NOTE 9 — REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements, which are now administered by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by banking regulators that, if undertaken, could have a direct material effect on the Company’s consolidated 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.

Prompt corrective action regulations provide five classifications: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Federal regulations require savings institutions to maintain certain minimum levels of regulatory capital. An institution that fails to comply with its regulatory capital requirements must obtain approval of a capital plan and can be subject to a capital directive and certain restrictions on its operations. At September 30, 2012, the adjusted total minimum regulatory capital regulations require institutions to have a minimum tangible capital to adjusted total assets ratio of 1.5%; a minimum leverage ratio of core (Tier 1) capital to adjusted total assets of 4.0%; a minimum ratio of core (Tier 1) capital to risk-weighted assets of 4.0%; and a minimum ratio of total capital to risk-weighted assets of 8.0%. At September 30, 2012 and 2011, respectively, the Bank exceeded all of the aforementioned regulatory capital requirements. For more information, please see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

On October 19, 2009, the Company and the Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the Office of Thrift Supervision (the “OTS”), whereby the Company and the Bank each consented to the issuance of an Order to Cease and Desist (the “Company Order” and the “Bank Order”) without admitting or denying that grounds existed for the OTS to initiate an administrative proceeding against the Company or the Bank. Effective July 21, 2011, the OCC and the Federal Reserve Board succeeded to all powers, authorities, rights, and duties of the OTS relating to the enforcement of the Bank and Company Orders, respectively, as a result of the regulatory transition under the Dodd-Frank Wall Street Reform and Consumer Protection. On August 27, 2012, the Bank was released from the Bank Order.

The Company Order requires the Company to take several actions, including, but not limited to: (i) submit a capital plan that includes, among other things, (1) the establishment of a minimum tangible capital ratio of tangible equity capital to total tangible assets commensurate with the Company’s consolidated risk profile, and (2) specific plans to reduce the risks to the Company from its current debt levels and debt servicing requirements; (ii) not declare, make or pay any cash dividends or other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase or redeem Company equity stock without the prior non-objection of the OTS, except that this provision does not apply to immaterial capital stock redemptions that arise in the normal course of the Company’s business in connection with its stock-based compensation plans; and (iii) not incur, issue, renew, roll over or increase any debt or commit to do so without the prior non-objection of the OTS (debt includes loans, bonds, cumulative preferred stock, hybrid capital instruments such as subordinated debt or trust preferred securities, and guarantees of debt).

The Company Order also imposes certain on-going reporting obligations and additional restrictions on severance and indemnification payments, changes in directors and management, employment agreements and compensation arrangements that the Company may enter into, third-party service contracts and transactions with affiliates.

At September 30, 2012, the Company believes it is in compliance with all requirements of the Order that are required to date. The Company Order will remain in effect until terminated, modified, or suspended in writing.

Regulations limit capital distributions by savings institutions. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At September 30, 2012, the Bank was not allowed to make any capital distributions without regulatory approval.

At September 30, 2012, the Bank was in compliance with regulatory capital requirements as set forth below (dollars in thousands):


											To Be Well
						Required					Capitalized Under					Required Under
						For Capital					Prompt Corrective					Regulatory
	Actual					Adequacy Purposes					Action Regulations					Bank Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2012
Total Capital to risk weighted assets	$	79,587		13.34	%	$	47,765		8.00	%	$	59,706		10.00	%		N/A		N/A
Tier 1 (Core) Capital to risk weighted assets		72,017		12.06	%		23,882		4.00	%		35,824		6.00	%		N/A		N/A
Tier 1 (Core) Capital to adjusted total assets		72,017		9.16	%		31,454		4.00	%		39,318		5.00	%		N/A		N/A
Tangible Capital to adjusted total assets		72,017		9.16	%		11,795		1.50	%		N/A		N/A			N/A		N/A

At June 30, 2012, the Bank was in compliance with regulatory capital requirements as set forth below (dollars in thousands):


											To Be Well
						Required					Capitalized Under					Required Under
						For Capital					Prompt Corrective					Regulatory
	Actual					Adequacy Purposes					Action Regulations					Bank Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2012
Total Capital to risk weighted assets	$	77,932		13.10	%	$	47,605		8.00	%	$	59,506		10.00	%	$	71,407		12.00	%
Tier 1 (Core) Capital to risk weighted assets		70,387		11.83	%		23,802		4.00	%		35,704		6.00	%		N/A		N/A
Tier 1 (Core) Capital to adjusted total assets		70,387		8.74	%		32,224		4.00	%		40,280		5.00	%		64,448		8.00	%
Tangible Capital to adjusted total assets		70,387		8.74	%		12,084		1.50	%		N/A		N/A			N/A		N/A