CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

12 Months Ended

Dec. 31, 2014

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks are subject to regulatory capital requirements administered by the federal banking agencies. Since the Company is a one-bank holding company with consolidated assets less than $500 million, regulatory minimum capital ratios are applied only to the Bank. 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 a bank is not well-capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, a bank may not make a capital distribution if, after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, acquisitions, new activities, new branches, payment of dividends or management fees are prohibited and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the bank at the discretion of the federal regulator.

At December 31, 2014, the total risk-based capital ratio of the Bank was 9.07%. The Bank’s total risk-based capital ratio was 8.48% at December 31, 2013. At both year-end periods, the Bank was in the adequately capitalized regulatory capital category.

Since September 2, 2010, the Bank has been operating under a Consent Order with the FDIC and the DIFS, its primary banking regulators. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DIFS.

Under the Consent Order, the Bank is required to maintain higher capital levels than requested under prompt corrective action levels for a well-capitalized bank and the Bank may not declare or pay any dividend without the prior written consent of the regulators. Under the Consent Order, the Bank is required to have and maintain its level of tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not in compliance with this requirement within the 90 days of the effective date of the Consent Order and has not attained those required levels at any reporting period including December 31, 2014. At year-end 2014, a capital contribution of $5,202,000 would have been needed to meet the capital ratios specified in the Consent Order. The Bank is in full compliance with the restrictions related to declaring and paying dividends.

Prior to the issuance of the Consent Order, the Bank's Board of Directors and management had already commenced initiatives and strategies to address a number of the requirements of the Consent Order. The Bank continues to work in cooperation with its regulators. Our ability to fully comply with all of the requirements of the Consent Order, including achieving and maintaining specified capital levels, is not entirely within our control, and is not assured. Our ability to comply with the requirements of the Consent Order may be affected by many factors, including the availability of capital and other funds, the extent of repayment of loans by borrowers, declines in the value of collateral including real estate, the Bank's ability to realize on collateral, and actions by bank regulators. Failure to comply with provisions of the Consent Order may result in further regulatory action including additional regulatory restriction or receivership that could have a material adverse effect on us and our shareholders, as well as the Bank.

Included in the tables are the actual capital amounts and ratios for the Bank and the required capital amounts and ratios for the Bank at December 31, 2014 and 2013.

					Minimum Required				Minimum Required
					For Capital				Under
	Actual				Adequacy Purposes				Consent Order
	Amount		Ratio		Amount		Ratio		Amount		Ratio
2014
Total Capital (Tier 1 and
Tier 2) to risk-weighted assets of the Bank	$	12,123,131	9.07	%	$	10,688,877	8.00	%	$	14,697,205	11.00	%
Tier 1 (Core) Capital to risk-weighted assets of the Bank		10,449,191	7.82			5,344,438	4.00			N/A	N/A
Tier 1 (Core) Capital to average assets of the Bank		10,449,191	5.67			7,365,478	4.00			15,651,640	8.50

					Minimum Required				Minimum Required
					For Capital				Under
	Actual				Adequacy Purposes				Consent Order
	Amount		Ratio		Amount		Ratio		Amount		Ratio
2013
Total Capital (Tier 1 and
Tier 2) to risk-weighted assets of the Bank	$	11,420,073	8.48	%	$	10,769,246	8.00	%	$	14,807,713	11.00	%
Tier 1 (Core) Capital to risk-weighted assets of the Bank		9,723,466	7.22			5,384,623	4.00			N/A	N/A
Tier 1 (Core) Capital to average assets of the Bank		9,723,466	5.24			7,423,426	4.00			15,774,781	8.50

Federal Reserve guidelines limit the amount of allowance for loan losses that can be included in tier 2 capital. In general, only 1.25% of net risk-weighted assets are allowed to be included. At December 31, 2014, only $1,673,940 was counted as tier 2 capital and $304,232 was disallowed. At December 31, 2013, $1,696,607 was counted as tier 2 capital and $1,113,035 was disallowed.

 

On August 17, 2011, the Bank was issued a Supervisory Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category at December 31, 2010, its failure to submit a capital restoration plan that satisfies the requirements stipulated in the FDIC Rules and Regulations, and the continued deterioration of the Bank. Through several quarters of earnings and a $25,000 capital contribution from the Company, the Bank reached an adequately capitalized regulatory capital category at March 31, 2013 and has maintained its adequately capitalized status since that time. The FDIC officially released the Directive in a letter to the board dated February 6, 2014.