REGULATORY MATTERS

9 Months Ended

Sep. 30, 2014

REGULATORY MATTERS [Abstract]

REGULATORY MATTERS

8. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. 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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and tier 1 capital, as defined in the federal banking regulations, to risk-weighted assets and of tier 1 capital to adjusted average assets (leverage). Management believes, as of September 30, 2014, that the Company and the Bank met all such capital adequacy requirements to which it is subject.

The Bank’s capital amounts (in thousands) and ratios are as follows:

						Minimum					Minimum to be Well
						for capital					Capitalized under prompt
	Actual capital ratios					adequacy					corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2014
Total capital to risk-weighted assets	$	195,388		13.97	%	$	111,863		8.00	%	$	139,829		10.00	%
Tier 1 capital to risk-weighted assets		177,890		12.72	%		55,932		4.00	%		83,897		6.00	%
Tier 1 capital to adjusted average assets (leverage)		177,890		10.11	%		70,350		4.00	%		87,938		5.00	%
December 31, 2013
Total capital to risk-weighted assets	$	181,952		14.92	%	$	97,542		8.00	%	$	121,927		10.00	%
Tier 1 capital to risk-weighted assets		166,683		13.67	%		48,771		4.00	%		73,156		6.00	%
Tier 1 capital to adjusted average assets (leverage)		166,683		9.74	%		68,454		4.00	%		85,567		5.00	%

The Company’s tier 1 leverage, tier 1 risk-based and total risk-based capital ratios were 10.21%, 12.84% and 14.09%, respectively, at September 30, 2014 versus 9.81%, 13.77% and 15.02%, respectively, at December 31, 2013.

The ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay dividends in an amount greater than its undivided profits or declare any dividends if such declaration would leave the bank inadequately capitalized.

In July 2013, the OCC approved new rules on regulatory capital applicable to national banks, implementing Basel III. Most banking organizations are required to apply the new capital rules on January 1, 2015. The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. They also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above minimum capital requirements. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets, including through new measures of creditworthiness to replace references to credit ratings, consistent with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Based on our capital levels and balance sheet composition at September 30, 2014, we believe implementation of the new rules will not have a material impact on our capital needs.