REGULATORY MATTERS

6 Months Ended

Jun. 30, 2015

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

16. REGULATORY MATTERS

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.

In July 2013, the Board of Governors of the FRB and the FDIC approved the Basel III interim final rule (Basel III), which is intended to strengthen the quality and increase the required level of regulatory capital for a more stable and resilient banking system. The changes include (1) a new regulatory capital measure, Common Equity Tier 1 (CET1), which is limited to capital elements of the highest quality, (2) a new definition and increase of Tier 1 capital which is now comprised of CET1 and Additional Tier 1, (3) changes in calculation of some risk-weighted assets and off-balance sheet exposure, and (4) a capital conservation buffer that will limit capital distributions, stock redemptions, and certain discretionary bonus payments if the institution does not maintain capital in excess of the minimum capital requirements. These new capital rules took effect for our Bank on January 1, 2015 and reporting began with the March 31, 2015 call report.

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.

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 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 90 days of the effective date of the Consent Order and has not attained those required levels at any reporting period including June 30, 2015. The Bank is in full compliance with the restrictions related to declaring and paying dividends.

Actual capital amounts and ratios for the Bank and required capital amounts and ratios for the Bank to be adequately capitalized and to be at the level mandated by the Consent Order at June 30, 2015 and December 31, 2014 were:

						Minimum Required					Minimum Required
						For Capital					Under
	Actual					Adequacy Purposes					Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2015
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank	$	11,640,066		8.44	%	$	6,209,836		4.50	%		N/A		N/A%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank		13,213,439		9.58			11,039,709		8.00		$	15,179,600		11.00	%
Tier 1 (Core) Capital to risk-weighted assets of the Bank		11,640,066		8.44			8,279,782		6.00			N/A		N/A
Tier 1 (Core) Capital to average assets of the Bank		11,640,066		6.52			7,143,041		4.00			15,178,962		8.50

						Minimum Required					Minimum Required
						For Capital					Under
	Actual					Adequacy Purposes					Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 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

Under Basel III regulatory capital requirements, to be adequately capitalized, a financial institution would need a CET 1 ratio of 4.5%, a total risk-based capital ratio of 8.0% and a Tier 1 capital ratio of 6.0%. At June 30, 2015, the Bank’s CET1 and Tier 1 capital ratios were both 8.44%; above the required minimum to be adequately capitalized. Total risk-based capital ratio of the Bank was 9.58% at June 30, 2015. This compares favorably to a total risk based capital ratio of 9.07% at December 31, 2014, under the old regulatory calculation rules. Consequently, the Bank was in the adequately capitalized regulatory category under both Basel III and the previous regulatory capital calculation rule at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, a capital contribution of $3,539,000 would have been needed to meet the capital ratios specified in the Consent Order.

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 June 30, 2015, the full allowance for loan loss balance $1,573,373 was counted as Tier 2 capital, no portion disallowed. At December 31, 2014, $1,673,940 was counted as Tier 2 capital and $304,232 was disallowed.

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.