Note 11 - Regulatory Restrictions

9 Months Ended

Sep. 30, 2018

Banking And Thrift [Abstract]

Regulatory Restrictions

11. REGULATORY RESTRICTIONS

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was enacted into law.  Most of the changes made by the new Act can be grouped into five general areas:  mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified a systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation.  Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.  

Section 214 of the Act 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 this Note 11 and had a positive impact of approximately five basis points to the ratios.

Section 217 of the Act 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.

QNB continues to analyze the changes implemented by the Act, but does not believe that such changes will materially impact QNB’s business, operations, or financial results.

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 September 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 September 30, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	118,529		12.80	%	$	74,056		8.00	%	$	92,570		10.00	%
Bank		108,267		12.11			71,551	8.00				89,439	10.00
Tier I capital (to risk-weighted assets):
Consolidated		109,811		11.86			55,542	6.00				55,542	6.00
Bank		99,549		11.13			53,663	6.00				71,551	8.00
Common equity tier 1 capital (to risk-weighted    assets):
Consolidated		109,811		11.86		$	41,656	4.50			N/A		N/A
Bank		99,549		11.13			40,248	4.50				58,135	6.50
Tier I capital (to average assets):
Consolidated		109,811		9.23		$	47,605	4.00			N/A		N/A
Bank		99,549		8.44			47,203	4.00				59,003	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