Note 17 - Regulatory Matters

12 Months Ended

Dec. 31, 2013

Disclosure Text Block [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

17. Regulatory Matters

The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements will initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the banks must meet specific capital guidelines that involve quantitative measures of the banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary banks’ 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 its subsidiary banks to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). As of December 31, 2013, the most recent notification from the FDIC categorized the banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the banks must maintain minimum Tier 1 Risk-based, Total Risk-based, and Tier 1 Leverage ratios as set forth in the tables. There are no conditions or events since that notification that management believes have changed the institutions’ category. As noted below under the caption “Summary of Regulatory Agreements,” two of the Company’s subsidiary banks are required to maintain certain capital ratios that exceed the regulatory established well-capitalized status.

The regulatory capital amounts and ratios of the consolidated Company and its subsidiary banks are presented in the following tables for the dates indicated.

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
December 31, 2013	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Risk-based Capital1
Consolidated	$	216,162		18.95	%	$	45,623		4.00	%	N/A		N/A
Farmers Bank		67,409		17.56			15,351		4.00		$	23,026		6.00	%
United Bank2		51,336		15.06			13,634		4.00			20,450		6.00
First Citizens		28,814		12.92			8,917		4.00			13,376		6.00
Citizens Northern2		24,455		13.57			7,208		4.00			10,812		6.00
Total Risk-based Capital 1
Consolidated	$	230,497		20.21	%	$	91,245		8.00	%	N/A		N/A
Farmers Bank		72,231		18.82			30,702		8.00		$	38,377		10.00	%
United Bank2		55,664		16.33			27,267		8.00			34,084		10.00
First Citizens		30,485		13.67			17,835		8.00			22,294		10.00
Citizens Northern2		26,708		14.82			14,415		8.00			18,019		10.00
Tier 1 Leverage Capital 3
Consolidated	$	216,162		11.90	%	$	72,677		4.00	%	N/A		N/A
Farmers Bank		67,409		9.60			28,077		4.00		$	35,096		5.00	%
United Bank2		51,336		9.67			21,233		4.00			26,542		5.00
First Citizens		28,814		9.03			12,768		4.00			15,960		5.00
Citizens Northern2		24,455		9.67			10,113		4.00			12,641		5.00
December 31, 2012
Tier 1 Risk-based Capital1
Consolidated	$	206,470		18.27	%	$	45,215		4.00	%	N/A		N/A
Farmers Bank2		69,582		17.94			15,515		4.00		$	23,273		6.00	%
United Bank2		51,695		15.41			13,420		4.00			20,130		6.00
First Citizens		29,017		13.57			8,552		4.00			12,828		6.00
Citizens Northern2		23,553		12.97			7,264		4.00			10,896		6.00
Total Risk-based Capital 1
Consolidated	$	220,741		19.53	%	$	90,431		8.00	%	N/A		N/A
Farmers Bank2		74,475		19.20			31,030		8.00		$	38,788		10.00	%
United Bank2		55,980		16.69			26,839		8.00			33,549		10.00
First Citizens		30,908		14.46			17,104		8.00			21,380		10.00
Citizens Northern2		25,826		14.22			14,528		8.00			18,159		10.00
Tier 1 Leverage Capital 3
Consolidated	$	206,470		11.24	%	$	73,479		4.00	%	N/A		N/A
Farmers Bank2		69,582		9.68			28,768		4.00		$	35,960		5.00	%
United Bank2		51,695		9.45			21,878		4.00			27,347		5.00
First Citizens		29,017		9.42			12,327		4.00			15,409		5.00
Citizens Northern2		23,553		9.36			10,063		4.00			12,579		5.00

¹Tier 1 Risk-based and Total Risk-based Capital ratios are computed by dividing a bank’s Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation. The safest assets (e.g., government obligations) are assigned a weighting of 0% with riskier assets receiving higher ratings (e.g., ordinary commercial loans are assigned a weighting of 100%).

²See discussion below under the caption “Summary of Regulatory Agreements” for minimum capital ratios required as part of the bank’s regulatory agreement.

³Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.

Payment of dividends by the Company’s subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. Generally, capital distributions are limited to undistributed net income for the current and prior two years, subject to the capital requirements as summarized above. Furthermore, at December 31, 2013, two of the Company’s subsidiary banks are required to obtain regulatory approval before declaring or paying a dividend to the Parent Company as a result of agreements entered into with their primary regulator. The payment of dividends by the Parent Company to its shareholders is also subject to approval as a result of its regulatory agreement.

Summary of Regulatory Agreements

Below is a summary of the regulatory agreements that the Parent Company and two of its subsidiary banks have entered into with their primary regulators. The agreement entered into during 2009 between Farmers Bank and its primary regulator was terminated in January 2013 as a result of satisfactory compliance.

Parent Company

Primarily due to regulatory actions during 2009 at certain of the Company’s subsidiary banks (further discussed below), the Federal Reserve Bank of St. Louis (“FRB St. Louis”) and the Kentucky Department of Financial Institutions (“KDFI”) proposed the Company enter into a Memorandum of Understanding (“Memorandum”). The Company’s board approved entry into the Memorandum at a regular board meeting during the fourth quarter of 2009. Pursuant to the Memorandum, the Company agreed that it would develop an acceptable capital plan to ensure that the consolidated organization remains well-capitalized and each of its subsidiary banks meet the capital requirements imposed by their regulator as summarized below.

The Company also agreed to reduce its common stock dividend in the fourth quarter of 2009 from $.25 per share down to $.10 per share and not make interest payments on the Company’s trust preferred securities or dividends on its common or preferred stock without prior approval from FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the KDFI have indicated that any such approval for the payment of dividends will be predicated on a demonstration of adequate, normalized earnings on the part of the Company’s subsidiaries sufficient to support quarterly payments on the Company’s trust preferred securities and quarterly dividends on the Company’s common and preferred stock.  While both regulatory agencies have granted approval of all subsequent quarterly Company requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009.  Moreover, the Company will not pay any such dividends on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted. 

Other components in the regulatory order for the parent company include requesting and receiving regulatory approval for the payment of new salaries/bonuses or other compensation to insiders; assisting its subsidiary banks in addressing weaknesses identified in their reports of examinations; providing periodic reports detailing how it will meet its debt service obligations; and providing progress reports with its compliance with the regulatory Memorandum.

United Bank  

In November of 2009, the FDIC and the KDFI entered into a Cease and Desist Order (“C&D”) with United Bank primarily as a result of its level of nonperforming assets.  The C&D was terminated in December 2011 coincident with the issuance of a Consent Order (“Consent Order”) entered into between the parties. The Consent Order is substantially the same as the C&D, with the primary exception being that United Bank must achieve and maintain a Tier 1 Leverage ratio of 9.0% and a Total Risk-based Capital ratio of 13.0% no later than March 31, 2012. 

Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the Consent Order. It also includes an increase in the level of reporting by management to its board of directors of its financial results, budgeting, and liquidity analysis, as well as restricting the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination. There is also a requirement to obtain written consent prior to declaring or paying a dividend and to develop a written contingency plan if the bank is unable to meet the capital levels established in the Consent Order.

During January 2014, the Company received written notification from the FDIC and KDFI that the formal Consent Order entered into during 2011 with United Bank had been terminated and replaced with a stepped-down enforcement action in 

the form of an informal Memorandum. The informal Memorandum includes substantially the same provisions covered by the Consent Order.

Citizens Northern  

The FDIC and the KDFI entered into a Memorandum with Citizens Northern in September 2010.  The Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum contains many of the same provisions included in the terminated Memorandum, with a new requirement that Citizens Northern maintain a Tier 1 leverage ratio at or above 9.0%. In addition, the updated Memorandum requires having and retaining qualified management in the areas of loan administration and collection. It also requires Citizens Northern to address credit underwriting and administration weaknesses identified in the most recent examination of the bank by the FDIC and the KDFI.

Other parts of the regulatory order include the development and documentation of plans for reducing problem loans, providing progress reports on compliance with the Memorandum, and for the development and implementation of a written profit plan and strategic plans. It also restricts the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination.

Regulators continue to monitor the Company’s progress and compliance with the regulatory agreements through periodic on-site examinations, regular communications, and quarterly data analysis. At the Parent Company and at each of its bank subsidiaries, the Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements has been met. The Company believes that it and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2013.

The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries as determined by management or if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.