Capital Standards

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional, discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank’s 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 Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase‑in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the following table) of Common Equity Tier 1 capital, Tier 1 capital, and Total capital (as defined in the regulations) to risk‑weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt‑out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Under the revised prompt corrective action requirements, as of January 1, 2015, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk‑based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk‑based capital ratio of 10%; and (4) a Tier 1 leverage ratio of 5%. Management believes that, as of December 31, 2017, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased‑in basis as if such requirements were fully in effect.

The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Bank.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk‑weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

As of December 31, 2018 the most recent notification from the OCC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

The OCC, through formal or informal agreement, has the authority to require an institution to maintain higher capital ratios than those provided by statute, to be categorized as well capitalized under the regulatory framework for prompt corrective action.

The following table presents actual and required capital ratios as of December 31, 2018 and 2017 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2018 and 2017 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are presented in the following table as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.



Regulatory Capital
	Actual				Minimum Capital Adequacy				To Be Well Capitalized				Full Phase In of Basel III
(Dollar amounts in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2018
The Company
Tier 1 leverage ratio (to average assets)	$	117,220	10.76	%	$	43,575	4.000	%	N/A		N/A		$	43,575	4.00	%
Tier 1 capital (to risk-weighted assets)	117,220		12.95	%	71,259		7.875	%	N/A		N/A		76,914		8.50	%
Common equity tier 1 capital ratio (to risk-weighted assets)	115,158		12.73	%	57,686		6.375	%	N/A		N/A		63,341		7.00	%
Total capital ratio (to risk-weighted assets)	128,544		14.21	%	89,356		9.875	%	N/A		N/A		95,012		10.50	%

The Bank
Tier 1 leverage ratio (to average assets)	$	96,122	9.06	%	$	42,445	4.000	%	$	53,056	5.00	%	$	42,445	4.00	%
Tier 1 capital (to risk-weighted assets)	96,122		11.00	%	68,822		7.875	%	69,914		8.00	%	74,284		8.50	%
Common equity tier 1 capital ratio (to risk-weighted assets)	96,122		11.00	%	55,713		6.375	%	56,805		6.50	%	61,175		7.00	%
Total capital ratio (to risk-weighted assets)	107,061		12.25	%	86,301		9.875	%	87,393		10.00	%	91,763		10.50	%

December 31, 2017
The Company
Tier 1 leverage ratio (to average assets)	$	82,428	8.10	%	$	40,724	4.000	%	N/A		N/A		$	40,724	4.00	%
Tier 1 capital (to risk-weighted assets)	82,428		10.18	%	58,717		7.250	%	N/A		N/A		68,841		8.50	%
Common equity tier 1 capital ratio (to risk-weighted assets)	80,366		9.92	%	46,569		5.750	%	N/A		N/A		56,693		7.00	%
Total capital ratio (to risk-weighted assets)	92,562		11.43	%	74,915		9.250	%	N/A		N/A		85,039		10.50	%

The Bank
Tier 1 leverage ratio (to average assets)	$	86,150	8.55	%	$	40,316	4.000	%	$	50,395	5.00	%	$	40,316	4.00	%
Tier 1 capital (to risk-weighted assets)	86,150		10.78	%	57,928		7.250	%	63,920		8.00	%	67,915		8.50	%
Common equity tier 1 capital ratio (to risk-weighted assets)	86,150		10.78	%	45,943		5.750	%	51,935		6.50	%	55,930		7.00	%
Total capital ratio (to risk-weighted assets)	96,148		12.03	%	73,908		9.250	%	79,900		10.00	%	83,895		10.50	%