Note 12 - Regulatory Capital and Oversight

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

(12)

Regulatory Capital and Oversight

Effective January 1, 2015 the capital requirements of the Bank were changed to implement the regulatory requirements of the Basel III capital reforms. The Basel III requirements, among other things, (i) apply a strengthened set of capital requirements to the Bank (the Company is exempt, pursuant to the Small Bank Holding Company Policy Statement (Policy Statement) described below), including requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a higher minimum tier 1 capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The rules made corresponding revisions to the prompt corrective action framework and include new capital ratios and buffer requirements which will be phased in incrementally, with full implementation scheduled for January 1, 2019. 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 Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Federal Reserve amended its Policy Statement, to exempt small bank holding companies from the above capital requirements, by raising the asset size threshold for determining applicability from $500 million to $1 billion. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company met the qualitative exemption requirements, and therefore, is exempt from the above capital requirements.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table and defined in the regulation) of Common Equity Tier 1 capital to risk weighted assets, Tier 1 capital to adjusted total assets, Tier 1 capital to risk weighted assets, and total capital to risk weighted assets.

On September 30, 2016, the Bank’s average total assets were $667.9 million, its adjusted total assets were $663.7 million, and its risk-weighted assets were $579.7 million. The following table presents the Bank’s capital amounts and ratios at September 30, 2016 for actual capital, required capital, and excess capital, including ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations.

	Actual					Required to be Adequately Capitalized					Excess Capital					To Be Well Capitalized Under Prompt Corrective Action Provisions (1 )
(Dollars in thousands)	Amount		Percent of Assets (2 )			Amount		Percent of Assets (2 )			Amount		Percent of Assets (2 )			Amount		Percent of Assets (2 )
Bank stockholder’s equity	$	77,058
Plus:
Net unrealized loss on certain securities available for sale		83
Less:
Goodwill and other intangibles		1,089
Disallowed servicing and tax assets		3,057
Common equity tier I capital		72,995
Common equity tier I capital ratio				12.59	%	$	26,085		4.50	%	$	46,910		8.09	%	$	37,678		6.50	%
Tier I capital		72,995
Tier I capital leverage ratio				11.00	%	$	26,550		4.00	%	$	46,445		7.00	%	$	33,187		5.00	%
Tier I capital risk-based capital ratio				12.59	%	$	34,780		6.00	%	$	38,215		6.59	%	$	46,373		8.00	%
Plus:
Allowable allowance for loan losses		7,300
Risk-based capital	$	80,295
Total risk-based capital ratio				13.85	%	$	46,373		8.00	%	$	33,922		5.85	%	$	57,966		10.00	%

(1) Under the final rules, revised requirements began to be phased in commencing January 1, 2015, as described above.

(2) Based upon the Bank’s adjusted total assets for the purpose of the Tier 1 or core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratios.

Beginning in 2016, the Bank must maintain a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. For 2016, the capital conservation buffer is 0.625%. The buffer amount will increase incrementally each year until 2019 when the entire 2.50% capital conservation buffer will be fully phased in.

Management believes that, as of September 30, 2016, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the current prompt corrective action regulations, including the capital conservation buffer described above. However, there can be no assurance that the Bank will continue to maintain such status in the future. The Office of the Comptroller of the Currency has extensive discretion in its supervisory and enforcement activities, and can adjust the requirement to be “well-capitalized” in the future.