NOTE 4- STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 2019 the Banks could, without prior approval, declare dividends to the Company of approximately $8.4 million plus any 2019 net profits retained to the date of the dividend declaration.

The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the 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 Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following tables). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes, as of September 30, 2019, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

Shown below is a summary of regulatory capital ratios, exclusive of the capital conservation buffer, for the Company:

	September 30, 2019			December 31, 2018			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		15.4	%		14.2	%		4.5	%		6.5	%
Tier 1 Capital (to Risk-Weighted Assets)		15.9	%		14.7	%		6.0	%		8.0	%
Total Capital (to Risk-Weighted Assets)		17.1	%		15.9	%		8.0	%		10.0	%
Tier 1 Capital (to Average Assets)		11.4	%		10.7	%		4.0	%		5.0	%

Beginning on January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action. The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four year period from 2016 thru 2019. As of January 1, 2019, the capital conservation buffer is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company. The capital ratios of the Affiliate Banks and the Company exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50%, and a Total Capital to risk weighted assets ratio of at least 10.50%. The Company’s capital conservation buffer was 9.07% at September 30, 2019 and 7.88% at December 31, 2018, well in excess of the fully phased-in 2.50% required by January 1, 2019.

The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options. Certain leases contain renewal options and rent escalation clauses calling for rent increases during the term of the lease. Short-term leases of equipment are recognized on a straight-line basis over the lease term. As of September 30, 2019, the weighted average remaining lease term for operating leases was 9.59 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.22%.

Total lease expense for the nine months ended September 30, 2019, which is included in net occupancy and equipment expense, was $922,000, consisting of $75,000 short-term lease expense and $847,000 of operating lease expense. For the three months ended September 30, 2019, lease expense was $300,000, consisting of $27,000 short-term lease expense and $273,000 of operating lease expense.

The following table summarizes the future minimum rental commitments under operating leases:

2019	$	268
2020		1,059
2021		1,013
2022		995
2023		779
2024 and thereafter		4,172
Total undiscounted cash flows		8,286
Discounted cash flows		(874	)
Total lease liability	$	7,412