Regulatory Matters

9 Months Ended

Sep. 30, 2012

Regulatory Matters [Abstract]

Regulatory Matters

(10) Regulatory Matters

On October 25, 2010, the Bank, following discussion with the Office of the Comptroller of the Currency (the “OCC”) entered into an agreement with the OCC (the “Agreement”). The Agreement requires the Bank to take certain actions, and set forth below are the requirements of the OCC Agreement along with a description of the actions taken by the Bank to date to satisfy the requirements. References to “Article” are to those sections of the Agreement setting forth the specific requirements for the issue being addressed.

1. Create a Compliance Committee which is to meet at least monthly to monitor and coordinate the Bank’s adherence to the provisions of the Agreement and make monthly reports to the Board of Directors.

The Bank has created a Compliance Committee consisting of members of the Board of Directors and of management which meets at least monthly to monitor and coordinate the Bank’s adherence to the provisions of the Agreement. The Compliance Committee makes monthly reports to the Board.

2. Ensure the Bank has competent management in certain officer positions to carry out the Board’s policies, ensure compliance with the Agreement, applicable laws, rules and regulations and manage the daily operations of the Bank.

Upon receipt of the Agreement, the Board of Directors engaged qualified independent consultants to assist with compliance with the Agreement, including an assessment of key management roles. The Board has evaluated management and subsequently several strategic hires were made to ensure competent management. (See staffing plan discussed in number 3 below.)

3. Develop a staffing plan that is consistent with the goals and objectives established in the Bank’s strategic plan that addresses the workload requirements and maintenance of an effective control environment.

A comprehensive staffing plan was established following receipt of the Agreement. Since that time, the Bank has hired qualified management to fill certain key positions and has made other staffing and organization changes to effectively manage the operations of the Bank consistent with the Bank’s strategic plan. Steps taken by the Bank include:

• Hired a new, qualified, and highly-experienced President and Chief Executive Officer effective December 31, 2011.

• Hired a new, qualified, and highly-experienced Chief Lending Officer during the second quarter of 2011. During the first quarter of 2012, the Chief Lending Officer was promoted into the newly created position of Chief Credit Officer.

• Hired a new, qualified, highly-experienced Chief Lending Officer during the first quarter of 2012.

• During the first quarter of 2012, hired a qualified and highly-experienced Chief Financial Officer with sufficient knowledge of U.S. GAAP, regulatory accounting and the banking industry and the skills to implement this knowledge.

• Improved credit function by hiring a new loan administrator, additional underwriting staff and a loan workout specialist.

• During the first quarter of 2012, hired a qualified and highly-experienced Comptroller with sufficient knowledge of U.S. GAAP, regulatory accounting and the banking industry and the skills to implement this knowledge.

• During the third quarter of 2012, created and filled the position of Financial Reporting Manager with experience in regulatory and SEC reporting.

• Created and filled the position of Treasurer to further relieve the Chief Financial Officer of day-to-day duties in asset liability management, investment portfolio management, and additional treasury functions.

• During the second quarter of 2012, hired a qualified and highly experienced General Counsel and Corporate Secretary with prior experience as general counsel of publicly held financial institutions.

• Appointed a Vice Chairman of the Board of Directors, who was subsequently named Chairman in May 2012, to provide daily oversight of management on behalf of the full Board and to communicate back to the Board.

• Outsourced the internal audit function to a qualified risk management firm to provide greater independence and depth to the function.

All key executive and senior management positions necessary to carry out the Board’s policies and to ensure compliance with the Agreement, applicable laws, rules and regulations and manage the daily operations of the Bank have been filled.

4. Adopt, implement, and thereafter ensure adherence to a three year written strategic plan.

A three year strategic plan incorporating all required elements of this Article, including monitoring of adherence to the strategic plan, has been approved and adopted by the Board of Directors.

5. Develop, implement, and thereafter ensure adherence to a three year capital program.

A three year capital program incorporating all required elements of this Article, including monitoring of adherence to the capital program, has been approved and adopted by the Board of Directors.

6. Adopt, implement, and thereafter ensure adherence to an independent internal audit program.

Management has outsourced the internal audit function to a qualified risk management firm to provide greater independence and depth to the function. The Bank’s internal auditors meet regularly with the Audit Committee of the Board of Directors. The Audit Committee monitors internal audit activities, the results of audits and the tracking of action plans for corrective actions of findings.

7. Implement and adhere to a written program for the maintenance of an adequate Allowance for Loan Losses.

Management has made substantial progress in developing and implementing a written program for the maintenance of an adequate Allowance for Loan Losses (“ALLL”). The Bank has devoted substantial management resources to this area. An ALLL Committee has been established that meets quarterly to discuss and review the Bank’s computed ALLL, which is then presented to the Board of Directors. Technology solutions are being explored to provide more robust measuring and reporting tools. The program being developed is consistent with OCC guidelines and current US GAAP standards and incorporates all elements required by the Agreement.

8. Develop, implement and thereafter ensure adherence to a written program to ensure compliance with the appraisal and evaluation requirements for loans and other real estate owned.

The Bank has developed and implemented a written program to ensure compliance with the appraisal and evaluation requirements for loans and other real estate owned.

9. Develop, implement and thereafter ensure adherence to a written program to improve credit risk management processes and practices to reduce the high level of credit risk in the Bank.

The Bank has made substantial progress in developing and implementing a written program to improve its credit risk management process and practices to reduce the high level of credit risk in the Bank. The program being developed is consistent with OCC guidelines and incorporates all elements required by the Agreement. Steps taken by the Bank include:

• Reorganized the credit department to ensure appropriate separation of duties and developed expanded training for lenders.

• Hired a senior credit officer to run a newly created separate loan review and workout department.

• Changed the Bank’s credit policy to require identification of concentrations of risk, analysis of our customer’s global cash flows, reappraisal and re-evaluation of collateral, more accurate and timely credit-risk rating procedures and improved underwriting processes and standards.

• Incorporated the results of a systematic re-appraisal of commercial real estate which secures loans in excess of $1 million.

• Engaged qualified outside consultants to assist in re-evaluating risk ratings.

• Improved the processes for identifying loans and the determination of the amount of impairment.

• Augmented the Bank’s credit policy to govern loan workout.

• Implemented a new procedure to ensure that OREO was accounted for in accordance with U.S. GAAP.

10. Adopt, implement and thereafter ensure adherence to a written asset diversification program.

The Bank has adopted and implemented a written asset diversification program which is reviewed quarterly by management and the Board of Directors.

11. Develop, implement and thereafter ensure adherence to a written program of policies and procedures, staffing and training to provide for compliance with the Bank Secrecy Act.

The Bank has developed and implemented a written program of policies and procedures, staffing and training to provide for compliance with the Bank Secrecy Act.

12. Review and revise the contingency funding plan.

The Bank has reviewed and revised its contingency funding plan.

13. Adopt, implement and thereafter ensure adequate management reports that enable the Board and management to monitor the Bank’s liquidity position on a monthly basis.

The Bank has adopted and implemented adequate management reports that enable the Board of Directors and management to monitor the Bank’s liquidity position on a monthly basis.

14. Develop, implement and thereafter ensure adherence to a comprehensive, written information security program to ensure the safety and soundness of its operations to support the Bank’s efforts to safeguard customer information.

The Bank has developed and implemented a comprehensive, written information security program to ensure the safety and soundness of its operations to support the Bank’s efforts to safeguard customer information.

Management and the Board of Directors are committed to taking all necessary actions to promptly address the requirements of the Agreement, and believe that the Bank has already made measurable progress in addressing these requirements.

The Bank is subject to individual minimum capital ratios (“IMCR’s”) established by the OCC requiring Tier 1 leverage capital equal to at least 8.00% of adjusted total assets; Tier 1 risk-based capital equal to at least 10.50% of risk-weighted assets; and total risk-based capital equal to at least 12.00% of risk-weighted assets. Management believes the Bank met all three IMCR’s at September 30, 2012: Tier 1 capital was 9.65% of adjusted total assets, Tier 1 risk-based capital was 16.85% of risk-weighted assets, and total risk-based capital was 18.11% of risk-weighted assets. 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 Bank’s financial statements.

The Company’s Tier 1 leverage ratio was 9.74% at September 30, 2012. The Company’s Tier 1 risk-based and total risk-based capital ratios were 16.90% and 18.17%, respectively, at September 30, 2012.

The ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock of which the Bank has none as of September 30, 2012. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the Bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements. In addition, under the Agreement the Bank is required to establish a dividend policy that will permit the declaration of a dividend only when the Bank is in compliance with its capital program and with the prior written determination of no supervisory objection by the OCC.

While subject to the Agreement, the Company expects that its and the Bank’s management and Board of directors will be required to focus a substantial amount of time on complying with its terms. There is no guarantee that the Bank will be able to fully comply with the Agreement. If the Bank fails to comply with the terms of the Agreement, it could be subject to further regulatory enforcement actions.

See also Note 13 of the Company’s December 31, 2011 Form 10-K for a complete description of the Agreement with the OCC.