Regulatory Matters

12 Months Ended

Dec. 31, 2019

Regulatory Matters

Regulatory Matters

Note 13: Regulatory Matters

The Company, Merchants Bank, and FMBI are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by federal and state banking regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, Merchants Bank and FMBI must meet specific capital guidelines that involve quantitative measures of the Company’s, Merchants Bank’s, and FMBI’s assets, liabilities and certain off‑balance‑sheet items as calculated under regulatory accounting practices. The Company’s, Merchants Bank’s, and FMBI’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s, Merchants Bank’s, and FMBI’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2019 and 2018, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

As of December 31, 2019, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank and FMBI as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company, Merchants Bank, or FMBI’s category.

The Company’s, Merchants Bank’s, and FMBI’s actual capital amounts and ratios are also presented in the following tables.

					Minimum Amount
					Required for				Minimum Amount
					Adequately				To Be Well
	Actual				Capitalized(1)				Capitalized(1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2019
Total capital(1) (to risk-weighted assets)
Company	$	637,472	11.6	%	$	440,063	8.0	%	$	—	N/A
Merchants Bank		639,104	12.0	%		426,748	8.0	%		533,435	10.0	%
FMBI		21,726	13.1	%		13,306	8.0	%		16,632	10.0	%
Tier 1 capital(1) (to risk-weighted assets)
Company		621,630	11.3	%		330,047	6.0	%		—	N/A
Merchants Bank		623,716	11.7	%		320,061	6.0	%		426,748	8.0	%
FMBI		21,272	12.8	%		9,979	6.0	%		13,306	8.0	%
Common Equity Tier 1 capital(1) (to risk-weighted assets)
Company		408,984	7.4	%		247,536	4.5	%		—	N/A
Merchants Bank		623,716	11.7	%		240,046	4.5	%		346,733	6.5	%
FMBI		21,272	12.8	%		7,484	4.5	%		10,811	6.5	%
Tier 1 capital(1) (to average assets)
Company		621,630	9.4	%		264,324	4.0	%		—	N/A
Merchants Bank		623,716	9.7	%		257,487	4.0	%		321,859	5.0	%
FMBI		21,272	11.7	%		7,302	4.0	%		9,128	5.0	%

(1) As defined by regulatory agencies.

					Minimum				Minimum
					Amount Required				Amount To Be
					for Adequately				Well
	Actual				Capitalized(1)				Capitalized(1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2018
Total capital(1) (to risk-weighted assets)
Company	$	393,654	12.3	%	$	255,884	8.0	%	$	—	N/A
Merchants Bank		412,386	13.3	%		248,290	8.0	%		310,363	10.0	%
FMBI		17,537	18.6	%		7,559	8.0	%		9,448	10.0	%
Tier 1 capital(1) (to risk-weighted assets)
Company		380,950	11.9	%		191,913	6.0	%		—	N/A
Merchants Bank		399,815	12.9	%		186,218	6.0	%		248,290	8.0	%
FMBI		17,404	18.4	%		5,669	6.0	%		7,559	8.0	%
Common Equity Tier 1 capital(1) (to risk-weighted assets)
Company		339,369	10.6	%		143,935	4.5	%		—	N/A
Merchants Bank		399,815	12.9	%		139,663	4.5	%		201,736	6.5	%
FMBI		17,404	18.4	%		4,252	4.5	%		6,141	6.5	%
Tier 1 capital(1) (to average assets)
Company		380,950	10.0	%		152,081	4.0	%		—	N/A
Merchants Bank		399,815	11.0	%		145,723	4.0	%		182,154	5	%
FMBI		17,404	10.8	%		6,453	4.0	%		8,066	5.0	%

(1) As defined by regulatory agencies.

Beginning January 1, 2015, the Basel III capital rules applied to Merchants Bank. The following table lists the capital categories and ratios determined by the Federal Reserve and FDIC.

					Common Equity
	Total Risk-based		Tier 1 Risk-based		Tier 1 Risk-based		Tier 1
Capital Category	Capital ratio		Capital ratio		Capital ratio		Leverage ratio
Well capitalized	10	%	8	%	6.5	%	5	%
Adequately capitalized	8		6		4.5		4
Undercapitalized	<8		<6		<4.5		<4
Significantly undercapitalized	<6		<4		<3		<3
Critically undercapitalized	Tangible Equity/Total Assets </= 2%

The Basel III capital rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (CET1), (ii) specified that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, and were phased in over a four-year period, becoming fully phased in on January 1, 2019. Additionally, under the Basel III Capital Rules, in order to avoid limitations on capital distributions of dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of capital above its minimum risk-based capital requirements. On January 1, 2019 the capital conservation buffer became fully phased in at 2.5%.

The Company’s principal source of funds for dividend payments to shareholders is dividends received from Merchants Bank and FMBI. Banking regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to Merchants Bank’s and FMBI’s retained net income (as defined) for the current year plus those for the previous two years, subject to the capital requirements described above. At December 31, 2019, the amount available, without prior regulatory approval, for dividends which could be paid by Merchants Bank and FMBI to the Company was $117.7 million.