Note 18 - Regulatory Matters

12 Months Ended

Dec. 31, 2014

Disclosure Text Block [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

18. 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, 2014, 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.

In July 2013, U.S. banking regulators adopted final rules related to standards on bank capital adequacy and liquidity (commonly referred to “Basel III”). The new rules are effective for the Company beginning on January 1, 2015, subject to a phase-in period for certain provisions extending through January 1, 2019. The new rules include a new common equity Tier 1 capital ratio, an increase to the minimum Tier 1 capital ratio, an increase to risk-weightings of certain assets, implementation of a new capital conservation buffer in excess of the required minimum, and changes to how regulatory capital is defined. The Company has completed a pro forma analysis which indicates that it meets the minimum capital ratios and a fully phased-in capital conservation buffer under the new rules.

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

											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Provisions
December 31, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Risk-based Capital1
Consolidated	$	215,090		19.75	%	$	43,569		4.00	%	N/A		N/A
Farmers Bank		65,744		17.71			14,852		4.00		$	22,278		6.00	%
United Bank2		57,691		18.00			12,820		4.00			19,230		6.00
First Citizens		29,703		13.66			8,700		4.00			13,049		6.00
Citizens Northern2		24,575		14.46			6,798		4.00			10,197		6.00
Total Risk-based Capital1
Consolidated	$	228,710		21.00	%	$	87,137		8.00	%	N/A		N/A
Farmers Bank		69,418		18.70			29,704		8.00		$	37,130		10.00	%
United Bank2		61,728		19.26			25,640		8.00			32,050		10.00
First Citizens		31,094		14.30			17,399		8.00			21,749		10.00
Citizens Northern2		26,703		15.71			13,596		8.00			16,995		10.00
Tier 1 Leverage Capital3
Consolidated	$	215,090		12.04	%	$	71,461		4.00	%	N/A		N/A
Farmers Bank		65,744		9.40			27,965		4.00		$	34,956		5.00	%
United Bank2		57,691		11.08			20,829		4.00			26,037		5.00
First Citizens		29,703		9.44			12,587		4.00			15,734		5.00
Citizens Northern2		24,575		10.11			9,723		4.00			12,153		5.00

											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					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 Capital1
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 Capital3
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

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, 2014, 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.

Summary of Regulatory Agreements

Below is a summary of the regulatory agreements that two of the Company’s subsidiary banks have entered into with their primary regulators. The agreement entered into during 2009 between the Parent Company and its primary regulator was terminated in March 2014 as a result of satisfactory compliance, most notably from the progress made in lowering nonperforming assets and increasing capital levels.

United Bank  

In November of 2009, the FDIC and the Kentucky Department of Financial Institutions (“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%. 

During January 2014, the formal Consent Order entered into during 2011 with United Bank was terminated and replaced with a stepped-down enforcement action in the form of an informal Memorandum of Understanding (“Memorandum”). The informal Memorandum includes many of the same provisions covered by the Consent Order.

Other components in the regulatory order include oversight and reporting obligations to its regulators in terms of complying with the Memorandum. It also includes requirements 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 Memorandum.

The Company received written notification in March 2015 that the FDIC and KDFI, as a result of their recent examination, terminated the Memorandum that was entered into with United Bank effective immediately. In connection with the termination of the Memorandum, the Board of Directors of United Bank agreed to adopt a resolution which includes many of the same provisions as the Memorandum, including the requirement to seek approval from the FDIC and KDFI prior to the payment of dividends. However, the requirement for maintaining a minimum Tier 1 Leverage ratio of 9.0% and a Total Risk-based Capital ratio of 13.0% no longer applies.

Citizens Northern  

The FDIC and KDFI entered into a Memorandum with Citizens Northern on September 8, 2010.  The Memorandum was terminated July 7, 2013 and replaced with 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 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. 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 each of its subsidiary banks are in compliance with the requirements identified in their regulatory agreements as of December 31, 2014.

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.