REGULATORY MATTERS

3 Months Ended

Mar. 31, 2013

REGULATORY MATTERS

REGULATORY MATTERS

NOTE 16 - REGULATORY MATTERS

Regulatory Actions

As reported in the Form 8-K filed on March 22, 2011, the Company entered into a written agreement (the “FRB Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) on March 18, 2011.   The FRB Agreement is designed to enhance the Company’s ability to act as a source of strength to the Bank. The Bank’s lending and deposit operations continue to be conducted in the usual and customary manner, and all other products, services and hours of operation remain the same.  All Bank deposits will remain insured by the FDIC to the maximum extent allowed by law.

In addition to the foregoing, on June 1, 2010, the Federal Deposit Insurance Corporation (the “FDIC”) and the South Carolina State Board of Financial Institutions (the “State Board”) conducted their annual joint examination of the Bank.  As a result of the examination, the Bank entered into a Consent Order, effective December 28, 2010 (the “Consent Order”), with the FDIC and the State Board. Based on information included in the FDIC’s report, the Bank’s credit risk rating at the FHLB has been negatively impacted, resulting in reduced borrowing capacity.  This action also restricts the Bank’s ability to accept, renew, or roll over brokered deposits.  In addition, the Bank’s ability to borrow funds from the Federal Reserve Bank Discount Window as a source of short-term liquidity is not guaranteed.  The Federal Reserve Discount Window borrowing capacity has been curtailed to only overnight terms, contingent upon credit approval for each transaction.

The Consent Order requires the Bank to, among other things, take the following actions: establish a board committee to monitor and coordinate compliance with the Consent Order; ensure that the Bank has competent management in place; develop an independent assessment of the Bank’s management and staffing needs; achieve Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets within 150 days and establish a capital plan that includes a contingency plan to sell or merge the Bank; implement a plan addressing liquidity, contingency funding, and asset liability management; implement a program designed to reduce the Bank’s exposure in problem assets; develop a three year strategic plan; adopt an effective internal loan review and grading system; adopt a plan to reduce concentrations of credit; implement a policy to ensure the adequacy of the Bank’s allowance for loan and lease losses; implement a written plan to improve and sustain the Bank’s earnings; revise, adopt and implement a written asset/liability management policy to provide effective guidance and control over the Bank’s funds management activities; develop a written policy for managing interest rate risk; not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval; not accept, renew, or rollover any brokered deposits unless it is in compliance with regulatory requirements and adopt a plan to eliminate reliance on brokered deposits; limit asset growth to 10% per year; adopt an employee compensation plan after undertaking an independent review of compensation paid to all the Bank’s senior executive officers; and address various violations of law and regulation cited by the FDIC.

The Company intends to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order.  There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the FDIC and the State Board.  Failure to meet the requirements of the Consent Order could result in additional regulatory requirements, which could ultimately lead to the Bank being taken into receivership by the FDIC.  As of March 31, 2013, the Bank is not in compliance with the provisions outlined in the Consent Order.

Regulatory Capital Requirements

The Company and Bank are 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 adverse material effect on the Company’s or Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company’s and 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 Company and Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets.  Tier 2 capital consists of the allowance for loan losses subject to certain limitations.  Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.  The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Company and Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio.  Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios 1% to 2% above the minimum.

To be considered “well-capitalized,” generally a bank must maintain a Leverage Capital ratio of at least 5%, Tier 1 Capital of at least 6%, and Total Risk-Based Capital of at least 10%.  The Consent Order, however, includes a requirement that the Bank achieves and maintain minimum capital requirements that exceed the minimum regulatory capital ratios for “well capitalized” banks.

The following table summarizes the capital amounts and ratios of the Company and the regulatory minimum requirements at March 31, 2013 and December 31, 2012:

	Actual				For Capital Adequacy Purposes				To Be Well- Capitalized Under Prompt Corrective Action Provisions
Tidelands Bancshares, Inc.	Amount		Ratio		Amount		Ratio		Amount	Ratio
March 31, 2013
Total capital (to risk-weighted assets)	$	25,254,000	6.68	%	$	30,240,480	8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	12,627,000		3.34	%	15,120,240		4.00	%	N/A	N/A
Tier 1 capital (to average assets)	12,627,000		2.43	%	20,797,400		4.00	%	N/A	N/A
December 31, 2012
Total capital (to risk-weighted assets)	$	27,170,000	6.96	%	$	31,240,880	8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	13,585,000		3.48	%	15,620,440		4.00	%	N/A	N/A
Tier 1 capital (to average assets)	13,585,000		2.57	%	21,112,440		4.00	%	N/A	N/A

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at March 31, 2013 and December 31, 2012:

	Actual				For Capital Adequacy Purposes				To Be Well- Capitalized Under Prompt Corrective Action Provisions
Tidelands Bank	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2013
Total capital (to risk-weighted assets)	$	30,984,000	8.20	%	$	30,214,140	8.00	%	$	37,767,670	10.00	%
Tier 1 capital (to risk-weighted assets)	26,238,000		6.95	%	15,107,070		4.00	%	22,660,600		6.00	%
Tier 1 capital (to average assets)	26,238,000		5.06	%	20,732,360		4.00	%	25,915,450		5.00	%
December 31, 2012
Total capital (to risk-weighted assets)	$	31,460,000	8.06	%	$	31,214,400	8.00	%	$	39,018,010	10.00	%
Tier 1 capital (to risk-weighted assets)	26,559,000		6.81	%	15,607,200		4.00	%	23,410,800		6.00	%
Tier 1 capital (to average assets)	26,559,000		5.05	%	21,052,720		4.00	%	26,315,900		5.00	%

To be considered “well-capitalized” per the requirements of the Consent Order, the Bank must maintain a minimum amount of $37,767,670 in total capital in order to maintain a Total Risk-Based Capital of 10%. In addition, the Bank would need to maintain $41,464,720 of Tier 1 capital in order to achieve a minimum Leverage Capital ratio of 8%. As of March 31, 2013, the Bank was deemed “adequately capitalized.” As such, the Bank was not considered in compliance with the capital requirements of the Consent Order.