Note 9. Regulatory Capital Requirements

The Company and its Subsidiaries 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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its Subsidiaries must meet specific capital adequacy guidelines that involve quantitative measures of the Company’s and the Subsidiaries assets, liabilities, and certain off‑balance‑sheet items as calculated under regulatory accounting practices. The Company’s and its Subsidiaries’ 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 its Subsidiaries 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 common equity Tier I capital to risk‑weighted assets. Management believes as of March 31, 2020 that the Company and its Subsidiaries meet all capital adequacy requirements to which they are subject.

As of March 31, 2020, the most recent notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized the Subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Subsidiaries must maintain minimum total risk‑based, Tier I risk‑based, Tier I leverage and common equity Tier I risk‑based ratios. There are no conditions or events since that notification that management believes have changed the Subsidiaries 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 Tier I 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 Subsidiaries and the Company 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 capital plus Tier 2 capital) 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 was 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 Subsidiaries or the Company. 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 March 31, 2020 and December 31, 2019 for the Subsidiaries and Company under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2020 and December 31, 2019 based on the fully phased‑in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the Company's and Subidiaries’ capital amounts and ratios as of March 31, 2020 and December 31, 2019 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 March 31, 2020
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	134,174	13.1	%	$	107,491	10.5	%	$	—	N/A
The Bank of Delmarva		80,926	12.7	%		66,933	10.5	%		63,746	10.0	%
Virginia Partners Bank		48,085	12.5	%		40,258	10.5	%		38,341	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		119,590	11.7	%		87,016	8.5	%		—	N/A
The Bank of Delmarva		73,431	11.5	%		54,184	8.5	%		50,997	8.0	%
Virginia Partners Bank		47,496	12.4	%		32,590	8.5	%		30,673	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		119,590	11.7	%		71,660	7.0	%		—	N/A
The Bank of Delmarva		73,431	11.5	%		44,622	7.0	%		41,435	6.5	%
Virginia Partners Bank		47,496	12.4	%		26,839	7.0	%		24,922	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		119,590	9.6	%		49,784	4.0	%		—	N/A
The Bank of Delmarva		73,431	9.4	%		31,347	4.0	%		39,184	5.0	%
Virginia Partners Bank		47,496	10.5	%		18,170	4.0	%		22,712	5.0	%

As of December 31, 2019
Total Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp	$	131,443	13.1	%	$	105,140	10.5	%	$	—	N/A
The Bank of Delmarva		79,080	12.7	%		65,132	10.5	%		62,030	10.0	%
Virginia Partners Bank		47,122	12.5	%		39,676	10.5	%		37,787	10.0	%
Tier I Capital Ratio
(To Risk Weighted Assets)
Delmar Bancorp		117,374	11.7	%		85,113	8.5	%		—	N/A
The Bank of Delmarva		71,752	11.6	%		52,726	8.5	%		49,624	8.0	%
Virginia Partners Bank		46,881	12.4	%		32,119	8.5	%		30,230	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
Delmar Bancorp		117,374	11.7	%		70,224	7.0	%		—	N/A
The Bank of Delmarva		71,752	11.6	%		43,421	7.0	%		40,320	6.5	%
Virginia Partners Bank		46,881	12.4	%		26,451	7.0	%		24,562	6.5	%
Tier I Leverage Ratio
(To Average Assets)
Delmar Bancorp		117,374	11.9	%		39,331	4.0	%		—	N/A
The Bank of Delmarva		71,752	9.1	%		31,520	4.0	%		39,399	5.0	%
Virginia Partners Bank		46,881	10.4	%		18,093	4.0	%		22,616	5.0	%

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