12.

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 our 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

March

31,

2017

and

December

31,

2016,

our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since

March

31,

2017

that we believe have changed our bank’s categorization.

Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were:

											Minimum Required
											to be Well
						Minimum Required					Capitalized Under
						for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Total capital (to risk weighted assets)
Consolidated	$	359,984		13.1	%	$	220,614		8.0	%	NA		NA
Bank		356,798		13.0			220,408		8.0			275,509		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		341,708		12.4			165,461		6.0		NA		NA
Bank		338,522		12.3			165,306		6.0			220,408		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		298,776		10.8			124,096		4.5		NA		NA
Bank		338,522		12.3			123,980		4.5			179,081		6.5
Tier 1 capital (to average assets)
Consolidated		341,708		11.5			118,508		4.0		NA		NA
Bank		338,522		11.4			118,462		4.0			148,078		5.0

											Minimum Required
											to be Well
						Minimum Required					Capitalized Under
						for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2016
Total capital (to risk weighted assets)
Consolidated	$	354,278		13.1	%	$	215,819		8.0	%	NA		NA
Bank		353,243		13.1			215,605		8.0			269,506		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		336,316		12.5			161,864		6.0		NA		NA
Bank		335,282		12.4			161,704		6.0			215,605		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		293,555		10.9			121,398		4.5		NA		NA
Bank		335,282		12.4			121,278		4.5			175,179		6.5
Tier 1 capital (to average assets)
Consolidated		336,316		11.2			120,486		4.0		NA		NA
Bank		335,282		11.1			120,383		4.0			150,479		5.0

Our consolidated capital levels as of

March

31,

2017

and

December

31,

2016

include

$42.9

million and

$42.8

million, respectively, of trust preferred securities subject to certain limitations. 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 elements that

may

be included in our Tier

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

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. As of

March

31,

2017

and

December

31,

2016,

all

$42.9

million and

$42.8

million, respectively, of the trust preferred securities were included in our consolidated Tier

capital.

Under the final BASEL III capital rules that became effective on

January

2015,

there is a requirement for a common equity Tier

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 is being phased in over

three

years beginning in

2016.

The capital buffer requirement effectively raises the minimum required common equity Tier

capital ratio to

7.0%,

the Tier

capital ratio to

8.5%

and the total capital ratio to

10.5%

on a fully phased-in basis on

January

2019.

We believe that, as of

March

31,

2017,

our bank would meet all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis as if all such requirements were currently in effect.

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

12,

2017,

our Board of Directors declared a cash dividend on our common stock in the amount of

$0.18

per share that was paid on

March

22,

2017

to shareholders of record as of

March

10,

2017.

April

13,

2017,

our Board of Directors declared a cash dividend on our common stock in the amount of

$0.18

per share that will be paid on

June

21,

2017

to shareholders of record as of

June

2017.

January

30,

2015,

we announced that our Board of Directors had authorized a new 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. On

April

19,

2016,

we announced a

$15.0

million expansion of the stock repurchase plan. Since inception, we have purchased a total of

956,419

shares at a total price of

$19.5

million, at an average price per share of

$20.38;

no shares were purchased under the authorized plan during the

first

three

months of

2017.

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, which would also likely be funded from cash dividends paid to us from our bank.

January

26,

2016,

we closed on a repurchase of trust preferred securities that were auctioned as part of a pooled collateralized debt obligation (“Fund”). The Fund owned

$11.0

million of the

$32.0

million in trust preferred securities that had been issued by Mercantile Bank Capital Trust I, a wholly-owned business trust subsidiary. The

$11.0

million in trust preferred securities was retired upon the repurchase, resulting in a commensurate reduction in the related Floating Rate Junior Subordinate Note, leaving

$21.0

million outstanding. Our winning bid equated to

73%

of the

$11.0

million par value, with the

27%

discount resulting in a pre-tax gain of approximately

$3.0

million (after-tax gain of approximately

$1.8

million, or

$0.11

per diluted share). The repurchase was primarily funded via a

$9.1

million cash dividend from our bank, resulting in an approximately

basis point decline in the bank's regulatory capital ratios. Subsequent to the repurchase, the regulatory capital ratios of both Mercantile and our bank remained well above the minimum thresholds to be categorized as well capitalized.