REGULATORY CAPITAL MATTERS

6 Months Ended

Jun. 30, 2020

REGULATORY CAPITAL MATTERS

REGULATORY CAPITAL MATTERS

NOTE 17 - 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”) has been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. During the three months ended June 30, 2020, the Company made a $10.0 million capital injection into the Bank. Management believes as of June 30, 2020, 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).

The actual capital ratios of the Bank, along with the applicable regulatory capital requirements as of June 30, 2020, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios, which are fully effective 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%. Banks are 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 establish a maximum percentage of eligible retained income that can be utilized for such activities. At June 30, 2020, required ratios including the capital conservation buffer were (i) CET 1 of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%.

As of June 30, 2020 and December 31, 2019, the most recent filings with the 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. Management believes there are no conditions or events since June 30, 2020, that have changed the categorization of the Bank as well capitalized. Management believes the Bank met all capital adequacy requirements to which it was subject as

of June 30, 2020 and December 31, 2019.

The following presents the actual and required capital amounts and ratios as of June 30, 2020 and December 31, 2019 (in thousands):

									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes(1)				Regulations
June 30, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	117,027	10.12	%	$	69,410	6.0	%	$	92,546	8.0	%
Consolidated		112,739	9.67			N/A	N/A			N/A	N/A
Common Equity Tier 1(CET1) to risk-weighted assets
Bank		117,027	10.12			52,057	4.5			75,194	6.5
Consolidated		112,739	9.67			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		127,781	11.05			92,546	8.0			115,683	10.0
Consolidated		138,052	11.84			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		117,027	8.63			54,266	4.0			67,833	5.0
Consolidated	$	112,739	8.30	%	$	N/A	N/A	%	$	N/A	N/A	%

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(1) Does not include capital conservation buffer.

									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes(1)				Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	99,461	10.67	%	$	55,954	6.0	%	$	74,606	8.0	%
Consolidated		105,821	11.31			N/A	N/A			N/A	N/A
Common Equity Tier 1(CET1) to risk-weighted assets
Bank		99,461	10.67			41,966	4.5			60,617	6.5
Consolidated		105,821	11.31			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		107,509	11.53			74,606	8.0			93,257	10.0
Consolidated		120,429	12.87			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		99,461	8.09			49,166	4.0			61,458	5.0
Consolidated	$	105,821	8.58	%	$	N/A	N/A	%	$	N/A	N/A	%

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(1) Does not include capital conservation buffer.