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Note 12 - Regulatory and Operational Matters

6 Months Ended

Jun. 30, 2021

Regulatory Capital Requirements under Banking Regulations [Text Block]

Note 12.

Regulatory and Operational Matters

In November 2018, the Bank entered into a formal written agreement (the “Agreement”) with the OCC. Pursuant to 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 states that the Board of the 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 agreed to provide a revised written 3-year strategic and capital plan for the Bank. The Bank provided the documents and policies requested in the Agreement. To date, the Bank has addressed each of the items identified in the Agreement and is currently working collaboratively with the OCC to bring all matters to full resolution. Further details pertaining to the Agreement were provided in Part II Item 9B: Other information included on the Annual Report on Form 10-K for the year ended December 31, 2018.

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.

In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The Bank did not adopt the CBLR framework at June 30, 2021 but retains the option to adopt the framework in a future period.

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 9.0%. 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 June 30, 2021 and December 31, 2020 are summarized as follows:

(In thousands)	Patriot National Bancorp, Inc.								Patriot Bank, N.A.
	June 30, 2021				December 31, 2020				June 30, 2021				December 31, 2020
	Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)
Total Capital (to risk weighted assets):
Actual	$	88,877		11.904	$	87,428		11.132	$	99,831		13.285	$	97,608		12.510
To be Well Capitalized⁽¹⁾		-		-		-		-		75,148		10.000		78,026		10.000
For capital adequacy with Capital Buffer⁽²⁾		-		-		-		-		78,905		10.500		81,927		10.500
For capital adequacy		59,727		8.000		62,827		8.000		60,118		8.000		62,421		8.000

Tier 1 Capital (to risk weighted assets):
Actual		69,532		9.313		67,602		8.608		90,426		12.033		87,844		11.258
To be Well Capitalized⁽¹⁾		-		-		-		-		60,118		8.000		62,421		8.000
For capital adequacy with Capital Buffer⁽²⁾		-		-		-		-		63,876		8.500		66,322		8.500
For capital adequacy		44,796		6.000		47,120		6.000		45,089		6.000		46,815		6.000

Common Equity Tier 1 Capital (to risk weighted assets):
Actual		61,532		8.242		59,602		7.589		90,426		12.033		87,844		11.258
To be Well Capitalized⁽¹⁾		-		-		-		-		48,846		6.500		50,717		6.500
For capital adequacy with Capital Buffer⁽²⁾		-		-		-		-		52,603		7.000		54,618		7.000
For capital adequacy		33,597		4.500		35,340		4.500		33,816		4.500		35,112		4.500

Tier 1 Leverage Capital (to average assets):
Actual		69,532		7.766		67,602		7.539		90,426		10.099		87,844		9.794
To be Well Capitalized⁽¹⁾		-		-		-		-		80,589		9.000		80,721		9.000
For capital adequacy		35,814		4.000		35,868		4.000		35,817		4.000		35,876		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 conversation buffer of 2.5% has been included in the minimum capital adequacy ratios in the 2021 and 2020 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 was effective on January 1, 2019. As of June 30, 2021, Patriot satisfies all regulatory capital adequacy requirements on a fully phased-in basis.

On January 22, 2019, based on its supervisory profile, the Bank was notified by the OCC that it established individual minimum capital ratios for the Bank. Specifically, the Bank is required to maintain a Tier 1 leverage ratio of 9.0% and a total risk-based capital to risk-weighted assets of 11.0%.

At June 30, 2021, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of 10.1% of adjusted total assets of $90.4 million, which is above the well-capitalized required level of 9.0%; and total risk-based capital of $99.8 million, or 13.3% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk weighted assets. At December 31, 2020, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $87.8 million, or 9.8% of adjusted total assets, which is above the well-capitalized required level of 9.0%; total risk-based capital of $97.6 million, or 12.5% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk-weighted assets. Accordingly, the Bank was categorized as well capitalized as of June 30, 2021 and December 31, 2020. Management is not aware of any conditions or events since the most recent notification that would change the Bank’s category.

- Definition

The entire disclosure for regulatory capital requirement for depository and lending institutions. Institutions include, but not are not limited to, finance company, insured depository institution, bank holding company, savings and loan association holding company, bank and savings institution not federally insured, mortgage company, foreign financial institution and credit union.

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