Note 17 - Regulatory Matters

12 Months Ended

Dec. 31, 2011

Regulatory Matters [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, 2011, 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”, three 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.

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
December 31, 2011 (Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Risk-based Capital1
Consolidated	$	192,648		16.68	%	$	46,194		4.00	%		N/A		N/A
Farmers Bank & Capital Trust Company		70,101		17.58			15,954		4.00		$	23,932		6.00	%
First Citizens Bank		28,025		13.47			8,323		4.00			12,485		6.00
United Bank & Trust Company		48,744		13.51			14,437		4.00			21,656		6.00
Citizens Bank of Northern Kentucky, Inc.		21,553		12.24			7,045		4.00			10,568		6.00
Total Risk-based Capital 1
Consolidated	$	207,254		17.95	%	$	92,388		8.00	%		N/A		N/A
Farmers Bank & Capital Trust Company		75,151		18.84			31,909		8.00		$	39,886		10.00	%
First Citizens Bank		29,579		14.21			16,647		8.00			20,809		10.00
United Bank & Trust Company		53,368		14.79			28,874		8.00			36,093		10.00
Citizens Bank of Northern Kentucky, Inc.		23,764		13.49			14,091		8.00			17,614		10.00
Tier 1 Leverage Capital 2
Consolidated	$	192,648		9.99	%	$	77,162		4.00	%		N/A		N/A
Farmers Bank & Capital Trust Company		70,101		9.47			29,611		4.00		$	37,013		5.00	%
First Citizens Bank		28,025		8.93			12,550		4.00			15,688		5.00
United Bank & Trust Company		48,744		8.44			23,105		4.00			28,881		5.00
Citizens Bank of Northern Kentucky, Inc.		21,553		8.48			10,168		4.00			12,711		5.00

1 Tier 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%).

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

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
December 31, 2010 (Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Risk-based Capital1
Consolidated	$	187,237		15.35	%	$	48,794		4.00	%		N/A		N/A
Farmers Bank & Capital Trust Company		66,013		15.59			16,935		4.00		$	25,402		6.00	%
First Citizens Bank		25,969		12.76			8,143		4.00			12,214		6.00
United Bank & Trust Company		51,347		12.91			15,908		4.00			23,863		6.00
Citizens Bank of Northern Kentucky, Inc.		20,552		11.42			7,196		4.00			10,795		6.00
Total Risk-based Capital 1
Consolidated	$	202,652		16.61	%	$	97,588		8.00	%		N/A		N/A
Farmers Bank & Capital Trust Company		71,386		16.86			33,870		8.00		$	42,337		10.00	%
First Citizens Bank		27,481		13.50			16,286		8.00			20,357		10.00
United Bank & Trust Company		56,408		14.18			31,817		8.00			39,771		10.00
Citizens Bank of Northern Kentucky, Inc.		22,812		12.68			14,393		8.00			17,991		10.00
Tier 1 Leverage Capital 2
Consolidated	$	187,237		9.39	%	$	79,761		4.00	%		N/A		N/A
Farmers Bank & Capital Trust Company		66,013		8.55			30,868		4.00		$	38,586		5.00	%
First Citizens Bank		25,969		8.46			12,285		4.00			15,356		5.00
United Bank & Trust Company		51,347		8.24			24,935		4.00			31,168		5.00
Citizens Bank of Northern Kentucky, Inc.		20,552		8.04			10,227		4.00			12,784		5.00

1 Tier 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%).

2 Tier 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. At December 31, 2011, three 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 that were 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 regulatory agreement. The regulatory agreements, which are summarized below, also require three of the Company’s subsidiary banks to maintain capital ratios that exceed the regulatory established well-capitalized status.

Summary of Regulatory Agreements

Below is a summary of the regulatory agreements that the Parent Company and three of its subsidiary banks have entered into with their primary regulators. For a more complete discussion and additional information regarding these regulatory actions, please refer to the section captioned “Capital Resources” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Result of Operations” part of this Form 10-K.

Parent Company

Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (as discussed below), the Federal Reserve Bank of St. Louis (“FRB St. Louis”) and 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 KDFI.  Representatives of the FRB St. Louis and 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.

Farmers Bank.  In November of 2009, the KDFI and FRB St. Louis entered into a Memorandum with Farmers Bank.  The Memorandum requires that Farmers Bank obtain written consent prior to declaring or paying the Parent Company a cash dividend and to achieve and maintain a Tier 1 Leverage ratio of 8.0% by June 30, 2010.  The Parent Company injected from its reserves $11 million in capital into Farmers Bank subsequent to the Memorandum.

At June 30, 2010, Farmers Bank had a Tier 1 Leverage ratio of 7.98% and a Total Risk-based Capital ratio of 15.78%. Subsequent to June 30, 2010, the Parent Company injected into Farmers Bank an additional $200 thousand in capital in order to raise its Tier 1 Leverage ratio to 8.0% to comply with the Memorandum. At December 31, 2011, Farmers Bank had a Tier 1 Leverage ratio of 9.47% and a Total Risk-based Capital ratio of 18.84%.

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, developing and implementing a written profit plan and strategic plans, and evaluating policies and procedures for monitoring construction loans and use of interest reserves. 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.

United Bank.  In November of 2009, the Federal Deposit Insurance Corporation (“FDIC”) and United Bank entered into a Cease and Desist Order (“C&D”) 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% no later than March 31, 2012.   At December 31, 2011, United Bank had a Tier 1 Leverage ratio of 8.44% and a Total Risk-based Capital ratio of 14.79%. Based on current estimates, the Parent Company has adequate cash levels as of December 31, 2011 to inject additional capital into United Bank, if determined necessary, for it to meet the higher minimum Tier 1 Leverage ratio requirement at March 31, 2012. The Parent Company has injected from its reserves $12.4 million of capital into United Bank since 2009.

Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the 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 develop a written contingency plan if the bank is unable to meet the capital levels established in the Consent Order.

Citizens Northern.  The KDFI and the FDIC entered into a Memorandum with Citizens Northern on September 8, 2010.  The Memorandum requires that Citizens Northern obtain written consent prior to declaring or paying a dividend and to increase Tier 1 Leverage ratio to equal or exceed 7.5% prior to September 30, 2010 and to achieve and maintain Tier 1 Leverage ratio to equal or exceed 8.0% prior to December 31, 2010.  In December 2010, the Parent Company injected $250 thousand of capital into Citizens Northern to bring its Tier 1 Leverage ratio up to 8.04% as of year-end 2010.  At December 31, 2011, Citizens Northern had a Tier 1 Leverage ratio of 8.48% and a Total Risk-based Capital ratio of 13.49%.

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 have been met. The Company and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2011.

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.