Regulatory Matters

6 Months Ended

Jun. 30, 2017

Regulatory Matters

Regulatory Matters

NOTE (10) – Regulatory Matters

The Bank’s capital requirements are administered by the Office of the Comptroller of the Currency (“OCC”) and 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 the OCC.  Failure to meet capital requirements can result in regulatory action.

The federal banking regulators approved final capital rules (“Basel III Capital Rules”) in July 2013 implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act.  The Basel III Capital Rules prescribe a standardized approach for calculating risk-weighted assets and revised the definition and calculation of Tier 1 capital and Total capital, and include a new Common Equity Tier 1 capital (“CET1”) measure.  Under the Basel III Capital Rules, the currently effective minimum capital ratios are:

· 4.5% CET1 to risk-weighted assets;

· 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

· 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

· 4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”).

A new capital conservation buffer was also established above the regulatory minimum capital requirements.  This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until it reaches its final level of 2.5% on January 1, 2019.

The Basel III Capital rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness.  Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are now required to meet the following increased capital level requirements in order to qualify as “well capitalized”: (i) a CET1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).  At June 30, 2017 and December 31, 2016, the Bank’s level of capital exceeded all regulatory capital requirements and its regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes.  Actual and required capital amounts and ratios as of the periods indicated are presented below.

	Actual			Minimum Capital Requirements			Minimum Required To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
June 30, 2017:
Tier 1 (Leverage)	$	47,009	10.51%	$	17,884	4.0%	$	22,356	5.0%
Common Equity Tier 1	$	47,009	15.87%	$	13,333	4.5%	$	19,258	6.5%
Tier 1	$	47,009	15.87%	$	17,777	6.0%	$	23,703	8.0%
Total Capital	$	50,720	17.12%	$	23,703	8.0%	$	29,628	10.0%
December 31, 2016:
Tier 1 (Leverage)	$	43,954	10.60%	$	16,594	4.0%	$	20,742	5.0%
Common Equity Tier 1	$	43,954	15.36%	$	12,875	4.5%	$	18,597	6.5%
Tier 1	$	43,954	15.36%	$	17,166	6.0%	$	22,888	8.0%
Total Capital	$	47,544	16.62%	$	22,888	8.0%	$	28,610	10.0%

Effective as of May 15, 2015, the Federal Reserve Board (“FRB”) adopted a final rule that exempts bank holding companies and savings and loan holding companies with less than $1 billion in consolidated assets, such as the Company, from FRB’s consolidated regulatory capital requirements.