Green Dot 2014 Annual Report Download - page 16

respect to securities activities and investments in companies engaged in nonbanking 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 restrict us from engaging in
activities that are currently contemplated by our business strategies. It is possible, however, that these restrictions
could 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” 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” 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.
As part of our financial commitments to the Federal Reserve Board and Utah Department of Financial Institutions,
our subsidiary bank, Green Dot Bank, is restricted from paying dividends for 3 years from the date of acquisition.
Capital Adequacy. Bank holding companies and banks are subject to various requirements relating to capital
adequacy, including limitations on leverage. As a bank holding company that is a financial holding company, we are
required to be “well-capitalized,” meaning we must maintain 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%. In addition, we are also subject to the generally
applicable bank holding company minimum Tier 1 leverage ratio of 4%, which is the ratio of Tier 1 capital to average
total consolidated assets. 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.
Our subsidiary bank is also subject to separate capital and leverage requirements that we have committed to with
the Federal Reserve Board and Utah Department of Financial Institutions. As of December„31, 2014, we and our
subsidiary bank are each “well-capitalized” under the above standards and presently exceed our respective capital
and leverage commitments.
In July 2013, the Federal Reserve and other U.S. banking regulators approved final rules that conform to the new
risk-based capital, leverage and liquidity standards, known as “Basel III” that were adopted by the international Basel
Committee on Banking Supervision in December 2010. The Basel III rules, which became effective for us and our bank
on January 1, 2015, are subject to certain phase-in periods that occur over several years. The U.S. Basel III rules
contain new capital standards that raise the quality of capital, increase minimum capital ratios and strengthen
counterparty credit risk capital requirements. The U.S. Basel III rules also include a new definition of common equity
Tier 1 capital and require that certain levels of such common equity Tier 1 capital be maintained. The rules also include
a new capital conservation buffer, which impose a common equity requirement above the new minimum that can be
depleted under stress, and could result in restrictions on capital distributions and discretionary bonuses under certain
circumstances, as well as a new standardized approach for calculating risk-weighted assets. Under the Basel III rules,
we must maintain a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, a ratio of Tier 1
capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of at least 8% and a minimum
Tier 1 leverage ratio of 4.0%.
Under the regulatory framework that Congress has established and bank regulators have implemented, banks are
either “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically
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