REGULATORY CAPITAL MATTERS

9 Months Ended

Sep. 30, 2018

REGULATORY CAPITAL MATTERS

REGULATORY CAPITAL MATTERS

NOTE 14 - REGULATORY CAPITAL MATTERS

The Bank is subject to various regulatory capital adequacy requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off‑balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification is also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi‑year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available‑for‑sale securities is not included in computing regulatory capital. Management believes as of September 30, 2018, the Bank meets all capital adequacy requirements to which it is subject to.

Prompt corrective action regulations for the Bank provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The standard ratios established by the Bank’s primary regulators to measure capital require the Bank to maintain minimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital (“CET 1”), Tier 1 capital and total capital (as defined in the regulations) to risk‑weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).

Actual capital ratios of the Bank, along with the applicable regulatory capital requirements as of September 30, 2018, which were calculated in accordance with the requirements of Basel III, became effective January 1, 2015. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum ratios: (i) a CET 1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement began phasing in, in January 2016 at 0.625% of risk‑weighted assets and will increase each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities. At September 30, 2018, required ratios including the capital conservation buffer were (i) CET 1 of 6.375%; (ii) a Tier 1 capital ratio of 7.875%; and (iii) a total capital ratio of 9.875%.

As of September 30, 2018 and December 31, 2017, the most recent filings with the Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain minimum CET 1 risk‑based, Tier 1 risk‑based, total risk‑based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since September 30, 2018, the Company believes have changed the categorization of the Bank as well capitalized. Management believes the Bank met all capital adequacy requirements to which it is subject as of September 30, 2018 and December 31, 2017.

The following presents the actual and required capital amounts and ratios as of September 30, 2018 and December 31, 2017 (in thousands):

									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes				Regulations
September 30, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common Equity Tier 1(CET1) to risk-weighted assets
Bank	$	84,975	10.42	%	$	36,691	4.5	%	$	52,998	6.5	%
Consolidated		91,936	11.22			36,882	4.5			N/A	N/A
Tier 1 capital to risk-weighted assets
Bank		84,975	10.42			48,921	6.0			65,228	8.0
Consolidated		91,936	11.22			49,176	6.0			N/A	N/A
Total capital to risk-weighted assets
Bank		92,242	11.31			65,228	8.0			81,535	10.0
Consolidated		105,764	12.90			65,568	8.0			N/A	N/A
Tier 1 capital to average assets
Bank		84,975	8.45			40,208	4.0			50,259	5.0
Consolidated		91,936	9.09			40,457	4.0			N/A	N/A

									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes				Regulations
December 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common Equity Tier 1(CET1) to risk-weighted assets
Bank	$	77,879	9.81	%	$	35,719	4.5	%	$	51,595	6.5	%
Consolidated		52,703	6.56			36,132	4.5			N/A	N/A
Tier 1 capital to risk-weighted assets
Bank		77,879	9.81			47,626	6.0			63,501	8.0
Consolidated		70,573	8.79			48,176	6.0			N/A	N/A
Total capital to risk-weighted assets
Bank		85,304	10.75			63,501	8.0			79,377	10.0
Consolidated		93,903	11.70			64,234	8.0			N/A	N/A
Tier 1 capital to average assets
Bank		77,879	8.27			37,659	4.0			47,073	5.0
Consolidated		70,573	7.41			38,101	4.0			N/A	N/A