Stockholders' Equity and Regulatory Capital

12 Months Ended

Jun. 30, 2020

Stockholders' Equity and Regulatory Capital

Stockholders' Equity and Regulatory Capital

NOTE 14: Stockholders’ Equity and Regulatory Capital

The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in 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 Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under U.S. GAAP, regulatory reporting requirements and regulatory capital standards. The Company and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Furthermore, the Company and Bank’s regulators could require adjustments to regulatory capital not reflected in the condensed consolidated financial statements.

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital (as defined), and common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average total assets (as defined). Management believes, as of June 30, 2020 and 2019, that the Company and the Bank met all capital adequacy requirements to which they are subject.

In July 2013, the Federal banking agencies announced their approval of the final rule to implement the Basel III regulatory reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The approved rule included a new minimum ratio of common equity Tier 1 (CET1) capital of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and included a minimum leverage ratio of 4.0% for all banking institutions. Additionally, the rule created a capital conservation buffer of 2.5% of risk-weighted assets, and prohibited banking organizations from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative, if the capital conservation buffer is not maintained. This new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until being fully implemented in January 2019. The enhanced capital requirements for banking organizations such as the Company and the Bank began January 1, 2015. Other changes included revised risk-weighting of some assets, stricter limitations on mortgage servicing assets and deferred tax assets, and replacement of the ratings-based approach to risk weight securities.

Effective January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a tier 1 leverage ratio of greater than 9 percent, are considered qualifying community banking organizations and are eligible to opt into an alternative, simplified regulatory capital framework, which utilizes a newly-defined “Community Bank Leverage Ratio” (CBLR). The CBLR framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement is a minimum of 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The Company and the Bank have not made an election to utilize the CBLR framework, but will continue to monitor the available option, and could do so in the future.

As of June 30, 2020, the most recent notification from the Federal banking agencies 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 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The tables below summarize the Company and Bank’s actual and required regulatory capital:

									To Be Well Capitalized Under
									Prompt Corrective Action
	Actual				For Capital Adequacy Purposes				Provisions
As of June 30, 2020	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	278,924	13.17	%	$	169,473	8.00	%	n/a	n/a
Southern Bank		271,137	12.88	%		168,355	8.00	%	210,444	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		252,609	11.92	%		127,105	6.00	%	n/a	n/a
Southern Bank		244,822	11.63	%		126,266	6.00	%	168,355	8.00	%
Tier I Capital (to Average Assets)
Consolidated		252,609	9.95	%		101,528	4.00	%	n/a	n/a
Southern Bank		244,822	9.66	%		101,370	4.00	%	126,713	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		237,467	11.21	%		95,328	4.50	%	n/a	n/a
Southern Bank		244,822	11.63	%		94,700	4.50	%	136,789	6.50	%

									To Be Well Capitalized Under
									Prompt Corrective Action
	Actual				For Capital Adequacy Purposes				Provisions
As of June 30, 2019	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	256,982	13.22	%	$	155,536	8.00	%	n/a	n/a
Southern Bank		247,199	12.81	%		154,364	8.00	%	192,954	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		235,768	12.13	%		116,652	6.00	%	n/a	n/a
Southern Bank		225,985	11.71	%		115,773	6.00	%	154,364	8.00	%
Tier I Capital (to Average Assets)
Consolidated		235,768	10.81	%		87,231	4.00	%	n/a	n/a
Southern Bank		225,985	10.38	%		87,077	4.00	%	108,846	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		220,725	11.35	%		87,489	4.50	%	n/a	n/a
Southern Bank		225,985	11.71	%		86,829	4.50	%	125,420	6.50	%

The Bank’s ability to pay dividends on its common stock to the Company is restricted to maintain adequate capital as shown in the above tables. Additionally, prior regulatory approval is required for the declaration of any dividends generally in excess of the sum of net income for that calendar year and retained net income for the preceding two calendar years. At June 30, 2020, approximately $11.2 million of the equity of the Bank was available for distribution as dividends to the Company without prior regulatory approval.