REGULATORY MATTERS

9 Months Ended

Sep. 30, 2017

REGULATORY MATTERS

REGULATORY MATTERS

NOTE 16: REGULATORY MATTERS

Regulatory Capital

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and 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 about components, risk weighting and other factors.

The Company and Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company and Bank elected to opt‑out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both the Company and Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities, and subject to transition provisions.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk‑weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk‑weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk‑weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk‑weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four‑year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company and Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk‑weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk‑weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following table presents actual and required capital ratios as of September 30, 2017 and December 31, 2016 for the Company and Bank under the Basel III Capital Rules:

					Minimum				Minimum
					Capital				Capital
					Required-Basel				Required-Basel				Required to be
					III Phase-in				III Fully				Considered Well
	Actual				Schedule				Phased-in				Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2017
Common Equity Tier I to Risk-Weighted Assets:
Consolidated	$	311,698	12.9	%	$	109,020	4.5	%	$	169,587	7.0	%	$	157,474	6.5	%
Bank Only	$	320,334	13.2	%	$	108,879	4.5	%	$	169,367	7.0	%	$	157,270	6.5	%
Tier I Capital to Risk-Weighted Assets:
Consolidated	$	318,098	13.1	%	$	145,360	6.0	%	$	205,927	8.5	%	$	193,814	8.0	%
Bank Only	$	320,334	13.2	%	$	145,172	6.0	%	$	205,660	8.5	%	$	193,563	8.0	%
Total Capital to Risk-Weighted Assets:
Consolidated	$	342,233	14.1	%	$	193,814	8.0	%	$	254,381	10.5	%	$	242,267	10.0	%
Bank Only	$	344,469	14.2	%	$	193,563	8.0	%	$	245,051	10.5	%	$	241,953	10.0	%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$	318,098	11.0	%	$	115,539	4.0	%	$	115,539	4.0	%	$	144,424	5.0	%
Bank Only	$	320,335	11.1	%	$	115,539	4.0	%	$	115,539	4.0	%	$	144,424	5.0	%

					Minimum				Minimum
					Capital				Capital
					Required-Basel				Required-Basel				Required to be
					III Phase-in				III Fully				Considered Well
	Actual				Schedule				Phased-in				Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2016
Common Equity Tier I to Risk-Weighted Assets:
Consolidated	$	274,516	11.5	%	$	107,272	4.5	%	$	166,867	7.0	%	$	154,948	6.5	%
Bank Only	$	304,058	12.8	%	$	107,209	4.5	%	$	166,770	7.0	%	$	154,844	6.5	%
Tier I Capital to Risk-Weighted Assets:
Consolidated	$	280,916	11.8	%	$	143,029	6.0	%	$	202,624	8.5	%	$	190,705	8.0	%
Bank Only	$	304,058	12.8	%	$	142,946	6.0	%	$	202,507	8.5	%	$	190,594	8.0	%
Total Capital to Risk-Weighted Assets:
Consolidated	$	306,287	12.9	%	$	190,705	8.0	%	$	250,300	10.5	%	$	238,381	10.0	%
Bank Only	$	329,428	13.8	%	$	190,594	8.0	%	$	250,155	10.5	%	$	238,243	10.0	%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$	280,916	9.8	%	$	114,872	4.0	%	$	114,872	4.0	%	$	143,590	5.0	%
Bank Only	$	304,058	10.6	%	$	114,872	4.0	%	$	114,872	4.0	%	$	143,590	5.0	%

Management believes that, as of September 30, 2017 and December 31, 2016, the Company and its bank subsidiary, CommunityBank of Texas, National Association, were “well capitalized” based on the ratios presented above.

The Company and Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board and, for the Bank, the OCC. Regulatory authorities can initiate certain mandatory actions if Company or Bank fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of September 30, 2017 and December 31, 2016, that the Company and Bank meet all capital adequacy requirements to which they are subject.

Dividend Restrictions

In the ordinary course of business, the Company may be dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.