Note 11 - Regulatory Restrictions

6 Months Ended

Jun. 30, 2018

Banking And Thrift [Abstract]

Regulatory Restrictions

11. REGULATORY RESTRICTIONS

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was enacted into law, which provides certain modifications to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which will provide regulatory relief for smaller and certain regional banking organizations.  In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements.  In addition to the sections that reduce the regulator burden on the Bank, the following sections of EGRRCPA will impact or potentially impact QNB’s financial statements:  

• Section 201 requires the Federal banking agencies to promulgate a rule establishing a new “Community Bank Leverage Ratio” of 8%-10% for depository institutions and depository institution holding companies, including banks and bank holding companies, with less than $10 billion in total consolidated assets.  If such a depository institution or holding company maintains tangible equity in excess of this leverage ratio, it would be deemed to be in compliance with (1) the leverage and risk-based capital requirements promulgated by the Federal banking agencies; (2) in the case of a depository institution, the capital ratio requirements to be considered “well capitalized” under the Federal banking agencies’ “prompt corrective action” regime; and (3) “any other capital or leverage requirements” to which the depository institution or holding company is subject, in each case unless the appropriate Federal banking agency determines otherwise based on the particular institution’s risk profile.  In carrying out these requirements, the Federal banking agencies are required to consult with State banking regulators and notify the applicable State banking regulator of any qualifying community bank that exceeds or no longer exceeds the Community Bank Leverage Ratio.

• Section 214 statutorily prescribes that the Federal banking agencies may only require depository institutions to apply a heightened risk-weight to exposures that are “high volatility commercial real estate” (HVCRE) if the exposures meet the definition of a HVCRE Acquisition, Development or Construction (ADC) loan as set forth in that section.  The new definition applies to a narrower scope of exposures.  The new definition of HVCRE ADC loan excludes loans made prior to January 1, 2015, amends the loan-to-value/capital contribution exemption, specifies the loan must primarily finance the property, has the purpose of providing financing to acquire, develop or improve such real property in income-producing property and is dependent upon future income or sales proceeds or refinancing of such property to repay the loan.  Once the property sufficiently produces cash-flows to support the debt service and expenses in accordance with the bank’s underwriting criteria for permanent financing, the loan meets the exemption as a HVCRE ADC loan.  The new definition is applicable for QNB’s reporting of its Regulatory Capital Ratios in Note 11 and had a positive impact of approximately five basis points to the ratios.  

• Section 217 requires a reduction of the Federal Reserve Bank’s combined surplus fund from $7.5 billion to $6.825 billion.  This surplus fund was decreased earlier this year from $10 billion to $7.5 billion as part of the Bipartisan Budget Act of 2018.  This will impact the calculation of QNB’s Deposit Insurance.

Dividends payable by the Company and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Federal and Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including QNB Corp., unless such loans are collateralized by specific obligations.

Both the Company and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items.

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of June 30, 2018, that the Company and the Bank met capital adequacy requirements to which they were subject.

As of the most recent notification, the primary regulator of the Bank considered it to be “well capitalized” under the regulatory framework. There are no conditions or events since that notification that management believes have changed the classification. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios as set forth in the following table below.

The Company and the Bank’s actual capital amounts and ratios are presented as follows:

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of June 30, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	115,662		12.70	%	$	72,861		8.00	%	$	91,077		10.00	%
Bank		106,129		12.03			70,572	8.00				88,215	10.00
Tier I capital (to risk-weighted assets):
Consolidated		107,397		11.79			54,646	6.00				54,646	6.00
Bank		97,864		11.09			52,929	6.00				70,572	8.00
Common equity tier 1 capital (to risk-weighted    assets):
Consolidated		107,397		11.79			40,985	4.50			N/A		N/A
Bank		97,864		11.09			39,697	4.50				57,339	6.50
Tier I capital (to average assets):
Consolidated		107,397		9.20			46,655	4.00			N/A		N/A
Bank		97,864		8.46			46,262	4.00				57,827	5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	110,352		12.52	%	$	70,520		8.00	%	$	88,150		10.00	%
Bank		101,040		11.67			69,277	8.00				86,596	10.00
Tier I capital (to risk-weighted assets):
Consolidated		102,438		11.62			52,890	6.00				52,890	6.00
Bank		93,126		10.75			51,957	6.00				69,277	8.00
Common equity tier 1 capital (to risk-weighted    assets):
Consolidated		102,438		11.62			39,668	4.50			N/A		N/A
Bank		93,126		10.75			38,968	4.50				56,287	6.50
Tier I capital (to average assets):
Consolidated		102,438		8.88			46,149	4.00			N/A		N/A
Bank		93,126		8.14			45,761	4.00				57,201	5.00