Regulatory Matters

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank the 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 about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined), or leverage ratio.

In July 2013, the federal bank regulatory agencies adopted final rules revising the agencies’ capital adequacy guidelines and prompt corrective action rules, designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The new minimum capital requirements were effective on January 1, 2015. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer requirements phase in over a four-year period beginning January 1, 2016.

The Corporation adopted the new Basel III regulatory capital rules during the first quarter of 2015 under the transition rules, primarily relating to regulatory deductions and adjustments impacting common equity tier 1 capital and tier 1 capital, to be phased in over a three-year period beginning January 1, 2015. Under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. During 2016, the Corporation and the Bank were required to hold a capital conservation buffer greater than 0.625% above its minimum risk-based capital requirements in order to avoid limitations on capital distributions. During 2017, the Corporation and the Bank must hold a capital conservation buffer greater than 1.25% above its minimum risk-based capital requirements in order to avoid limitations on capital distributions.

The Corporation's and Bank's actual and required capital ratios as of December 31, 2016 and December 31, 2015 under BASEL III regulatory capital rules were as follows.



(Dollars in thousands)	Actual				For Capital Adequacy Purposes				To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
At December 31, 2016
Total Capital (to Risk-Weighted Assets):
Corporation	$	462,198	12.44	%	$	297,284	8.00	%	$	371,604	10.00	%
Bank	436,435		11.85		294,679		8.00		368,349		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	349,942		9.42		222,963		6.00		297,284		8.00
Bank	418,266		11.36		221,010		6.00		294,679		8.00
Tier 1 Common Capital (to Risk-Weighted Assets):
Corporation	349,942		9.42		167,222		4.50		241,543		6.50
Bank	418,266		11.36		165,757		4.50		239,427		6.50
Tier 1 Capital (to Average Assets):
Corporation	349,942		8.84		158,410		4.00		198,013		5.00
Bank	418,266		10.64		157,254		4.00		196,567		5.00
At December 31, 2015
Total Capital (to Risk-Weighted Assets):
Corporation	$	334,757	13.35	%	$	200,613	8.00	%	$	250,766	10.00	%
Bank	300,527		12.09		198,816		8.00		248,521		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	267,098		10.65		150,460		6.00		200,613		8.00
Bank	282,245		11.36		149,112		6.00		198,816		8.00
Tier 1 Common Capital (to Risk-Weighted Assets):
Corporation	267,098		10.65		112,845		4.50		162,998		6.50
Bank	282,245		11.36		111,834		4.50		161,538		6.50
Tier 1 Capital (to Average Assets):
Corporation	267,098		9.69		110,227		4.00		137,783		5.00
Bank	282,245		10.31		109,480		4.00		136,850		5.00

At December 31, 2016 and December 31, 2015, management believes that the Corporation and the Bank continued to meet all capital adequacy requirements to which they are subject. The Corporation, like other bank holding companies, currently is required to maintain Tier 1 Capital and Total Capital equal to at least 6.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. During 2016, the Corporation and the Bank was required to hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than .625% of total risk-weighted assets in order to avoid limitations on capital distributions. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, Tier 1 and Total Capital ratios must be at least 8.0% and 10.0% on a risk-adjusted basis, respectively. At December 31, 2016, the Bank is categorized 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 Bank’s category. The Corporation will continue to analyze the impact of the new rules as it grows and as the capital conservation buffer requirements are phased in.

Dividends and Other Restrictions

The primary source of the Corporation’s dividends paid to its shareholders is from the earnings of the Bank paid to the Corporation in the form of dividends.

The approval of the Federal Reserve Board of Governors is required for a state bank member in the Federal Reserve system to pay dividends if the total of all dividends declared in any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2017 without approval of the Federal Reserve Board of Governors of approximately $16.1 million plus an additional amount equal to the Bank’s net profits for 2017 up to the date of any such dividend declaration.

Federal Reserve Board policy applicable to the holding company also provides that, as a general matter, a bank holding company should inform the Federal Reserve and should eliminate, defer or significantly reduce the holding company’s dividends if the holding company’s net income for the preceding four quarters, net of dividends paid during the period, is not sufficient to fully fund the dividends, the holding company’s prospective rate of earnings retention is inconsistent with capital needs and overall current and prospective financial condition, or the holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Federal Reserve Board policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period or that could result in a material adverse change to the organization’s capital structure.

The Federal Reserve Act requires that the extension of credit by the Bank to certain affiliates, including the Corporation (parent), be secured by readily marketable securities, that the extension of credit to any one affiliate be limited to 10% of the Bank’s capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of the Bank’s capital and surplus.