Note 17 - Regulatory Capital Matters

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

NOTE

1

7

–

REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on

January 1, 2015

with full compliance with all of the requirements being phased in over a multi-year schedule through

January 1, 2019.

The final rules allowed banks and their holding companies with less than

$250

billion in assets a

one

-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also require a “capital conservation buffer” of

2.5%

above the regulatory minimum risk-based capital ratios. With the capital conservation buffer fully phased in as of

January 1, 2019,

the minimum ratios are a common equity Tier

1

risk-based capital ratio of

7.0%,

a Tier

1

risk-based capital ratio of

8.5%,

and a total risk-based capital ratio of

10.5%.

 The capital conservation buffer for

2019

is

2.5%

and

1.875%

for

2018.

An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.

The Company’s capital ratios were positively impacted by the

$17.0

million of subordinated notes issued on

July 23, 2019,

as the subordinated notes meet the requirements to qualify as Tier

2

capital. The Bank’s capital ratios also benefitted as the Company contributed

$10.0

million of the proceeds to the Bank as Common Equity Tier

1

Capital.

As of

December 31, 2019,

the Company and Bank meet all capital adequacy requirements to which they are subject. At year end

2019

and

2018,

the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are

no

conditions or events since the notification that management believes have changed the institution’s category.

The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier

1,

Tier

1

capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank at the dates indicated (dollars in thousands):

	Actual					Minimum Requirement for Capital Adequacy Purposes					Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 201 9 :
Total risk-based capital (to risk- weighted assets)	$	121,335		12.08	%	$	80,341		8.00	%	$	100,426		10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)		112,959		11.25			45,192		4.50			65,277		6.50
Tier 1 capital (to risk-weighted assets)		112,959		11.25			60,256		6.00			80,341		8.00
Tier 1 capital (to average assets)		112,959		9.99			45,208		4.00			56,510		5.00

	Actual					Minimum Requirement for Capital Adequacy Purposes					Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 201 8 :
Total risk-based capital (to risk- weighted assets)	$	109,309		12.88	%	$	67,920		8.00	%	$	84,900		10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)		100,429		11.83			38,205		4.50			55,185		6.50
Tier 1 capital (to risk-weighted assets)		100,429		11.83			50,940		6.00			67,920		8.00
Tier 1 capital (to average assets)		100,429		9.60			41,837		4.00			52,297		5.00

Kentucky banking laws limit the amount of dividends that

may

be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that

may

be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding

two

years, less any dividends declared during those periods. In addition, a bank must have positive retained earnings.