Huntington National Bank 2011 Annual Report Download - page 22

assigned to categories perceived as representing greater risk. The risk-based ratio represents total capital divided by
total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the
guidelines. The Bank is subject to substantially similar capital requirements. Banking regulators are finalizing
changes to capital requirements that are expected to incorporate many of the Basel III capital requirements.
Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers.
Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a
third tier of capital in the form of restricted short-term subordinated debt. These tiers are:
• Tier 1 risk-based capital, or core capital, which includes total equity plus qualifying capital securities and
minority interests, excluding unrealized gains and losses accumulated in other comprehensive income,
and nonqualifying intangible and servicing assets.
• Tier 2 risk-based capital, or supplementary capital, which includes, among other things, cumulative and
limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the ACL,
up to 1.25% of risk-weighted assets.
• Total risk-based capital is the sum of Tier 1 and Tier 2 risk-based capital.
The Federal Reserve and the other federal banking regulators require that all intangible assets (net of
deferred tax), except originated or purchased MSRs, nonmortgage servicing assets, and purchased credit card
relationships intangible assets, be deducted from Tier 1 capital. However, the total amount of these items
included in capital cannot exceed 100% of its Tier 1 capital.
Under the risk-based guidelines to remain adequately-capitalized, financial institutions are required to maintain
a total risk-based capital ratio of 8%, with 4% being Tier 1 risk-based capital. The appropriate regulatory authority
may set higher capital requirements when they believe an institution’s circumstances warrant.
Under the leverage guidelines, financial institutions are required to maintain a Tier 1 leverage ratio of at
least 3%. The minimum ratio is applicable only to financial institutions that meet certain specified criteria,
including excellent asset quality, high liquidity, low interest rate risk exposure, and the highest regulatory rating.
Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.
Failure to meet applicable capital guidelines could subject the financial institution to a variety of
enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to
pay dividends, the issuance by the regulatory authority of a directive to increase capital, and the termination of
deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described
below under Prompt Corrective Action as applicable to under-capitalized institutions.
The risk-based capital standards of the Federal Reserve, the OCC, and the FDIC specify that evaluations by
the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the
economic value of a bank’s capital due to changes in interest rates. These banking agencies issued a joint policy
statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on
internal measures of exposure and active oversight of risk management activities by senior management.
FDICIA requires federal banking regulatory authorities to take Prompt Corrective Action with respect to
depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and
critically under-capitalized.
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