Note 3 - Regulatory Matters

6 Months Ended

Jun. 30, 2015

Disclosure Text Block [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

Note 3.     Regulatory Matters

The Bank was under a Consent Order (the “Order”) from the Office of the Comptroller of the Currency (“OCC”) dated September 1, 2010. On March 25, 2015, after meeting all of the requirements of the Order, the Bank was fully and completely released from the Order. The Company has been, and continues to be, subject to a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”) dated November 24, 2010.

Federal Reserve Agreement. The Agreement requires the Company to undertake certain actions within designated timeframes, and to operate in compliance with the provisions thereof during its term. The material provisions of the Agreement are set forth below with a description of the status of the Company’s efforts to comply with such provisions:

(i) the Company’s Board was required to take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complied with its Consent Order entered into with the OCC;

The Company has taken, and continues to take, steps the Board believes are appropriate to use the Company’s financial and managerial resources to serve as a source of strength to the Bank.

(ii) the Company may not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation (the “Director”) of the Federal Reserve Board;

The Company has acknowledged the prohibition on payment of dividends without the prior written consent of the Reserve Bank and Director. The Company has not paid any dividends since the effective date of the Agreement.

(iii) the Company may not take dividends or other payments representing a reduction of the Bank’s capital without the prior written approval of the Reserve Bank;

The Company has acknowledged the prohibition on taking dividends or any other capital distributions from the Bank without the prior written consent of the Reserve Bank. On September 8, 2014, the Company sent a request to the Reserve Bank to approve a dividend from the Bank in the amount of $1.0 million. The dividend was to be used to cure the interest deferral on the junior subordinated debentures. The Company received written non-objection to allow the $1.0 million dividend payment from the Bank and cure of the interest deferral on the junior subordinated debentures in the amount of $921 thousand. The $1.0 million dividend payment from the Bank to the Company and the interest deferral payment on the junior subordinated debentures were completed in December 2014. The Company made subsequent requests for, and received approval from the Reserve Bank to permit payment of the quarterly interest payments on the junior subordinated debentures, which was due and paid by the Company on March 15, 2015 and June 15, 2015. On July 15, 2015, the Company sent a request to the Reserve Bank to permit payment of the quarterly interest payment on the junior subordinated debentures, which is due and payable on September 15, 2015.

On April 22, 2015, the Company made an additional request to the Reserve Bank non-objection to a dividend from the Bank to the Company related to principal payments on the subordinated debentures. On May 27, 2015, the Company received written non-objection from the Reserve Bank to allow a $12.5 million dividend payment from the Bank to be used to make an $11.0 million pro-rata principal reduction on the 9% fixed-rate subordinated notes. The holders of the subordinated notes agreed to reduce the fixed interest rate from 9.0% to 4.5% effective July 1, 2015. The $12.5 million dividend payment and the $11.0 million principal reduction on the subordinated debt were completed in June 2015. On July 15, 2015, the Company sent a request to the Reserve Bank to permit payment of the quarterly interest payment on the subordinated debentures, which is due and payable on September 1, 2015.

(iv) the Company and its nonbank subsidiary may not make any payment of interest, principal or other amounts on the Company’s subordinated debentures or junior subordinated debentures without the prior written approval of the Reserve Bank and the Director;

The Company has acknowledged the prohibition on any payment related to the Company’s subordinated debentures and junior subordinated debentures without the written approval of the Reserve Bank and Director. Previously, the Company had not made any payments of interest, principal or other amounts on the Company’s subordinated debentures or junior subordinated debentures since the effective date of the Agreement.

On September 8, 2014, the Company sent to the Reserve Bank requests for approval for the Company to receive a $1.0 million capital distribution from the Bank, and to make a distribution on the junior subordinated debentures to cure the interest deferral. The Company received written non-objection from the Reserve Bank in November 2014 to cure and pay the interest deferral. On December 15, 2014, the Company paid all deferred and currently payable accrued interest totaling $921 thousand. The Company made subsequent requests for, and received approval from the Reserve Bank to permit payment of the quarterly interest payments on the junior subordinated debentures, which was due and paid by the Company on March 15, 2015 and June 15, 2015. On July 15, 2015, the Company sent a request to the Reserve Bank to permit payment of the quarterly interest payment on the junior subordinated debentures, which is due and payable on September 15, 2015.

On April 22, 2015, the Company made an additional request to the Reserve Bank for non-objection to a dividend from the Bank to the Company related to principal payments on the subordinated debentures. On May 27, 2015, the Company received written non-objection from the Reserve Bank to allow a $12.5 million dividend payment from the Bank to be used to make an $11.0 million pro-rata principal reduction on the 9% fixed-rate subordinated notes. The holders of the subordinated notes agreed to reduce the fixed interest rate from 9.0% to 4.5% effective July 1, 2015. The $12.5 million dividend payment and the $11.0 million principal reduction on the subordinated debentures were completed in June 2015. On July 15, 2015, the Company sent a request to the Reserve Bank to permit payment of the quarterly interest payment on the subordinated debentures, which is due and payable on September 1, 2015.

(v) the Company may not make any payment of interest, principal or other amounts on debt owed to insiders of the Company without the prior written approval of the Reserve Bank and Director;

Previously, the Company had not made any payment related to the debt owed to insiders of the Company without the written approval of the Reserve Bank and Director.

On April 22, 2015, the Company made a request to the Reserve Bank for non-objection to receive a dividend from the Bank and make pro-rata principal payments on the subordinated debentures including those debentures held by insiders of the Company. On May 27, 2015, the Company received written non-objection from the Reserve Bank to allow a $12.5 million dividend payment from the Bank to be used to make an $11.0 million principal reduction on the subordinated debentures. Included in the principal reduction on the subordinated notes were principal payments to related parties and their interests who are Noteholders of the subordinated debt. See Note 11 – “Related Parties” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the principal reduction on the subordinated debt pertaining to insiders.

(vi) the Company and its nonbank subsidiary may not incur, increase or guarantee any debt without the prior written approval of the Reserve Bank;

The Company has acknowledged the prohibition on incurring, increasing or guaranteeing any debt without the written approval of the Reserve Bank other than permitted borrowings by the Bank from the Federal Home Loan Bank (“FHLB”). The Company has not incurred, increased or guaranteed any debt since the effective date of the Agreement.

(vii) the Company may not purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank;

The Company has acknowledged the prohibition on purchasing or redeeming any shares of its stock without the written approval of the Reserve Bank. The Company has not purchased or redeemed any shares of its stock since the effective date of the Agreement.

(viii) the Company was required to submit to the Reserve Bank, by January 23, 2011, an acceptable written plan to maintain sufficient capital at the Company on a consolidated basis. Thereafter, the Company must notify the Reserve Bank within 45 days of the end of any quarter in which the Company’s capital ratios fall below the approved capital plan’s minimum ratios, and submit an acceptable written plan to increase the Company’s capital ratios above the capital plan’s minimums;

The Company has developed a Capital Plan that it believes is acceptable and maintains sufficient capital at the Company on a consolidated basis. The Company notified the Reserve Bank that the OCC issued a written determination of supervisory non-objection to the 2014-2016 Capital Plan in June 2014, and that the Bank’s Board of Directors adopted the plan in June 2014. The annual update and revision to the Capital Plan for the three-year period January 1, 2015 to December 31, 2017 was completed in conjunction with the annual budget and strategic planning initiatives and provided to the Reserve Bank in January 2015.

(ix) the Company was required to immediately take all actions necessary to ensure that: (1) each regulatory report accurately reflects the Company’s condition on the date for which it is filed and all material transactions between the Company and its subsidiaries; (2) each such report is prepared in accordance with its instructions; and (3) all records indicating how the report was prepared are maintained for supervisory review;

The Company believes that it has taken actions to ensure that all required regulatory reports are filed to accurately reflect its financial condition on the date filed, are prepared in accordance with instructions and that records detailing how the reports were filed are maintained and available for supervisory review.

(x) the Company was required to submit to the Reserve Bank, by January 23, 2011, acceptable written procedures to strengthen and maintain internal controls to ensure all required regulatory reports and notices filed with the Board of Governors are accurate and filed in accordance with the instructions for preparation;

The Company believes that it has designed effective written procedures and strengthened internal controls so that all required Board of Governors reports and notices filed are accurate, timely and in accordance with instructions. The written procedures were provided to the Reserve Bank on January 21, 2011.

(xi) the Company was required to submit to the Reserve Bank, by January 8, 2011, a cash flow projection for 2011, reflecting the Company’s planned sources and uses of cash, and submit a cash flow projection for each subsequent calendar year at least one month prior to the beginning of such year;

The Company created a cash flow projection for 2011 and submitted it to the Reserve Bank on January 7, 2011 in accordance with requirements of the Agreement. Similar cash flow projections for 2012, 2013, 2014, and 2015 were provided to the Reserve Bank within the time requirements prescribed in the Agreement.

(xii) the Company must comply with: (1) the notice provisions of Section 32 of the FDI Act and Subpart H of Regulation Y in appointing any new director or senior executive officer or changing the duties of any senior executive officer; and (2) the restrictions on indemnification and severance payments of Section 18(k) of the FDI Act and Part 359 of the FDIC’s regulations;

The Company has acknowledged the notice requirements on the appointment of any new director or senior executive officer. The Company has filed the appropriate notice for each new director or senior executive officer since the date of the Agreement.

The Company acknowledges the restriction on indemnification and severance payments under Section 18(k) of the FDI Act and Part 359 of the FDIC’s regulations. The Company has not made any such indemnification or severance payments since the effective date of the Agreement without obtaining prior regulatory non-objection and regulatory concurrence from the FDIC as required by Part 359.

(xiii) the Board must submit written progress reports within 30 days of the end of each calendar quarter.

The Company’s Board has filed each of the required written progress reports with the Reserve Bank since the Agreement was executed.

Banking regulations also limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. At June 30, 2015, the Company and the Bank are restricted from paying any dividends, without regulatory approval based on provisions contained in the Written Agreement.

The Company is 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 adverse effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices must be met. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July 2013, the Federal Reserve, the OCC and the FDIC approved the final Basel III capital framework for U.S. banking organizations (the “Regulatory Capital Rules”) implementing regulatory capital reforms and changes required by the Dodd-Frank Act.

The Regulatory Capital Rules are effective on January 1, 2014; however, the mandatory compliance date for the Company and the Bank as “standardized approach” banking organizations began on January 1, 2015 and is subject to transitional provisions extending to January 1, 2019. The Regulatory Capital Rules include new risk-based capital and leverage ratios and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank under the Regulatory Capital Rules are:

● a new common equity Tier I capital ratio of 4.50%;

● a Tier I capital ratio of 6.00% (increased from 4.00%);

● a total capital ratio of 8.00% (unchanged from current rules); and

● a Tier I capital to average assets (“Tier I leverage ratio”) of 4.00% for all institutions.

The Regulatory Capital Rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier I capital and result in the following minimum ratios effective January 1, 2019:

● a common equity Tier I capital ratio of 7.00%;

● a Tier I capital ratio of 8.50%; and

● a total capital ratio of 10.50%.

The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.50%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.

The Regulatory Capital Rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier I capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier I capital, some of which will be phased out over time.

The Regulatory Capital Rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well capitalized”:

● a new common equity Tier I risk-based capital ratio of 6.50%;

● a Tier I risk-based capital ratio of 8.00% (increased from 6.00%);

● a total risk-based capital ratio of 10.00% (unchanged from current rules); and

● a Tier I leverage ratio of 5.00%.

The Regulatory Capital Rules set forth certain changes for the calculation of risk-weighted assets, which are required to be utilized beginning January 1, 2015. The provisions applicable to banking organizations under the “standardized approach” include changes with respect to risk weights for commercial real estate loans, past due exposures and conversion factors for commitments with an original maturity of one year or less.

Current quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

The Company’s and the Bank’s actual capital positions at June 30, 2015 and December 31, 2014 are presented in the following table:

Capital Analysis

	June 30,		December 31,
(in thousands)	2015		2014
Company:
Tier I common equity	$	54,542		N/A
Tier I capital		64,542	$	59,930
Tier II capital:
Subordinated notes		9,800		25,000
Allowable portion of allowance for loan and lease losses		8,999		8,591
Total tier II capital		18,799		33,591
Total risk-based capital		83,341		93,521
Total risk-weighted assets	$	718,203	$	683,956
Total average assets (for Tier I leverage ratio)	$	972,512	$	990,346
Bank:
Tier I common equity	$	90,171		N/A
Tier I capital		90,171	$	96,816
Tier II capital:
Allowable portion of allowance for loan and lease losses		8,994		8,587
Total tier II capital		8,994		8,587
Total risk-based capital		99,165		105,403
Total risk-weighted assets	$	717,805	$	683,576
Total average assets (for Tier I leverage ratio)	$	971,944	$	990,407

The following tables present summary information regarding the Company’s and the Bank’s risk-based capital and related ratios at June 30, 2015 and December 31, 2014:

	Company				Bank				Minimum Required For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Regulations*
(dollars in thousands)	Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Ratio (%)		Ratio (%)
June 30, 2015
Total capital (to risk-weighted assets)		83,341		11.60		99,165		13.82		8.00		10.00
Tier I capital (to risk-weighted assets)		64,542		8.99		90,171		12.56		6.00		8.00
Tier I common equity (to risk-weighted assets)		54,542		7.59		90,171		12.56		4.50		6.50
Tier I capital (to average assets)		64,542		6.64		90,171		9.28		4.00		5.00

	Company				Bank				Minimum Required For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Regulations*
(dollars in thousands)	Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Ratio (%)		Ratio (%)
December 31, 2014
Total capital (to risk-weighted assets)		93,521		13.67		105,403		15.42		8.00		10.00
Tier I capital (to risk-weighted assets)		59,930		8.76		96,816		14.16		4.00		6.00
Tier I capital (to average assets)		59,930		6.05		96,816		9.78		4.00		5.00

 *Applies to the Bank only.