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20 Church Street  Liberty Corner, NJ 07938  P: (908) 604-9336  F: (908) 604-5951  finpro@finpro.us  www.fi

Basel III - Impact to Community Banks 2013 AICPA National Conference on Banks and Savings Institutions . 20 Church Street  Liberty Corner, NJ 07938  P: (908) 604-9336  F: (908) 604-5951  finpro@finpro.us  www.finpro.us. Basel III has been a long time in coming . . . .

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20 Church Street  Liberty Corner, NJ 07938  P: (908) 604-9336  F: (908) 604-5951  finpro@finpro.us  www.fi

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

  2. 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

  3. 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

  4. 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 1st 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

  5. 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% • NewCapital Conservation Buffer equal to 2.5% RWA above minimum RBC requirements • NEW High Volatility CRE definition: Risk Weight at 150% vs. previously at 100%

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