Note 11 - Regulatory Matters

3 Months Ended

Mar. 31, 2012

Regulatory Capital Requirements under Banking Regulations [Text Block]

NOTE 11 – REGULATORY MATTERS

The Corporation and its subsidiary 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 material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of each entity’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s and its subsidiary bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Furthermore, the Corporation and subsidiary bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average adjusted assets. As of March 31, 2012 and December 31, 2011, the subsidiary bank and the Corporation were classified as significantly under-capitalized for all three ratios.

The most recent notifications, at March 31, 2012 from the federal banking agencies categorized the subsidiary bank as under-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Corporation and the subsidiary bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table that follows, at December 31, 2011.

The Corporation’s and the subsidiary bank’s actual capital amounts and ratios as of March 31, 2012 and December 31, 2011 are as follows:

	Actual						Minimum Capital Requirement					Minimum To Be Well- Capitalized Under Prompt Corrective Action Provisions
	Amount			Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2012:
Total Capital (to risk-weighted assets):
inPrinceton National Bancorp, Inc.	$	(1,438	)		(0.23	)%	$	50,284		8.00	%	$	75,426		12.00	%
CiCitizens First National Bank		32,180			5.12	%		50,270		8.00	%		75,406		12.00	%
Tier 1 Capital (to risk-weighted assets):
PrPrinceton National Bancorp, Inc.	$	(1,438	)		(0.23	)%	$	25,142		4.00	%		N/A		N/A
CiCitizens First National Bank		24,055			3.83	%		25,135		4.00	%		N/A		N/A
Tier 1 Capital (to average adjusted assets):
Princeton National Bancorp, Inc.	$	(1,438	)		(0.14	)%	$	40,470		4.00	%	$	80,940		8.00	%
CiCitizens First National Bank		24,055			2.38	%		40,476		4.00	%		80,952		8.00	%

	Actual						Minimum Capital Requirement					Minimum To Be Well- Capitalized Under Prompt Corrective Action Provisions
	Amount			Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2011:
Total Capital (to risk-weighted assets):
PrPrinceton National Bancorp, Inc.	$	(3,418	)		(0.38	)%	$	55,204		8.00	%	$	81,306		12.00	%
CiCitizens First National Bank		31,554			4.60	%		54,892		8.00	%		82,339		12.00	%
Tier 1 Capital (to risk-weighted assets):
PrPrinceton National Bancorp, Inc.	$	(3,418	)		(0.38	)%	$	27,102		4.00	%	$	N/A		N/A	%
CiCitizens First National Bank		22,707			3.31	%		27,446		4.00	%		N/A		N/A	%
Tier 1 Capital (to average adjusted assets):
PrPrinceton National Bancorp, Inc.	$	(3,418	)		(0.24	)%	$	42,365		4.00	%	$	84,729		8.00	%
CiCitizens First National Bank		22,707			2.14	%		42,354		4.00	%		84,718		8.00	%

On March 15, 2010 the subsidiary bank entered into a Written Agreement with the OCC.  The Agreement sets forth the subsidiary bank’s commitments to: (i) review and take action as necessary regarding its allowance for loan and lease losses; (ii) improve the subsidiary bank’s asset quality through the development of workout plans for criticized assets and the assessment of credit risk; and (iii) revise the subsidiary bank’s credit risk rating management information system.  The subsidiary bank has taken steps to address the issues raised in the Agreement and intends to fully comply with the requirements set forth in the Agreement.

Pursuant to the Agreement, the subsidiary bank’s Board of Director’s has reviewed on a monthly basis the adequacy of the subsidiary bank’s allowance for loan losses and established a program for the maintenance of an adequate allowance.  The subsidiary bank also took immediate action to protect its interest in criticized assets and to adopt individual written workout plans with respect to such assets.  A copy of the workout plans is provided to the OCC on a quarterly basis for any criticized asset equal to or exceeding $100,000. Under the Agreement, the board ensures that the subsidiary bank’s internal ratings of loan relationships are timely, accurate and consistent with the regulatory credit classification criteria established by the OCC.

The subsidiary bank’s risk management staff reports independently to the Directors’ Loan Committee.  The Directors’ Loan Committee reports further to the subsidiary bank’s Board of Directors.  Management furnishes its reports and additional documentation to these committees on a regular basis.  The coverage of independent loan review processes, which are monitored by the risk management department, have been expanded significantly.  The Directors’ Loan Committee has directed risk management to refine its loan review grading methodology to ensure that loans with a probability of payment default or well-defined weaknesses are graded substandard regardless of mitigating controls which might reduce the credit risk.  The Directors’ Loan Committee monitors this process through bi-monthly meetings and reviews loan review reports to ensure compliance with the terms of the Agreement.

In the fourth quarter of 2010, the subsidiary bank filled a newly created role of Chief Credit Officer and established a credit administration division and a special assets group.  The primary responsibility of the credit administration division is to oversee the development, maintenance, and monitoring of loan policies and procedures. Other responsibilities include credit analysis, credit risk management, loan servicing and administration and collections, as well as loan portfolio analysis and the allowance for loan losses.  The functions of the special assets group include loss mitigation and workout of non-performing loans, liquidation of non-performing assets and other responsibilities to accelerate and maximize loan recoveries.  As part of establishing the new credit administration division, the subsidiary bank’s Chief Credit Officer identified and engaged experienced personnel to fill key roles within credit administration in continuing to address the subsidiary bank’s commitments relative to the Agreement.

On September 20, 2011, the subsidiary bank entered into a Stipulation and Consent to the Issuance of a Consent Order (the “Consent Order”) with the OCC.  Pursuant to the Consent Order, the subsidiary bank has agreed to take certain actions and operate in compliance with the Consent Order’s provisions during its term.

Under the terms of the Consent Order, the subsidiary bank is required to, among other things: (i) adopt and adhere to a three-year written strategic plan that establishes objectives for the subsidiary bank’s overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in non-performing assets and its product development; (ii) adopt and maintain a capital plan; (iii) by December 19, 2011, achieve and thereafter maintain a Tier 1 capital ratio of at least 8% and a total risk-based capital ratio of at least 12%; (iv) seek approval of the OCC prior to paying dividends on its capital stock; (v) develop a program to reduce the subsidiary bank’s credit risk; (vi) take certain actions related to credit and collateral exceptions; (vii) reaffirm the subsidiary bank’s liquidity risk management program; and (viii) appoint a compliance committee of the Board of Directors to help ensure the subsidiary bank’s compliance with the Consent Order.  The subsidiary bank is also required to submit certain regular reports with respect to the foregoing requirements.

On October 27, 2011, the Corporation entered into a Written Agreement with the Federal Reserve Bank.  Pursuant to the Written Agreement, the Corporation has agreed to take certain actions and operate in compliance with the Written Agreement’s provisions during its term.

Under the terms of the Written Agreement, the Corporation is required to, among other things: (i) serve as a source of strength to the subsidiary bank, including taking steps to ensure  that the subsidiary bank complies with the Consent Order it entered into with the OCC on September 20, 2011, and any other supervisory action taken by the subsidiary bank’s federal regulator; (ii) refrain from declaring or paying any dividend, or taking dividends or other payments representing a reduction in the subsidiary bank’s capital, each without the prior written consent of the FRB and the Director of the Division of Banking Supervision and Regulation (the “Director”) of the Board of Governors of the Federal Reserve System; (iii) refrain from making any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior approval of the FRB and the Director; (iv) refrain from incurring, increasing, or guaranteeing any debt, and from purchasing or redeeming any shares of its capital stock, each without the prior approval of the FRB; (v) provide the FRB with a written plan to maintain sufficient capital at the Corporation on a consolidated basis; (vi) provide the FRB with a projection of the Corporation’s planned sources and uses of cash; (vii) comply with certain regulatory notice provisions pertaining to the appointment of any new director or senior executive officer, or the changing of responsibilities of any senior executive officer; and (viii) comply with certain regulatory restrictions on indemnification and severance payments.  The Corporation is also required to submit certain reports to the FRB with respect to the foregoing requirements.

The Consent Order replaced the previously disclosed formal written agreement entered into by the subsidiary bank with the OCC on March 15, 2010.  The formal written agreement had  set forth the subsidiary bank’s commitment to; (i) review and take action as necessary regarding its allowance for loan losses; (ii) improve the subsidiary bank’s asset quality through the development of workout plans for criticized assets and the assessment of credit risk; and (iii) revise the subsidiary bank’s credit risk rating management information system.

On December 19, 2011, the subsidiary bank submitted to the OCC a three year strategic plan and capital plan designed to strengthen the Corporation and its subsidiary bank’s operations and capital position going forward.  The plans reflected the current challenges with respect to the capital and difficulties in projecting the impact of economic weakness in the Corporation’s markets on its loan portfolio, as well as strategies to maintain the financial strength of the Corporation and its subsidiary bank.  A significant part of the plans was the initiative by the Corporation to sell branch locations of the subsidiary bank in order to generate profits to improve capital ratios of the subsidiary bank.

On March 29, 2012, the subsidiary bank’s Board of Directors received a Prompt Corrective Action (“PCA”) Notice under 12 U.S.C. 1831o and 12 C.F.R. Part 6 due to its amended Call Report filed with the OCC on March 22, 2012 reflecting capital ratios in the Significantly Undercapitalized PCA capital category.  This Notice places the Bank under certain mandatory PCA restrictions regarding the payment of capital distributions and management fees, as well as restrictions on asset growth, on certain expansion activities, including acquisitions, new branches, and new lines of business, and on payment of bonuses and compensation to senior executive officers.  These mandatory requirements also include a requirement that the Bank submit an acceptable Capital Restoration Plan (“CRP”) to the OCC, addressing the steps the Bank will take to become adequately capitalized, the levels of capital to be attained during each quarter of each year of the CRP, the types and level of activities in which the Bank will engage; and how management will comply with the restrictions against asset growth, and acquisition, branching and new lines of business.

On April 18, 2012, the Corporation received written notice (the “Listing Notice”) from the Listing Qualifications Staff (the “Staff”) of the NASDAQ stock market that the Corporation is no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the NASDAQ Global Market.  NASDAQ Global Market Listing Rule 5450(b)(1)(A) requires registrants to maintain a minimum of $10,000,000 in stockholders’ equity.  As disclosed in the Corporation’s fiscal year 2011 annual report on Form 10-K, filed on April 12. 2012, the Corporation’s stockholders’ equity as of December 31, 2011  did not meet this requirement.

The Listing Notice does not result in the immediate delisting of the Corporation’s common stock from the NASDAQ Global Market.  Rather, in accordance with the NASDAQ Listing Rules, the Corporation has 45 calendar days from the date of the Listing Notice to submit to the Staff a plan to regain compliance with this continued listing requirement.  If the Corporation submits a plan, the Staff will decide whether to accept such plan considering criteria such as the likelihood that the plan will result in compliance, the Corporation’s past compliance history, the reasons for the Corporation’s current non-compliance, other corporate events that may occur within the review period, the Corporation’s overall financial condition, and the Corporation’s public disclosures.  If the plan is accepted, the Staff may grant an extension of up to 180 calendar days from the date of the Listing Notice for the Corporation to provide evidence of compliance.

If the Staff does not accept the Corporation’s plan, or the Corporation elects not to submit a plan, the Corporation may apply to transfer the listing of its common stock to the NASDAQ Capital Market if it satisfies all of the criteria for initial listing on the NASDAQ Capital Market.  If the Corporation does not transfer its common stock to the NASDAQ Capital Market, the Staff will notify the Corporation that its common stock is subject to delisting.  At that time, the Corporation may appeal the Staff’s delisting determination to a NASDAQ Hearings Panel.

The Corporation is reviewing its options to regain compliance with the NASDAQ Listing Rules, but no decision has been reached at this time.

On May 7, 2012, the subsidiary bank submitted to the OCC the CRP required under the PCA Notice received in March 2012 reflecting the strategies to achieve compliance with the requirements of the notice, including plans regarding the sale of branches and the sale of stock to improve capital ratios of the subsidiary bank.