Regulatory Capital and Dividends

12 Months Ended

Dec. 31, 2019

Banking and Thrift [Abstract]

Regulatory Capital and Dividends

REGULATORY CAPITAL AND DIVIDENDS

Regulatory Capital

Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios.

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the

regulations. Banks with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

Basel III was effective for the Corporation on January 1, 2015. Basel III requires the Corporation and the Bank to maintain a minimum ratio of CET1 capital to risk weighted assets, as defined in the regulation. Under the Basel III rules, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a capital conservation buffer above the adequately capitalized CET1 capital to risk-weighted assets ratio. The capital conservation buffer was phased in from zero percent in 2015 to the fully-implemented 2.50 percent in 2019. Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital.

As of December 31, 2019, the Bank met all capital adequacy requirements to be considered well capitalized. There is no threshold for well capitalized status for bank holding companies. The Corporation's and Bank's actual and required capital ratios as of December 31, 2019 and December 31, 2018 were as follows:

					Prompt Corrective Action Thresholds
	Actual				Adequately Capitalized				Well Capitalized
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation	$	1,400,617	14.29	%	$	783,946	8.00	%	N/A		N/A
First Merchants Bank	1,267,649		12.87		787,753		8.00		$	984,691	10.00	%
Tier 1 capital to risk-weighted assets
First Merchants Corporation	$	1,255,333	12.81	%	$	587,960	6.00	%	N/A		N/A
First Merchants Bank	1,187,365		12.06		590,815		6.00		$	787,753	8.00	%
Common equity tier 1 capital to risk-weighted assets
First Merchants Corporation	$	1,188,970	12.13	%	$	440,970	4.50	%	N/A		N/A
First Merchants Bank	1,187,365		12.06		443,111		4.50		$	640,049	6.50	%
Tier 1 capital to average assets
First Merchants Corporation	$	1,255,333	10.54	%	$	476,383	4.00	%	N/A		N/A
First Merchants Bank	1,187,365		9.99		475,564		4.00		$	594,455	5.00	%
					Prompt Corrective Action Thresholds
	Actual				Adequately Capitalized				Well Capitalized
December 31, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation	$	1,177,725	14.61	%	$	644,871	8.00	%	N/A		N/A
First Merchants Bank	1,092,602		13.46		649,531		8.00		$	811,914	10.00	%
Tier 1 capital to risk-weighted assets
First Merchants Corporation	$	1,032,173	12.80	%	$	483,653	6.00	%	N/A		N/A
First Merchants Bank	1,012,050		12.47		487,148		6.00		$	649,531	8.00	%
Common equity tier 1 capital to risk-weighted assets
First Merchants Corporation	$	966,032	11.98	%	$	362,740	4.50	%	N/A		N/A
First Merchants Bank	1,012,050		12.47		365,361		4.50		$	527,744	6.50	%
Tier 1 capital to average assets
First Merchants Corporation	$	1,032,173	10.91	%	$	378,379	4.00	%	N/A		N/A
First Merchants Bank	1,012,050		10.70		379,397		4.00		$	472,996	5.00	%

Management believes that all of the above capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of Tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier I regulatory capital consists primarily of total stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

Because these measures are not defined in GAAP, they are considered non-GAAP financial measures. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. For a reconciliation of GAAP measures to regulatory measures (non-GAAP), see additional details within the “Capital” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

Dividends

The Corporation's principal source of funds for dividend payments to shareholders is dividends received from the Bank. 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 the bank’s retained net income (as defined) for the current year plus those for the previous two years, subject to the capital requirements described above.  As of December 31, 2019, the amount available without prior regulatory approval for 2020 dividends from the Corporation’s subsidiaries (both banking and non-banking) was $189,371,000.

Additionally, the Corporation has a Dividend Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have their cash dividends on all shares automatically reinvested in additional shares of the Corporation’s common stock. In addition, stockholders may elect to make optional cash payments up to an aggregate of $5,000 per quarter for the purchase of additional shares of common stock.  The stock is credited to participant accounts at fair market value.  Dividends are reinvested on a quarterly basis.

Stockholders' Equity

On September 1, 2019, the Corporation acquired 100 percent of MBT. Pursuant to the merger agreement, each MBT shareholder received 0.275 shares of the Corporation's common stock for each outstanding share of MBT common stock held. The Corporation issued approximately 6.4 million shares of common stock, which was valued at approximately $229.9 million. Details regarding the MBT acquisition are discussed in NOTE 2. ACQUISITION of these Notes to Consolidated Financial Statements.

Stock Repurchase Program

On September 3, 2019, the Board of Directors of the Corporation approved a stock repurchase program of up to 3 million shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $75 million. On a share basis, the amount of common stock subject to the repurchase program represents approximately 5 percent of the Corporation's outstanding shares. The actual timing, number and share price of shares purchased under the repurchase program will be determined at the Corporation's discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements. During 2019, the Corporation repurchased 516,016 shares of common stock for a total amount of $19.0 million at an average price of $36.90. All shares repurchased under the stock repurchase program were retired upon settlement.