESTRICTIONS WILL APPLY UPON LOWEST MEASUREMENT
Common Equity Tier 1 Risk-Based
Ratio
Tier 1 Risk-Based Ratio
Total Risk-Based Ratio
Common Equity Tier 1 Risk-Based Buffer Measure
Tier 1 Risk-Based Buffer Measure
Total Risk-Based Buffer Measure
Bank’s Conservation Buffer is Lowest of the Above
Minus
4.5%
Equals
Minus
6.0%
Equals
Minus
8.0%
Equals
Regulatory
Capital
Private and Confidential
Monroe Securities, Inc.- 16 -
CAPITAL CONSERVATION BUFFER: EXAMPLECAPITAL CONSERVATION BUFFER: EXAMPLE
Example Bank Ratios
%
Basel III Minimum
Ratios %
Calculated Buffer
Measure %
Maximum Payout
Amount %
Common Equity Tier 1 Risk-Based Capital Ratio
7.50 4.50 3.00 None
Tier 1 Risk-Based Capital Ratio 8.50 6.00 2.50 60
Total Risk-Based Capital Ratio 9.00 8.00 1.00 20
Conservation Buffer Example
Determination of Buffer and Limit
1. Determine bank risk-based capital ratios.
2. Subtract Basel III minimum ratios.
3. Determine calculated buffer for each ratio.4. Apply the maximum payout limit of eligible retained
income that is consistent with the lowest buffer.
Regulatory
Capital
Payout Limit:
20% of LTM Earnings
Private and Confidential
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TIMELINE AND TRANSITION PERIODTIMELINE AND TRANSITION PERIOD
Item2013 (%)
2014 (%)
2015 (%)
2016 (%)
2017 (%)
2018 (%)
2019 (%)
Phase-in of certain deductions from Common Equity Tier 1 (including threshold deduction items that are over the limits) 20 40 60 80 100
Minimum Common Equity Tier 1 RBC 3.5 4.0 4.5
Minimum Tier 1 RBC 4.5 5.5 6.0
Minimum Total RBC 8.0
Capital Conservation Buffer 0.625 1.25 1.875 2.50Common Equity Tier 1 Plus Capital Conservation Buffer 3.5 4.0 4.5 5.125 5.75 6.375 7.00Minimum Tier 1 Capital Plus Capital Conservation Buffer 4.5 5.5 6.0 6.625 7.25 7.875 8.50Minimum Total Capital Plus Conservation Buffer 8.0 8.0 8.0 8.625 9.25 9.875 10.50
Phase-in Schedule
Capital instruments that no longer qualify as additional Tier 1 or Tier 2 capital would be phased out over a 10 year horizon beginning in 2013.
Revised PCA ratios are effective on January 1, 2015.
Regulatory
Capital
Private and Confidential
Monroe Securities, Inc.- 18 -
“STANDARDIZED APPROACH” TO RISK WEIGHTING ASSETS
“STANDARDIZED APPROACH” TO RISK WEIGHTING ASSETS
Private and Confidential
Monroe Securities, Inc.- 19 -
NEW ASSET RISK WEIGHTING RULESNEW ASSET RISK WEIGHTING RULES
1. Revised Risk-weighting Methodology – On-Balance Sheet Assets:
1-4 Family Residential Real Estate Loans “High Volatility” Commercial Real Estate Past Due Assets Structured Securities Equity Holdings
2. Revised Risk-weighting Methodology – Off-Balance Sheet Items.
3. Allows for substitution of a wider range of financial collateral and eligible guarantors for calculating risk-weighted assets.
4. Rules begin January 1, 2015
Standardized Approach on
RiskMain Impact on Community Banks
Private and Confidential
Monroe Securities, Inc.- 20 -
Past Due Exposures Other Assets Off-Balance Sheet Items Over-the-Counter Derivative Contracts Cleared Transactions Guarantees and Credit Derivatives Collateralized Transactions Unsettled Transactions Securitization Exposures Equity Exposures
Exposure to Sovereigns Exposures to Certain
Supranational Entities and Multilateral Development Banks
Exposures to Government-sponsored entities
Exposures to Depository Institutions, Foreign Banks, and Credit Unions
Exposures to Public Sector Entities
Corporate Exposures Residential Mortgage
Exposures Pre-sold Construction Loans
and Statutory Multifamily Mortgages
High Volatility Commercial Real Estate Exposures
STANDARDIZED APPROACH TO RISK WEIGHTINGSTANDARDIZED APPROACH TO RISK WEIGHTING
Standardized Approach on
Risk
Private and Confidential
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1-4 FAMILY RESIDENTIAL MORTGAGES1-4 FAMILY RESIDENTIAL MORTGAGES
Category 1 Category 2 Term < 30 years Regular Periodic paymentsNo increases in principal, deferments, or balloonsUnderwriting and repayment ability based On:
— Principal, Interest, Taxes, Insurance— Maximum Interest Rate Allowed In First Five Years—Documented Income
Interest changes limited to 2% per year and 6% over the life of the loan HELOC qualification includes principal and interest on maximum exposure Loans that are not 90 days past due, nonaccrual, or certain junior liens
All other residential mortgage exposures including:
— Certain junior liens— Nontraditional mortgage products
Category 1 Category 2< 60 35% 100%
> 60 to < 80 50% 100%> 80 to < 90 75% 150%
> 90 100% 200%
Risk WeightLoan to Value (%) (excludes PMI coverage)
Standardized Approach on
Risk
Private and Confidential
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1-4 FAMILY RISK WEIGHTS - EXAMPLES1-4 FAMILY RISK WEIGHTS - EXAMPLES
35% 50% 75% 100% 150% 200%30 year amortization and maturity, current, LTV < 60%30 year amortization and maturity, current, LTV > 60% to < 80%30 year amortization and maturity, current, LTV > 80% to < 90%
5 year balloon, 30 year amortization, current, LTV < 80%
5 year balloon, 30 year amortization, current, LTV > 80% to < 90
Stand-alone junior lien LTV > 90%
Risk Weights1-4 Family Residential Mortgages
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 23 -
HIGH VOLATILITY COMMERCIAL REAL ESTATEHIGH VOLATILITY COMMERCIAL REAL ESTATE
Other CRE
Non-
Residential
ADC
Includes HVCRE
High Volatility CRE (HVCRE) Represents a Small Subset of the Industry’s CRE Portfolio
HVCRE means Acquisition, Development, or Construction Financing except:
1-4 family residential propertiesProjects in which:
1. The loan-to value ratio < maximum supervisory loan-to-value, and
2. Borrower contributed at least 15% of “as completed” appraised value, and
3. Borrower contributed the capital before the bank advances funds, and the capital is contractually required to remain throughout the project life.
The NPR would assign HVCRE loans a risk weight of 150%.
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 24 -
CRE RISK WEIGHTS - EXAMPLESCRE RISK WEIGHTS - EXAMPLES
100% 150%
Owner-Occupied Offi ce Building
Non Owner-Occupied Offi ce Building
Manufacturing/Industrial Building
Acquisition, Development, and Construction: 1-4 family residential properties
Acquisition, Development, and Construction: non-1-4 family residential properties and LTV is 90%
Risk WeightsCommercial Real Estate
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 25 -
PAST DUE ASSETS RISK WEIGHTSPAST DUE ASSETS RISK WEIGHTS
50% 100% 150%
Revenue Bond
Multifamily Loan
Consumer Loan
Commercial and Industrial
Non-Farm Non-Residential
Agricultural
Assets > 90 days past due or nonaccrual
Risk Weights
Would not apply to:
1-4 family residential exposures HVCRE
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 26 -
STRUCTURED SECURITIESSTRUCTURED SECURITIES
Examples may include:Private Label Mortgage-Backed Securities
Trust Preferred Collateralized Debt Obligations (TruPS)Asset-Backed Securities
Three Approaches
Risk weight based on one of the following:
1. Weighted average of underlying collateral (Gross UP)
2. 2. Formula based on subordination position and delinquencies (Simplified Supervisory Formula Approach – SSFA)
3. 1,250%
Eliminates Ratings-Based Approach.
Other Requirements/Options
Must apply approach selected consistently.
1,250% option may be used regardless of approach selected.
Requirement for comprehensive understanding and due diligence.
— If not met, 1,250% would apply.
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 27 -
EQUITY RISK WEIGHTSEQUITY RISK WEIGHTS
0% 20% 100% 250% 300% 400% 600%
Federal Reserve Bank stock
Federal Home Loan Bank stock
CDFI and community development equity exposures
An investment of common stock in an unconsolidated financial institution (unless already deducted)*
A publicly traded equity exposure*
An equity exposure that is not publicly traded*
An equity exposure to a hedge fund or any investment firm that has greater than immaterial leverage*
Risk WeightsEquity Exposures
* To the extent that the aggregate adjusted carrying value of certain equity exposures do not exceed 10% of the bank’s total capital, a 100% risk weight may be applied.
Standardized Approach on
Risk
Private and Confidential
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OFF-BALANCE SHEET: CREDIT CONVERSIONOFF-BALANCE SHEET: CREDIT CONVERSION
0% 20% 50%
Unused portion of commitments that are unconditionally cancelable by the bank
Commitments with an original maturity of < 1 year that are not unconditionally cancelable
Commitments with an original maturity of > 1 year that are not unconditionally cancelable
Off-Balance Sheet ItemsCredit Conversion Factors
For HELOCs, refer to the 1-4 family mortgage section of the proposal
Standardized Approach on
Risk
Private and Confidential
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OFF-BALANCE SHEET: MORTGAGE BANKINGOFF-BALANCE SHEET: MORTGAGE BANKING
1-4 Family Mortgage Loans Sold Credit-Enhancing Representations and Warranties on Assets Sold:
— Early Payment Default—Premium Refund Clause
Existing Treatment:— Provides exclusion for early payment default or premium refund clauses that are for a period of 120 days or less.
Proposed Treatment:— Eliminates existing 120-day exclusion.—All early payment default and premium refund clauses are treated as off-balance sheet guarantees for the duration of the enhancement.
Proposed Risk Weight:— Credit Conversion Factor: 100%— Risk Weight: 35% to 200% based on Category 1 or Category 2 and loan to value.
Standardized Approach on
Risk
Private and Confidential
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COLLATERALIZED TRANSACTIONS EXAMPLESCOLLATERALIZED TRANSACTIONS EXAMPLES
Under the proposal, a bank may substitute the asset’s risk weight with the collateral’s risk weight.
0% 20% 50% 100%Cash on deposit at the bank or third party custodian*US Government Securities (proposed: must discount market value by 20%)*
Government Sponsored Entity securities
Money market funds
"Investment grade" securities (examples):
General Obligation Municipal
Revenue Municipal
Corporate
Risk Weights
Risk Weight Varies
“Investment grade” means that “the entity to which the bank is exposed through a loan or security, or the reference entity with respect to a credit derivative, has adequate capacity to meet financial commitments for the projected life of the asset or exposure.”
*Current risk weight for state nonmember banks. Current risk weight may differ for national and state member banks.
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 31 -
TREATMENT OF GUARANTEESTREATMENT OF GUARANTEES
Under the proposal, a bank may substitute the risk weight of an eligible guarantor for the risk weight of the exposure.
Eligible Guarantors Include:
Depository institution or holding company
Federal Home Loan Banks
Farmer Mac
Entity that has “investment grade” debt
Eligible Guarantees Must:
Be written and either:— Unconditional, or
—A contingent obligation of the U.S. government or its agencies
Also meet other requirements
Standardized Approach on
Risk
Private and Confidential
Monroe Securities, Inc.- 32 -
Region SoutheastTotal Assets ($000) $394,806
Loans/ Deposits 82% NPA + 90/Assets 6.80%Total 1-4 Fam. Loans/ Loans 54% Nonaccrual+ 90 PD/ Loans 6.10%Total CRE Loans/Loans (1) 30%
Old Risk Weighted Assets 245,274 247,115 Excess ALLL 1,237 1-4 Family Risk Adj. (2) 38,037 CRE High Volatility Adj. (3) 5,782 Past Due Loans Adj. 4,102 Other Adj. 316 New Risk Weighted Assets 294,115
Difference 48,841 % Difference 19.9%
Old Calculation New Calculation Basel III MinimumLeverage Ratio 6.61% 6.55% 5.00%Common Equity Tier 1 Ratio (5) NA 8.69% 7.00%Tier 1 Capital Ratio 10.51% 8.69% 8.50%Total Capital Ratio 11.77% 9.95% 10.50%
Company Information
Loan Mix and Asset Quality (%)
Risk Weighted Assets Calculation ($000)
Capital Ratios
Region MidwestTotal Assets ($000) $228,536
Loans/ Deposits 80% NPA + 90/Assets 1.23%Total 1-4 Fam. Loans/ Loans 64% Nonaccrual+ 90 PD/ Loans 0.67%Total CRE Loans/Loans (1) 22%
Old Risk Weighted Assets 138,249 138,249 Excess ALLL - 1-4 Family Risk Adj. (2) 29,752 CRE High Volatility Adj. (3) 2,805 Past Due Loans Adj. 376 Other Adj. - New Risk Weighted Assets 171,181
Difference 32,932 % Difference 23.8%
Old Calculation New Calculation Basel III MinimumLeverage Ratio 6.17% 6.17% 5.00%Common Equity Tier 1 Ratio NA 8.18% 7.00%Tier 1 Capital Ratio 10.13% 8.18% 8.50%Total Capital Ratio 11.12% 8.98% 10.50%
Company Information
Loan Mix and Asset Quality (%)
Risk Weighted Assets Calculation ($000)
Capital Ratios
COMMUNITY BANKS WITH HIGH MORTGAGE LOAN EXPOSURECOMMUNITY BANKS WITH HIGH MORTGAGE LOAN EXPOSURE
(1). CRE Loans are defined as other construction and development, farm, multifamily and commercial real estate loans.(2). Assumes 90% of 1-4 family 1st lien loans fall under category 1. LTV breakdowns are based on the avg. LTV breakdowns found in the 10-Ks of publicly traded banks.(3). Assumes 15% of the CRE loans are highly volatile.
Community banks with high mortgage loan exposure may find themselves struggling to meet the new capital requirements under Basel III.
Private and Confidential
Monroe Securities, Inc.- 33 -
Region WestTotal Assets ($000) $137,164
Loans/ Deposits 87% NPA + 90/Assets 6.58%Total 1-4 Fam. Loans/ Loans 7% Nonaccrual+ 90 PD/ Loans 5.71%Total CRE Loans/Loans (1) 80%
Old Risk Weighted Assets 102,497 104,103 Excess ALLL 1,500 1-4 Family Risk Adj. (2) 1,745 CRE High Volatility Adj. (3) 5,788 Past Due Loans Adj. 2,718 Other Adj. - New Risk Weighted Assets 112,854
Difference 10,357 % Difference 10.1%
Old Calculation New Calculation Basel III MinimumLeverage Ratio 7.39% 7.44% 5.00%Common Equity Tier 1 Ratio NA 5.47% 7.00%Tier 1 Capital Ratio 10.00% 9.13% 8.50%Total Capital Ratio 11.27% 10.40% 10.50%
Company Information
Loan Mix and Asset Quality (%)
Risk Weighted Assets Calculation ($000)
Capital Ratios
COMMUNITY BANKS WITH HIGH COMMERCIAL LOAN EXPOSURECOMMUNITY BANKS WITH HIGH COMMERCIAL LOAN EXPOSURE
(1). CRE Loans are defined as other construction and development, farm, multifamily and commercial real estate loans.(2). Assumes 90% of 1-4 family 1st lien loans fall under category 1. LTV breakdowns are based on the avg. LTV breakdowns found in the 10-Ks of publicly traded banks.(3). Assumes 15% of the CRE loans are highly volatile.
Basel III’s new capital requirements will also affect banks with high commercial loan exposure.
Region Mid AtlanticTotal Assets ($000) $340,928
Loans/ Deposits 98% NPA + 90/Assets 0.02%Total 1-4 Fam. Loans/ Loans 34% Nonaccrual+ 90 PD/ Loans 0.00%Total CRE Loans/Loans (1) 56%
Old Risk Weighted Assets 281,667 281,770 Excess ALLL - 1-4 Family Risk Adj. (2) 36,069 CRE High Volatility Adj. (3) 11,962 Past Due Loans Adj. - Other Adj. 1,300 New Risk Weighted Assets 331,101
Difference 49,434 % Difference 17.6%
Old Calculation New Calculation Basel III MinimumLeverage Ratio 8.94% 9.18% 5.00%Common Equity Tier 1 Ratio NA 8.60% 7.00%Tier 1 Capital Ratio 9.85% 8.60% 8.50%Total Capital Ratio 11.08% 9.68% 10.50%
Company Information
Loan Mix and Asset Quality (%)
Risk Weighted Assets Calculation ($000)
Capital Ratios
- 34 -Monroe Securities, Inc.
Private and Confidential
CONCLUSION: FIGHTING THE LAST WAR
The new rules as proposed present a dramatically more conservative posture around capital requirements
Higher overall levels of capital required Higher proportion of common equity required
Creative Tier 1 instruments are being legislated out of existence Much more restrictive rules around shareholder distributions,
buybacks and bonuses, all limited by capital levels Much more detailed approach and conservative to weighting the risk
of assets
As mentioned, these proposed rules have been vigorously lobbied against, and have had a few high-profile detractors, so the final outcome is still uncertain
We will host another webinar when the final rules are posted