Note 8. Shareholders’ Equity

Cash Dividends

On January 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on February 29, 2016 to shareholders of the Company’s common stock as of February 17, 2016.

On April 27 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on May 31, 2016 to shareholders of the Company’s common stock as of May 18, 2016.

As discussed in Note 14. Subsequent Events of these condensed consolidated financial statements, on July 27, 2016 the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on August 31, 2016 to shareholders of the Company’s common stock as of August 15, 2016.

Stock Repurchase Program

On January 6, 2016, the Company amended its previously announced program for the repurchase of up to $5.0 million of its outstanding common stock pursuant to a written plan compliant with Rule 10b5-1 and Rule 10b-18. The amendment to the stock repurchase program includes an extension of the program beyond its then expiration date of January 31, 2016. Under the amended program, repurchase activity commenced on February 1, 2016 and may continue until August 2, 2016, the program’s new expiration date, or expire earlier upon the completion of the repurchase of $5.0 million of the Company’s common stock, as well as under certain other circumstances as set forth in the amended program. The Company has no obligation to repurchase any shares under this program, and may suspend or discontinue it at any time. All shares repurchased as part of the repurchase program will be cancelled, and therefore no longer available for reissuance.

During the six months ended June 30, 2016, the Company repurchased and cancelled 226,170 shares of its common stock at an aggregate cost of $1.6 million or $7.23 per share. As of June 30, 2016, the Company had repurchased and cancelled a total of 281,598 shares of its common stock under this plan at an aggregate total cost of $2.0 million or $7.28 per share.

Regulatory Capital

Capital ratios for commercial banks in the United States are generally calculated using four different formulas. These calculations are referred to as the “Leverage Ratio,” and three “risk-based” calculations known as: “Common Equity Tier I Capital Ratio,” “Tier One Risk Based Capital Ratio” and “Total Risk Based Capital Ratio.” These metrics were developed through joint efforts of banking authorities from different countries around the world. The standards are based on the premise that different types of assets have different levels of risk associated with them and take into consideration the off-balance sheet exposures of banks when assessing capital adequacy.

The Bank seeks to maintain strong levels of capital in order to generally be considered “well-capitalized” under the Prompt Corrective Action framework as determined by regulatory agencies. The Company’s potential sources of capital include retained earnings and the issuance of equity, while the Bank’s primary sources of capital include retained earnings and capital contributions from Bancorp.

In 2013, the Board of Governors of the Federal Reserve System (“FRB”), the FDIC, and the Office of the Comptroller of the Currency (“OCC”) issued final rules under Basel III (the “Basel III Capital Rules”), establishing a new comprehensive framework for regulatory capital for U.S. banking organizations. These rules implement the Basel Committee’s December 2010 proposed framework, certain provisions of the Dodd-Frank Act, and revise the risk-based capital requirements applicable to bank-holding companies, and depository institutions, including the Company. These rules became effective for the Company on January 1, 2015, and are subject to phase-in periods for certain of their components through 2019.

The significant changes outlined under the Basel III Capital Rules that are applicable to the Company and the Bank include:

A Common Equity Tier I (“CET I”) capital measure, with a minimum ratio requirement of 4.5% CET I to risk-weighted assets, and for Prompt Corrective Action purposes 6.5% or greater to generally be considered “well-capitalized.”

The capital conservation buffer is determined in addition to CET I of: 0.625% for 2016; 1.25% for 2017; 1.875% for 2018; and 2.5% for 2019. The capital conservation buffer began phasing-in on January 1, 2016.

The exclusion from CET I of certain items on a phased-in basis, such as deferred tax assets and intangible assets. For 2016, certain deferred tax assets and intangible assets are phased-out of CET I at a rate of 60%, compared to 40% for 2015.

When Basel III Capital Rules are fully phased-in on January 1, 2019, the Company and the Bank will also be required to maintain a 2.5% “capital conservation buffer,” which is designed to absorb losses during periods of economic stress. This capital conservation buffer will be comprised entirely of CET I, and will be in addition to minimum risk-weighted asset ratios outlined under the Basel III Capital Rules. If a banking organization fails to hold capital above minimum capital ratios, including the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.

The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of June 30, 2016 and December 31, 2015:

	Regulatory Standard to Be Considered
	Adequately Capitalized (1)		Well Capitalized (2)	June 30, 2016		December 31, 2015
	Bank	Company	Bank	Company	Bank	Company	Bank
Ratio
Common Equity Tier I Capital Ratio	5.125%	5.125%	6.50%	12.16%	11.91%	12.61%	12.48%
Leverage ratio	4.000%	4.000%	5.00%	9.80%	9.20%	9.90%	9.50%
Tier I Risk-Based Capital Ratio	6.625%	6.625%	8.00%	12.69%	11.91%	13.01%	12.48%
Total Risk-Based Capital Ratio	8.625%	8.625%	10.00%	13.91%	13.13%	14.26%	13.74%

(1)

As of June 30, 2016, includes Capital Conservation Buffer of 0.625%. On a fully phased-in basis, effective January 1, 2019, under Basel III Capital Rules, minimum capital ratios to be considered “adequately capitalized,” including the Capital Conservation Buffer of 2.5%, will be as follows: CET I: 7.0%; Leverage Ratio: 6.5%; Tier I Risk-Based Capital Ratio: 8.5%; Total Risk-Based Capital Ratio: 10.5%.

(2)

Reflects minimum threshold to be considered “well capitalized” under Prompt Corrective Action framework, specific to depository institutions.

At June 30, 2016, the Company was able to include $10.1 million of junior subordinated debt in its Tier I capital for regulatory capital purposes compared to $10.0 million at December 31, 2015.