Annual report pursuant to Section 13 and 15(d)

Note 12 - Regulatory Capital

v3.20.1
Note 12 - Regulatory Capital
 12 Months Ended
Dec. 31, 2019
Notes to Financial Statements  
Regulatory Capital Requirements under Banking Regulations [Text Block]
Note
1
2
–
Regulatory Capital
The Bancorp and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action. Prompt corrective action regulations provide
five
classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are
not
used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At
December 31, 2019
and
2018,
the most recent regulatory notifications categorized the Bancorp and Bank as well capitalized under the regulatory framework for prompt corrective action. There are
no
conditions or events since that notification that management believes have changed the Bancorp’s or the Bank’s category.
 
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does
not
hold a “capital conservation buffer” consisting of
2.5%
of common equity Tier
1
capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning
January 1, 2016
at
0.625%
of risk-weighted assets and increased each year until the buffer requirement became fully effective on
January 1, 2019.
 
The following table shows that, at
December 31, 2019,
and
December 31, 2018,
the Bancorp’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.
 
(Dollars in millions)
                                  
Minimum Required To Be
  
                   
Minimum Required For
    
Well Capitalized Under Prompt
  
   
Actual
    
Capital Adequacy Purposes
    
Corrective Action Regulations
  
At December 31, 2019
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
Common equity tier 1 capital to risk-weighted assets
   $
110.8
      
11.8%
     $
42.4
      
4.5%
      
N/A
      
N/A
  
Tier 1 capital to risk-weighted assets
   $
110.8
      
11.8%
     $
56.5
      
6.0%
      
N/A
      
N/A
  
Total capital to risk-weighted assets
   $
119.8
      
12.7%
     $
75.3
      
8.0%
      
N/A
      
N/A
  
Tier 1 capital to adjusted average assets
   $
110.8
      
8.5%
     $
52.3
      
4.0%
      
N/A
      
N/A
  
 
(Dollars in millions)
                                  
Minimum Required To Be
  
                   
Minimum Required For
    
Well Capitalized Under Prompt
  
   
Actual
    
Capital Adequacy Purposes
    
Corrective Action Regulations
  
At December 31, 2018
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
Common equity tier 1 capital to risk-weighted assets
   $
92.8
      
11.6%
     $
26.1
      
4.5%
      
N/A
      
N/A
  
Tier 1 capital to risk-weighted assets
   $
92.8
      
11.6%
     $
42.2
      
6.0%
      
N/A
      
N/A
  
Total capital to risk-weighted assets
   $
100.8
      
12.6%
     $
64.2
      
8.0%
      
N/A
      
N/A
  
Tier 1 capital to adjusted average assets
   $
92.8
      
8.6%
     $
43.2
      
4.0%
      
N/A
      
N/A
  
 
 
In addition, the following table shows that, at
December 31, 2019,
and
December 31, 2018,
the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.
 
(Dollars in millions)
                                  
Minimum Required To Be
  
                   
Minimum Required For
    
Well Capitalized Under Prompt
  
   
Actual
    
Capital Adequacy Purposes
    
Corrective Action Regulations
  
At December 31, 2019
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
Common equity tier 1 capital to risk-weighted assets
   $
108.9
      
11.6%
     $
42.4
      
4.5%
     $
61.2
      
6.5%
  
Tier 1 capital to risk-weighted assets
   $
108.9
      
11.6%
     $
56.5
      
6.0%
     $
75.3
      
8.0%
  
Total capital to risk-weighted assets
   $
117.9
      
12.5%
     $
75.3
      
8.0%
     $
94.1
      
10.0%
  
Tier 1 capital to adjusted average assets
   $
108.9
      
8.3%
     $
52.3
      
4.0%
     $
65.3
      
5.0%
  
 
(Dollars in millions)
                                  
Minimum Required To Be
  
                   
Minimum Required For
    
Well Capitalized Under Prompt
  
   
Actual
    
Capital Adequacy Purposes
    
Corrective Action Regulations
  
At December 31, 2018
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
Common equity tier 1 capital to risk-weighted assets
   $
89.9
      
11.2%
     $
36.2
      
4.5%
     $
52.2
      
6.5%
  
Tier 1 capital to risk-weighted assets
   $
89.9
      
11.2%
     $
48.2
      
6.0%
     $
64.3
      
8.0%
  
Total capital to risk-weighted assets
   $
97.9
      
12.2%
     $
64.3
      
8.0%
     $
80.3
      
10.0%
  
Tier 1 capital to adjusted average assets
   $
89.9
      
8.4%
     $
42.9
      
4.0%
     $
53.6
      
5.0%
  
 
The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank
may
pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous
two
years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of
1
or
2
as a result of the most recent federal or state examination; the proposed dividend would
not
result in a Tier
1
leverage ratio below
7.5%;
and that the Bank
not
be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that
may
be declared by the Bank in
2020,
without the need for qualifying for an exemption or prior DFI approval, is its
2020
net profits. Moreover, the FDIC and the Federal Reserve Board
may
prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On
November 22, 2019
the Board of Directors of the Bancorp declared a
fourth
quarter dividend of
$0.31
per share. The Bancorp’s
fourth
quarter dividend was paid to shareholders on
January 7, 2020.