REGULATORY MATTERS

9 Months Ended

Sep. 30, 2013

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, 2013, that the Company and the Bank met all such capital adequacy requirements to which it is subject.

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

						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, 2013
Total capital to risk-weighted assets	$	176,252		15.10	%	$	93,382		8.00	%	$	116,728		10.00	%
Tier 1 capital to risk-weighted assets		161,620		13.85	%		46,691		4.00	%		70,037		6.00	%
Tier 1 capital to adjusted average assets (leverage)		161,620		9.59	%		67,418		4.00	%		84,273		5.00	%
December 31, 2012
Total capital to risk-weighted assets	$	162,458		18.05	%	$	72,020		8.00	%	$	90,025		10.00	%
Tier 1 capital to risk-weighted assets		151,121		16.79	%		36,010		4.00	%		54,015		6.00	%
Tier 1 capital to adjusted average assets (leverage)		151,121		9.74	%		62,092		4.00	%		77,615		5.00	%

The reduction in the Bank’s capital ratios at September 30, 2013 versus December 31, 2012 resulted from an increase in total assets coupled with a change in the Bank’s mix of assets from 0% risk-weighted interest-bearing deposits due from banks to loans, principally at a 100% risk-weighting.

The Company’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 9.66%, 13.94% and 15.19%, respectively, at September 30, 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 the retirement of any preferred stock, of which the Bank had none as of September 30, 2013. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the Bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements.

The Office of the Comptroller of the Currency (“OCC”) approved the Final Rule on Regulatory Capital, revising regulatory capital rules applicable to national banks, on July 9, 2013 implementing Basel III. Most banking organizations are required to apply the new capital rules on January 1, 2015. The final rule sets a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. It also places 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 rule revises the Prompt Corrective Action Framework to incorporate the new regulatory capital minimums. It also enhances risk sensitivity and addresses 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 Act. Based on our capital levels and balance sheet composition at September 30, 2013, we believe implementation of the new rule will not have a material impact on our capital needs.