Note 13 - Regulatory Matters
 12 Months Ended
Dec. 31, 2016
Notes to Financial Statements  
Regulatory Capital Requirements under Banking Regulations [Text Block]
NOTE
13
– REGULATORY MATTERS
 
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
 
The Bank’s mortgage banking division qualifies as a HUD-approved Title II Supervised Mortgagee and issues mortgages insured by the US Department of Housing and Urban Development (“HUD”). A Title II supervised mortgagee must maintain an adjusted net worth equal to a minimum of
$1
million, plus
1%
of FHA originations in excess of
$25
million, up to a maximum of
$2.5
million. Possible penalties related to noncompliance with this minimum net worth requirement include the revocation of the Bank’s license to issue HUD-insured mortgages, which
may
have a material adverse affect on the Company’s financial condition and results of operations. For the years ended
December
31,
2016
and
2015,
the Bank satisfied the requirement of maintaining
$1
million in adjusted net worth.
 
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios of different components of capital to risk-weighted assets and average assets. The Company’s capital position is reflected in its shareholders’ equity, subject to certain adjustments for regulatory purposes. In particular, deferred tax assets that are dependent on future taxable income do not qualify for inclusion as core capital based on the capital guidelines of the primary federal supervisory agencies for the Bank and the Company. Under these guidelines, the disallowed portion of deferred tax assets at
December
31,
2016
was
$3.1
million for the Company and
$3.1
million for the Bank and at
December
31,
2015
was
$4.2
million for the Company and
$4.2
million for the Bank.
 
Risk-based capital regulations adopted by the Federal Reserve Board and the FDIC require bank holding companies and banks to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure different components of capital in relation to the credit risk of both on- and off-balance sheet items.
 
The required minimum ratios are as follows:
 
 
●
common equity Tier
1
capital ratio (common equity Tier
1
capital to standardized total risk-weighted assets) of
4.5%;
 
●
Tier
1
capital ratio (Tier
1
capital to standardized total risk-weighted assets) of
6%;
 
●
total capital ratio (total capital to standardized total risk-weighted assets) of
8%;
and
 
●
leverage ratio (Tier
1
capital to average total consolidated assets) of
4%.
 
In addition, under the new capital guidelines all covered banking organizations must maintain a new capital conservation buffer of common equity Tier
1
capital in an amount greater than
2.5%
of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The capital conservation buffer requirement is being phased in annually beginning
January
1,
2016
at the
0.625%
level, increasing by that same amount on each subsequent
January
1
until it reaches
2.5%
on
January
1,
2019.
When fully phased in, the capital conservation buffer effectively will result in a required minimum common equity Tier
1
capital ratio of at least
7.0%,
Tier
1
capital ratio of at least
8.5%
and total capital ratio of at least
10.5%.
Failure to satisfy the capital buffer requirements will result in increasingly stringent limitations on various types of capital distributions, including dividends, share buybacks and discretionary payments on Tier
1
instruments, and discretionary bonus payments.
 
 
The final regulatory capital rules also incorporate these changes in regulatory capital into the prompt corrective action framework, under which the thresholds for “adequately capitalized” banking organizations are equal to the new minimum capital requirements. Under this framework, in order to be considered “well capitalized”, insured depository institutions are required to maintain a Tier
1
leverage ratio of
5%,
a common equity Tier
1
risk-based capital measure of
6.5%,
a Tier
1
risked-based capital ratio of
8%
and a total risk-based capital ratio of
10%.
Prompt corrective action provisions are not applicable to bank holding companies.
 
At both
December
31,
2016
and
2015,
both the Company and the Bank were in compliance with the required capital ratios, and the Bank was “well capitalized”. As permitted for regulated institutions that are not designated as ”advanced approach” banking organizations (those with assets greater than
$250
billion or with foreign exposures greater than
$10
billion), the Company made a
one
-time, permanent election to opt out of the requirement to include most components of accumulated other comprehensive income in regulatory capital.
Actual and required capital levels at
December
31,
2016
and
2015
are presented below:
 
 
 
Capital Ratios at December 31, 2016
 
 
 
Actual
 
 
Minimum Basel III
Requirement
 
 
Minimum Basel III Fully
Phased In Requirements
 
 
Well Capitalized
Requirement
 
(Dollars in thousands)
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
The Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
   $
351,007
     
13.44
 %   $
208,926
     
8.00
 %   $
274,215
     
10.50
 %   $
261,158
     
10.00
 %
Tier 1 capital (to risk-weighted assets)
    
338,882
     
12.98
 %    
156,695
     
6.00
 %    
221,984
     
8.50
 %    
208,926
     
8.00
 %
Common equity Tier 1 capital (to risk-weighted assets)
    
338,882
     
12.98
 %    
117,521
     
4.50
 %    
182,810
     
7.00
 %    
169,752
     
6.50
 %
Tier 1 capital (to average assets)
    
338,882
     
10.77
 %    
125,918
     
4.00
 %    
125,918
     
4.00
 %    
157,397
     
5.00
 %
Risk Weighted Assets
    
2,611,576
     
 
      
 
      
 
      
 
      
 
      
 
      
 
  
Average Assets for Tier 1
    
3,147,940
     
 
      
 
      
 
      
 
      
 
      
 
      
 
  
                                                                 
The Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
   $
326,168
     
12.48
 %   $
208,873
     
8.00
 %   $
274,145
     
10.50
 %    
N/A
      
N/A
  
Tier 1 capital (to risk-weighted assets)
    
314,043
     
12.02
 %    
156,654
     
6.00
 %    
221,927
     
8.50
 %    
N/A
      
N/A
  
Common equity Tier 1 capital (to risk-weighted assets)
    
288,594
     
11.04
 %    
117,491
     
4.50
 %    
182,764
     
7.00
 %    
N/A
      
N/A
  
Tier 1 capital (to average assets)
    
314,043
     
9.92
 %    
125,877
     
4.00
 %    
125,877
     
4.00
 %    
N/A
      
N/A
  
Risk Weighted Assets
    
2,613,003
      
 
      
 
      
 
      
 
      
 
      
 
      
 
  
Average Assets for Tier 1
    
3,165,665
      
 
      
 
      
 
      
 
      
 
      
 
      
 
  
 
 
 
Capital Ratios at December 31, 2015
 
 
 
Actual
 
 
Minimum Basel III
Requirement
 
 
Minimum Basel III Fully
Phased In Requirements
 
 
Well Capitalized
Requirement
 
(Dollars in thousands)
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
The Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
   $
268,354
     
13.86
 %   $
154,840
     
8.00
 %   $
203,228
     
10.50
 %   $
193,550
     
10.00
 %
Tier 1 capital (to risk-weighted assets)
    
259,290
     
13.40
 %    
116,130
     
6.00
 %    
164,518
     
8.50
 %    
154,840
     
8.00
 %
Common equity Tier 1 capital (to risk-weighted assets)
    
259,290
     
13.40
 %    
87,098
     
4.50
 %    
135,485
     
7.00
 %    
125,808
     
6.50
 %
Tier 1 capital (to average assets)
    
259,290
     
10.66
 %    
97,255
     
4.00
 %    
97,255
     
4.00
 %    
121,568
     
5.00
 %
Risk Weighted Assets
    
1,935,503
     
 
      
 
      
 
      
 
      
 
      
 
      
 
  
Average Assets for Tier 1
    
2,431,369
     
 
      
 
      
 
      
 
      
 
      
 
      
 
  
                                                                 
The Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
   $
277,669
     
14.30
 %   $
155,334
     
8.00
 %   $
203,877
     
10.50
 %    
N/A
      
N/A
  
Tier 1 capital (to risk-weighted assets)
    
268,605
     
13.83
 %    
116,501
     
6.00
 %    
165,043
     
8.50
 %    
N/A
      
N/A
  
Common equity Tier 1 capital (to risk-weighted assets)
    
251,807
     
12.97
 %    
87,376
     
4.50
 %    
135,918
     
7.00
 %    
N/A
      
N/A
  
Tier 1 capital (to average assets)
    
268,605
     
11.00
 %    
97,672
     
4.00
 %    
97,672
     
4.00
 %    
N/A
      
N/A
  
Risk Weighted Assets
    
1,941,681
     
 
      
 
      
 
      
 
      
 
      
 
      
 
  
Average Assets for Tier 1
    
2,441,811
     
 
      
 
      
 
      
 
      
 
      
 
      
 
  
 
Federal regulations require institutions to set aside specified amounts of cash as reserves against transaction and time deposits. At
December
31,
2016
and
2015,
the required cash reserves were satisfied by vault cash on hand and amounts due from correspondent banks.
 
 
On
October
29,
2014,
the Company announced a common stock repurchase program for up to
2.2
million shares, which expired on
November
1,
2016.
On
October
26,
2016,
the Company’s board of directors approved a new share repurchase program for up to
2.65
million shares, effective
November
1,
2016.
This new share repurchase program, which replaces the program that expired, is effective through
November
1,
2018
and permits the Company to effect the repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and other derivative transactions. During
2016,
the Company repurchased
725,249
shares of Common Stock at an average price of
$9.00
per share and during
2015,
the Company repurchased
201,651
shares of Common Stock at an average price of
$6.69
per share, in each case in open market transactions under the repurchase programs.
 
The Company must obtain Federal Reserve Board approval prior to repurchasing its Common Stock in excess of
10%
of its net worth during any
twelve
-month period unless the Company (i) both before and after is "well capitalized"; (ii) is “well managed”; and (iii) is not the subject of any unresolved supervisory issues. Although the payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, neither the NC Commissioner nor the Federal Reserve Board have promulgated any regulations specifically limiting the right of the Company to pay dividends or repurchase shares. However, the ability of the Company to pay dividends or repurchase shares
may
be dependent upon the Company's receipt of dividends from the Bank.
 
Under the laws of the State of North Carolina, provided the Bank does not make distributions that reduce its capital below its applicable required capital, the board of directors of the Bank
may
declare such distributions out of undivided profits as the directors deem proper.
As noted above, the Bank would also be prohibited from declaring any dividend the payment of which would result in the Bank becoming undercapitalized. Finally, an undercapitalized institution is generally prohibited from paying dividends to its shareholders.
 
As part of Citizens South’s Plan of Conversion and Reorganization in
May
2002,
it established a memo liquidation account in an amount equal to its equity at the time of the conversion of approximately
$44
million for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at Citizens South Bank after the conversion. In accordance with the memo liquidation account, in the event of a complete liquidation of Citizens South Bank, each eligible account holder and supplemental eligible account holder would be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. In connection with the Citizens South merger and the subsequent merger of Citizens South Bank into the Bank, the Bank assumed this memo liquidation account. This liquidation account is reviewed and adjusted annually. The value of the liquidation account was
$4.2
million at
December
31,
2016
and
$6.6
million at
December
31,
2015.