Note 17 - Regulatory Matters

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

(17) Regulatory Matters

Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. 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 Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.

Banking regulators have categorized the Bank as well-capitalized. The regulations in accordance with Basel III define “well capitalized” as a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and Bank must hold a capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer set forth by the Basel III regulatory capital framework was 2.5% of risk-weighted assets above the minimum risk based capital ratio requirements at June 30, 2020 and December 31, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on Bancorp’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. At June 30, 2020 and December 31, 2019, Bancorp’s and the Bank’s risk-based capital exceeded the required capital conservation buffer.

Bancorp continues to exceed the regulatory requirements to be considered “well-capitalized” for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based Capital and Tier I Leverage. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the well-capitalized requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer. There are no conditions or events since June 30, 2020 that management believes have changed Bancorp’s well-capitalized status.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “Financial Instruments – Credit Losses,” or CECL, which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were declared to be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. Had Bancorp elected not to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would have exceeded the well-capitalized level.

Dividends paid by Bancorp are limited to, without prior regulatory approval, current year earnings and earnings less dividends paid during the preceding two years.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:

(dollars in thousands)	Actual					Minimum for adequately capitalized					Minimum for well capitalized
June 30, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (1)
Consolidated	$	446,117		13.50	%	$	264,297		8.00	%	NA		NA
Bank		430,654		13.07			263,610		8.00		$	329,512		10.00	%
Common equity tier 1 risk-based capital
Consolidated		409,251		12.39			148,667		4.50		NA		NA
Bank		393,788		11.95			148,280		4.50			214,183		6.50
Tier 1 risk-based capital (1)
Consolidated		409,251		12.39			198,223		6.00		NA		NA
Bank		393,788		11.95			197,707		6.00			263,610		8.00
Leverage (2)
Consolidated		409,251		9.50			172,277		4.00		NA		NA
Bank		393,788		9.15			172,124		4.00			215,155		5.00

(dollars in thousands)	Actual					Minimum for adequately capitalized					Minimum for well capitalized
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (1)
Consolidated	$	418,460		12.85	%	$	260,448		8.00	%	NA		NA
Bank		396,299		12.20			259,823		8.00		$	324,778		10.00	%
Common equity tier 1 risk-based capital
Consolidated		391,319		12.02			146,502		4.50		NA		NA
Bank		369,158		11.37			146,150		4.50			211,106		6.50
Tier 1 risk-based capital (1)
Consolidated		391,319		12.02			195,336		6.00		NA		NA
Bank		369,158		11.37			194,867		6.00			259,823		8.00
Leverage (2)
Consolidated		391,319		10.60			147,733		4.00		NA		NA
Bank		369,158		10.67			138,392		4.00			172,990		5.00

(1)     Ratio is computed in relation to risk-weighted assets.

(2)     Ratio is computed in relation to average assets.     

NA – Not Applicable