1. © 2013 – FinPro, Inc. 0 20 Church Street  Liberty Corner, NJ 07938  P: (908) 604-9336  F: (908) 604-5951  finpro@finpro.us  www.finpro.us Basel III - Impact to Community Banks 2013 AICPA National Conference on Banks and Savings Institutions

2. © 2013 – FinPro, Inc. Basel III has been a long time in coming.... July 2010: Dodd Frank Act passed into law December 2010: BCBS published original Basel III international rules August 12, 2012: U.S. Banking agencies published Basel III NPR in Federal Register Basel III NPR Standardized Approach NPR Advanced Approaches NPR July 2, 2013: FRB approved Basel III Final Rule 1

3. © 2013 – FinPro, Inc. Comments to the NPR were concentrated in 4 key areas...  The requirement to include most elements of AOCI in regulatory capital (e.g. +/- on AFS securities)  The final rule has an AOCI opt-out option  The new framework for risk weighting residential mortgages (Category 1 and Category 2)  The final rule eliminates the Category 1 & 2 that was introduced in the NPR  The requirement to phase out TruPS from T1 capital (3 year or 10 year transition period based on total consolidated assets)  The final rule grandfathers if under $15 billion  The application of the rule to BHCs and SLHCs with substantial insurance and commercial activities  The final rule excludes these entities 2

4. © 2013 – FinPro, Inc. The Final Rule is much better for community banks...  Allows a one-time election to not include most elements of AOCI in regulatory capital  Does not adopt the proposed treatment of residential mortgages, and instead keeps the historical 50% and 100% risk weights  50%: 1-4 that are prudently underwritten and performing to original terms  100%: all other, including junior liens (unless bank also holds 1 st and there are no intervening liens)  Permanently grandfathers non-qualifying capital instruments in the tier 1 capital of holding companies with consolidated assets under $15 billion 3

5. © 2013 – FinPro, Inc. The Final Rule also presents some challenges to Community Banks...  New Capital Ratio: Common Equity Tier 1 / Risk Weighted Assets at 4.5%  Change: Tier 1 / Risk Weighted Assets of 6%: previously 4%  New Capital Conservation Buffer equal to 2.5% RWA above minimum RBC requirements  NEW High Volatility CRE definition: Risk Weight at 150% vs. previously at 100% 4

6. © 2013 – FinPro, Inc. 5  To continue reading this presentation, please visit FinPro Central Hub FinPro Central Hub