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Note 20 - Regulatory Matters
12 Months Ended
Dec. 31, 2020
Notes to Financial Statements  
Regulatory Capital Requirements under Banking Regulations [Text Block]

NOTE 20 - REGULATORY MATTERS

 

We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and 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 about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

 

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. At year-end 2020 and 2019, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2020 that we believe have changed our bank’s categorization.

 

Our actual capital levels (dollars in thousands) and minimum required levels were:

 

  

Actual

  

Minimum Required

for Capital

Adequacy Purposes

  

Minimum Required

to be Well

Capitalized Under

Prompt Corrective

Action Regulations

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

2020

                        

Total capital (to risk weighted assets)

                        

Consolidated

 $468,113   13.8

%

 $271,325   8.0

%

 

NA

  

NA

 

Bank

  457,203   13.5   271,196   8.0   338,995   10.0

%

Tier 1 capital (to risk weighted assets)

                        

Consolidated

  430,146   12.7   203,494   6.0  

NA

  

NA

 

Bank

  419,236   12.4   203,397   6.0   271,196   8.0 

Common equity (to risk weighted assets)

                        

Consolidated

  384,658   11.3   152,621   4.5  

NA

  

NA

 

Bank

  419,236   12.4   152,548   4.5   220,347   6.5 

Tier 1 capital (to average assets)

                        

Consolidated

  430,146   9.8   176,053   4.0  

NA

  

NA

 

Bank

  419,236   9.5   175,999   4.0   219,999   5.0 
                         
                         

2019

                        

Total capital (to risk weighted assets)

                        

Consolidated

 $429,038   13.1

%

 $262,141   8.0

%

 

NA

  

NA

 

Bank

  424,917   13.0   262,088   8.0   327,610   10.0

%

Tier 1 capital (to risk weighted assets)

                        

Consolidated

  405,148   12.4   196,606   6.0  

NA

  

NA

 

Bank

  401,027   12.2   196,566   6.0   262,088   8.0 

Common equity (to risk weighted assets)

                        

Consolidated

  360,342   11.0   147,454   4.5  

NA

  

NA

 

Bank

  401,027   12.2   147,425   4.5   212,947   6.5 

Tier 1 capital (to average assets)

                        

Consolidated

  405,148   11.3   143,689   4.0  

NA

  

NA

 

Bank

  401,027   11.2   143,670   4.0   179,588   5.0 

 

Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 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 meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement raised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of December 31, 2020, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

 

Federal and state banking laws and regulations place certain restrictions on the amount of dividends our bank can transfer to Mercantile and on the capital levels that must be maintained. At year-end 2020, under the most restrictive of these regulations, our bank could distribute $85.7 million to Mercantile as dividends without prior regulatory approval. Our and our bank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. On January 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on March 18, 2020 to shareholders of record as of March 6, 2020. On April 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on June 17, 2020 to shareholders of record as of June 5, 2020. On July 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on September 16, 2020 to shareholders of record as of September 4, 2020. On October 15, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on December 16, 2020 to shareholders of record as of December 4, 2020.

 

On January 14, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $0.29 per share that will be paid on March 17, 2021 to shareholders of record as of March 5, 2021.

 

In May 2019, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. During the first quarter of 2020, we repurchased approximately of 222,000 for $6.3 million, at an average price per share of $28.25. After electing to temporarily cease stock repurchases in March 2020 to preserve capital for lending and other purposes while we assessed the potential impacts of the Coronavirus Pandemic, we reinstated the buyback program during the fourth quarter of 2020. Fourth quarter repurchases totaled approximately 14,000 shares for $0.3 million, at an average weighted price per share of $22.05. Availability under our current repurchase plan totals about $10.0 million. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank.

 

Our consolidated capital levels as of December 31, 2020 and 2019 include $45.5 million and $44.8 million, respectively, of trust preferred securities. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element. The guidelines provide that the aggregate amount of restricted core capital elements that may be included in Tier 1 capital must not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Our ability to include the trust preferred securities in Tier 1 capital in accordance with the guidelines is not affected by the provision of the Dodd-Frank Act generally restricting such treatment, because (i) the trust preferred securities were issued before May 19, 2010, and (ii) our total consolidated assets as of December 31, 2009 were less than $15.0 billion. At December 31, 2020 and 2019, all $45.5 million and $44.8 million, respectively, of the trust preferred securities were included as Tier 1 capital of Mercantile.