| Capital management
consists of providing equity to support both current and future operations.
The Company is subject to capital adequacy requirements imposed by
the Federal Reserve Board and the Bank is subject to capital
adequacy requirements
imposed by the OCC. Both the Federal Reserve Board and the OCC have
adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital
and establish minimum capital requirements in relation to assets and
off-balance sheet exposure, adjusted for credit risk. The risk-based
capital standards currently in effect are designed to make regulatory
capital requirements more sensitive to differences in risk profiles
among bank holding companies and banks, to account for off-balance
sheet exposure and to minimize disincentives for holding liquid assets.
Assets and off-balance sheet items are assigned to broad risk categories,
each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items.
Bank regulatory
authorities in the United States have issued risk-based capital
standards by which all bank holding companies and banks are evaluated
in terms of capital adequacy. The risk-based capital standards issued
by the Federal Reserve Board apply to the Company, and the OCC guidelines
apply to the Bank. These guidelines relate a financial institution’
capital to the risk profile of its assets. The risk-based capital
standards require all financial organizations to have ‘‘Tier
1 capital" of at least 4.0% of risk-adjusted assets and ‘‘total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of risk-adjusted
assets. ‘‘Tier 1 capital" includes, generally, common
shareholders’ equity and qualifying perpetual preferred stock
together with related surpluses and retained earnings, qualifying
perpetual preferred stock and minority interest in equity accounts
of consolidated subsidiaries less deductions for goodwill and various
other intangibles. ‘‘Tier 2 capital" consist of a limited
amount of subordinated debt, certain hybrid capital instruments
and other debt securities, preferred stock not qualifying as Tier
1 capital, and a limited amount of the general valuation allowance
for loan losses. The sum of Tier 1 capital and Tier 2 capital is
‘‘total risk-based capital."
The agencies
have also adopted guidelines which supplement the risk-based capital
guidelines with a minimum leverage ratio of Tier 1 capital to average
total consolidated assets (‘‘leverage ratio") of 3.0%
for institutions with well diversified risk, including no undue
interest rate exposure; excellent asset quality; high liquidity;
good earnings; and that are generally considered to be strong banking
organizations, rated composite 1 under applicable federal guidelines,
and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage
ratio of at least 4.0% to 5.0%. These rules further provide that
banking organizations experiencing internal growth or making acquisitions
will be expected to maintain capital positions substantially above
the minimum supervisory levels and comparable to peer group averages,
without significant reliance on intangible assets.
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