Regulatory Capital and Regulatory Oversight

6 Months Ended

Jun. 30, 2011

Regulatory Capital and Regulatory Oversight [Abstract]

Regulatory Capital and Regulatory Oversight

(12) Regulatory Capital and Regulatory Oversight

The Bank 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, 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 regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier I or core capital and risk-based capital (as defined in the regulations) to total assets (as defined). Management believes, as of June 30, 2011, that the Bank meets all capital adequacy requirements to which it is subject.

Management believes that based upon the Bank’s capital calculations at June 30, 2011 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized.

The Bank’s tangible assets and adjusted total assets were $805.8 million and $879.5 million and its risk-weighted assets were $622.1 million and $687.7 million at June 30, 2011 and December 31, 2010, respectively. The following table presents the Bank’s capital amounts and ratios at June 30, 2011 and December 31, 2010 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations.

							Required to be
							Adequately										To Be Well Capitalized Under Prompt
	Actual						Capitalized					Excess Capital					Corrective Actions Provisions
				Percent of					Percent of					Percent of					Percent of
(Dollars in thousands)	Amount			Assets(1)			Amount		Assets(1)			Amount		Assets(1)			Amount		Assets(1)
June 30, 2011
Bank stockholder’s equity	$	67,070
Less:
Net unrealized gains on certain securities Available for sale		(1,533	)
		65,537
Tier I or core capital
Tier I capital to adjusted total assets					8.13	%	$	32,232		4.00	%	$	33,305		4.13	%	$	40,290		5.00	%
Tier I capital to risk-weighted assets					10.53	%	$	24,886		4.00	%	$	40,651		6.53	%	$	37,329		6.00	%
Plus:
Allowable allowance for loan losses		7,777
Risk-based capital	$	73,314					$	49,771				$	23,543				$	62,214
Risk-based capital to risk-weighted assets					11.78	%				8.00	%				3.78	%				10.00	%

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

							Required to be
							Adequately										To Be Well Capitalized Under Prompt
	Actual						Capitalized					Excess Capital					Corrective Actions Provisions
				Percent of					Percent of					Percent of					Percent of
(Dollars in thousands)	Amount			Assets(1)			Amount		Assets(1)			Amount		Assets(1)			Amount		Assets(1)
December 31, 2010
Bank stockholder’s equity	$	68,034
Less:
Net unrealized gains on certain securities Available for sale		(1,210	)
		66,824
Tier I or core capital
Tier I capital to adjusted total assets					7.60	%	$	35,181		4.00	%	$	31,643		3.60	%	$	43,977		5.00	%
Tier I capital to risk-weighted assets					9.72	%	$	27,507		4.00	%	$	39,317		5.72	%	$	41,261		6.00	%
Plus:
Allowable allowance for loan losses		8,596
Risk-based capital	$	75,420					$	55,014				$	20,406				$	68,768
Risk-based capital to risk-weighted assets					10.97	%				8.00	%				2.97	%				10.00	%

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

The Bank entered into a written Supervisory Agreement with its primary federal banking regulator, the Office of Thrift Supervision (OTS), effective February 22, 2011 that primarily relates to the Bank’s financial performance and credit quality issues. This agreement replaced the prior memorandum of understanding that the Bank entered into with the OTS on December 9, 2009. In accordance with the Supervisory Agreement, the Bank submitted a two year business plan that the OTS may make comments upon, and require revisions to. The Bank must operate within the parameters of the final business plan and is required to monitor and submit periodic reports on its compliance with the plan. The Bank also submitted a problem asset reduction plan that the OTS may make comments upon, and require revisions to. The Bank must operate within the parameters of the final problem asset plan and is required to monitor and submit periodic reports on its compliance with the plan. The Bank has also revised its loan modification policies and its program for identifying, monitoring and controlling risk associated with concentrations of credit, and improved the documentation relating to the allowance for loan and lease losses as required by the agreement. In addition, without the consent of the OCC (as successor to the OTS), the Bank may not declare or pay any cash dividends, materially increase the total assets of the Bank, enter into any new contractual arrangement or renew or extend any existing arrangement related to compensation or benefits with any directors or officer, make any golden parachute payments, or enter into any significant contracts with a third party service provider.

The Company also entered into a written Supervisory Agreement with the OTS effective February 22, 2011. This agreement replaced the prior memorandum of understanding that the Company entered into with the OTS on December 9, 2009. In accordance with the Supervisory Agreement, the Company submitted a capital plan to the OTS through December 31, 2012 that the OTS may make comments upon, and to which it may require revisions. The Company must operate within the parameters of the final capital plan and is required to monitor and submit periodic reports on its compliance with the plan. In addition, without the consent of the OTS, the Company may not incur or issue any debt, guarantee the debt of any entity, declare or pay any cash dividends or repurchase any of the Company’s capital stock, enter into any new contractual arrangement or renew or extend any existing arrangement related to compensation or benefits with any directors or officer, or make any golden parachute payments.

The OTS proposed to the Bank as its Individual Minimum Capital Requirement (IMCR) a tier 1 capital to adjusted total assets requirement of 8.5% commencing September 30, 2011, which is in excess of the Bank’s tier 1 capital to adjusted total assets ratio at June 30, 2011. An IMCR requires a bank to establish and maintain levels of capital greater than those required for banks generally to be classified as “well-capitalized.” The Bank has submitted proposed modifications to the proposed IMCR and had discussions with the OTS (predecessor to the OCC, the Bank’s current primary banking regulator) related to the timing for implementation of the proposed IMCR. However, at the time of filing of this Quarterly Report on Form 10-Q, no IMCR has been imposed on the Bank.

References to the OTS shall mean, with respect to the Company, beginning July 21, 2011, the Federal Reserve Board (FRB) and mean, with respect to the Bank, beginning July 21, 2011, the Office of the Comptroller of the Currency (OCC). On July 21, 2011 the OTS was integrated into the OCC and the primary banking regulator for the Company became the FRB. It is not anticipated that the change in primary regulators as a result of the OTS being abolished will have any significant impact on the Company, the Bank, or our shareholders.