REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Dec. 31, 2018

REGULATORY CAPITAL REQUIREMENTS [Abstract]

REGULATORY CAPITAL REQUIREMENTS

NOTE 18. REGULATORY CAPITAL REQUIREMENTS

Banks and bank holding companies 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 financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Basel III

The FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. At December 31, 2018 the capital conservation buffer was 1.875% and the Bank’s specific capital buffer was 4.73%.

The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, ending on January 1, 2019.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio). As of December 31, 2018, management believes that Shore United Bank met all capital adequacy requirements to which it was subject.

As of December 31, 2018, the most recent notification from the Federal Reserve Bank categorized Shore Untied Bank, as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Bank’s classification. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below.

The minimum ratios for capital adequacy purposes are 6.38%,  7.88%,  9.88% and 4.00% for the common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively which include a capital conservation buffer of 1.875% respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.50%,  8.00%,  10.00% and 5.00% for its common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively.

The following tables present the capital amounts and ratios as of December 31, 2018 and 2017.

Common

Total

Net

Tier 1

Total

Equity/

Risk-

Risk-

Adjusted

Common

Risk-Based

Risk-Based

Tier 1

(Dollars in thousands)

Tier 1

Based

Weighted

Average

Equity

Capital

Capital

Leverage

December 31, 2018

Capital

Capital

Assets

Total Assets

Tier 1 ratio

Ratio

Ratio

Ratio

Company (1)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Shore United Bank

$

140,265

$

150,909

$

1,185,050

$

1,432,686

11.84

%

11.84

%

12.73

%

9.79

%

Common

Total

Net

Tier 1

Total

Equity/

Risk-

Risk-

Adjusted

Common

Risk-Based

Risk-Based

Tier 1

(Dollars in thousands)

Tier 1

Based

Weighted

Average

Equity

Capital

Capital

Leverage

December 31, 2017

Capital

Capital

Assets

Total Assets

Tier 1 ratio

Ratio

Ratio

Ratio

Company

$

132,370

$

142,452

$

1,112,259

$

1,345,876

11.90

%

11.90

%

12.81

%

9.84

%

Shore United Bank

126,751

136,833

1,107,074

1,342,484

11.45

%

11.45

%

12.36

%

9.44

%

(1) In August of 2018 the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) directed the Federal Reserve Board (“FRB”) to revise the Small Bank Holding Company Policy Statement to raise the total consolidated asset limit in the Policy Statement from $1 billion to $3 billion. The Company was previously required to comply with the minimum capital requirements on a consolidated basis; however, the Company continues to meet the conditions of the revised policy statement and was, therefore, exempt from the consolidated capital requirements at December 31, 2018.

The Company, also began filing less extensive and less frequent regulatory reports with the FRB, which will reduce administrative costs for the Company.

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.

At December 31, 2018, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios. The Bank paid $4.0 million and $0 of dividends to Shore Bancshares, Inc. for the years ended December 31, 2018 and 2017, respectively. Shore Bancshares, Inc. had no outstanding receivables from subsidiaries at December 31, 2018 or 2017.