Note 16 - Regulatory and Operational Matters

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

Note 16. Regulatory and Operational Matters

In

November 2018,

the Bank entered into a formal written agreement (the “Agreement”) with the Office of the Comptroller of the Currency (the “OCC”).  Under the terms of the Agreement, the Bank has appointed a Compliance Committee of

three

independent outside directors and

one

member of management responsible for monitoring adherence to the Agreement and has appointed a Lead Independent Director.

The Agreement stated that by

December 31, 2018

the Board and Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model. Under the Agreement the Bank also agreed to provide a revised written

3

-year strategic and capital plan for the Bank by

December 31, 2018. 

To date, the Bank has addressed each of the items in accordance with the agreement and continues to respond to any further enhancements requested by the OCC. Further details pertaining to the Agreement are provided in Part II Item

9B:

Other information.

Federal and state regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective

January 1, 2015,

federal banking agencies imposed

four

minimum capital requirements on a community bank’s risk-based capital ratios consisting of Total Capital, Tier

1

Capital, Common Equity Tier

1

(

“CET1”

) Capital, and a Tier

1

Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.

Capital adequacy is

one

of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least

10%,

a Tier

1

Capital ratio of at least

8.0%,

a

CET1

Capital ratio at least

6.5%,

and a Tier

1

Leverage Capital ratio of at least

5.0%.

However, regardless of a financial institution’s ratios, the OCC

may

require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.

Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.

The Company’s and the Bank’s regulatory capital amounts and ratios at

December 

31,

 

2018

and

2017

are summarized as follows:

(In thousands)	Patriot National Bancorp, Inc.								Patriot Bank, N.A.
	December 31, 2018				December 31, 2017				December 31, 2018				December 31, 2017
	Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)
Total Capital (to risk weighted assets):
Actual		89,993		10.377		74,264		10.092		99,204		11.491		83,711		11.406
To be Well Capitalized (1)		-		-		-		-		86,335		10.000		73,393		10.000
For capital adequacy with Capital Buffer (2)		-		-		-		-		85,255		9.875		67,889		9.250
For capital adequacy		69,379		8.000		58,868		8.000		69,068		8.000		58,715		8.000
Tier 1 Capital (to risk weighted assets):
Actual		72,373		8.345		67,959		9.235		91,583		10.608		77,407		10.547
To be Well Capitalized (1)		-		-		-		-		69,068		8.000		58,715		8.000
For capital adequacy with Capital Buffer (2)		-		-		-		-		67,988		7.875		53,210		7.250
For capital adequacy		52,034		6.000		44,151		6.000		51,801		6.000		44,036		6.000
Common Equity Tier 1 Capital (to risk weighted assets):
Actual		64,373		7.423		59,959		8.148		91,583		10.608		77,407		10.547
To be Well Capitalized (1)		-		-		-		-		56,117		6.500		47,706		6.500
For capital adequacy with Capital Buffer (2)		-		-		-		-		55,038		6.375		42,201		5.750
For capital adequacy		39,026		4.500		33,113		4.500		38,851		4.500		33,027		4.500
Tier 1 Leverage Capital (to average assets):
Actual		72,373		7.764		67,959		8.219		91,583		9.823		77,407		9.360
To be Well Capitalized (1)		-		-		-		-		46,617		5.000		41,351		5.000
For capital adequacy		37,288		4.000		33,072		4.000		37,294		4.000		33,081		4.000

( 1 )	Designation as "Well Capitalized" does not apply to bank holding companies - the Company. Such categorization of capital adequacy only applies to insured depository institutions - the Bank.
( 2 )	The Capital Conservation Buffer implemented by the FDIC began to be phased in beginning January 1, 2016. It was not applicable to periods prior to that date and does not apply to bank holding companies - the Company.

Under the final capital rules that became effective on

January 1, 2015,

there was a requirement for a

CET1

capital conservation buffer of

2.5%

of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do

not

maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that

may

be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer requirement is being phased in over

three

years beginning in

2016.

The

1.25%

capital conversation buffer for

2017

has been included in the minimum capital adequacy ratios in the

2017

column in the table above. The capital conversation buffer increased to

1.875%

for

2018,

which has been included in the minimum capital adequacy ratios in the

2018

column above.

The capital buffer requirement effectively raises the minimum required Total Capital ratio to

10.5%,

the Tier

1

capital ratio to

8.5%

and the

CET1

capital ratio to

7.0%

on a fully phased-in basis, which will be effective beginning on

January 

1,

 

2019.

Management believes that, as of

December 

31,

 

2018,

Patriot satisfies all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.