Stockholders' Equity and Regulatory Capital

12 Months Ended

Jun. 30, 2021

Stockholders' Equity and Regulatory Capital

Stockholders' Equity and Regulatory Capital

NOTE 11: 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). Additionally, to make distributions or discretionary bonus payments, the Company and Bank must maintain a capital conservation buffer of 2.5% of risk-weighted assets. Management believes, as of June 30, 2021 and 2020, that the Company and the Bank met all capital adequacy requirements to which they are subject.

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 to provide temporary relief to community banking organizations. Under the rules, CBLR requirement was a minimum of 8% for the remainder of calendar year 2020, and is 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.

In August 2020, the Federal banking agencies adopted a final rule updating a December 2018 rule regarding the impact on regulatory capital of adoption of the CECL standard. The rule now allows institutions that adopt the CECL standard in 2020 a five-year transition period to recognize the estimated impact of adoption on regulatory capital. The Company and the Bank elected to exercise the option to recognize the impact of adoption over the five-year period.

As of June 30, 2021, 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, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	315,490	14.18	%	$	177,938	8.00	%		n/a	n/a
Southern Bank		308,482	13.96	%		176,816	8.00	%		221,019	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		287,701	12.93	%		133,453	6.00	%		n/a	n/a
Southern Bank		282,638	12.79	%		132,612	6.00	%		176,816	8.00	%
Tier I Capital (to Average Assets)
Consolidated		287,701	10.61	%		108,505	4.00	%		n/a	n/a
Southern Bank		282,638	10.43	%		108,369	4.00	%		135,461	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		272,458	12.25	%		100,090	4.50	%		n/a	n/a
Southern Bank		282,638	12.79	%		99,459	4.50	%		143,663	6.50	%

									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	%

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, 2021, approximately $42.9 million of the equity of the Bank was available for distribution as dividends to the Company without prior regulatory approval.