NOTE

- 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,

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

2019

and

2018,

our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are

conditions or events since

December 31, 2019

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
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

	Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required to be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2018
Total capital (to risk weighted assets)
Consolidated	$	396,102		12.5	%	$	253,413		8.0	%	NA		NA
Bank		388,591		12.3			253,225		8.0			316,531		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		373,721		11.8			190,060		6.0		NA		NA
Bank		366,211		11.6			189,919		6.0			253,225		8.0
Common equity (to risk weighted assets)
Consolidated		329,596		10.4			142,545		4.5		NA		NA
Bank		366,211		11.6			142,439		4.5			205,745		6.5
Tier 1 capital (to average assets)
Consolidated		373,721		11.4			131,014		4.0		NA		NA
Bank		366,211		11.2			130,913		4.0			163,641		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

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 has been phased in over

three

years beginning in

2016.

The capital buffer requirement effectively raised 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 1, 2019.

We believe that, as of

December 31, 2019,

our bank met all capital adequacy requirements under the Basel III capital rules.

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

2019,

under the most restrictive of these regulations, our bank could distribute

$75.2

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 17, 2019,

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

$0.26

per share that was paid on

March 20, 2019

to shareholders of record as of

March 8, 2019.

April 11, 2019,

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

$0.26

per share that was paid on

June 19, 2019

to shareholders of record as of

June 7, 2019.

July 11, 2019,

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

$0.27

per share that was paid on

September 18, 2019

to shareholders of record as of

September 6, 2019.

October 10, 2019,

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

$0.27

per share that was paid on

December 18, 2019

to shareholders of record as of

December 6, 2019.

January 16, 2020,

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

$0.28

per share that will be paid on

March 18, 2020

to shareholders of record as of

March 6, 2020.

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. This stock repurchase plan was instituted in conjunction with the completion of our existing program that was introduced in

January 2015

and later expanded in

April 2016.

During

2019,

we repurchased a total of

233,300

shares at a total price of

$7.2

million, at an average price per share of

$30.79.

During the period of

January 2015

through

December 2019,

we repurchased a total of about

1.4

million shares at a total price of

$32.6

million, at an average price per share of

$23.47.

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, 2019

and

2018

include

$44.8

million and

$44.1

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

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. At

December 31, 2019

and

2018,

all

$44.8

million and

$44.1

million, respectively, of the trust preferred securities were included as Tier

capital of Mercantile.