Note 10. Regulatory Matters

6 Months Ended

Jun. 30, 2012

Regulatory Capital Requirements under Banking Regulations [Text Block]

10.       REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (“OCC”), as successor to the Office of Thrift Supervision (“OTS”) (see discussion below regarding “Regulatory Changes”). Failure to meet minimum capital requirements can result in certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct and material effect on the Bank’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 the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.   

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of tangible capital (as defined) to tangible assets (as defined) and core capital (as defined) to adjusted tangible assets (as defined), and of total risk-based capital (as defined) to risk-weighted assets (as defined).   Tier 1 (core) capital includes common stockholders’ equity less certain other deductions.  Total capital includes Tier 1 capital plus the allowance for loan and lease losses, subject to limitations.

On April 12, 2010, the Company and the Bank each consented to the terms of Cease and Desist Orders issued by the OTS (the “Bank Order” and the “Company Order” and, together, the “Orders”).  The Orders became effective April 14, 2010. The Orders impose certain restrictions on the Company and, to a greater extent, the Bank, including lending and dividend restrictions.  The Orders also require the Company and the Bank to take certain actions, including the submission of capital and business plans to, among other things, preserve and enhance the capital of the Company and the Bank and strengthen and improve the consolidated Company’s operations, earnings and profitability.  The Bank Order specifically requires the Bank to achieve and maintain, by December 31, 2010, a Tier 1 (core) capital ratio of at least 8% and a total risk-based capital ratio of at least 12.0% and maintain these higher ratios for as long as the Bank Order is in effect.

The Bank’s actual and required capital amounts (in thousands) and ratios are presented in the following table:

	Actual					For Capital Adequacy Purposes					To be Categorized as Adequately Capitalized Under Prompt Corrective Action Provisions					Required Per Bank Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount			Ratio
As of June 30, 2012:
Tangible Capital to Tangible Assets	$	67,234		12.12	%	$	8,320		1.50	%		N/A		N/A			N/A			N/A
Core Capital to Adjusted Tangible Assets		67,234		12.12	%		22,188		4.00	%	$	22,188		4.00	%	$	44,375	(1)		8.00	%(1)
Total Capital to Risk-Weighted Assets		71,901		19.93	%		28,862		8.00	%		28,862		8.00	%		43,293	(1)		12.00	%(1)
Tier I Capital to Risk-Weighted Assets		67,234		18.64	%		N/A		N/A			14,431		4.00	%		N/A			N/A

As of December 31, 2011:
Tangible Capital to Tangible Assets	$	64,839	11.22	%	$	8,666	1.50	%		N/A	N/A			N/A		N/A
Core Capital to Adjusted Tangible Assets		64,839	11.22	%		23,111	4.00	%	$	23,111	4.00	%	$	46,221	(1)	8.00	%(1)
Total Capital to Risk-Weighted Assets		69,466	19.62	%		28,319	8.00	%		28,319	8.00	%		42,479	(1)	12.00	%(1)
Tier I Capital to Risk-Weighted Assets		64,839	18.32	%		N/A	N/A			14,160	4.00	%		N/A		N/A

(1) The Bank Order states that no later than December 31, 2010, the Bank shall achieve and maintain a Tier 1 (core) capital ratio of at least 8% and a total risk-based capital ratio of at least 12%.  The required amounts presented reflect these ratios.

Reverse Stock Split. The Company amended its Articles of Incorporation to effect a 1-for-5 reverse split (the “Reverse Split”) of the Company’s issued and outstanding shares of common stock effective May 3, 2011. All periods presented in this Form 10-Q have been retroactively restated to reflect the Reverse Split.

Dividend Restrictions.  The principal source of the Company’s revenue is dividends from the Bank.  The Company’s ability to pay dividends to stockholders depends to a large extent upon the dividends received from the Bank.  On November 19, 2009, the OTS issued written directives which require the Company and the Bank to obtain prior written non-objection of their primary regulator, now the FRB for the Company and the OCC for the Bank, in order to make or declare any dividends or payments on their outstanding securities.  Neither the Company nor the Bank has the present intention to declare any dividends or payments on their outstanding securities.

Regulatory Changes.  Effective July 21, 2011, pursuant to Section 312 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) (i) the regulatory functions and rulemaking authority of the OTS with regard to federally chartered savings and loan associations (including the Bank) were transferred to the OCC and (ii) the regulatory functions and rulemaking authority of the OTS with regard to savings and loan holding companies (including the Company) were transferred to the Board of Governors of the Federal Reserve System (“FRB”).  Beginning on July 21, 2011, the OCC became the primary regulator of the Bank and is vested with authority to enforce the Bank Order.  Also beginning on July 21, 2011, the Company became subject to the regulation of the FRB, which is vested with authority to enforce the Company Order.