Note 10 - Regulatory Matters

3 Months Ended

Mar. 31, 2015

Disclosure Text Block [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

10. 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, 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.

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 were effective for the Company beginning on January 1, 2015, subject to a phase-in period for certain provisions extending through January 1, 2019. The 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 (which is set to be phased in beginning in 2016), and changes to how regulatory capital is defined. The Company and each of its bank subsidiaries meet the minimum capital ratios and a fully phased-in capital conservation buffer under the new rules.

The regulatory ratios of the consolidated Company and its subsidiary banks were as follows for the dates indicated.

	March 31, 2015												December 31, 2014
	Common Equity Tier 1 Risk-based Capital1			Tier 1 Risk-based Capital1			Total Risk-based Capital1			Tier 1 Leverage2			Common Equity Tier 1 Risk-based Capital1	Tier 1 Risk-based Capital1			Total Risk-based Capital1			Tier 1 Leverage2
Consolidated		14.48	%		19.62	%		20.75	%		12.12	%	N/A		19.75	%		21.00	%		12.04	%
Farmers Bank		17.33			17.33			18.25			9.48		N/A		17.71			18.70			9.40
United Bank		19.04			19.04			20.29			11.92		N/A		18.00			19.26			11.08
First Citizens		14.61			14.61			15.24			10.09		N/A		13.66			14.30			9.44
Citizens Northern		14.14			14.14			15.39			9.72		N/A		14.46			15.71			10.11

¹Common Equity Tier 1 Risked-based, Tier 1 Risk-based, and Total Risk-based Capital ratios are computed by dividing a bank’s Common Equity Tier 1, 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%).

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

N/A – Not applicable.

On May 5, 2015, the Company announced that it received approval from its banking regulators to repurchase the final 10,000 shares of its remaining outstanding Series A preferred stock. The Company will redeem the preferred shares at the stated liquidation value of $1,000 per share, plus any accrued dividends. The timing of the repurchase is expected to occur during the second quarter of 2015. The total redemption amount will be $10.0 million, plus accrued dividends at 9.0% per share.

The Company originally issued 30,000 shares of its Series A preferred stock in 2009. The current action will be the third and final partial redemption of the original shares issued. No additional debt or equity was issued in connection with the previous redemptions. Likewise, none will be issued in connection with the current redemption.

Summary of Regulatory Agreements

The Company has one subsidiary bank, Citizens Northern, which is currently under an agreement with its primary banking regulators. This agreement is summarized below.

Citizens Northern  

The Federal Deposit Insurance Corporation (“FDIC”) and Kentucky Department of Financial Institutions (“KDFI”) entered into a Memorandum of Understanding (“Memorandum”) with Citizens Northern in September 2010.  The Memorandum was terminated and updated in July 2013. 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 agreement through periodic on-site examinations, regular communications, and quarterly data analysis. The Company believes it is adequately addressing all issues of the regulatory agreement. However, only the regulatory agencies can determine if compliance with the agreement has been met. The Company believes that Citizens Northern is in compliance with the requirements identified in its regulatory agreement as of March 31, 2015.

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.