REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Dec. 31, 2016

REGULATORY CAPITAL REQUIREMENTS

REGULATORY CAPITAL REQUIREMENTS

NOTE 20: REGULATORY CAPITAL REQUIREMENTS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2016 is 0.625%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2016, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2016 and 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

The following table summarizes Merchants’ and Merchants Bank’s capital ratios in comparison to the regulatory requirements:

									To Be Well-
										Capitalized Under			Fully Phased-in,
					For Capital				Prompt  Corrective				with Capital
	Actual				Adequacy Purposes				Action Provisions				Conservation Buffers
(In thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount			Percent
As of December 31, 2016
Merchants Bancshares, Inc.:
Tier 1 Leverage Capital	$	173,945	8.71	%	$	79,903	4.00	%	$	N/A	N/A	%	$	79,903	(1)	4.00	%
Tier 1 Risk-Based Capital		173,945	14.04	%		74,360	6.00	%		N/A	N/A	%		105,344		8.50	%
Total Risk-Based Capital		187,624	15.14	%		99,147	8.00	%		N/A	N/A	%		130,130		10.50	%
Common Equity Tier 1 Capital		153,945	12.42	%		55,770	4.50	%		N/A	N/A	%		86,754		7.00	%
Merchants Bank:
Tier 1 Leverage Capital	$	170,732	8.53	%	$	80,028	4.00	%	$	100,035	5.00	%	$	80,028	(1)	4.00	%
Tier 1 Risk-Based Capital		170,732	13.72	%		74,662	6.00	%		99,550	8.00	%		105,771		8.50	%
Total Risk-Based Capital		184,411	14.82	%		99,550	8.00	%		124,437	10.00	%		130,659		10.50	%
Common Equity Tier 1 Capital		170,732	13.72	%		55,997	4.50	%		80,884	6.50	%		87,106		7.00	%
As of December 31, 2015
Merchants Bancshares, Inc.:
Tier 1 Leverage Capital	$	165,799	8.77	%	$	75,646	4.00	%	$	N/A	N/A	%	$	75,646	(1)	4.00	%
Tier 1 Risk-Based Capital		165,799	14.63	%		68,005	6.00	%		N/A	N/A	%		96,341		8.50	%
Total Risk-Based Capital		178,754	15.77	%		90,673	8.00	%		N/A	N/A	%		119,009		10.50	%
Common Equity Tier 1 Capital		145,799	12.86	%		51,004	4.50	%		N/A	N/A	%		79,339		7.00	%
Merchants Bank:
Tier 1 Leverage Capital	$	164,446	8.64	%	$	76,112	4.00	%	$	95,139	5.00	%	$	76,112	(1)	4.00	%
Tier 1 Risk-Based Capital		164,446	14.44	%		68,352	6.00	%		91,136	8.00	%		96,832		8.50	%
Total Risk-Based Capital		177,401	15.57	%		91,136	8.00	%		113,920	10.00	%		119,616		10.50	%
Common Equity Tier 1 Capital		164,446	14.44	%		51,264	4.50	%		74,048	6.50	%		79,744		7.00	%

(1) Capital conservation buffer does not directly affect the required leverage ratio. Institutions must still maintain the required ratio for capital adequacy purposes.

Capital amounts for Merchants Bancshares, Inc. include $20.62 million in trust preferred securities issued in December 2004. These hybrid securities qualify as Tier 2 regulatory capital up to certain regulatory limits.