CASH 2018 Annual Report

58 The OCC and Federal Reserve are our primary banking regulators, and we may not be able to comply with applicable banking regulations to their satisfaction. Our primary regulators have broad discretionary powers to enforce banking laws and regulations and may seek to take informal or formal supervisory action if they deem such actions are necessary or required. If imposed in the future, corrective steps could result in additional regulatory requirements, operational restrictions, a consent order, enhanced supervision and/or civil money penalties. If imposed, additional resources, both economic and in terms of personnel, would likely need to be dedicated by the Company and the Bank and such regulatory actions could have a material adverse effect on us. Regulatory capital requirements have increased. Under the Basel III Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. The Basel III Capital Rules include a new minimum ratio of CET1 Capital to risk-weighted assets of 4.5% and a capital conservation buffer of 1.8750% for 2018, increasing by 0.0625% per year to 2.5% of risk- weighted assets for 2019 and later years. The rules also impose a minimum ratio of tier 1 capital to risk-weighted assets of 6% and include a minimum leverage ratio (tier 1 capital to average total assets) of 4% for all banking organizations. The rules emphasize CET1 Capital and implement strict eligibility criteria for regulatory capital instruments. The minimum total capital ratio remains at 8%, but the general PCA framework has been changed to incorporate these increased minimum requirements. The Basel III Capital Rules phase-in period for smaller, less complex banking organizations, like us and the Bank, began in January 2015. The phase-in has already increased capital requirements for the Company and the Bank, which will be subject to further increasing capital requirements until the phase-in is complete. While the recently passed Regulatory Relief Act requires that federal banking regulators establish a simplified leverage capital framework for smaller banks, the increased regulatory capital requirements could affect our and the Bank's future growth, and if we or the Bank fail to meet such requirements, including of the Basel III Capital Rules (including the application of well-capitalized levels in connection with such rules), we and the Bank would be subject to adverse regulatory action by our regulators, which action could have a material adverse effect on us, the Bank, and our shareholders. We have a concentration of our assets in mortgage-backed securities and municipal securities. As of September 30, 2018, approximately 6.4% of our assets were invested in MBS. Our mortgage-backed and related securities portfolio consists primarily of securities issued by U.S. government instrumentalities, including those of Fannie Mae and Freddie Mac which are in conservatorship. The Fannie Mae and Freddie Mac certificates are modified pass-through MBS that represent undivided interests in underlying pools of fixed-rate, or certain types of adjustable- rate, predominantly single-family and, to a lesser extent, multi-family residential mortgages issued by these U.S. government instrumentalities. MBS are subject to credit risk and the risk that a fluctuating interest rate environment, along with other risks such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and affect both the prepayment speed and value of such securities. As of September 30, 2018, approximately 21.9% of the Bank’s assets were invested in municipal securities. Municipal securities remain subject to the risk that a fluctuating interest rate environment may alter the value of the securities. The full impact of the Dodd-Frank Act is still unknown. Hundreds of new federal regulations, studies and reports were required under the Dodd-Frank Act. A significant number of them have been finished, but some, including the executive compensation rule, still need to be finalized. Based on the provisions of the Dodd-Frank Act that have already been implemented as well as anticipated regulations, it is likely that banks and thrifts as well as their holding companies will continue to be subject to regulation and compliance obligations that expose us to higher costs as well as noncompliance risk and related regulatory consequences. Given that required regulations under the Dodd-Frank Act have not yet been adopted, there can be no assurance as to the specific provisions of any such of future regulations or their impact on us or our business, including whether any such future regulations will impose greater restrictions on our business, which could adversely impact our business and results of operations.