the impact of standardized basel ii on mercantile bancorp, inc
TRANSCRIPT
mercantile bank quincy, ILThe Impact of Standardized Basel II on
Mercantile Bancorp, Inc.
Sample Bank Analysis: Contact Second Pillar Consulting for analysis of your institution
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 2
Executive Summary
• Basel II bank capital regulations are in the news …
• Starting in 2009, banks can choose to calculate their capital requirements using new Basel II risk-weights
• We estimate that implementation of Standardized Basel II at Mercantile Bancorp, Inc. can generate $6.17M in capital savings
• 80.3% of Illinois banks would be eligible for regulatory capital savings with the median bank saving $1M or 3.92%
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 3
The incremental capital associated with Basel II compliance can be stockpiled or deployed in a variety of ways
Mercantile Bancorp, Inc. Highlights
• Stockpile: total RBC increases from 10.33% to 10.80%, an amount equal to $6.17M or 4.57% of the existing capital base
• Deploy: a variety of balance sheet actions that preserve the current 10.33% total RBC ratio:
• Issue a special dividend of $0.71 per share
• Repurchase 364,963 shares and increase EPS $5.02 or 4.36%
• Organically grow assets by $71M Capital Metrics and Management Metrics
Gross Income Margin 3.4%
Tangible Common Equity 3.7%
Total RBC 10.3% 10.8%
One time Dividend
Capital Savings: $6.17M, or 4.57%
*Based on Closing Price as of 7/29/2008
0.71$
364,963
4.36%
70,669$
$103,061
$96,893
$3,335
$5,116
$5,426
$1,186
$2,046
$1,129
$9,811
$80,000
$85,000
$90,000
$95,000
$100,000
$105,000
Current 1st Lien Jr. Lien FHA/ VA/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk Basel II
T h
o u
sa n
d s
National
$16,668,754
$15,464,568
$248,141
$1,544,361
$12,000,000
$12,500,000
$13,000,000
$13,500,000
$14,000,000
$14,500,000
$15,000,000
$15,500,000
$16,000,000
$16,500,000
$17,000,000
Current 1st Lien Jr. Lien FHA/ VA/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk Basel II
T h
o u
s a
n d
s
Illinois Banks can save up to $1,204.2M in required capital under Standardized Basel II while improving risk management
Capital savings estimate1
R e g u la to ry C a p it a l R e q u ir e m e n t
Note: 1 2008Q1 Call Report; SPC estimates
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 5
Illinois banks with the highest percentage change in regulatory capital under Standardized Basel II
Name City Asset Size ($000's)
Dollar Change
Evergreen Private Bank Oak Brook 230,022$ 3,866$ 19.9%
Bank of Montgomery Montgomery 34,140$ 717$ 19.7%
Providence Bank, LLC South Holland 192,991$ 3,765$ 19.6%
Metropolitan Capital Bank Chicago 92,090$ 1,527$ 19.1%
Burling Bank Chicago 117,323$ 1,599$ 18.8%
First Community Bank of Joliet Joliet 397,926$ 6,214$ 18.7%
Millennium Bank Des Plaines 28,833$ 1,174$ 18.6%
SouthernTrust Bank Goreville 32,932$ 645$ 18.5%
Hickory Point Bank and Trust, FSB Decatur 764,121$ 8,458$ 17.9%
LincolnWay Community Bank New Lenox 105,714$ 2,177$ 17.5%
First Clover Leaf Bank, FSB Edwardsville 401,767$ 9,281$ 17.4%
State Farm Bank, FSB Bloomington 15,754,418$ 190,159$ 17.4%
Cummins-American Corp. Glenview 936,614$ 14,571$ 16.6%
Allied First Bank, SB Oswego 164,523$ 1,878$ 16.4%
Farmers State Bank of Alto Pass, Ill. Alto Pass 246,786$ 2,811$ 16.3%
Town Community Bank and Trust Antioch 62,604$ 1,117$ 16.0%
Bankers' Bancorp, Inc. Springfield 590,799$ 7,781$ 15.9%
Signature Bank Chicago 92,091$ 2,229$ 15.8%
Arcola Homestead Savings Bank Arcola 9,933$ 340$ 15.8%
Averages 1,013,703.20$ 13,034.03$ 17.9%
Source: Based Upon Second Pillar Estimates and Call report or TFR data
Table 1. Top 20 Banks with the highest percentage changes in regulatory capital
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 6
Illinois banks with the lowest or negative percentage changes in regulatory capital under Standardized Basel II
Name City Asset Size ($000's)
Dollar Change
First National Bank of Catlin Catlin 39,950$ (193)$ -5.0%
First National Bank of Grand Ridge Grand Ridge 30,617$ (199)$ -5.0%
Camp Grove State Bank Camp Grove 15,269$ (181)$ -5.3%
Lemont National Bank Lemont 56,275$ (370)$ -6.0%
Maroa Forsyth Community Bank Maroa 21,273$ (166)$ -6.1%
Charleston Federal Savings and Loan Association Charleston 33,289$ (186)$ -6.3%
State Bank of Colusa Colusa 17,727$ (246)$ -6.5%
SBC, Incorporated Countryside 960,136$ (8,760)$ -6.9%
Builders Financial Corporation Chicago 529,262$ (4,472)$ -7.0%
Illinois-Service Federal Savings and Loan AssociationChicago 120,270$ (1,167)$ -7.4%
Elkville State Bank Elkville 19,079$ (293)$ -7.6%
Texico State Bank Texico 8,832$ (71)$ -7.8%
First State Bank of West Salem West Salem 14,871$ (295)$ -8.1%
Corus Bankshares, Inc. Chicago 9,072,057$ (112,104)$ -8.2%
American Home Bank Chicago 269,674$ (5,874)$ -9.7%
Heritage Community Bank Glenwood 296,625$ (3,191)$ -9.9%
Reynolds State Bank Reynolds 63,889$ (2,014)$ -12.5%
American Union Savings and Loan Association, S.B.Chicago 7,541$ (120)$ -12.6%
Peoples National Bank of Kewanee Kewanee 189,477$ (13,426)$ -24.7%
Averages 589,119$ (7,673)$ -8.4%
Source: Based Upon Second Pillar Estimates and Call report or TFR data
Table 2. Bottom 20 Banks with the lowest or negative percentage changes in regulatory capital
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 7
But not all banks are ready to answer the tough risk management questions posed by Basel II compliance
Do you have a well-functioning risk oversight structure?
Do you have clear risk management policies and procedures?
Have you identified the important risks faced by your institution?
Have you articulated an institutional appetite for risk-taking?
Do you have accessible data on the risk characteristics of your existing portfolio?
Do you have accessible data on the past performance of your portfolio?
Do you have personnel that can fill critical risk assessment?
Do you actively manage and plan your capital position?
Are you committed to enhancing your overall risk and capital management?
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 8
Second Pillar Consulting can help banks prepare for Basel II compliance
•Our principals have over thirty years of experience in enterprise risk management, regulatory capital compliance, and regulatory relations
•Supported International Basel II compliance at a top-ten bank
•Developed analytical and reporting capabilities •Created governance structure and supporting policies •Led regulatory exams for approval
•Managed risk in retail banking, commercial banking, and insurance
•Focused on building strong regulatory relationships •Active participants in several Basel II industry and regulatory
forums that facilitated drafting the new rules •Frequent speakers at industry and regulatory conferences on Basel •Several Basel II academic papers written jointly with regulators
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com
Bill Nayda
Sample Bank Analysis: Contact Second Pillar Consulting for analysis of your institution
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 2
Executive Summary
• Basel II bank capital regulations are in the news …
• Starting in 2009, banks can choose to calculate their capital requirements using new Basel II risk-weights
• We estimate that implementation of Standardized Basel II at Mercantile Bancorp, Inc. can generate $6.17M in capital savings
• 80.3% of Illinois banks would be eligible for regulatory capital savings with the median bank saving $1M or 3.92%
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 3
The incremental capital associated with Basel II compliance can be stockpiled or deployed in a variety of ways
Mercantile Bancorp, Inc. Highlights
• Stockpile: total RBC increases from 10.33% to 10.80%, an amount equal to $6.17M or 4.57% of the existing capital base
• Deploy: a variety of balance sheet actions that preserve the current 10.33% total RBC ratio:
• Issue a special dividend of $0.71 per share
• Repurchase 364,963 shares and increase EPS $5.02 or 4.36%
• Organically grow assets by $71M Capital Metrics and Management Metrics
Gross Income Margin 3.4%
Tangible Common Equity 3.7%
Total RBC 10.3% 10.8%
One time Dividend
Capital Savings: $6.17M, or 4.57%
*Based on Closing Price as of 7/29/2008
0.71$
364,963
4.36%
70,669$
$103,061
$96,893
$3,335
$5,116
$5,426
$1,186
$2,046
$1,129
$9,811
$80,000
$85,000
$90,000
$95,000
$100,000
$105,000
Current 1st Lien Jr. Lien FHA/ VA/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk Basel II
T h
o u
sa n
d s
National
$16,668,754
$15,464,568
$248,141
$1,544,361
$12,000,000
$12,500,000
$13,000,000
$13,500,000
$14,000,000
$14,500,000
$15,000,000
$15,500,000
$16,000,000
$16,500,000
$17,000,000
Current 1st Lien Jr. Lien FHA/ VA/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk Basel II
T h
o u
s a
n d
s
Illinois Banks can save up to $1,204.2M in required capital under Standardized Basel II while improving risk management
Capital savings estimate1
R e g u la to ry C a p it a l R e q u ir e m e n t
Note: 1 2008Q1 Call Report; SPC estimates
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 5
Illinois banks with the highest percentage change in regulatory capital under Standardized Basel II
Name City Asset Size ($000's)
Dollar Change
Evergreen Private Bank Oak Brook 230,022$ 3,866$ 19.9%
Bank of Montgomery Montgomery 34,140$ 717$ 19.7%
Providence Bank, LLC South Holland 192,991$ 3,765$ 19.6%
Metropolitan Capital Bank Chicago 92,090$ 1,527$ 19.1%
Burling Bank Chicago 117,323$ 1,599$ 18.8%
First Community Bank of Joliet Joliet 397,926$ 6,214$ 18.7%
Millennium Bank Des Plaines 28,833$ 1,174$ 18.6%
SouthernTrust Bank Goreville 32,932$ 645$ 18.5%
Hickory Point Bank and Trust, FSB Decatur 764,121$ 8,458$ 17.9%
LincolnWay Community Bank New Lenox 105,714$ 2,177$ 17.5%
First Clover Leaf Bank, FSB Edwardsville 401,767$ 9,281$ 17.4%
State Farm Bank, FSB Bloomington 15,754,418$ 190,159$ 17.4%
Cummins-American Corp. Glenview 936,614$ 14,571$ 16.6%
Allied First Bank, SB Oswego 164,523$ 1,878$ 16.4%
Farmers State Bank of Alto Pass, Ill. Alto Pass 246,786$ 2,811$ 16.3%
Town Community Bank and Trust Antioch 62,604$ 1,117$ 16.0%
Bankers' Bancorp, Inc. Springfield 590,799$ 7,781$ 15.9%
Signature Bank Chicago 92,091$ 2,229$ 15.8%
Arcola Homestead Savings Bank Arcola 9,933$ 340$ 15.8%
Averages 1,013,703.20$ 13,034.03$ 17.9%
Source: Based Upon Second Pillar Estimates and Call report or TFR data
Table 1. Top 20 Banks with the highest percentage changes in regulatory capital
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 6
Illinois banks with the lowest or negative percentage changes in regulatory capital under Standardized Basel II
Name City Asset Size ($000's)
Dollar Change
First National Bank of Catlin Catlin 39,950$ (193)$ -5.0%
First National Bank of Grand Ridge Grand Ridge 30,617$ (199)$ -5.0%
Camp Grove State Bank Camp Grove 15,269$ (181)$ -5.3%
Lemont National Bank Lemont 56,275$ (370)$ -6.0%
Maroa Forsyth Community Bank Maroa 21,273$ (166)$ -6.1%
Charleston Federal Savings and Loan Association Charleston 33,289$ (186)$ -6.3%
State Bank of Colusa Colusa 17,727$ (246)$ -6.5%
SBC, Incorporated Countryside 960,136$ (8,760)$ -6.9%
Builders Financial Corporation Chicago 529,262$ (4,472)$ -7.0%
Illinois-Service Federal Savings and Loan AssociationChicago 120,270$ (1,167)$ -7.4%
Elkville State Bank Elkville 19,079$ (293)$ -7.6%
Texico State Bank Texico 8,832$ (71)$ -7.8%
First State Bank of West Salem West Salem 14,871$ (295)$ -8.1%
Corus Bankshares, Inc. Chicago 9,072,057$ (112,104)$ -8.2%
American Home Bank Chicago 269,674$ (5,874)$ -9.7%
Heritage Community Bank Glenwood 296,625$ (3,191)$ -9.9%
Reynolds State Bank Reynolds 63,889$ (2,014)$ -12.5%
American Union Savings and Loan Association, S.B.Chicago 7,541$ (120)$ -12.6%
Peoples National Bank of Kewanee Kewanee 189,477$ (13,426)$ -24.7%
Averages 589,119$ (7,673)$ -8.4%
Source: Based Upon Second Pillar Estimates and Call report or TFR data
Table 2. Bottom 20 Banks with the lowest or negative percentage changes in regulatory capital
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 7
But not all banks are ready to answer the tough risk management questions posed by Basel II compliance
Do you have a well-functioning risk oversight structure?
Do you have clear risk management policies and procedures?
Have you identified the important risks faced by your institution?
Have you articulated an institutional appetite for risk-taking?
Do you have accessible data on the risk characteristics of your existing portfolio?
Do you have accessible data on the past performance of your portfolio?
Do you have personnel that can fill critical risk assessment?
Do you actively manage and plan your capital position?
Are you committed to enhancing your overall risk and capital management?
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com Page 8
Second Pillar Consulting can help banks prepare for Basel II compliance
•Our principals have over thirty years of experience in enterprise risk management, regulatory capital compliance, and regulatory relations
•Supported International Basel II compliance at a top-ten bank
•Developed analytical and reporting capabilities •Created governance structure and supporting policies •Led regulatory exams for approval
•Managed risk in retail banking, commercial banking, and insurance
•Focused on building strong regulatory relationships •Active participants in several Basel II industry and regulatory
forums that facilitated drafting the new rules •Frequent speakers at industry and regulatory conferences on Basel •Several Basel II academic papers written jointly with regulators
Do not use without permission © Second Pillar Consulting, 2008. www.secondpillar.com
Bill Nayda