Green Dot 2010 Annual Report Download - page 22

managing and controlling banks, as well as closely related activities. The business activities that we
currently conduct are permissible activities for bank holding companies under U.S. law, and we do not
expect the limitations described above will adversely affect our current operations or materially prohibit us
from engaging in activities that are currently contemplated by our business strategies. It is possible,
however, that these restrictions might limit our ability to enter other businesses in which we may wish to
engage at some time in the future. It is also possible that in the future these laws may be amended in ways,
or new laws or regulations may be adopted, that adversely affect our ability to engage in our current or
additional businesses.
Even if our activities are permissible for a bank holding company, as discussed under “— Capital
Adequacy and Prompt Corrective Action” below, the Federal Reserve Board has the authority to order a
bank holding company or its subsidiaries to terminate any activity or to require divestiture of ownership or
control of a subsidiary in the event that it has reasonable cause to believe that the activity or continued
ownership or control poses a serious risk to the financial safety, soundness or stability of the bank holding
company or any of its bank subsidiaries.
Dividend Restrictions. Bank holding companies are subject to various restrictions that may affect
their ability to pay dividends. Federal and state banking regulations applicable to bank holding companies
and banks generally require that dividends be paid from earnings and, as described under “— Capital
Adequacy and Prompt Corrective Action” below, require minimum levels of capital, which limits the funds
available for payment of dividends. Other restrictions include the Federal Reserve Board’s general policy
that bank holding companies should pay cash dividends on common stock only out of net income available
to stockholders for the preceding year or four quarters and only if the prospective rate of earnings retention
is consistent with the organization’s expected future needs and financial condition, including the needs of
each of its bank subsidiaries. In the current financial and economic environment, the Federal Reserve
Board has indicated that bank holding companies should carefully review their dividend policies and has
discouraged dividend pay-out ratios that are at the 100% level unless both their asset quality and capital
are very strong. A bank holding company also should not maintain a dividend level that places undue
pressure on the capital of its bank subsidiaries, or that may undermine the bank holding company’s ability
to serve as a source of strength for its bank subsidiaries. See “— Source of Strength” below.
In addition, various federal and state statutory provisions and regulations limit the amount of dividends
that banks may pay. We expect that our new state-chartered bank subsidiary will become a member of the
Federal Reserve System following completion of our pending bank acquisition. State-chartered banks that
are members of the Federal Reserve System may not pay dividends in an amount that exceeds the lesser
of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent
earnings test, a bank may not pay a dividend if the total of all dividends it declares in any calendar year is in
excess of the current year’s net income combined with the retained net income of the two preceding years,
unless the bank obtains the approval of its chartering authority. Under the undivided profits test, a bank
may not pay a dividend in excess of its “undivided profits.”
Capital Adequacy and Prompt Corrective Action. Bank holding companies and banks are subject to
various federal requirements relating to capital adequacy. These include meeting minimum leverage ratio
requirements. As a bank holding company, we will be required to be “well-capitalized,” meaning we will
need to maintain a ratio of Tier 1 capital to assets of at least 5%, a ratio of Tier 1 capital to risk-weighted
assets of at least 6% and a ratio of total capital to risk-weighted assets of at least 10%. Tier 1 capital, or
“core” capital, generally consists of common stockholders’ equity, perpetual non-cumulative preferred
stock and, up to certain limits, other capital elements. Tier 2 capital consists of supplemental capital items
such as the allowance for loan and lease losses, certain types of preferred stock, hybrid capital securities
and certain types of debt, all subject to certain limits. Total capital is the sum of Tier 1 capital plus Tier 2
capital. When measuring compliance with certain of these capital requirements, bank regulators adjust the
asset values in accordance with their perceived risk. We believe that we and our proposed subsidiary bank
will be “well capitalized” under these standards and we will be able to maintain these ratios in future
periods. It is possible, however, that regulators may require us or our proposed subsidiary bank to maintain
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