REGULATORY MATTERS

6 Months Ended

Jun. 30, 2016

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 business, results of operations and financial condition. 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, tier 1 and common equity tier 1 capital, as defined in the federal banking regulations, to risk-weighted assets and of tier 1 capital to adjusted average assets (leverage).

The Office of the Comptroller of the Currency (“OCC”), the Company’s primary bank regulator, established higher capital requirements for the Bank than those set forth in its capital regulations that require the Bank to maintain a tier 1 leverage ratio of at least 9%, a tier 1 risk-based capital ratio of at least 11% and a total risk-based capital ratio of at least 12%. At June 30, 2016, the Bank satisfied the OCC’s regulatory capital requirements as well as these individual minimum capital ratios, although there is no guarantee that the Bank will be able to maintain compliance with these heightened capital ratios.

In July 2013, the OCC approved new rules on regulatory capital applicable to national banks, implementing Basel III. Most banking organizations were 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. 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 (the “Dodd-Frank Act”). The Company’s implementation of the new rules on January 1, 2015 did not have a material impact on its capital needs.

The final capital rules 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 capital buffer requirement is being phased in beginning January 1, 2016 at 0.625% per year until it becomes 2.50% in 2019 and thereafter. At June 30, 2016, the Company’s and the Bank’s capital buffers were in excess of both the current and fully phased-in requirements.

The Bank’s capital amounts (in thousands) and ratios are presented in the table that follows. The minimum amounts presented therein reference the minimums required by capital regulations and not the individual minimum capital ratios the OCC established for the Bank.

	Actual capital ratios					Minimum for capital adequacy					Minimum to be Well Capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2016
Total capital to risk-weighted assets	$	232,576		13.10	%	$	142,039		8.00	%	$	177,549		10.00	%
Tier 1 capital to risk-weighted assets		211,371		11.90	%		106,529		6.00	%		142,039		8.00	%
Common equity tier 1 capital to risk-weighted assets		211,371		11.90	%		79,897		4.50	%		115,407		6.50	%
Tier 1 capital to adjusted average assets (leverage)		211,371		9.55	%		88,562		4.00	%		110,703		5.00	%
December 31, 2015
Total capital to risk-weighted assets	$	219,562		12.66	%	$	138,716		8.00	%	$	173,395		10.00	%
Tier 1 capital to risk-weighted assets		198,587		11.45	%		104,037		6.00	%		138,716		8.00	%
Common equity tier 1 capital to risk-weighted assets		198,587		11.45	%		78,028		4.50	%		112,706		6.50	%
Tier 1 capital to adjusted average assets (leverage)		198,587		9.58	%		82,905		4.00	%		103,632		5.00	%

The Company’s tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 9.66%, 12.04%, 12.04% and 13.24%, respectively, at June 30, 2016. The Company’s tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 9.77%, 11.68%, 11.68% and 12.89%, respectively, at December 31, 2015.

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.