1. Effects on Community Banks by Craig N. Landrum
BASEL III
Effects on Community Banks by
Craig N. Landrum
JONES, WALKER, WAECHTER, POITEVENT, CARRÈRE & DENÈGRE L.L.P.
A T T O R N E Y S A T L A W
September 13, 2012

2. Changes in Capital Ratios
Proposed CCB Effective Current
Common Equity Tier 1 Capital
(CETI)/RWA 4.5% % = 7% Majority
Tier 1 Capital/RWA 6% % = 8.5% 4
Total Capital/RWA 8% % = 10.5% 8
Tier 1 Leverage Ratio/AA 4% 4
Fully implemented January 1, 2013

3. Capital Conservation Buffer
2.5% Capital Buffer
limits dividends, repurchases, discretionary executive bonuses
phase-in
Eligible Retained Income – last 4 quarters of net income less any capital distributions and certain discretionary payments

4. Capital Conservation Buffer

5. Capital Conservation Buffer
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 that is consistent with the lowest buffer.

6. Regulatory Deductions & Adjustments to Capital
Goodwill and other intangibles (excluding MSR net of associated deferred tax liabilities (DTLs)
Deferred Tax Assets (DTAs) arising from NOLS and Tax Credit carryforwards net of valuation allowance and DTLs deducted from CETI
DTAs from temporary time differences exceeding to 10% of CETI
Mortgage Servicing Rights (MSRs) net of associated DTLs exceeding 10% of capital
Significant investments in unconsolidated financial entities exceeding 10% of target
Investment in capital instruments of financial entities beyond scope of regulatory consolidation exceeding 10% of CETI
Defined benefit pension fund assets net of associated DTLs
Unrealized Gains and Losses on AFS securities
Unrealized Gains and Losses on cash flow hedges included in Accumulated Other Comprehensive Income arising from hedges that are not recognized at fair value on Balance Sheet
Cumulative gains and losses from changes in fair value of liabilities that arise from change in banking organization’s own credit risk
Gain on sale associated with securitization transactions

7. Elimination of TRUPs as Form of Tier 1 Capital
Collins Amendment to Dodd Frank grandfathered TRUPs as Tier 1 Capital for institutions of $15 billion or less
Requires Amortization of 10% per year over 10 years beginning January 1, 2013 for bhcs over $500 million
Encourages Organic Growth rather than Acquisition
if exceed $15 Billion by organic growth – 10 year phase out;
if exceed $15 Billion by acquisition– 3 year phase out
CPP/SBLF/CDCI permanently grandfathered

8. Changes to Risk Weighting of Assets
residential mortgages
pre-sold construction loans and multifamily mortgages
high volatility commercial real estate loans
past due and non-accrual loans
mortgages sold with a representation or warranty that contains an early default clause and/or certain premium refund clauses that cover assets guaranteed in whole or in part by US or GSE
DTAs

9. Residential Mortgage Loans
Unconditionally guaranteed mortgage loans 0%
Conditional guaranteed mortgage loans 20%
Category 1 residential mortgage loans %
current
fully amortizing with 30 year or less term
1st lien
Category %
not a Category 1 (balloon)
HELOC %
LTV Adjustment Category 1 Mortgage Category 2 Mortgage
< or = 60% 35% 100%
61< or = 80% 50% 100%
81< or = 90% 75% 150%
90% 100% 200%
Other credit risk ignored

10. Presold Construction Loans, Multifamily Mortgages
Presold Construction Loans with qualified purchase contract and multi-family mortgages
50% if meet prescribed payment history, LTV, amortization and interest payment criteria
otherwise 100%

11. HVCRE
Acquisition Development and Construction Loans viewed as High Volatility Commercial Real Estate Exposure (HVCRE)
150% unless financing 1-4 family or low LTV commercial real estate and borrower contributes cash of 15% or more of appraised value

12. Past Due, Non-Accrual, DTA, MSR
All loans 90 or more days past due or non-accrual – 150%
DTA from carryover of NOL and tax credits are required to be deducted from equity
DTA from NOL carryback – 100% (excess over 10% deducted from capital)
MSR and DTA from temporary differences – 250% (excess over 10% deducted from capital)

13. SUMMARY Broad Application Complex Capital Calculations
Potential Volatility of Capital
Reallocation of Capital or Products
Impact on Residential Mortgages and Markets
Repricing of Risk
Higher Cost of Capital