Note 9. Regulatory Capital Requirements

The Company and the Bank are subject to various regulatory capital 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital adequacy 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 classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier I capital to risk‑weighted assets, Tier I capital to average assets, and beginning in 2015, common equity Tier I capital to risk‑weighted assets. Management believes as of September 30, 2019 that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of September 30, 2019, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk‑based, Tier I risk‑based, Tier I leverage and, beginning in 2015, common equity Tier I risk‑based ratios. There are no conditions or events since that notification that management believes have changed the Bank's category.

The Common Equity Tier I, Tier I and Total capital ratios are calculated by dividing the respective capital amounts by risk‑weighted assets. Risk‑weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain off‑balance‑sheet items, among other things. The leverage ratio is calculated by dividing Tier I capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

When fully phased in on January 1, 2019, the Basel III Capital Rules required the Bank and Bancorp to maintain (i) a minimum ratio of Common Equity Tier I 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 I capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier I capital to risk‑weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier I capital to risk‑weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier I capital ratio as that buffer is phased in, effectively resulting in a minimum Tier I capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier I 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 I capital to average quarterly assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 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 Bank or Bancorp. 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 I 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, 2019 and December 31, 2018 for the Bank and Company under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2019 and December 31, 2018 based on the phase‑in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased‑in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the Company's and the Bank's capital amounts and ratios as of September 30, 2019 and December 31, 2018 with the minimum requirements are presented below.


									To Be
									Well Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
In Thousands	Actual				Purposes				Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	78,392	12.6	%	$	65,525	10.5	%	$	—	N/A
The Bank of Delmarva		77,192	12.4	%		65,469	10.5	%		62,351	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		53,044	8.5	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		52,999	8.5	%		49,881	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		64,573	10.3	%		43,683	7.0	%		—	N/A
The Bank of Delmarva		69,873	11.2	%		43,646	7.0	%		40,528	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		64,573	8.3	%		31,052	4.0	%		—	N/A
The Bank of Delmarva		69,873	9.0	%		31,052	4.0	%		38,814	5.0	%
As of December 31, 2018
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	72,344	11.8	%	$	60,466	9.9	%	$	—	N/A
The Bank of Delmarva		71,498	11.7	%		60,425	9.9	%		61,190	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		48,220	7.9	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		48,187	7.9	%		48,952	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		58,516	9.6	%		39,035	6.4	%		—	N/A
The Bank of Delmarva		64,170	10.5	%		39,009	6.4	%		39,774	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		58,516	8.0	%		29,377	4.0	%		—	N/A
The Bank of Delmarva		64,170	8.7	%		29,377	4.0	%		36,721	5.0	%

Banking regulations also limit the amount of dividends that may be paid without prior approval of the Bank's regulatory agencies. Regulatory approval is required to pay dividends, which exceed the Bank's net profits for the current year plus its retained net profits for the preceding two years.