Pub. 14 2019-2020 Issue 4

WWW.NEBANKERS.ORG 16 Counselor’s Corner — continued from page 15 1 Dodd-Frank Is One of the Biggest Regulatory Events Ever, Mercatus Center, George Mason University (August 31, 2017). 2 Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (FRB); and the Federal Deposit Insurance Corporation (FDIC), Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations available at https://www.fdic.gov/news/board/2019/2019-09-17-notice-dis-a- fr.pdf (September 17, 2019) (October 29, 2019). A community bank compliance guide is available at the following link: https://www.fdic. gov/regulations/resources/cbi/cblr-guide.pdf. 3 In order to qualify for use of the CBLR under the CBLR rule, a banking organization must meet the following criteria: (a) a leverage ratio of greater than 9%; (b) total consolidated assets of less than $10 billion; (c) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; (d) the sum of trading assets and trading liabilities of 5% or less of total consolidated assets; and (e) not be an advanced approaches banking organization. 4 In February 2019, the agencies published the CECL transitions final rule, providing for an optional three-year transition arrangement that will allow a banking organization to phase in any adverse day-one regulatory capital effects of CECL adoption on retained earnings, deferred tax assets, allowance for credit losses, and average total consolidated assets. For further information on the CECL transitions final rule please see 84 Fed. Reg. 4222 (Feb. 14, 2019). 5 On July 22, 2019, the agencies issued a final rule titled Regulatory Capital: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (simplifications rule), which simplified the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and the calculation of minority interest. Simultaneous with the CBLR rule, the agencies adopted a final rule that permits banking organizations not subject to the advanced approaches capital rules to implement the simplifications rule in the quarter beginning January 1, 2020, or to wait until the quarter beginning April 1, 2020. 6 Statement by FDIC Chairman Jelena McWilliams on the Final Rule: Capital Simplification for Qualifying Community Banking Organizations (Sep. 17, 2019). 7 FRB, FDIC, OCC Joint Press Release: Federal Bank Regulatory Agencies Issue Final Rule to Simplify Capital Calculation for Community Banks (October 29, 2019). 8 For example, if the CBLR banking organization no longer meets one of the qualifying criteria as of Feb. 15, and still does not meet the criteria as of the end of that quarter, the grace period for such a banking organization will begin as of the end of the quarter ending March 31 and may continue through the quarter ending June 30. By September 30, the qualifying community banking organization would need to either meet the CBLR qualifying criteria again or comply with the generally applicable capital rules. CBLR rule at pg 39. For more information, contact Jeff Makovicka at Kutak Rock LLP: (402) 346-6000 or jeff.makovicka@kutakrock. com. Mr. Makovicka is a member of Kutak Rock LLP’s banking practice group, where he concentrates on bank matters. CBLR framework and become subject to the generally applicable capital rule by completing the associated reporting requirements on its Call Report and/or Form FR Y - 9C, as applicable. 2. Ratio is 9%. When the EGRRCPA was passed in May 2018, bankers hoped that the agencies would imple- ment the CBLR by instituting a minimum rate of 8%, which was the bottom of the range suggested in the EGRRCPA. There was some disappointment that the proposed rule contained a 9% CBLR instead. Before the final CBLR rule was released, FDIC Chairman Jelena McWilliams, intimated that the CBLR in the final rule would stay put at 9%, saying that a lower rate might have been possible, but only with numer- ous caveats and qualifications defeating the original purpose of the rule, i.e., to simplify the process for determining capital adequacy of community banks. As promised, the final CBLR rule mandated a capital ratio of greater than 9%. 3. Off-Ramp. Qualifying community banking orga- nizations that elect to use the CBLR framework and maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and lever- age capital requirements in the agencies’ generally applicable capital rule. Additionally, such insured depository institutions are considered to have met the well-capitalized ratio requirements for purposes of the PCA framework. 4. PCA grace? A big concern with the proposed rule was the concept of an alternative PCA framework for those banks that opted into the CBLR. Under the proposed rule, a bank opting into the CBLR would remain “well- capitalized” until its capital fell to 9% or lower, after which it would be considered only “adequately capital- ized” under the proposed system that treated CBLR capi- tal levels as “proxies” for the existing PCA capital ratios. This “proxy” systemwas replaced in the final CBLR rule by a two-quarter grace period where a qualifying com- munity banking organization that temporarily fails to meet the CBLR criteria, including falling to 9% capital or lower, will still be considered well-capitalized as long as the bank maintains a leverage ratio of more than 8%. If the bank fails to meet all the qualifying criteria (see footnote 3) at the end of the grace period, or it falls to a capital level of 8% or below, it must comply with the standard PCA requirements, including the calculation of risk-based capital ratios. 8 5. Definition of capital. The originally proposed rule calculated the CBLR using a ratio of “tangible equity” to average total consolidated assets. Tangible equity was defined as total bank equity capital or total holding company equity capital, as applicable, before including minority interests and excluding accumulated other comprehensive income, deferred tax assets arising from net operating losses and tax credit carryforwards, goodwill and other intangible assets. In the final CBLR rule, however, the agencies used tier 1 capital instead of tangible equity, as many commenters on the proposed rule bemoaned the complexity created with the proposed introduction of a novel way to measure capital. 