MISSION STATEMENT
ANNUAL REPORT 2016
JOURNEY
The mission of Mercantile Bank Corporation
is to provide value in a highly professional and
personalized manner.
We recognize that our most important partners
are our customers. We will satisfy our customers'
need for security and achievement of their goals
and dreams by delivering top quality service that
distinguishes us from our competitors.
Our employees are our most valuable asset.
Our exceptional team members are committed
to maintaining an environment of personal growth
and development.
We recognize the importance of being strong
supporters of the diverse communities in which
we live and serve. We pledge to help make them
stronger through investments of time and resources.
We believe that by fulfilling our mission to our
customers, employees and communities, we will
provide our shareholders with an excellent return
on their investment in Mercantile Bank Corporation.
310 Leonard Street NW
Grand Rapids, MI 49504
888.345.6296
mercbank.com
Mercantile Bank of Michigan and Michigan’s Community Bank
are registered trademarks of Mercantile Bank Corporation.
002CSN78D9
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CORPORATE
JOURNEY
MERCANTILE BANK OF MICHIGAN
2017 STRATEGIC PLANNING TEAM
Mark S. Augustyn
Senior Vice President, West Region President
Charles E. Christmas
Executive Vice President, Chief Financial Officer
Amy W.M. Kam
Vice President, Executive Administrator
Robert B. Kaminski, Jr.
Chief Executive Officer
David L. Miller
Senior Vice President,
Training and Communications Director
Douglas J. Ouellette
Senior Vice President,
Chief Community Banking Officer,
Central Region President
Michael H. Price
Executive Chairman of the Board
Raymond E. Reitsma
President of the Bank
Richard D. Rice
Senior Vice President, Operations Manager
John R. Schulte
Senior Vice President, Chief Information Officer
Michelle L. Shangraw
Senior Vice President, Retail Banking Director
Lonna L. Wiersma
Senior Vice President, Human Resource Director
Robert T. Worthington
Senior Vice President,
Chief Operating Officer and General Counsel
SHAREHOLDER INFORMATION
Annual Meeting
The Corporation’s Annual Meeting of Shareholders
will be held on Thursday, May 25, 2017, at
Kent Country Club, 1600 College Ave. NE,
Grand Rapids, MI 49505 at 9:00 a.m. local time.
Administrative Headquarters
310 Leonard Street NW, 4th Floor
Grand Rapids, MI 49504
616.406.3000 or 888.345.6296
Legal Counsel
Dickinson Wright PLLC
500 Woodward Avenue, Suite 4000
Detroit, MI 48226-3425
www.dickinson-wright.com
Independent Certified Public Accountants
BDO USA, LLP
200 Ottawa Avenue NW, Suite 300
Grand Rapids, MI 49503-2654
www.bdo.com
Investor Relations
Lambert, Edwards & Associates
47 Commerce
Grand Rapids, MI 49503
www.lambert-edwards.com
Common Stock Listing
NASDAQ Global Select Market
Symbol: MBWM
Stock Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
Shareholder Inquiries 1.800.733.5001
www.computershare.com/investor
SEC Form 10-K
Copies of the Corporation’s Annual Report
on Form 10-K, as filed with the Securities and
Exchange Commission, are available to shareholders
without charge upon written request.
mercbank.com
Mercantile Bank Corporation does not discriminate on
the basis of race, color, age, religion, sex, sexual orientation,
gender identity, national origin, disability or veteran status
in employment or the provision of services.
Please mail your request to:
Charles E. Christmas
Mercantile Bank Corporation
310 Leonard Street NW, 4th Floor
Grand Rapids, MI 49504
LOOKING BACK. FOCUSED FORWARD.
EVERY
JOURNEY...
is unique, and often full of twists and turns.
Looking back, we reflect on how we’ve grown and what
we’ve learned. Focused forward, we anticipate the path
ahead, knowing we can do even greater things because
of where we’ve been.
2016 was an incredible journey for us at Mercantile, and
it’s largely because of the connections we’ve shared with
you: our customers, our communities, our employees and
our shareholders—we could not have done it without you.
Thanks for being an essential part of our journey.
MERCANTILE ANNUAL REPORT 2
We are pleased to share the results
of Mercantile Bank Corporation's
performance for 2016.
By almost any measure, our 19th year of operation was our very
best. Compared to 2015, diluted earnings per share grew 21%,
fueled by solid loan growth, stellar asset quality, improved
non-interest income and excellent expense control.
Our loan portfolio grew by 4.4%, with commercial loan growth
leading the way. The bank attracted many new customers with
our strong suite of business products and excellent relationship
bankers. Our mortgage banking revenue grew impressively as
we added seasoned mortgage professionals and streamlined
our operational processes.
FINANCIAL
JOURNEY
The financial
metrics are
compelling, and
they provide
the lynchpin
for Mercantile
to strengthen
its position
as Michigan’s
Community Bank®.
3 LOOKING BACK. FOCUSED FORWARD.
Our net interest margin, an important measure of
success for community banks, remains at the upper
end of our Midwestern peer group at 3.86%. This margin,
combined with minimal loan losses and exceptional asset
quality, helped Mercantile post a record operating profit
of $31.9 million for 2016.
MERCANTILE ANNUAL REPORT 4
PERFORMANCE
NET INCOME
*Impacted by Merger Event
3
3
0
7
1
$
,
*
1
3
3
7
1
$
,
0
2
0
7
2
$
,
3
1
9
,
1
3
$
2013
2014
2015
2016
EPS GROWTH
*Impacted by Merger Event
%
0
0
5
.
2014
%
6
6
2
.
%
0
.
1
2
2013
2015
2016
*
%
4
4
3
-
.
NONPERFORMING ASSETS
(% of Total Assets)
%
7
6
0
.
%
9
0
.
1
%
3
2
0
.
%
1
2
0
.
$35M
$30M
$25M
$20M
$15M
$10M
$5M
$0M
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
2.0%
1.5%
1.0%
0.5%
0.0%
$3,500M
$3,000M
$2,500M
$2,000M
$1,500M
$1,000M
$500M
$0M
60%
50%
40%
30%
20%
10%
0%
-10%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
TOTAL ASSETS
,
0
0
0
7
2
4
,
1
$
,
0
0
4
3
9
8
2
$
,
,
0
0
6
4
0
9
2
$
,
,
0
0
6
2
8
0
3
$
,
2013
2014
2015
2016
STOCK PRICE GROWTH
*Impacted by Merger Event
%
8
0
3
.
2014
2013
*
%
6
2
-
.
%
7
6
1
.
%
6
3
5
.
2015
2016
NET INTEREST MARGIN
%
3
7
3
.
%
5
7
3
.
%
3
8
3
.
%
6
8
3
.
2013
2014
2015
2016
2013
2014
2015
2016
During 2016, we upgraded our online
and mobile offerings with new features,
including an enhanced user interface and
biometric security options. While all banks
aspire to strong customer connections
via electronic channels, Mercantile also
recognizes that personal connections with
our customers, communities, vendors and
the environment are essential in our goal
to remain exceptional. The bankers in each
of our 48 branches continue to provide
excellent service, based on the specific
needs of each customer.
PERSONAL
JOURNEY
In today’s technology-driven environment,
how a bank connects with its constituents
is more important than ever.
5 LOOKING BACK. FOCUSED FORWARD.
MERCANTILE ANNUAL REPORT 6
Creating a perfect
balance between
technology-driven
banking and
personal service.
Our employees
volunteered over
30,400 hours of
service in 2016.
7 LOOKING BACK. FOCUSED FORWARD.
MERCANTILE ANNUAL REPORT 8
GIVING
JOURNEY
Mercantile is committed to providing support
to its communities, directly contributing over
$450,000 in 2016.
Additionally, our employees volunteered
over 30,400 hours of assistance to many
community projects and served on 230
local boards across all our regions. On any
given day, you might find a group of our
employees building a home for a family
in need, walking to fight diseases or making
sack lunches to feed hungry children.
A big part of who we are is reflected
in what we do in our communities.
Mercantile’s definition of sustainability is the leveraging of combined abilities to ensure
our ongoing impact on people, the environment and our company’s success is always
focused on upholding long-lasting, positive results.
SUSTAINABLE
JOURNEY
Our sustainable efforts are delivered through
a three-pronged strategy:
COLLABORATION
At Mercantile, we see ourselves as one team
CONSERVATION
Sustainability and conservation have always
and the very act of working together allows
been a part of Mercantile’s strategic plan and
us to reach far beyond what we could achieve
is woven deeply into the fabric of how we do
individually. Our ability to collaborate, inside
business. From an efficient branch footprint
the organization and outside the company,
to utilizing the latest technology, we are
generates a positive impact on individuals,
continuously focused on seeking new ways
organizations and entire communities.
to be more productive with our time and
Collaboration enables us to celebrate diversity,
energy, while remaining good stewards of
appreciate different points of view, develop
the resources to which we are entrusted.
new ideas and put them into action. It takes
people to collaborate and one of Mercantile’s
greatest strengths is its people. To ensure
CONTRIBUTION
Our company is consistently focused on
our collaborative efforts remain strong and
creating long-term value through meaningful
sustainable, we invest in all of our team
relationships and when this is done right,
members’ development from day one. The
these contributions are reflected in our
success of our sustainable culture is evident
bottom line success. The history of our ability
in our low rate of employee turnover.
to grow our position in innovative ways, while
remaining strong and profitable, speaks to our
commitment to uphold our values and leverage
our experienced team. Extending our pledge
into the communities in which we live and work,
we believe that invested time, money and effort
also help to sustain and advance the mission of
local non-profit and community organizations.
9 LOOKING BACK. FOCUSED FORWARD.
SUSTAINABLE
JOURNEY
MERCANTILE ANNUAL REPORT 10
SUSTAIN + ABILITY
Sustainability
is to strengthen
and support in
an ongoing way,
to the best of
one’s abilities.
Thank you to
our customers,
employees,
communities
and shareholders
for a very
successful year.
11 LOOKING BACK. FOCUSED FORWARD.
MERCANTILE ANNUAL REPORT 12
JOURNEY
CONTINUES
In closing, this is the last shareholder letter
I write to you as your CEO.
My transition to Executive Chairman was effective
January 1, 2017. Our Board of Directors unanimously
elected Robert Kaminski as our new CEO.
Bob and I have worked together for over 32 years,
and I have the utmost confidence in his leadership.
As the founding President of Mercantile Bank of
Michigan, I have been both proud and humbled
by the tremendous success of our company. This
success has been made possible through wonderful
relationships involving customers, employees,
communities and shareholders. I thank all of you
for allowing me the opportunity of a lifetime.
Michael H. Price
Executive Chairman
BOARD OF DIRECTORS
Jeff A. Gardner, CPM
Owner, Gardner Group
Edward J. Clark
Chairman and Chief Executive
Michael H. Price
Executive Chairman
Robert B. Kaminski, Jr.
President and
Edward B. Grant, CPA, PhD
Retired Public Broadcasting
Executive
Officer, American Seating
of the Board of Directors
Chief Executive Officer
Company
Michelle L. Eldridge
Owner, Clear Ridge Wealth
Management
Thomas R. Sullivan
Retired Banking Executive
David M. Cassard
Retired Real Estate Executive
EXECUTIVE OFFICERS
Charles E. Christmas
Executive Vice President,
Michael H. Price
Executive Chairman
Robert B. Kaminski
President and
Robert T. Worthington
Senior Vice President,
Chief Financial Officer
of the Board of Directors
Chief Executive Officer
Chief Operating Officer,
and Treasurer
General Counsel and Secretary
13 LOOKING BACK. FOCUSED FORWARD.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 000-26719
MERCANTILE BANK CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of incorporation or organization)
38-3360865
(I.R.S. Employer Identification No.)
310 Leonard Street NW, Grand Rapids, Michigan
(Address of principal executive offices)
49504
(Zip Code)
(616) 406-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ___ Accelerated filer X
Non-accelerated filer ___ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate value of the common equity held by non-affiliates (persons other than directors and executive officers) of the registrant,
computed by reference to the closing price of the common stock as of the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $379 million.
As of March 1, 2017, there were issued and outstanding 16,428,161 shares of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s proxy statement for the Annual Meeting of Shareholders to be held May 25, 2017 are incorporated by reference into
Part III of this report.
Item 1. Business.
The Company
PART I
Mercantile Bank Corporation is a registered bank holding company under the Bank Holding Company Act of
1956, as amended (the “Bank Holding Company Act”). Unless the text clearly suggests otherwise, references to “us,”
“we,” “our,” or “the company” include Mercantile Bank Corporation and its wholly-owned subsidiaries. As a bank holding
company, we are subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”). We were organized on July 15, 1997, under the laws of the State of Michigan, primarily for the purpose of
holding all of the stock of Mercantile Bank of Michigan (“our bank”), and of such other subsidiaries as we may acquire or
establish. Our bank commenced business on December 15, 1997. During the third quarter of 2013, we filed an election to
become a financial holding company, which election became effective April 14, 2014.
Mercantile Insurance Center, Inc. (“our insurance company”), a subsidiary of our bank, commenced operations
during 2002 to offer insurance products. Mercantile Bank Real Estate Co., L.L.C., (“our real estate company”), a
subsidiary of our bank, was organized on July 21, 2003, principally to develop, construct and own our facility in downtown
Grand Rapids which serves as our bank’s main office and Mercantile Bank Corporation’s headquarters.
Our expenses have generally been paid using cash dividends from our bank. Our principal source of future
operating funds is expected to be dividends from our bank.
Firstbank Corporation Merger
We completed our merger with Firstbank Corporation (“Firstbank”), a Michigan corporation with approximately
$1.5 billion in total assets and 46 branch locations, into Mercantile Bank Corporation as of June 1, 2014 (“Merger Date”).
The merger substantially expanded our geographic footprint and increased the size of our balance sheet.
In conjunction with the completion of the merger, Mercantile assumed the obligations of Firstbank Capital Trust I,
Firstbank Capital Trust II, Firstbank Capital Trust III and Firstbank Capital Trust IV, all of which are business trust
subsidiaries formed to issue trust preferred securities. At the Merger Date, Firstbank had two Michigan-chartered bank
subsidiaries that were consolidated into Mercantile Bank of Michigan effective June 30, 2014.
Our Bank
Our bank is a state banking company that operates under the laws of the State of Michigan, pursuant to a charter
issued by the Michigan Office of Financial and Insurance Regulation. Our bank’s deposits are insured to the maximum
extent permitted by law by the Federal Deposit Insurance Corporation (“FDIC”). Our bank, through its 49 office locations,
provides commercial banking services primarily to small- to medium-sized businesses and retail banking services. Our
bank’s main office is located in Grand Rapids, and our operations are centered around the West and Central portions of
Michigan, with branch office locations in Alma, Belding, Cadillac, Canadian Lakes, Clare, Comstock Park, DeWitt,
Fairview, Grand Rapids, Hale, Hastings, Holland, Howard City, Ionia, Ithaca, Kalamazoo, Kentwood, Lakeview, Lansing,
Lowell, Merrill, Mt. Pleasant, Paw Paw, Portage, Remus, Rose City, Shepherd, St. Charles, St. Helen, St. Johns, Vestaburg,
West Branch, and Wyoming. We also recently expanded into Southeast Michigan, opening a banking office in Troy during
the first quarter of 2017.
Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts
checking, savings and time deposits. Our bank owns 49 automated teller machines ("ATM") located at certain of our office
locations and at one off-site location that participate in the ACCEL/EXCHANGE and PLUS regional network systems, as
well as other ATM networks throughout the country. Our bank also enables customers to conduct certain loan and deposit
transactions by personal computer and through mobile applications. Courier service is provided to certain commercial
customers, and safe deposit facilities are available at a vast majority of our office locations. Our bank does not have trust
powers.
2
Our Insurance Company
Our insurance company acquired an existing shelf insurance agency effective April 15, 2002. An Agency and
Institution Agreement was entered into among our insurance company, our bank and Hub International for the purpose of
providing programs of mass marketed personal lines of insurance. Insurance product offerings include private passenger
automobile, homeowners, personal inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small
business and life insurance products, all of which are provided by and written through companies that have appointed Hub
International as their agent. To date, we have not provided the insurance products noted above and currently have no plans
to do so.
Our Real Estate Company
Our real estate company was organized on July 21, 2003, principally to develop, construct and own our facility in
downtown Grand Rapids that serves as our bank’s main office and Mercantile Bank Corporation’s headquarters. This
facility was placed into service during the second quarter of 2005. Our real estate company is 99% owned by our bank and
1% owned by our insurance company.
Our Trusts
We have five business trusts that are wholly-owned subsidiaries of Mercantile, four of which were assumed by
Mercantile in conjunction with the merger with Firstbank. Each of the trusts was formed to issue Preferred Securities that
were sold in private sales, as well as selling Common Securities to Mercantile. The proceeds from the Preferred and
Common Securities sales were used by the trusts to purchase Floating Rate Notes issued by Mercantile. The rates of
interest, interest payment dates, call features and maturity dates of each Floating Rate Note are identical to its respective
Preferred Securities. The net proceeds from the issuance of the Floating Rate Notes were used for a variety of purposes,
including contributions to our bank as capital to provide support for asset growth and the funding of stock repurchase
programs and certain acquisitions. The only significant assets of our trusts are the Floating Rate Notes, and the only
significant liabilities of our trusts are the Preferred Securities. The Floating Rate Notes are categorized on our
Consolidated Balance Sheets as subordinated debentures, and the interest expense is recorded on our Consolidated
Statements of Income under interest expense on other borrowings.
Effect of Government Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United
States Government, its agencies, and the Federal Reserve Board. The Federal Reserve Board’s monetary policies have had,
and will likely continue to have, an important impact on the operating results of commercial banks through its power to
implement national monetary policy in order to, among other things, curb inflation, maintain or encourage employment,
and mitigate economic recessions. The policies of the Federal Reserve Board have a major effect upon the levels of bank
loans, investments and deposits through its open market operations in United States Government securities, and through its
regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against
member bank deposits. Our bank maintains reserves directly with the Federal Reserve Bank of Chicago to the extent
required by law. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Regulation and Supervision
Banks and bank holding companies, among other financial institutions, are regulated under federal and state law.
These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Dodd
Frank Act, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act,
the USA PATRIOT Act, the FACT Act, the Gramm-Leach-Bliley Act, the Sarbanes Oxley Act, the Bank Secrecy Act,
electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money
laundering laws and privacy laws. Our growth and earnings performance may be impacted by the statutes administered by,
and the regulations and policies of, various governmental regulatory authorities. Those regulatory authorities include, but
are not limited to, the Federal Reserve Board, the FDIC, the Michigan Department of Insurance and Financial Services, the
Internal Revenue Service and state taxing authorities. The effect of such statutes, regulations and policies, and any changes
thereto, can be significant and cannot necessarily be predicted.
3
As a registered bank holding company under the Bank Holding Company Act, we are required to file an annual
report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require. We are
also subject to examination by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding companies to banking and the management
of banking organizations, and to certain non-banking activities. The permitted non-banking activities include those limited
activities that the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the Gramm-
Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking. These permitted non-banking
activities include, among other things: operating a mortgage company, finance company, or factoring company; performing
certain data processing operations; providing certain investment and financial advice; acting as an insurance agent for
certain types of credit-related insurance; leasing property on a full-payout, nonoperating basis; and providing discount
securities brokerage services for customers. Neither we nor any of our subsidiaries engage in any of the non-banking
activities listed above.
On April 14, 2014, our election to become a financial holding company, as permitted by the Bank Holding
Company Act, as amended by Title I of the Gramm-Leach-Bliley Act, was accepted by the Federal Reserve Board. In
order to continue as a financial holding company, we and our bank must satisfy statutory requirements regarding
capitalization, management and compliance with the Community Reinvestment Act. As a financial holding company, we
are permitted to engage in a broader range of activities under the Bank Holding Company Act than are permitted to bank
holding companies. Those expanded activities include any activity which the Federal Reserve Board (in certain instances
in consultation with the Department of the Treasury) determines, by order or by regulation, to be financial in nature or
incidental to such financial activity, or to be complementary to a financial activity, and not to pose a substantial risk to the
safety and soundness of depository institutions of the financial system generally. Such expanded activities include, among
others: insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities,
and acting as principal, agent or broker for such purposes; providing financial, investment or economic advisory services,
including advising a mutual fund; and underwriting, dealing in, or making a market in securities. While our insurance
company is permitted to engage in the insurance agency activities described above by virtue of our financial holding
company status, neither we nor any of our subsidiaries currently engage in the expanded activities.
Our bank is subject to restrictions imposed by federal and state law and regulations. Among other things, these
restrictions apply to any extension of credit to us or to our other subsidiaries, to securities borrowing or lending,
derivatives, and repurchase transactions with us or our other subsidiaries, to investments in stock or other securities that we
issue, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or
services from, and sales of certain types of assets to, us or our other subsidiaries. Michigan banking laws place restrictions
on various aspects of banking, including branching, payment of dividends, loan interest rates and capital and surplus
requirements. Federal law restricts our ability to borrow from our bank by limiting the aggregate amount we may borrow
and by requiring that all loans to us be secured in designated amounts by specified forms of collateral.
With respect to the acquisition of banking organizations, we are generally required to obtain the prior approval of
the Federal Reserve Board before we can acquire all or substantially all of the assets of any bank, or acquire ownership or
control of any voting shares of any bank or bank holding company, if, after the acquisition, we would own or control more
than 5% of the voting shares of the bank or bank holding company. Acquisitions of banking organizations across state
lines are subject to restrictions imposed by federal and state laws and regulations.
The scope of regulations and supervision of various aspects of our business has expanded as a result of the
adoption in July, 2010 of the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”), and
may continue to expand as the result of implementing regulations being adopted by federal regulators. However, the new
federal administration has indicated its intention to repeal or amend certain aspects of the Dodd Frank Act and the precise
scope of those changes has not yet been determined. For additional information on this legislation and its potential impact,
refer to the Risk Factor entitled “The effect of financial services legislation and regulations remains uncertain” in Item 1A-
Risk Factors in this Annual Report.
Employees
As of December 31, 2016, we employed 552 full-time and 130 part-time persons. Management believes that
relations with employees are good.
4
Lending Policy
As a routine part of our business, we make loans to businesses and individuals located within our market areas.
Our lending policy states that the function of the lending operation is twofold: to provide a means for the investment of
funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of the creditworthy
businesses and individuals who are our customers. We recognize that in the normal business of lending, some losses on
loans will be inevitable and should be considered a part of the normal cost of doing business.
Our lending policy anticipates that priorities in extending loans will be modified from time to time as interest
rates, market conditions and competitive factors change. The policy sets forth guidelines on a nondiscriminatory basis for
lending in accordance with applicable laws and regulations. The policy describes various criteria for granting loans,
including the ability to pay; the character of the customer; evidence of financial responsibility; purpose of the loan;
knowledge of collateral and its value; terms of repayment; source of repayment; payment history; and economic conditions.
The lending policy further limits the amount of funds that may be loaned against specified types of real estate
collateral. For certain loans secured by real estate, the policy requires an appraisal of the property offered as collateral by a
state certified independent appraiser. The policy also provides general guidelines for loan to value for other types of
collateral, such as accounts receivable and machinery and equipment. In addition, the policy provides general guidelines as
to environmental analysis, loans to employees, executive officers and directors, problem loan identification, maintenance of
an allowance for loan losses, loan review and grading, mortgage and consumer lending, and other matters relating to our
lending practices.
The Board of Directors has delegated significant lending authority to officers of our bank. The Board of Directors
believes this empowerment, supported by our strong credit culture and the significant experience of our commercial
lending staff, enables us to be responsive to our customers. The loan policy specifies lending authority for our lending
officers with amounts based on the experience level and ability of each lender. Our loan officers and loan managers are
able to approve loans up to $1.0 million and $2.5 million, respectively. We have established higher approval limits for our
bank’s Senior Lender, President and Chief Executive Officer, and Executive Chairman of the Board ranging from $4.0
million up to $10.0 million. These lending authorities, however, are typically used only in rare circumstances where timing
is of the essence. Generally, loan requests exceeding $2.5 million require approval by the Officers Loan Committee, and
loan requests exceeding $7.5 million, up to the legal lending limit of approximately $80.2 million, require approval by the
bank’s Board of Directors. We apply an in-house lending limit that is significantly less than our bank’s legal lending limit.
Provisions of recent legislation, including the Dodd-Frank Act, when fully implemented by regulations to be
adopted by federal agencies, may have a significant impact on our lending policy, especially in the areas of single-family
residential real estate and other consumer lending. For additional information on this legislation and its potential impact,
refer to the Risk Factor entitled “The effect of financial services legislation and regulations remains uncertain” in Item 1A-
Risk Factors in this Annual Report.
Lending Activity
Commercial Loans. Our commercial lending group originates commercial loans primarily in our market areas.
Our commercial lenders have extensive commercial lending experience, with most having at least ten years’ experience.
Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery
and equipment acquisition, and commercial real estate financing, including new construction and land development.
Working capital loans are often structured as a line of credit and are reviewed periodically in connection with the
borrower’s year-end financial reporting. These loans are generally secured by substantially all of the assets of the borrower
and have a floating interest rate tied to the Wall Street Journal Prime Rate or 30-day Libor Rate. Loans for machinery and
equipment purposes typically have a maturity of three to five years and are fully amortizing, while commercial real estate
loans are usually written with a five-year maturity and amortize over a 10- to 20-year period. Commercial loans typically
have an interest rate that is fixed to maturity or is tied to the Wall Street Journal Prime Rate or 30-day Libor Rate.
5
We evaluate many aspects of a commercial loan transaction in order to minimize credit and interest rate risk.
Underwriting includes an assessment of the management, products, markets, cash flow, capital, income and collateral of the
borrowing entity. This analysis includes a review of the borrower’s historical and projected financial results. Appraisals
are generally required to be performed by certified independent appraisers where real estate is the primary collateral, and in
some cases, where equipment is the primary collateral. In certain situations, for creditworthy customers, we may accept
title reports instead of requiring lenders’ policies of title insurance.
Commercial real estate lending involves more risk than residential lending because loan balances are typically
greater and repayment is dependent upon the borrower’s business operations. We attempt to minimize the risks associated
with these transactions by generally limiting our commercial real estate lending to owner-operated properties and to owners
of non-owner occupied properties who have an established profitable history and satisfactory tenant structure. In many
cases, risk is further reduced by requiring personal guarantees, limiting the amount of credit to any one borrower to an
amount considerably less than our legal lending limit and avoiding certain types of commercial real estate financings.
We have no material foreign loans, and only limited exposure to companies engaged in energy producing and
agricultural-related activities.
Single-Family Residential Real Estate Loans. We originate single-family residential real estate loans in our market
areas, generally according to secondary market underwriting standards. Loans not conforming to those standards are made
in certain circumstances. Single-family residential real estate loans provide borrowers with a fixed or adjustable interest
rate with terms up to 30 years and are generally sold to certain investors.
Our bank has a home equity line of credit program. Home equity lines of credit are generally secured by either a
first or second mortgage on the borrower’s primary residence. The program provides revolving credit at a rate tied to the
Wall Street Journal Prime Rate.
Consumer Loans. We originate consumer loans for a variety of personal financial needs, including new and used
automobiles, boats, credit cards and overdraft protection for our checking account customers. Consumer loans generally
have shorter terms and higher interest rates and usually involve more credit risk than single-family residential real estate
loans because of the type and nature of the collateral.
We believe our consumer loans are underwritten carefully, with a strong emphasis on the amount of the down
payment, credit quality, employment stability and monthly income of the borrower. These loans are generally repaid on a
monthly repayment schedule with the source of repayment tied to the borrower’s periodic income. In addition, consumer
lending collections are dependent on the borrower’s continuing financial stability, and are thus likely to be adversely
affected by job loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan
will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying
collateral. We believe that the generally higher yields earned on consumer loans compensate for the increased credit risk
associated with such loans, and that consumer loans are important to our efforts to serve the credit needs of the
communities and customers that we serve.
Loan Portfolio Quality
We utilize a comprehensive grading system for our commercial loans, whereby all commercial loans are graded on
a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such
as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial
loans are graded at inception and reviewed at various intervals.
Our independent loan review program is primarily responsible for the administration of the grading system and
ensuring adherence to established lending policies and procedures. The loan review program is an integral part of
maintaining our strong asset quality culture. The loan review function works closely with senior management, although it
functionally reports to the Board of Directors. Using a risk-based approach to selecting credits for review, our loan review
program has covered approximately 65% to 75% of total commercial loans outstanding during the past two years. In
addition, a random sampling of retail loans are reviewed each quarter. Our watch list credits are reviewed monthly by our
Board of Directors and our Watch List Committee, the latter of which is comprised of senior level officers from the
administration, lending and loan review functions.
6
Loans are placed in a nonaccrual status when, in our opinion, uncertainty exists as to the ultimate collection of all
principal and interest. As of December 31, 2016, loans placed in nonaccrual status totaled $5.9 million, or 0.2% of total
loans, compared to $5.4 million, or 0.2% of total loans, at December 31, 2015. No loans were past due 90 days or more
and still accruing interest at year-end 2016, and only a nominal amount of such loans existed at year-end 2015.
Additional detail and information relative to the loan portfolio is incorporated by reference to Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) and
Note 4 of the Notes to Consolidated Financial Statements in this Annual Report.
Allowance for Loan Losses
In each accounting period, we adjust the allowance to the amount we believe is necessary to maintain the
allowance at an adequate level. Through the loan review and credit departments, we establish specific portions of the
allowance based on specifically identifiable problem loans. The evaluation of the allowance is further based on, but not
limited to, consideration of the internally prepared Allowance Analysis, loan loss migration analysis, composition of the
loan portfolio, third party analysis of the loan administration processes and portfolio, and general economic conditions.
The Allowance Analysis applies reserve allocation factors to non-impaired outstanding loan balances, the result of
which is combined with specific reserves to calculate an overall allowance amount. For non-impaired commercial loans,
reserve allocation factors are based on the loan ratings as determined by our standardized grade paradigms and by loan
purpose. Our commercial loan portfolio is segregated into five classes: 1) commercial and industrial loans; 2) vacant land,
land development and residential construction loans; 3) owner occupied real estate loans; 4) non-owner occupied real estate
loans; and 5) multi-family and residential rental property loans. The reserve allocation factors are primarily based on the
historical trends of net loan charge-offs through a migration analysis whereby net loan losses are tracked via assigned
grades over various time periods, with adjustments made for environmental factors reflecting the current status of, or recent
changes in, items such as: lending policies and procedures; economic conditions; nature and volume of the loan portfolio;
experience, ability and depth of management and lending staff; volume and severity of past due, nonaccrual and adversely
classified loans; effectiveness of the loan review program; value of underlying collateral; lending concentrations; and other
external factors, including competition and regulatory environment. Adjustments for specific lending relationships,
particularly impaired loans, are made on a case-by-case basis. Non-impaired retail loan reserve allocations are determined
in a similar fashion as those for non-impaired commercial loans, except that retail loans are segmented by type of credit and
not a grading system. We regularly review the Allowance Analysis and make adjustments periodically based upon
identifiable trends and experience.
A migration analysis is completed quarterly to assist us in determining appropriate reserve allocation factors for
non-impaired loans. Our migration takes into account various time periods; however, at year-end 2016 we placed most
weight on the period starting December 31, 2010 through December 31, 2016. We believe this period represents an
appropriate range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation
factors given current economic conditions and the general market consensus of economic conditions in the near future.
Although the migration analysis provides an accurate historical accounting of our net loan losses, it is not able to
fully account for environmental factors that will also very likely impact the collectability of our loans as of any quarter-end
date. Therefore, we incorporate the environmental factors as adjustments to the historical data. Environmental factors
include both internal and external items. We believe the most significant internal environmental factor is our credit culture
and the relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external
environmental factor being the assessment of the current economic environment and the resulting implications on our loan
portfolio.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the
sufficiency of collateral, and the timeliness of scheduled payments. We have a policy of requesting and reviewing periodic
financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of
collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the
timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to
pursue creditor’s rights in order to preserve our collateral position.
Additional detail regarding the allowance is incorporated by reference to Management’s Discussion and Analysis
and Note 4 of the Notes to Consolidated Financial Statements included in this Annual Report.
7
Investments
Bank Holding Company Investments. The principal investments of our bank holding company are the investments in
the common stock of our bank and the common securities of our trusts. Other funds of our bank holding company may be
invested from time to time in various debt instruments.
Subject to the limitations of the Bank Holding Company Act and the “Volcker Rule”, we are also permitted to
make portfolio investments in equity securities and to make equity investments in subsidiaries engaged in a variety of non-
banking activities, which include real estate-related activities such as community development, real estate appraisals,
arranging equity financing for commercial real estate, and owning and operating real estate used substantially by our bank
or acquired for its future use. Our bank holding company has no plans at this time to make directly any of these equity
investments at the bank holding company level. Our Board of Directors may, however, alter the investment policy at any
time without shareholder approval.
Our Bank’s Investments. Our bank may invest its funds in a wide variety of debt instruments and may participate
in the federal funds market with other depository institutions. Subject to certain exceptions, our bank is prohibited from
investing in equity securities. Among the equity investments permitted for our bank under various conditions and subject
in some instances to amount limitations, are shares of a subsidiary insurance agency, mortgage company, real estate
company, or Michigan business and industrial development company, such as our insurance company and our real estate
company. Under another such exception, in certain circumstances and with prior notice to or approval of the FDIC, our
bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in the acquisition
and development of real property for sale, or the improvement of real property by construction or rehabilitation of
residential or commercial units for sale or lease. Our bank has no present plans to make such an investment. Real estate
acquired by our bank in satisfaction of or foreclosure upon loans may be held by our bank for specified periods. Our bank
is also permitted to invest in such real estate as is necessary for the convenient transaction of its business. Our bank’s
Board of Directors may alter the bank’s investment policy without shareholder approval at any time.
Additional detail and information relative to the securities portfolio is incorporated by reference to Management’s
Discussion and Analysis and Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report.
Competition
We face substantial competition in all phases of our operations from a variety of different competitors. We
compete for deposits, loans and other financial services with numerous Michigan-based and national and regional banks,
savings banks, thrifts, credit unions and other financial institutions as well as from other entities that provide financial
services. Some of the financial institutions and financial service organizations with which we compete are not subject to
the same degree of regulation as we are. Many of our primary competitors have been in business for many years, have
established customer bases, are larger, have substantially higher lending limits than we do, and offer larger branch networks
and other services which we do not. Most of these same entities have greater capital resources than we do, which, among
other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit
facilities than we do. Under specified circumstances (that have been modified by the Dodd-Frank Act), securities firms and
insurance companies that elect to become financial holding companies under the Bank Holding Company Act may acquire
banks and other financial institutions. Federal banking law affects the competitive environment in which we conduct our
business. The financial services industry is also likely to become more competitive as further technological advances
enable more companies to provide financial services. We will also face new competition as we expand into the Southeast
Michigan marketplace.
Selected Statistical Information
Management’s Discussion and Analysis beginning on Page F-4 in this Annual Report includes selected statistical
information.
Return on Equity and Assets
Return on Equity and Asset information is included in Management’s Discussion and Analysis beginning on Page
F-4 in this Annual Report.
8
Available Information
We maintain an internet website at www.mercbank.com. We make available on or through our website, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practical after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission. We do not intend the address of our website to be an active link or to otherwise incorporate the contents of
our website into this Annual Report.
Item 1A. Risk Factors.
The following risk factors could affect our business, financial condition or results of operations. These risk factors
should be considered in connection with evaluating the forward-looking statements contained in this Annual Report
because they could cause the actual results and conditions to differ materially from those projected in forward-looking
statements. Before you buy our common stock, you should know that investing in our common stock involves risks,
including the risks described below. The risks that are highlighted here are not the only ones we face. If the adverse
matters referred to in any of the risks actually occur, our business, financial condition or operations could be adversely
affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Adverse changes in economic conditions or interest rates may negatively affect our earnings, capital and liquidity.
The results of operations for financial institutions, including our bank, may be materially and adversely affected
by changes in prevailing local and national economic conditions, including declines in real estate market values and the
related declines in value of our real estate collateral, rapid increases or decreases in interest rates and changes in the
monetary and fiscal policies of the federal government. Our profitability is heavily influenced by the spread between the
interest rates we earn on loans and investments and the interest rates we pay on deposits and other interest-bearing
liabilities. Substantially all of our loans are to businesses and individuals in Western or Central Michigan, and any decline
in the economy of these areas could adversely affect us. Like most banking institutions, our net interest spread and margin
will be affected by general economic conditions and other factors that influence market interest rates and our ability to
respond to changes in these rates. At any given time, our assets and liabilities may be such that they will be affected
differently by a given change in interest rates.
Significant declines in the value of commercial real estate could adversely impact us.
Approximately 65% of our total commercial loans, or about 57% of our total loans, relate to commercial real
estate. Stressed economic conditions may reduce the value of commercial real estate and strain the financial condition of
our commercial real estate borrowers, especially in the land development and non-owner occupied commercial real estate
segments of our loan portfolio. Those difficulties could adversely affect us and could produce losses and other adverse
effects on our business.
Market volatility may adversely affect us.
The capital and credit markets may experience volatility and disruption. In some cases, the markets have
produced downward pressure on stock prices and credit availability for certain issuers without apparent regard to those
issuers’ underlying financial strength. Future levels of market disruption and volatility may have an adverse effect, which
may be material, on our ability to access capital and on our business, financial condition and results of operations.
9
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future
growth and success will depend on our ability to compete effectively in this highly competitive environment. We compete
for deposits, loans and other financial services with numerous Michigan-based and national and regional banks, thrifts, credit
unions and other financial institutions as well as other entities that provide financial services, including securities firms and
mutual funds. Some of the financial institutions and financial service organizations with which we compete are not subject to
the same degree of regulation as we are. Most of our competitors have been in business for many years, have established
customer bases, are larger, have substantially higher lending limits than we do and offer larger branch networks and other
services which we do not, including trust and international banking services. Most of these entities have greater capital and
other resources than we do, which, among other things, may allow them to price their services at levels more favorable to the
customer and to provide larger credit facilities than we do. This competition may limit our growth or earnings. Under
specified circumstances (that have been modified by the Dodd-Frank Act), securities firms and insurance companies that
elect to become financial holding companies under the Bank Holding Company Act may acquire banks and other financial
institutions. Federal banking law affects the competitive environment in which we conduct our business. The financial
services industry is also likely to become more competitive as further technological advances enable more companies to
provide financial services. These technological advances may diminish the importance of depository institutions and other
financial intermediaries in the transfer of funds between parties.
Our risk management systems may fall short of their intended objectives.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of
separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls,
management review processes and other mechanisms. Our risk management process seeks to balance our ability to profit
from investing or lending positions with our exposure to potential losses. While we employ a broad and diversified set of
risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot
anticipate every economic and financial outcome or the specifics and timing of such outcomes. Thus, we may, in the
course of our activities, incur losses.
We may not be able to successfully adapt to evolving industry standards and market pressures.
Our success depends, in part, on the ability to adapt products and services to evolving industry standards. There is
increasing pressure to provide products and services at lower prices. This can reduce net interest income and noninterest
income from fee-based products and services. In addition, the widespread adoption of new technologies could require us to
make substantial capital expenditures to modify or adapt existing products and services or develop new products and
services. We may not be successful in introducing new products and services in response to industry trends or
developments in technology, or those new products may not achieve market acceptance. As a result, we could lose
business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to
cost increases. As a result, our business, financial condition, or results of operations may be adversely affected.
Our inability to integrate potential future acquisitions successfully could impede us from realizing all of the benefits
of the acquisitions, which could weaken our operations.
If we are unable to successfully integrate potential future acquisitions, we could be impeded from realizing all of
the benefits of those acquisitions and could weaken our business operations. The integration process may disrupt our
business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our
results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems,
expenses, liabilities and competitive responses, and may cause our stock price to decline. The difficulties of integrating an
acquisition include, among others:
° unanticipated issues in integration of information, communications and other systems;
° unanticipated incompatibility of logistics, marketing and administration methods;
° maintaining employee morale and retaining key employees;
° integrating the business cultures of both companies;
° preserving important strategic client relationships;
° coordinating geographically diverse organizations; and
° consolidating corporate and administrative infrastructures and eliminating duplicative operations.
10
Finally, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of
the acquisition, including the synergies, cost savings or growth opportunities we expect. These benefits may not be
achieved within the anticipated time frame as well.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely
execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions
about, one or more financial services institutions, or the financial services industry generally, have led to market-wide
liquidity problems and could lead to losses or defaults by us or by other institutions. Even routine funding transactions
expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated
when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of
the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely
affect our results of operations.
The timing and effect of Federal Reserve Board policy normalization remains uncertain.
In September, 2014, the Federal Reserve Board announced principles it would follow to implement monetary
policy normalization, that is, to raise the Federal funds rate and other short-term interest rates to more historically normal
levels and to reduce the Federal Reserve’s securities holdings, so as to promote its statutory mandate of maximum
employment and price stability. The Federal Open Market Committee raised the Federal funds rate by 25 basis points in
December 2016, and announced its intention to raise the Federal funds rate gradually over the next few years. There can be
no assurance that these rate increases will continue to occur or as to the actual impact of those policies on the financial
markets, the broader economy, or on our business, financial condition, results of operations, access to credit or the trading
price of our common stock.
The effect of financial services legislation and regulations remains uncertain.
In response to the financial crisis, on July 21, 2010, President Obama signed the Dodd-Frank Act, the most
comprehensive reform of the regulation of the financial services industry since the Great Depression of the 1930’s. Among
many other things, the Dodd-Frank Act provides for increased supervision of financial institutions by regulatory agencies,
more stringent capital requirements for financial institutions, major changes to deposit insurance assessments by the FDIC,
prohibitions on proprietary trading and sponsorship or investment in hedge funds and private equity funds by insured
depository institutions, holding companies, and their affiliates, heightened regulation of hedging and derivatives activities,
a greater focus on consumer protection issues, in part through the formation of a new Consumer Financial Protection
Bureau (“CFPB”) having powers formerly split among different regulatory agencies, extensive changes to the regulation of
residential mortgage lending, imposition of limits on interchange transaction and network fees for electronic debit
transactions and repeal of the prohibition on payment of interest on demand deposits. Many of the Dodd-Frank Act’s
provisions have delayed effective dates, while other provisions require implementing regulations of various federal
agencies, some of which have not yet been adopted in final form. More recently, the new federal administration has
indicated its intention to repeal or amend certain aspects of the Dodd-Frank Act and the precise scope of those changes has
not yet been determined. Thus the effect of financial services legislation and its implementation, amendment or repeal
remains uncertain. The implementation of federal regulation or amendment or repeal of the same may limit our business
opportunities, impose additional costs on us, impact our revenues or the value of our assets, or otherwise adversely affect
our business.
11
Our credit losses could increase and our allowance may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, when it occurs, may have a
materially adverse effect on our earnings and overall financial condition as well as the value of our common stock. Our
focus on commercial lending may result in a larger concentration of loans to small businesses. As a result, we may assume
different or greater lending risks than other banks. We make various assumptions and judgments about the collectability of
our loan portfolio and provide an allowance for losses based on several factors. If our assumptions are wrong, our
allowance may not be sufficient to cover our losses, which would have an adverse effect on our operating results. The
actual amounts of future provisions for loan losses cannot be determined at this time and may exceed the amounts of past
provisions. Additions to our allowance decrease our net income.
We rely heavily on our management and other key personnel, and the loss of any of them may adversely affect our
operations.
We are and will continue to be dependent upon the services of our management team, including our executive
officers and our other senior managers. The unanticipated loss of our executive officers, or any of our other senior
managers, could have an adverse effect on our growth and performance.
In addition, we continue to depend on our key commercial loan officers. Several of our commercial loan officers
are responsible, or share responsibility, for generating and managing a significant portion of our commercial loan portfolio.
Our success can be attributed in large part to the relationships these officers as well as members of our management team
have developed and are able to maintain with our customers as we continue to implement our community banking
philosophy. The loss of any of these commercial loan officers could adversely affect our loan portfolio and performance,
and our ability to generate new loans. Many of our key employees have signed agreements with us agreeing not to compete
with us in one or more of our markets for specified time periods if they leave employment with us. However, we may not
be able to effectively enforce such agreements.
Some of the other financial institutions in our markets also require their key employees to sign agreements that
preclude or limit their ability to leave their employment and compete with them or solicit their customers. These
agreements make it more difficult for us to hire loan officers with experience in our markets who can immediately solicit
their former or new customers on our behalf.
Future sales of our common stock or other securities may dilute the value of our common stock.
In many situations, our Board of Directors has the authority, without any vote of our shareholders, to issue shares
of our authorized but unissued preferred or common stock, including shares authorized and unissued under our equity
incentive plans. In the future, we may issue additional securities, through public or private offerings, in order to raise
additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may
dilute the per share book value of the common stock. In addition, option holders under our stock-based incentive plans
may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable
terms.
We are subject to significant government regulation, and any regulatory changes may adversely affect us.
The banking industry is heavily regulated under both federal and state law. These regulations are primarily
intended to protect customers, the federal deposit insurance fund, and the stability of the U.S. financial system, not our
creditors or shareholders. Existing state and federal banking laws subject us to substantial limitations with respect to the
making of loans, the purchase of securities, the payment of dividends and many other aspects of our business. Some of
these laws may benefit us, others may increase our costs of doing business, or otherwise adversely affect us and create
competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous
change, which may be accelerated by the recent change in the federal administration, and we cannot predict the ultimate
effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal
economic and monetary policy may also affect our ability to attract deposits, make loans and achieve satisfactory interest
spreads.
12
Minimum capital requirements have increased.
The provisions of the Dodd-Frank Act relating to capital to be maintained by financial institutions approach
convergence with the standards (generally known as Basel III) adopted in December, 2010 by the Group of Governors and
Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision. Among other things, those
standards contain a narrower definition of elements qualifying for inclusion as Tier 1 capital and higher minimum risk-
based capital levels than those specified in previous U.S. law and regulations. In July, 2013, the U.S. federal bank
regulatory agencies adopted regulations to implement the provisions of the Dodd-Frank Act and Basel III for U.S. financial
institutions. The new regulations became applicable to us and our bank effective January 1, 2015.
The new regulations implemented (i) revised definitions of regulatory capital elements, (ii) a new common equity
Tier 1 (“CET 1”) minimum capital ratio requirement, (iii) an increase in the existing minimum Tier 1 capital ratio
requirement, (iv) new limits on capital distributions and certain discretionary bonus payments if an institution does not hold
a specified amount of CET 1 (called a capital conservation buffer) in addition to the amount required to meet its minimum
risk-based capital requirements, (v) new risk-weightings for certain categories of assets, and (vi) other requirements
applicable to banking organizations which have total consolidated assets of $250 billion or more, total consolidated on-
balance sheet foreign exposure of $10 billion or more, elect to use the advanced measurement approach for calculating risk-
weighted assets, or are subsidiaries of banking organizations that use the advanced measurement approach (“Advanced
Approaches Entities”).
Among other things, the new regulations generally require banking organizations to recognize in regulatory capital
most components of accumulated other comprehensive income (“AOCI”), including accumulated unrealized gains and losses
on available for sale securities. This requirement, which was not imposed under previous risk-based capital regulations, may
be avoided by banking organizations, such as us and our bank, that are not Advanced Approaches Entities, by making a one-
time, irrevocable election on the first quarterly regulatory report following the date on which the regulations become
effective as to them. We made the one-time, irrevocable election regarding the treatment of AOCI on March 31, 2015.
In addition, the new regulations (unlike the original proposal), permit companies such as us, which had total assets
of less than $15 billion on December 31, 2009, and had issued trust preferred securities on or prior to May 19, 2010, to
continue to include such securities in Tier 1 capital.
On January 1, 2015, for banking organizations such as us and our bank that are not Advanced Approaches Entities,
the new regulations mandated a minimum ratio of CET 1 to standardized total risk-weighted assets (“RWA”) of 4.5%, an
increased ratio of Tier 1 capital to RWA of 6.0% (compared to the prior requirement of 4.0%), a total capital ratio (that is,
the sum of Tier 1 and Tier 2 capital to RWA) of 8.0%, and a minimum leverage ratio (that is, Tier 1 capital to adjusted
average total consolidated assets) of 4.0%. The calculation of these amounts is affected by the new definitions of certain
capital elements. The capital conservation buffer comprised solely of CET 1 will be phased-in commencing January 1,
2016, beginning at 0.625% of RWA and rising to 2.5% of RWA on January 1, 2019. Failure by a banking organization to
maintain the aggregate required minimum capital ratios and capital conservation buffer will impair its ability to make
certain distributions (including dividends and stock repurchases) and discretionary bonus payments to executive officers.
These increased minimum capital requirements may adversely affect our ability (and that of our bank) to pay cash
dividends, reduce our profitability, or otherwise adversely affect our business, financial condition or results of operations.
In the event of a need for additional capital to meet these requirements, there can be no assurance of our ability to raise
funding in the equity and capital markets. Factors that we cannot control, such as the disruption of financial markets or
negative views of the financial services industry generally, could impair our ability to raise qualifying equity capital. In
addition, our ability to raise qualifying equity capital could be impaired if investors develop a negative perception of our
financial prospects. If we were unable to raise qualifying equity capital, it might be necessary for us to sell assets in order
to maintain required capital ratios. We may be unable to sell some of our assets, or we may have to sell assets at a discount
from market value, either of which could adversely affect our results of operations, cash flow and financial condition.
13
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need or want to raise additional capital in the future to provide us with sufficient capital resources and
liquidity to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate
significantly. Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at
that time, which are outside of our control, and our financial performance. Economic conditions and any loss of confidence
in financial institutions generally may increase our cost of funding and limit access to certain customary sources of capital.
There can be no assurance that capital will be available on acceptable terms or at all. Any occurrence that may
limit our access to the capital markets, such as a decline in the confidence of equity or debt purchasers, or counterparties
participating in the capital markets, may adversely affect our capital costs and our ability to raise capital and, potentially,
our liquidity. Also, if we need to raise capital in the future, we may have to do so when many other financial institutions
are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise
additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial
condition and results of operations.
We continually encounter technological change, and we may have fewer resources than our competitors to continue
to invest in technological improvements.
The banking industry is undergoing technological changes with frequent introductions of new technology-driven
products and services. In addition to better serving customers, the effective use of technology increases efficiency and
enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of
our customers by using technology to provide products and services that will satisfy customer demands for convenience as
well as create additional efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements than we do. There can be no assurance that we will be able to effectively implement
new technology-driven products and services or be successful in marketing these products and services to our customers.
Our Articles of Incorporation and By-laws and the laws of the State of Michigan contain provisions that may
discourage or prevent a takeover of our company and reduce any takeover premium.
Our Articles of Incorporation and By-laws, and the corporate laws of the State of Michigan, include provisions
which are designed to provide our Board of Directors with time to consider whether a hostile takeover offer is in our and
our shareholders’ best interest. These provisions, however, could discourage potential acquisition proposals and could
delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common
stock to participate in tender offers, including tender offers at a price above the then-current market price for our common
stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for
their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they
may deem to be in their best interest.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or
discourage various types of hostile takeover activities. In addition to these provisions and the provisions of our Articles of
Incorporation and By-laws, federal law requires the Federal Reserve Board’s approval prior to acquiring “control” of a
bank holding company. All of these provisions may delay or prevent a change in control without action by our
shareholders and could adversely affect the price of our common stock.
There is a limited trading market for our common stock.
The price of our common stock has been, and will likely continue to be, subject to fluctuations based on, among
other things, economic and market conditions for bank holding companies and the stock market in general, as well as
changes in investor perceptions of our company. The issuance of new shares of our common stock also may affect the
market for our common stock.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM.” The development
and maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence
of which is beyond our control. While we are a publicly-traded company, the volume of trading activity in our stock is still
relatively limited. Even if a more active market develops, there can be no assurance that such a market will continue, or
that our shareholders will be able to sell their shares at or above the price at which they acquired shares.
14
Our business is subject to operational risks.
We, like most financial institutions, are exposed to many types of operational risks, including the risk of fraud by
employees or outsiders, unauthorized transactions by employees or operational errors. Operational errors may include
clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Given
our volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully
corrected. Our necessary dependence upon automated systems to record and process our transaction volume may further
increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses
that are difficult to detect.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially
beyond our control, including, for example, computer viruses or electrical or telecommunications outages, which may give
rise to losses in service to customers and to loss or liability to us. We are further exposed to the risk that our external
vendors may be unable to fulfill their contractual obligations to us, or will be subject to the same risk of fraud or
operational errors by their respective employees as are we, and to the risk that our or our vendors’ business continuity and
data security systems prove not to be adequate. We also face the risk that the design of our controls and procedures proves
inadequate or is circumvented, causing delays in detection or errors in information. Although we maintain a system of
controls designed to keep operational risks at appropriate levels, there can be no assurance that we will not suffer losses
from operational risks in the future that may be material in amount.
We face the risk of cyber-attack to our computer systems.
Our computer systems, software and networks have been and will continue to be vulnerable to unauthorized
access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service,
computer viruses or other malicious code, cyber-attacks and other events. These threats may derive from human error,
fraud or malice on the part of employees or third parties, or may result from accidental technological failure. If one or
more of these events occurs, it could result in the disclosure of confidential client information, damage to our reputation
with our clients and the market, additional costs to us (such as repairing systems or adding new personnel or protection
technologies), regulatory penalties and financial losses, to both us and our clients and customers. Such events could also
cause interruptions or malfunctions in our operations (such as the lack of availability of our online banking system), as well
as the operations of our clients, customers or other third parties. Although we maintain safeguards to protect against these
risks, there can be no assurance that we will not suffer losses in the future that may be material in amount.
Damage to our reputation could materially harm our business.
Our relationship with many of our clients is predicated upon our reputation as a fiduciary and a service provider
that adheres to the highest standards of ethics, service quality and regulatory compliance. Adverse publicity, regulatory
actions, litigation, operational failures, the failure to meet client expectations and other issues with respect to one or more
of our businesses could materially and adversely affect our reputation, our ability to attract and retain clients or our sources
of funding for the same or other businesses. Preserving and enhancing our reputation also depends on maintaining systems
and procedures that address known risks and regulatory requirements, as well as our ability to identify and mitigate
additional risks that arise due to changes in our businesses and the marketplaces in which we operate, the regulatory
environment and client expectations. If any of these developments has a material effect on our reputation, our business will
suffer.
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the staff of the Securities
and Exchange Commission that were issued 180 days or more before the end of our 2016 fiscal year and that remain
unresolved.
15
Item 2. Properties.
Our headquarters is located in our bank’s main office facility in Grand Rapids, Michigan. Our bank operates 48
banking offices concentrated throughout Western and Central Michigan, most of which are full-service facilities. We also
recently opened a banking office in Troy, Michigan. We have larger banking facilities in Alma, Holland, Ionia,
Kalamazoo, Lansing, Mt. Pleasant and West Branch. The remaining banking offices generally range in size from 1,200 to
3,200 square feet, based on the location and number of employees located at the facility. All but five of the banking offices
are owned by our bank, with the remaining facilities rented under various operating lease agreements. In several instances,
the banking offices contain more usable space than what is needed for current banking operations. This excess space,
totaling approximately 23,500 square feet, is generally leased to unrelated businesses. In addition, certain functions operate
out of our standalone facility located in Alma.
We consider our properties and equipment to be well maintained, in good operating condition and capable of
accommodating current growth forecasts. However, we may choose to add branch locations to expand our presence in
current markets and/or in new markets or, alternatively, to consolidate, close or relocate branches if we believe it would be
beneficial to our overall performance.
Item 3. Legal Proceedings.
From time to time, we may be involved in various legal proceedings that are incidental to our business. In the
opinion of management, we are not a party to any legal proceedings that are material to our financial condition, either
individually or in the aggregate.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM.” At March 1, 2017,
there were approximately 1,600 record holders of our common stock. In addition, we estimate that there were
approximately 7,000 beneficial owners of our common stock who own their shares through brokers or banks. The
following table shows the high and low sales prices for our common stock as reported by the Nasdaq Global Select Market
for the periods indicated and the quarterly and special cash dividends paid by us during those periods.
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
24.37 $
25.40
27.99
38.68
21.23 $
22.00
21.96
26.27
20.84 $
21.05
23.42
26.48
18.75 $
19.35
18.42
19.27
0.16
0.16
0.17
0.67
0.14
0.14
0.15
0.15
16
Holders of our common stock are entitled to receive dividends that the Board of Directors may declare from time
to time. We may only pay dividends out of funds that are legally available for that purpose. We are a financial holding
company and substantially all of our assets are held by our bank and its subsidiaries. Our ability to pay dividends to our
shareholders depends primarily on our bank’s ability to pay dividends to us. Dividend payments and extensions of credit to
us from our bank are subject to legal and regulatory limitations, generally based on capital levels and current and retained
earnings, imposed by law and regulatory agencies with authority over our bank. The ability of our bank to pay dividends is
also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. In addition,
under the terms of our subordinated debentures, we would be precluded from paying dividends on our common stock if an
event of default has occurred and is continuing under the subordinated debentures, or if we exercised our right to defer
payments of interest on the subordinated debentures, until the deferral ended.
We and our bank are subject to regulatory capital requirements administered by state and federal banking
agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material
effect on our financial statements. 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 14, 2016, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.16 per share that was paid on March 23, 2016 to shareholders of record as of March 11, 2016. On April 14, 2016, our
Board of Directors declared a cash dividend on our common stock in the amount of $0.16 per share that was paid on June
23, 2016 to shareholders of record as of June 10, 2016. On July 14, 2016, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.17 per share that was paid on September 21, 2016 to shareholders of record as of
September 9, 2016. On October 13, 2016, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.17 per share that was paid on December 21, 2016 to shareholders of record as of December 9, 2016. In
addition, on October 13, 2016, our Board of Directors declared a special cash dividend on our common stock in the amount
of $0.50 per share that was paid on December 21, 2016 to shareholders of record as of December 9, 2016.
On January 15, 2015, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.14 per share that was paid on March 25, 2015 to shareholders of record as of March 13, 2015. On April 16, 2015, our
Board of Directors declared a cash dividend on our common stock in the amount of $0.14 per share that was paid on June
24, 2015 to shareholders of record as of June 12, 2015. On July 16, 2015, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.15 per share that was paid on September 23, 2015 to shareholders of record as of
September 11, 2015. On October 15, 2015, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.15 per share that was paid on December 23, 2015 to shareholders of record as of December 11, 2015.
On 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. During 2016, we repurchased 167,878 shares at a total price of $3.7 million, at an average price per share
of $22.23. 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. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional
repurchases may be made during 2017 under the authorized plan, which would also likely be funded from cash dividends
paid to us from our bank.
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 will be paid on March 22, 2017 to shareholders of record as of March 10, 2017.
17
Issuer Purchases of Equity Securities
We announced on January 30, 2015 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. No shares of our common stock were repurchased during the fourth quarter of 2016.
(d)
Maximum
Number of
Shares or
Approximate
Dollar Value
that May Yet
Be
Purchased
Under the
Plans or
Programs
(c) Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
0 $ 15,505,000
0 15,505,000
0 15,505,000
0 $ 15,505,000
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
Per Share
NA
NA
NA
NA
0 $
0
0
0 $
Period
October 1 – 31
November 1 – 30
December 1 – 31
Total
Shareholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return
on our common stock (based on the last reported sales price of the respective year) with the cumulative total return of the
Nasdaq Composite Index and the SNL Bank Nasdaq Index from December 31, 2011 through December 31, 2016. The
following is based on an investment of $100 on December 31, 2011 in our common stock, the Nasdaq Composite Index and
the SNL Bank Nasdaq Index, with dividends reinvested where applicable.
18
Total Return Performance
Mercantile Bank Corporation
NASDAQ Composite
SNL Bank NASDAQ
500
450
400
350
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Index
Mercantile Bank Corporation
NASDAQ Composite
SNL Bank NASDAQ
12/31/11
100.00
100.00
100.00
12/31/12
170.27
117.45
119.19
12/31/13
228.14
164.57
171.31
12/31/14
249.26
188.84
177.42
12/31/15
299.20
201.98
191.53
12/31/16
477.96
219.89
265.56
Period Ending
Item 6.
Selected Financial Data.
The Selected Financial Data in this Annual Report is incorporated here by reference.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis included in this Annual Report is incorporated here by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information under the heading “Market Risk Analysis” included in this Annual Report is incorporated here by
reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Reports of
Independent Registered Public Accounting Firm included in this Annual Report are incorporated here by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
19
Item 9A. Controls and Procedures.
As of December 31, 2016, an evaluation was performed under the supervision of and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of
December 31, 2016.
There have been no significant changes in our internal control over financial reporting during the quarter ended
December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f). There are inherent limitations in the effectiveness of any system
of internal control. Accordingly, even an effective system of internal control can provide only reasonable assurance with
respect to financial statement preparation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as
of December 31, 2016. This evaluation was based on criteria for effective internal control over financial reporting
described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our evaluation under the COSO framework, our management concluded that
our internal control over financial reporting was effective as of December 31, 2016. Refer to page F-33 for management’s
report.
Our independent registered public accounting firm has issued an audit report on our internal control over financial
reporting which is included in this Annual Report.
Item 9B. Other Information.
None
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information presented under the captions “Election of Directors,” “Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance” and “Corporate Governance – Code of Ethics” in the definitive Proxy
Statement of Mercantile for our May 25, 2017 Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which
will be filed with the Securities and Exchange Commission before April 30, 2017, is incorporated here by reference.
We have a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of
the Securities Exchange Act of 1934. The members of the Audit Committee consist of David M. Cassard, Edward J. Clark,
Michelle L. Eldridge, Jeff A. Gardner and Edward B. Grant. The Board of Directors has determined that Messrs. Cassard
and Grant, members of the Audit Committee, are qualified as audit committee financial experts, as that term is defined in
the rules of the Securities and Exchange Commission. All five members of the committee are independent, as
independence for audit committee members is defined in the Nasdaq listing standards and the rules of the Securities and
Exchange Commission.
Item 11. Executive Compensation.
The information presented under the captions “Executive Compensation,” “Corporate Governance –
Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy
Statement is incorporated here by reference.
20
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information presented under the caption “Stock Ownership of Certain Beneficial Owners and Management”
in the Proxy Statement is incorporated here by reference.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2016, relating to compensation plans under
which equity securities are authorized for issuance.
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
Plan Category
Equity compensation plans approved by security holders (1)
61,083 $
15.17
407,000 (2)
Equity compensation plans not approved by security holders
0
0
0
Total
61,083 $
15.17
407,000
(1) Includes Mercantile’s Stock Incentive Plan of 2006 and Stock Incentive Plan of 2016. Also, in conjunction with the
merger with Firstbank, we issued Mercantile stock options in replacement of all outstanding stock option grants that had
been issued to Firstbank employees under the Firstbank Corporation Stock Option and Restricted Stock Plan of 1997 and
the Firstbank Corporation Stock Compensation Plan.
(2) These securities are available under the Stock Incentive Plan of 2016. Incentive awards may include, but are not limited
to, stock options, restricted stock, stock appreciation rights and stock awards. No further issuances will be made under
Mercantile’s Stock Incentive Plan of 2006, the Firstbank Corporation Stock Option and Restricted Stock Plan of 1997 or
the Firstbank Corporation Stock Compensation Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information presented under the captions “Transactions with Related Persons” and “Corporate Governance –
Director Independence” in the Proxy Statement is incorporated here by reference.
Item 14. Principal Accountant Fees and Services.
The information presented under the caption “Principal Accountant Fees and Services” in the Proxy Statement is
incorporated here by reference.
21
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) (1) Financial Statements. The following financial statements and reports of the independent registered public
accounting firm of Mercantile Bank Corporation and its subsidiaries are filed as part of this report:
Reports of Independent Registered Public Accounting Firm dated March 6, 2017 – BDO USA, LLP
Consolidated Balance Sheets --- December 31, 2016 and 2015
Consolidated Statements of Income for each of the three years in the period ended December 31, 2016
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,
2016
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended
December 31, 2016
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016
Notes to Consolidated Financial Statements
The Consolidated Financial Statements, the Notes to the Consolidated Financial Statements, and the Reports of
Independent Registered Public Accounting Firm listed above are incorporated by reference in Item 8 of this report.
(2) Financial Statement Schedules
Not applicable
(b) Exhibits:
The Exhibit Index following the Signatures Page hereto is incorporated by reference under this item.
(c) Financial Statements Not Included In Annual Report
Not applicable
Item 16. Form 10-K Summary
None.
22
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2016 and 2015
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2016 and 2015
CONTENTS
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
F-4
F-31
F-33
F-34
F-35
F-36
F-37
F-40
F-42
F-2
Consolidated Results of Operations:
2016
2015
2014(*)
(Dollars in thousands except per share data)
2013
SELECTED FINANCIAL DATA
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Preferred stock dividends and accretion
Net income attributable to common shares
Consolidated Balance Sheet Data:
Total assets
Cash and cash equivalents
Securities
Loans
Allowance for loan losses
Bank owned life insurance
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated debentures
Shareholders’ equity
Consolidated Financial Ratios:
12,590
$ 118,457 $ 112,328 $
11,154
105,867 101,174
(1,000 )
16,038
79,381
38,831
11,811
27,020
0
27,020 $
2,900
21,038
77,118
46,887
14,974
31,913
0
31,913 $
$
89,118 $
11,340
77,778
(3,000 )
10,028
65,610
25,196
7,865
17,331
0
17,331 $
58,242 $
10,786
47,456
(7,200 )
6,872
36,403
25,125
8,092
17,033
0
17,033 $
2012
59,917
13,216
46,701
(3,100 )
7,994
39,624
18,171
5,636
12,535
1,030
11,505
$ 3,082,571 $ 2,903,556 $ 2,893,379 $ 1,426,966 $ 1,422,926
89,891 172,738 146,965 136,003
183,596
336,086 354,559 446,611 143,139 150,275
2,378,620 2,277,727 2,089,277 1,053,243 1,041,189
28,677
50,048
15,681
58,971
20,041
57,861
22,821
51,377
17,961
67,198
2,374,985 2,275,382 2,276,915 1,118,911 1,135,204
64,765
131,710 154,771 167,569
35,000
54,022
175,000
32,990
54,472
44,835
340,811 333,804 328,138 153,325 146,590
69,305
45,000
32,990
68,000
55,154
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
1.07 %
9.35 %
11.42 %
0.94 %
8.19 %
11.45 %
0.76 %
6.91 %
11.05 %
1.22 %
11.36 %
10.77 %
0.82 %
7.51 %
10.90 %
Nonperforming loans to total loans
Allowance for loan losses to total originated
loans
0.25 %
0.24 %
1.41 %
0.64 %
1.82 %
0.95 %
0.94 %
1.55 %
2.17 %
2.75 %
Tier 1 leverage capital
Common equity risk-based capital
Tier 1 risk-based capital
Total risk-based capital
Per Common Share Data:
Net income:
Basic
Diluted
11.17 %
10.88 %
12.47 %
13.13 %
11.56 %
10.89 %
12.83 %
13.45 %
11.15 %
NA
13.57 %
14.43 %
12.53 %
NA
14.65 %
15.91 %
11.31 %
NA
13.37 %
14.63 %
$
1.96 $
1.96
1.63 $
1.62
1.28 $
1.28
1.96 $
1.95
1.33
1.30
Tangible book value per share at end of period
Dividends declared
Dividend payout ratio
17.14
1.16
58.70 %
16.61
0.58
35.22 %
15.49
2.48
141.16 %
17.54
0.45
22.83 %
16.84
0.09
6.73 %
(*) – Merger with Firstbank effective June 1, 2014.
F-3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion and other portions of this Annual Report contain forward-looking statements that are based on
management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry,
the economy, and about our company. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,”
“intends,” “is likely,” “plans,” “projects,” and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and
degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include, among others, changes in interest rates and interest rate relationships; demand for products and
services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation or actions
by bank regulators; changes in tax laws; changes in prices, levies, and assessments; impact of technological advances;
governmental and regulatory policy changes; outcomes of contingencies; trends in customer behavior as well as their
ability to repay loans; changes in local real estate values; changes in the national and local economies; and other risk factors
described in Item 1A of this Annual Report. These are representative of the Future Factors that could cause a difference
between an ultimate actual outcome and a forward-looking statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and
Analysis”) is based on Mercantile Bank Corporation’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses, and actual results could differ from those estimates. We have reviewed
the analyses with the Audit Committee of our Board of Directors.
Allowance For Loan Losses: The allowance for loan losses (“allowance”) is maintained at a level we believe is adequate to
absorb probable incurred losses identified and inherent in the loan portfolio. Our evaluation of the adequacy of the
allowance is an estimate based on past loan loss experience, the nature and volume of the loan portfolio, information about
specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of
the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. Loan
losses are charged against the allowance when we believe the uncollectability of a loan is likely. The balance of the
allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic
conditions could result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or
improved economic conditions may result in a decline in the required allowance in the future. In either instance,
unanticipated changes could have a significant impact on the allowance and operating results.
We complete a migration analysis quarterly to assist us in determining appropriate reserve allocation factors for non-
impaired loans. Our migration takes into account various time periods; however, at year-end 2016 we placed most weight
on the period starting December 31, 2010 through December 31, 2016. We believe this period represents an appropriate
range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation factors given
current economic conditions and the general market consensus of economic conditions in the near future.
F-4
Although the migration analysis provides an accurate historical accounting of our net loan losses, it is not able to fully
account for environmental factors that will also very likely impact the collectability of our loans as of any quarter-end date.
Therefore, we incorporate the environmental factors as adjustments to the historical data. Environmental factors include
both internal and external items. We believe the most significant internal environmental factor is our credit culture and the
relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external
environmental factor being the assessment of the current economic environment and the resulting implications on our loan
portfolio.
The allowance is increased through a provision charged to operating expense. Uncollectable loans are charged-off through
the allowance. Recoveries of loans previously charged-off are added to the allowance. A loan is considered impaired when
it is probable that contractual principal and interest payments will not be collected either for the amounts or by the dates as
scheduled in the loan agreement. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as
residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan is impaired,
a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing interest rate or at the fair value of collateral if repayment is expected solely from the collateral.
The timing of obtaining outside appraisals varies, generally depending on the nature and complexity of the property being
evaluated, general breadth of activity within the marketplace and the age of the most recent appraisal. For collateral
dependent impaired loans, in most cases we obtain and use the “as is” value as indicated in the appraisal report, adjusting
for any expected selling costs. In certain circumstances, we may internally update outside appraisals based on recent
information impacting a particular or similar property, or due to identifiable trends (e.g., recent sales of similar properties)
within our markets. The expected future cash flows exclude potential cash flows from certain guarantors. To the extent
these guarantors are able to provide repayments, a recovery would be recorded upon receipt. Loans are evaluated for
impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the
credit relationship. Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on
nonaccrual status. We put loans into nonaccrual status when the full collection of principal and interest is not expected.
Income Tax Accounting: Current income tax assets and liabilities are established for the amount of taxes payable or
refundable for the current year. In the preparation of income tax returns, tax positions are taken based on interpretation of
federal and state income tax laws for which the outcome may be uncertain. We periodically review and evaluate the status
of our tax positions and make adjustments as necessary. Deferred income tax assets and liabilities are also established for
the future tax consequences of events that have been recognized in our financial statements or tax returns. A deferred
income tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences that can
be carried forward (used) in future years. The valuation of our net deferred income tax asset is considered critical as it
requires us to make estimates based on provisions of the enacted tax laws. The assessment of the realizability of the net
deferred income tax asset involves the use of estimates, assumptions, interpretations and judgments concerning accounting
pronouncements, federal and state tax codes and the extent of future taxable income. There can be no assurance that future
events, such as court decisions, positions of federal and state taxing authorities, and the extent of future taxable income will
not differ from our current assessment, the impact of which could be significant to the consolidated results of operations
and reported earnings.
Accounting guidance requires us to assess whether a valuation allowance should be established against our deferred tax
assets based on the consideration of all available evidence using a “more likely than not” standard. In making such
judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as
other factors that may impact future operating results. Significant weight is given to evidence that can be objectively
verified.
F-5
Securities and Other Financial Instruments: Securities available for sale consist of bonds and notes which might be sold
prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments,
liquidity needs and other factors. Securities classified as available for sale are reported at their fair value. Declines in the
fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other
than temporary losses, we consider: (1) the length of time and extent that fair value has been less than carrying value; (2)
the financial condition and near term prospects of the issuer; and (3) our ability and intent to hold the security for a period
of time sufficient to allow for any anticipated recovery in fair value. Fair values for securities available for sale are
generally obtained from outside sources and applied to individual securities within the portfolio. The difference between
the amortized cost and the current fair value of securities is recorded as a valuation adjustment and reported in other
comprehensive income.
Mortgage Servicing Rights: Mortgage servicing rights are recognized as assets based on the allocated fair value of retained
servicing rights on mortgage loans sold. Servicing rights are carried at the lower of amortized cost or fair value and are
expensed in proportion to, and over the period of, estimated net servicing income. We utilize a discounted cash flow model
to determine the value of our servicing rights. The valuation model utilizes mortgage loan prepayment speeds, the
remaining life of the mortgage loan pool, delinquency rates, our cost to service the mortgage loans and other factors to
determine the cash flow that we will receive from servicing each grouping of mortgage loans. These cash flows are then
discounted based on current interest rate assumptions to arrive at the fair value of the right to service those mortgage loans.
Impairment is evaluated quarterly based on the fair value of the mortgage servicing rights, using groupings of the
underlying mortgage loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.
Goodwill: Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities
of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination
of the fair value, including the use of discounted cash flow analysis, market comparisons and projected revenue streams.
For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our
own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to
determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price
paid for the acquired company and the fair value of its balance sheet is recorded as goodwill.
Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A
more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the
goodwill may not be recoverable. We may elect to perform a qualitative assessment for the annual impairment test. If the
qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for
goodwill impairment. The quantitative test is a two-step process consisting of comparing the carrying value of the
reporting unit to an estimate of its fair value. If the estimated fair value of the reporting unit is less than the carrying value,
goodwill is impaired and is written down to its estimated fair value. In 2015 and 2016, we elected to perform a qualitative
assessment for our annual impairment test and concluded it is more likely than not our fair value was greater than its
carrying amount; therefore, no further testing was required. Our qualitative assessment considered factors such as
macroeconomic conditions, market conditions specifically related to the banking industry and our overall financial
condition and results of operations.
INTRODUCTION
This Management’s Discussion and Analysis should be read in conjunction with the consolidated financial statements
contained in this Annual Report. This discussion provides information about the consolidated financial condition and
results of operations of Mercantile Bank Corporation and its consolidated subsidiary, Mercantile Bank of Michigan (“our
bank”), and of Mercantile Bank Real Estate Co., L.L.C. (“our real estate company”) and Mercantile Insurance Center, Inc.
(“our insurance company”), subsidiaries of our bank. Unless the text clearly suggests otherwise, references to “us,” “we,”
“our,” or “the company” include Mercantile Bank Corporation and its wholly-owned subsidiaries referred to above.
F-6
FINANCIAL OVERVIEW
We recorded net income of $31.9 million, or $1.96 per diluted share, for 2016. For 2015, we recorded net income of $27.0
million, or $1.62 per diluted share. Our earnings performance during 2016 reflects a 21% increase in diluted earnings per
share when compared to 2015. Our net interest income during 2016 was positively impacted by calls on U.S. Government
agency bonds that had been purchased at a discounted price, allowing us to record accelerated discount accretion totaling
$2.2 million. In addition, in January we repurchased $11.0 million in trust preferred securities at a 27% discount, resulting
in a pre-tax gain of $3.0 million. Provision expense during 2016 totaled $2.9 million, compared to a negative $1.0 million
in 2015.
The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.25% of total loans as of
December 31, 2016. The strength of our loan portfolio, combined with recoveries of prior loan charge-offs and the
eliminations of and reductions in specific reserves, had produced a positive impact on our allowance calculations and
allowed us to make negative provisions during the prior four calendar years. While our loan portfolio remains as strong,
ongoing loan growth, lower eliminations of and reductions in specific reserves and a change in the economic and
concentration environmental factors resulted in us recording a positive provision expense in 2016. We believe the
provision expense recorded during 2016 reflects a more normalized economic and operating environment, and expect to
record a similar provision expense during 2017. Gross loan charge-offs during 2016 totaled $2.2 million, while recoveries
of prior period loan charge-offs totaled $1.6 million, providing for net loan charge-offs of $0.6 million, or only 0.03% of
average total loans. We continue our collection efforts on charged-off loans, and expect to record recoveries in future
periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the
recoveries. Accruing loans past due 30 to 89 days remain very low.
New commercial term loan originations totaled approximately $549 million during 2016, slightly greater than the $532
million we booked during 2015. We also experienced net increases in commercial lines of credit during both years, in large
part reflecting lines that are part of new commercial lending relationships established during recent quarterly periods. Net
loan growth equaled $101 million during 2016, compared to $188 million during 2015, with both years reflecting the
impact of scheduled monthly payments as well as expected and unexpected commercial loan payoffs. Commercial loan
payoffs during the fourth quarter of 2016 were higher than typical, in large part reflecting the impact of credit decisions and
the competitive operating environment. During 2016, total commercial loans grew $119 million, or 6.1%, with commercial
real estate non-owner occupied loans growing $104 million. The new loan pipeline remains strong, and at year-end 2016,
we had $102 million in unfunded loan commitments on commercial construction and development projects that are in the
construction phase. We believe our loan portfolio is well diversified, with commercial real estate non-owner occupied
loans comprising 32%, commercial and industrial loans equaling 30%, commercial real estate owner occupied loans
comprising 19% and residential mortgage and consumer loans aggregating 13% of total loans as of December 31, 2016. As
a percent of total commercial loans, commercial and industrial loans and commercial real estate owner occupied loans
combined equaled 56% at year-end 2016, compared to 59% at December 31, 2015.
Our funding structure is also well diversified. As of December 31, 2016, noninterest-bearing checking accounts comprised
30% of total funds, interest-bearing checking and securities sold under agreements to repurchase (“sweep accounts”)
combined for 19%, savings and money market deposit accounts aggregated to 23% and local time deposits accounted for
19%. Wholesale funds, comprised of brokered deposits and Federal Home Loan Bank of Indianapolis (“FHLBI”)
advances, represented 9% of total funds.
SUBSEQUENT EVENT
On February 27, 2017, we filed a Form 8-K with the SEC announcing our expansion into the Southeast Michigan market
with the opening of a loan production office located in Troy, Michigan. We will soon be filing a branch application with the
Federal Deposit Insurance Corporation and Michigan Department of Insurance and Financial Services, and expect to expand
the activities of the new loan production office to a full service branch once the necessary regulatory approvals are received.
F-7
FINANCIAL CONDITION
Our total assets increased $179 million during 2016, and totaled $3.08 billion as of December 31, 2016. Total loans
increased $101 million and interest-earning deposits were up $86.9 million, while securities available for sale declined
$18.9 million. Total deposits increased $99.6 million and FHLBI advances were up $107 million, while sweep accounts
were down $23.1 million during 2016. We maintained a relatively high balance of funds in our interest-earning deposit
account at the Federal Reserve Bank of Chicago during the fourth quarter of 2016, primarily reflecting an excess liquidity
position resulting from the reduction in total loans and an increase in local deposits. During the first quarter of 2017, our
liquidity position returned to the more typical level such as it was at year-end 2015 primarily due to net loan growth,
brokered deposit maturities and a reduction in checking account products reflecting estimated federal income tax payments
from certain commercial customers.
Earning Assets
Average earning assets equaled 92.5% of average total assets during 2016, similar to the 92.1% during 2015. The loan
portfolio continued to comprise a majority and increasing level of earning assets, followed by securities and interest-
earning deposits. Average total loans equaled 84.9% of average earning assets during 2016, compared to 82.1% in 2015,
while securities and other interest-earning assets combined comprised 15.1% of average earning assets during 2016,
compared to 17.9% in 2015. The loan component of earning assets has increased since the effective date of the merger
with Firstbank reflecting our strategy to fund a majority of the net loan growth with monies from maturities and calls of
U.S. Government agency and municipal bonds and paydowns on mortgage-backed securities as the securities portfolio as a
percent of earning assets was larger than desired. The securities portfolio reached the desired level during the second
quarter of 2016; therefore, we expect to fund future net loan growth with increases in local deposits and FHLBI advances.
We further anticipate the level of earning assets to total assets remaining relatively stable at approximately 93%.
Our loan portfolio has historically been primarily comprised of commercial loans, although less so now following the
merger with Firstbank. Commercial loans increased $119 million during 2016, and at December 31, 2016 totaled $2.07
billion, or 86.8% of the loan portfolio. As of December 31, 2015, the commercial loan portfolio comprised 85.5% of total
loans. Non-owner occupied commercial real estate (“CRE”) loans increased $104 million, commercial and industrial loans
were up $17.6 million, owner occupied CRE loans increased $4.5 million and multi-family and residential rental loans
grew $2.9 million, while vacant land, land development and residential construction loans were down $10.3 million. As a
percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled
56.4% as of December 31, 2016, compared to 58.7% as of December 31, 2015.
We have significantly enhanced our commercial loan calling efforts over the past several years. We are very pleased with
the $1.8 billion in new commercial term loan fundings over the past five years, and our current commercial loan pipeline
reports indicate continued strong commercial loan funding opportunities in future periods. Also, as of December 31, 2016,
availability on existing construction and development loans totaled $102 million, with most of those commitments expected
to be drawn during 2017. Further, we have made additional lending commitments totaling $154 million, a majority of
which we expect to be accepted and funded over the next 12 to 18 months. Our commercial loan officers also report
substantial additional opportunities they are currently discussing with existing borrowers and potential new customers.
We continue to experience commercial loan principal paydowns and payoffs. While a portion of the principal paydowns
and payoffs received thus far have been welcomed, such as on stressed lending relationships, we have also experienced
significant instances where well-performing relationships have been refinanced at other financial institutions or non-bank
companies, and other situations where the borrower has sold the underlying asset. In many of those cases where the loans
have been refinanced elsewhere, we believed the terms and conditions of the new lending arrangements were too
aggressive, generally reflecting the very competitive banking environment in our markets. We remain committed to
prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits
we have established within our commercial loan portfolio. In addition, we continue to receive accelerated principal
paydowns from certain borrowers who have elevated deposit balances generally resulting from profitable operations and an
apparent unwillingness to expand their business and/or replace equipment due to economic- and tax-related uncertainties.
Usage of existing commercial lines of credit has remained relatively steady.
One-to-four family mortgage loans and other consumer loans declined a combined $17.8 million during 2016, and at
December 31, 2016 totaled a combined $313 million, or 13.2% of the loan portfolio. One-to-four family mortgage loans
and other consumer-related loans combined equated to 14.5% of total loans as of December 31, 2015.
F-8
The following table summarizes our loan portfolio:
12/31/16
12/31/15
12/31/14
12/31/13
12/31/12
Commercial:
Commercial & Industrial
Land Development & Construction
Owner Occupied Commercial Real
$ 713,903,000 $ 696,303,000 $ 550,629,000 $ 286,373,000 $ 285,322,000
48,099,000
36,741,000
34,828,000
51,977,000
45,120,000
Estate
450,464,000 445,919,000 430,406,000 261,877,000 259,277,000
Non-Owner Occupied Commercial
Real Estate
Multi-Family & Residential Rental
Total Commercial
748,269,000 644,351,000 559,594,000 364,066,000 324,886,000
117,883,000 115,003,000 122,772,000
50,922,000
2,065,347,000 1,946,696,000 1,715,378,000 986,696,000 968,506,000
37,639,000
Retail:
1-4 Family Mortgages
Home Equity & Other Consumer
Loans
Total Retail
Total Loans
195,226,000 190,385,000 214,695,000
31,467,000
33,766,000
118,047,000 140,646,000 159,204,000
313,273,000 331,031,000 373,899,000
35,080,000
66,547,000
38,917,000
72,683,000
$ 2,378,620,000 $ 2,277,727,000 $ 2,089,277,000 $ 1,053,243,000 $ 1,041,189,000
The following table presents total loans outstanding as of December 31, 2016, according to scheduled repayments of
principal on fixed rate loans and repricing frequency on variable rate loans. Floating rate loans that are currently at interest
rate floors are treated as fixed rate loans and are reflected using maturity date and not repricing frequency.
Less Than
One Year
One Through More Than
Five Years Five Years
Total
Construction and land development
Real estate - residential properties
Real estate - multi-family properties
Real estate - commercial properties
Commercial and industrial
Consumer
Total loans
Fixed rate loans
Floating rate loans
Total loans
$
8,003,000 21,535,000 29,448,000
87,867,000 $ 33,385,000 $ 18,164,000 $ 139,416,000
50,277,000 146,810,000 109,650,000 306,737,000
58,986,000
477,313,000 466,040,000 207,752,000 1,151,105,000
505,809,000 143,632,000 31,072,000 680,513,000
41,863,000
$ 1,132,807,000 $ 842,007,000 $ 403,806,000 $ 2,378,620,000
3,538,000 30,605,000
7,720,000
$ 241,609,000 $ 803,259,000 $ 378,680,000 $ 1,423,548,000
891,198,000 38,748,000 25,126,000 955,072,000
$ 1,132,807,000 $ 842,007,000 $ 403,806,000 $ 2,378,620,000
Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and
early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures
are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, we must
rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because
of changing economic conditions. Identified problem loans, which exhibit characteristics (financial or otherwise) that
could cause the loans to become nonperforming or require restructuring in the future, are included on the internal loan
watch list. Senior management and the Board of Directors review this list regularly. Market value estimates of collateral
on impaired loans, as well as on foreclosed and repossessed assets, are reviewed periodically; however, we have a process
in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit
policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and
internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets,
listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address
distressed market conditions.
F-9
Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed
properties, totaled $6.4 million (0.2% of total assets) as of December 31, 2016, compared to $6.7 million (0.2% of total
assets) as of December 31, 2015. The volume of nonperforming assets has generally been on a declining trend since the
peak of $118 million on March 31, 2010. Reductions in nonperforming assets over the past couple of years primarily
reflect principal payments on nonaccrual loans and sales proceeds on foreclosed properties. One commercial loan
relationship, which was placed on nonaccrual during late 2014, accounted for approximately 70% of total nonperforming
assets at year-end 2014. This relationship was resolved during mid-2015. Given the low level of nonperforming loans and
accruing loans 30 to 89 days delinquent, combined with the declining level of watch list credits and what we believe are
strong credit administration practices, we are pleased with the overall quality of the loan portfolio.
The following tables provide a breakdown of nonperforming assets by property type:
NONPERFORMING LOANS
12/31/16 12/31/15 12/31/14 12/31/13 12/31/12
Residential Real Estate:
Land Development
Construction
Owner Occupied / Rental
Commercial Real Estate:
Land Development
Construction
Owner Occupied
Non-Owner Occupied
Non-Real Estate:
Commercial Assets
Consumer Assets
$
16,000 $
0
40,000 $ 1,188,000
319,000
2,739,000 2,917,000 4,229,000 4,219,000 4,321,000
2,755,000 2,940,000 4,313,000 4,259,000 5,828,000
84,000 $
0
23,000 $
0
0
95,000
0
155,000
0
737,000
209,000
0
0
885,000 2,577,000
285,000 2,131,000 18,091,000
488,000
169,000 9,093,000
378,000
108,000
868,000 2,394,000 18,678,000 1,443,000 12,407,000
389,000
0
2,293,000
23,000
2,316,000
69,000 6,401,000 1,016,000
0
42,000
41,000
110,000 6,443,000 1,016,000
734,000
1,000
735,000
Total
$ 5,939,000 $ 5,444,000 $ 29,434,000 $ 6,718,000 $ 18,970,000
F-10
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS
Residential Real Estate:
Land Development
Construction
Owner Occupied / Rental
Commercial Real Estate:
Land Development
Construction
Owner Occupied
Non-Owner Occupied
Non-Real Estate:
Commercial Assets
Consumer Assets
12/31/16 12/31/15 12/31/14 12/31/13 12/31/12
$
0 $
0
144,000
144,000
0 $ 329,000 $ 427,000 $ 1,174,000
157,000
0
0
22,000
491,000
722,000
598,000
207,000
656,000 1,822,000
598,000 1,051,000
0
0
325,000
0
325,000
0
0
612,000
83,000
695,000
52,000
92,000
0
0
0
0
247,000
957,000
164,000
697,000 1,939,000 4,139,000
944,000 2,195,000 5,148,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
$ 469,000 $ 1,293,000 $ 1,995,000 $ 2,851,000 $ 6,970,000
The following tables provide a reconciliation of nonperforming assets:
NONPERFORMING LOANS RECONCILIATION
Beginning balance
Additions, net of transfers to other real estate
owned
Returns to performing status
Principal payments
Loan charge-offs
2016
2015
2014
2013
2012
$ 5,444,000 $ 29,434,000 $ 6,718,000 $ 18,970,000 $ 45,074,000
(13,000 )
5,655,000 4,543,000 25,871,000 1,726,000 4,998,000
(774,000 )
(4,166,000 ) (23,641,000 ) (2,063,000 ) (10,934,000 ) (25,095,000 )
(313,000 ) (3,044,000 ) (5,233,000 )
(981,000 ) (4,844,000 )
(779,000 )
(48,000 )
0
Total
$ 5,939,000 $ 5,444,000 $ 29,434,000 $ 6,718,000 $ 18,970,000
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION
2016
2015
2014
2013
2012
Beginning balance
Additions
Sale proceeds
Valuation write-downs
$ 1,293,000 $ 1,995,000 $ 2,851,000 $ 6,970,000 $ 15,282,000
725,000 2,186,000 2,593,000 2,181,000 11,808,000
(1,428,000 ) (2,377,000 ) (3,183,000 ) (5,585,000 ) (16,916,000 )
(715,000 ) (3,204,000 )
(121,000 )
(511,000 )
(266,000 )
Total
$ 469,000 $ 1,293,000 $ 1,995,000 $ 2,851,000 $ 6,970,000
F-11
Gross loan charge-offs equaled $2.2 million during 2016, while recoveries of prior period charge-offs totaled $1.6 million.
Resulting net loan charge-offs equaled $0.6 million, or only 0.03% of average total loans. The increase in gross loan
charge-offs during 2015 was associated with the aforementioned large distressed commercial loan relationship that was
resolved in mid-2015. We continue our collection efforts on charged-off loans, and expect to record recoveries in future
periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of recoveries.
The following table summarizes changes in the allowance for originated loan losses for the past five years:
Originated loans outstanding at year-
end
$ 1,884,548,000 $ 1,616,587,000 $ 1,246,116,000 $ 1,053,243,000 $ 1,041,189,000
2016
2015
2014
2013
2012
Daily average balance of originated
loans outstanding during the year
Balance of allowance for originated
$ 1,784,978,000 $ 1,428,150,000 $ 1,141,682,000 $ 1,050,961,000 $ 1,049,315,000
loans at beginning of year
$
15,233,000 $
19,299,000 $
22,821,000 $
28,677,000 $
36,532,000
Originated loans charged-off:
Commercial, financial and
agricultural
Construction and land development
Residential real estate
Instalment loans to individuals
Total charge-offs
Recoveries of previously charged-off
originated loans:
Commercial, financial and
agricultural
Construction and land development
Residential real estate
Instalment loans to individuals
Total recoveries
(980,000 )
0
(809,000 )
(344,000 )
(2,133,000 )
(4,910,000 )
(4,000 )
(1,053,000 )
(228,000 )
(6,195,000 )
(840,000 )
(36,000 )
(484,000 )
(70,000 )
(1,430,000 )
(3,596,000 )
(822,000 )
(862,000 )
(10,000 )
(5,290,000 )
(11,311,000 )
(348,000 )
(938,000 )
(46,000 )
(12,643,000 )
754,000
334,000
522,000
60,000
1,670,000
2,535,000
122,000
122,000
51,000
2,830,000
1,117,000
180,000
404,000
0
1,701,000
4,795,000
897,000
933,000
9,000
6,634,000
7,076,000
285,000
469,000
58,000
7,888,000
Net loan (charge-offs) recoveries
(463,000 )
(3,365,000 )
271,000
1,344,000
(4,755,000 )
Provision for loan losses for originated
loans
3,098,000
(701,000 )
(3,793,000 )
(7,200,000 )
(3,100,000 )
Balance of allowance for originated
loans at end of year
$
17,868,000 $
15,233,000 $
19,299,000 $
22,821,000 $
28,677,000
Ratio of net loan (charge-offs)
recoveries to average loans
outstanding during the year
Ratio of allowance to originated loans
outstanding at year-end
(0.03% )
(0.24% )
0.02 %
0.13%
(0.45% )
0.95 %
0.94 %
1.55 %
2.17 %
2.75 %
F-12
The following table illustrates the breakdown of the allowance for originated loans balance by loan type (dollars in
thousands) and of the total originated loan portfolio (in percentages):
12/31/2016
Loan
12/31/2015
Loan
12/31/2014
Loan
12/31/2013
Loan
12/31/2012
Loan
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Commercial,
financial and
agricultural $ 15,035
85.8 % $ 12,017
80.7 % $ 16,112
82.8 % $ 17,860
84.0 % $ 22,646
85.3 %
Construction
and land
development
Residential
real estate
Instalment
loans to
individuals
Unallocated
Total
991
6.0 1,655
10.9 1,012
8.8 1,858
8.9 2,246
6.2
1,374
6.4 1,235
6.4 1,974
7.2 3,027
6.8 3,646
8.1
508
(40 )
1.8
0.0
186
140
2.0
0.0
125
76
1.2
0.0
68
8
0.3
0.0
139
0
0.4
0.0
$ 17,868 100.0 % $ 15,233 100.0 % $ 19,299 100.0 % $ 22,821 100.0 % $ 28,677 100.0 %
The following table depicts the ratio of our allowance to nonperforming loans:
12/31/16
12/31/15
12/31/14
12/31/13
12/31/12
Ratio of allowance to
nonperforming loans
302.4 %
288.0 %
68.1 %
339.7 %
151.2 %
The decline in the ratio of our allowance to nonperforming loans during 2014 primarily reflects the aforementioned one
distressed commercial loan relationship that was placed into nonaccrual status in late 2014 but resolved during mid-2015.
In each accounting period, we adjust the allowance to the amount we believe is necessary to maintain the allowance at an
adequate level. Through the loan review and credit departments, we establish specific portions of the allowance based on
specifically identifiable problem loans. The evaluation of the allowance is further based on, but not limited to,
consideration of the internally prepared Allowance Analysis, loan loss migration analysis, composition of the loan
portfolio, third party analysis of the loan administration processes and portfolio, and general economic conditions.
The Allowance Analysis applies reserve allocation factors to non-impaired outstanding loan balances, the result of which is
combined with specific reserves to calculate an overall allowance amount. For non-impaired commercial loans, reserve
allocation factors are based on the loan ratings as determined by our standardized grade paradigms and by loan purpose.
Our commercial loan portfolio is segregated into five classes: 1) commercial and industrial loans; 2) vacant land, land
development and residential construction loans; 3) owner occupied real estate loans; 4) non-owner occupied real estate
loans; and 5) multi-family and residential rental property loans. The reserve allocation factors are primarily based on the
historical trends of net loan charge-offs through a migration analysis whereby net loan losses are tracked via assigned
grades over various time periods, with adjustments made for environmental factors reflecting the current status of, or recent
changes in, items such as: lending policies and procedures; economic conditions; nature and volume of the loan portfolio;
experience, ability and depth of management and lending staff; volume and severity of past due, nonaccrual and adversely
classified loans; effectiveness of the loan review program; value of underlying collateral; lending concentrations; and other
external factors, including competition and regulatory environment. Adjustments for specific lending relationships,
particularly impaired loans, are made on a case-by-case basis. Non-impaired retail loan reserve allocations are determined
in a similar fashion as those for non-impaired commercial loans, except that retail loans are segmented by type of credit and
not a grading system. We regularly review the Allowance Analysis and make adjustments periodically based upon
identifiable trends and experience.
F-13
A migration analysis is completed quarterly to assist us in determining appropriate reserve allocation factors for non-
impaired loans. Our migration takes into account various time periods; however, at year-end 2016 we placed most weight
on the period starting December 31, 2010 through December 31, 2016. We believe this period represents an appropriate
range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation factors given
current economic conditions and the general market consensus of economic conditions in the near future.
Although the migration analysis provides an accurate historical accounting of our net loan losses, it is not able to fully
account for environmental factors that will also very likely impact the collectability of our loans as of any quarter-end date.
Therefore, we incorporate the environmental factors as adjustments to the historical data. Environmental factors include
both internal and external items. We believe the most significant internal environmental factor is our credit culture and the
relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external
environmental factor being the assessment of the current economic environment and the resulting implications on our loan
portfolio.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of
collateral, and the timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial
statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral
and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness
of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue
creditor’s rights in order to preserve our collateral position.
The allowance for originated loans equaled $17.9 million as of December 31, 2016, or 1.0% of total originated loans
outstanding, compared to 0.9% at year-end 2015. The allowance for acquired loans equaled $0.1 million as of December
31, 2016, compared to $0.4 million at year-end 2015. As of December 31, 2016, the allowance for originated loans was
comprised of $16.3 million in general reserves relating to non-impaired loans, $0.9 million in specific reserve allocations
relating to nonaccrual loans, and $0.7 million in specific allocations on other loans, primarily accruing loans designated as
troubled debt restructurings.
Although we believe the allowance is adequate to absorb losses as they arise, there can be no assurance that we will not
sustain losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.
Troubled debt restructurings totaled $13.6 million at December 31, 2016, consisting of $1.1 million that are on nonaccrual
status and $12.5 million that are on accrual status. The latter, while considered and accounted for as impaired loans in
accordance with accounting guidelines, is not included in our nonperforming loan totals. Impaired loans with an aggregate
carrying value of $0.6 million as of December 31, 2016 had been subject to previous partial charge-offs aggregating $0.6
million. Those partial charge-offs were recorded as follows: less than $0.1 million in 2016, $0.1 million in 2015, less than
$0.1 million in 2013 and 2012, $0.4 million in 2011 and $0.1 million in 2010. As of December 31, 2016, specific reserves
allocated to impaired loans that had been subject to a previous partial charge-off totaled less than $0.1 million.
The following table provides a breakdown of our loans categorized as troubled debt restructurings:
12/31/16
12/31/15
12/31/14
12/31/13
12/31/12
Performing
Nonperforming
$ 12,480,000 $ 19,336,000 $ 24,001,000 $ 30,247,000 $ 38,148,000
4,645,000 12,612,000
2,358,000 26,433,000
1,132,000
Total
$ 13,612,000 $ 21,694,000 $ 50,434,000 $ 34,892,000 $ 50,760,000
F-14
Securities available for sale decreased $18.9 million during 2016, totaling $328 million as of December 31, 2016. The
securities portfolio equaled 12.0% of average earning assets during 2016. Purchases during 2016, generally limited to U.S.
Government agency and municipal bonds, totaled $164 million. Proceeds from matured and called U.S. Government
agency and municipal bonds during 2016 totaled $134 million and $19.6 million, respectively, with another $18.6 million
from principal paydowns on mortgage-backed securities. In addition, proceeds from the sales of municipal bonds totaled
$0.3 million. At December 31, 2016, the securities portfolio was primarily comprised of U.S. Government agency bonds
(46%), municipal bonds (39%) and U.S. Government agency issued or guaranteed mortgage-backed securities (14%). All
of our securities are currently designated as available for sale, and therefore are stated at fair value. The fair value of
securities designated as available for sale at December 31, 2016 totaled $328 million, including a net unrealized loss of
$8.5 million. We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity for our
daily operations. In addition, the securities portfolio serves a primary interest rate risk management function.
The following table reflects the composition of the securities portfolio:
12/31/16
12/31/15
12/31/14
Carrying
Value
Percent
Carrying
Value
Percent
Carrying
Value
Percent
U.S. Government agency debt
obligations
$ 152,040,000
46.3 % $ 147,040,000
42.4 % $ 193,468,000
44.7 %
Mortgage-backed securities
47,392,000
14.5 67,074,000
19.3 93,561,000
21.6
Municipal general obligations
119,047,000
36.3 122,023,000
35.2 133,082,000
30.8
Municipal revenue bonds
7,631,000
2.3
8,914,000
2.6 10,873,000
Other investments
1,950,000
0.6
1,941,000
0.5
1,928,000
2.5
0.4
Totals
$ 328,060,000
100.0 % $ 346,992,000
100.0 % $ 432,912,000
100.0 %
FHLBI stock totaled $8.0 million as of December 31, 2016, compared to $7.6 million as of December 31, 2015. The $0.4
million increase reflects stock purchases to support our level of FHLBI advances. Our investment in FHLBI stock is
necessary to engage in their advance and other financing programs. We continue to receive regular quarterly cash
dividends, and we expect a cash dividend will continue in future quarterly periods.
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S.
Government agencies and municipal bonds are determined on a monthly basis with the assistance of a third party vendor.
Evaluated pricing models that vary by type of security and incorporate available market data are utilized. Standard inputs
include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The market
value of certain non-rated securities issued by relatively small municipalities generally located within our markets is
estimated at carrying value. We believe our valuation methodology provides for a reasonable estimation of market value,
and that it is consistent with the requirements of accounting guidelines. Reference is made to Note 18 of the Notes to
Consolidated Financial Statements for additional information.
F-15
The following table shows by class of maturities as of December 31, 2016, the amounts and weighted average yields (on a
fully taxable-equivalent basis) of investment securities:
Obligations of U.S. Government agencies:
One year or less
Over one through five years
Over five through ten years
Over ten years
Obligations of states and political subdivisions:
One year or less
Over one through five years
Over five through ten years
Over ten years
Mortgage-backed securities
Other investments
Totals
Carrying
Value
Average
Yield
$
16,867,000
20,891,000
47,510,000
66,772,000
152,040,000
18,771,000
59,981,000
34,077,000
13,849,000
126,678,000
47,392,000
1,950,000
1.01 %
1.59
2.14
2.65
2.16
1.45
2.27
3.42
3.88
2.63
1.77
2.66
$
328,060,000
2.31 %
Other interest-earning assets, primarily consisting of excess funds deposited with the Federal Reserve Bank of Chicago, are
used to manage daily liquidity needs and interest rate sensitivity. The average balance of these funds equaled 2.8% of
average earning assets during 2016, compared to 3.0% during 2015. We anticipate the level of these earning assets to
average approximately 2% of average earning assets in future periods.
Non-Earning Assets
Cash and due from bank balances averaged 1.5% of total assets during 2016, with no significant changes expected in future
periods. Net premises and fixed assets equaled $45.5 million as of December 31, 2016, or 1.5% of total assets. Net
purchases during 2016 totaled $2.0 million, while depreciation expense aggregated to $2.9 million. Foreclosed and
repossessed assets totaled $0.5 million at December 31, 2016, compared to $1.3 million at December 31, 2015. While we
expect further transfers from loans to foreclosed and repossessed assets in future periods reflecting our collection efforts on
some impaired lending relationships, we believe the strong quality of our loan portfolio will limit any overall increase in,
and average balance of, this nonperforming asset category.
Source of Funds
Total deposits increased $99.6 million during 2016, totaling $2.37 billion as of December 31, 2016. Out-of-area deposits
decreased $45.2 million during 2016, and equaled 3.2% of total deposits at year-end 2016, compared to 5.3% as of
December 31, 2015. FHLBI advances increased $107 million during 2016, totaling $175 million as of December 31, 2016.
Noninterest-bearing checking accounts increased $136 million during 2016, generally due to deposit account openings as
part of recently established commercial lending relationships and transfers from business-related interest-bearing checking
accounts and sweep accounts to new noninterest-bearing checking accounts reflecting updated interest rate and fee
structures. Interest-bearing checking accounts decreased $25.4 million, savings deposits grew $12.2 million and money
market deposit accounts declined $2.3 million. Local time deposits increased $24.3 million, in large part reflecting a
commercial customer transferring excess funds from a noninterest-bearing checking account to certificates of deposit and a
certificate of deposit special offered during the third quarter of 2016.
Sweep accounts decreased $23.1 million during 2016, totaling $132 million at December 31, 2016. The decline primarily
reflects certain customers transferring funds from the sweep product to noninterest-bearing checking accounts reflecting
updated interest rate and fee structures. Our sweep account program entails transferring collected funds from certain
business noninterest-bearing checking accounts to overnight interest-bearing repurchase agreements. Such repurchase
agreements are not deposit accounts and are not afforded federal deposit insurance. All of our repurchase agreements are
accounted for as secured borrowings.
F-16
FHLBI advances increased $107 million during 2016, totaling $175 million as of December 31, 2016. The additional
monies were generally used to fund brokered deposit maturities and loan growth. FHLBI advances are primarily used to
assist in funding loan demand, as well as playing an integral role in our interest rate risk management program. FHLBI
advances are generally collateralized by a blanket lien on our residential mortgage loan portfolio. Our borrowing line of
credit at year-end 2016 totaled $517 million, with availability of $342 million.
Shareholders’ equity increased $7.0 million during 2016, totaling $341 million as of December 31, 2016. Positively
impacting shareholders’ equity was net income of $31.9 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $18.7 million, our share repurchase program that aggregated $3.7 million and a
change in the net unrealized gains and losses, net of tax effect, on our available for sales securities portfolio of $6.9 million.
Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our
dividend reinvestment plan positively impacted shareholders’ equity by a total of $2.9 million.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015
Summary
We recorded net income of $31.9 million, or $1.96 per basic and diluted share, for 2016, compared to net income of $27.0
million, or $1.63 per basic share and $1.62 per diluted share, for 2015. The repurchase of $11.0 million in trust preferred
securities at a 27% discount during the first quarter of 2016 increased net income during 2016 by $1.8 million, or $0.11 per
basic and diluted share. This unique opportunity resulted from a private investment fund that voluntarily liquidated and
auctioned all of its investments. We also recorded accelerated discount accretion on called U.S. Government agency bonds
that increased net income by $1.4 million, or $0.09 per basic and diluted share. Provision expense was $2.9 million, or
$0.12 per basic and diluted share after tax in 2016, compared to negative $1.0 million, or $0.04 per basic and diluted share
after tax in 2015.
The improved earnings performance in 2016 compared to 2015 resulted from increased net interest income and noninterest
income and decreased overhead costs, which more than offset increased provision expense. The increased net interest
income primarily resulted from a higher level of average earning assets; an improved net interest margin, resulting from an
increased yield on total earning assets, also contributed to the higher level of net interest income. The increased noninterest
income mainly resulted from the recording of a pre-tax gain associated with the trust preferred securities repurchase
transaction in January of 2016 and higher service charges on deposit and sweep accounts. The decreased noninterest
expense was primarily attributable to decreased problem asset costs, loan processing costs, and Federal Deposit Insurance
Corporation (“FDIC”) insurance premiums and various cost reduction initiatives, including the cost efficiency program
announced during the fourth quarter of 2015; the quarterly cost savings associated with the program were fully realized
beginning in the second quarter of 2016. The higher provision expense mainly resulted from ongoing loan growth and
increased allocations related to environmental factors.
The following table shows some of the key performance and equity ratios for the years ended December 31, 2016 and
2015:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
2016
2015
1.07 %
9.35 %
11.42 %
0.94 %
8.19 %
11.45 %
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest cost of funding those
assets, is our primary source of earnings. Interest income (adjusted for tax-exempt income) and interest expense totaled
$119 million and $12.6 million during 2016, respectively, providing for net interest income of $107 million. During 2015,
interest income and interest expense equaled $113 million and $11.2 million, respectively, providing for net interest income
of $102 million.
F-17
In comparing 2016 with 2015, interest income increased 5.6%, interest expense was up 12.9%, and net interest income
increased 4.8%. The level of net interest income is primarily a function of asset size, as the weighted average interest rate
received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as
types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset quality, liquidity, and
customer behavior also impact net interest income as well as the net interest margin.
The $4.9 million increase in net interest income in 2016 compared to 2015 resulted from a higher level of average earning
assets, and to a lesser degree, an improved net interest margin. During 2016, earning assets averaged $2.76 billion, or $110
million higher than average earning assets during 2015. Average loans increased $167 million, average securities
decreased $55.9 million, and average other interest-earning assets decreased $1.1 million. During 2016, the net interest
margin equaled 3.86%, up from 3.83% during 2015 due to an increased yield on average earning assets, which more than
offset a higher cost of funds. The increased yield on average earning assets primarily resulted from a higher yield on
securities and a reallocation of earning assets, which more than offset a decreased yield on loans. The higher yield on
securities mainly reflects a significant level of accelerated discount accretion on called U.S. Government agency bonds
being recorded as interest income, while the decreased yield on loans primarily reflects the ongoing low interest rate
environment and competitive industry pressures. The yield on loans generally declined over the past ten quarters,
consistent with the industry; however, the negative impact of the lower loan yield on the yield on average earning assets
was somewhat offset by the aforementioned reallocation of earning assets. Capitalizing on an opportunity stemming from
the 2014 merger with Firstbank, the earning asset mix was reallocated by reinvesting cash flows from monthly paydowns
on lower-yielding mortgage-backed securities and matured and called U.S. Government Agency bonds into the higher-
yielding loan portfolio. The reallocation of earning assets strategy was completed during the second quarter of 2016 as the
level of investments reached our internal policy guideline.
The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities
and shareholders’ equity during 2016, 2015 and 2014. The subsequent table also depicts the dollar amount of change in
interest income and interest expense of interest-earning assets and interest-bearing liabilities, respectively, segregated
between change due to volume and change due to rate. For tax-exempt investment securities, interest income and yield
have been computed on a tax equivalent basis using a marginal tax rate of 35%. Securities interest income was increased
by $0.8 million in 2016, $0.6 million in 2015, and $0.5 million in 2014 for this non-GAAP, but industry standard,
adjustment. This adjustment equated to a three basis point increase in our net interest margin during 2016, a two basis
point increase in our net interest margin during 2015, and a three basis point increase in our net interest margin during
2014.
F-18
Taxable securities
Tax-exempt
securities
(Dollars in
thousands)
2 0 1 6
Years ended December 31,
2 0 1 5
2 0 1 4
Average
Balance Interest
$ 224,297 $ 6,842
Average
Rate
Average
Balance Interest
3.05 % $ 281,476 $ 5,919
Average
Rate
Average
Balance Interest
2.10 % $ 262,696 $ 6,417
Average
Rate
2.44 %
115,875 2,932
Total securities 340,172 9,774
2.53 114,603 2,649
2.87 396,079 8,568
2.31
78,075 2,157
2.16 340,771 8,574
2.76
2.52
Savings deposits
Money market
accounts
Time deposits
Loans
Interest-earning
deposits
Federal funds sold
Total earning
2,345,308 109,049
4.65 2,178,276 104,106
4.78 1,653,605 80,824
4.89
77,852
11
401
<1
0.51
0.25
68,234
10,719
188
27
0.28
0.25
46,161
48,690
110
124
0.24
0.25
assets
2,763,343 119,224
4.31 2,653,308 112,889
4.25 2,089,227 89,632
4.29
Allowance for loan
losses
Cash and due from
banks
Other non-earning
(16,895 )
45,890
(18,082 )
46,714
(21,214 )
35,248
assets
195,446
199,557
166,652
Total assets
$ 2,987,784
$ 2,881,497
$ 2,269,913
Interest-bearing
demand deposits $ 360,180 $
340,076
336
296
0.09 % $ 404,866 $
0.09 341,265
721
401
0.18 % $ 323,335 $ 1,141
405
0.12 223,658
0.35 %
0.18
290,528
360
577,062 6,557
0.12 268,071
420
1.14 657,938 6,048
0.16 196,723
364
0.92 648,102 6,468
0.19
1.00
Total interest-
bearing deposits 1,567,846 7,549
0.48 1,672,140 7,590
0.45 1,391,818 8,378
0.60
Short-term
borrowings
149,079
211
0.14 146,826
157
0.11 105,474
122
0.12
Federal Home Loan
Bank advances
Other borrowings
Total interest-
bearing
liabilities
149,344 2,263
48,711 2,567
1.51
5.27
55,556
765
58,509 2,642
1.38
4.52
51,456
636
51,642 2,204
1.24
4.27
1,914,980 12,590
0.66 1,933,031 11,154
0.58 1,600,390 11,340
0.71
Demand deposits
Other liabilities
715,550
15,914
Total liabilities 2,646,444
341,340
Average equity
606,750
11,929
2,551,710
329,787
407,870
10,774
2,019,034
250,879
Total liabilities
and equity
$ 2,987,784
$ 2,881,497
$ 2,269,913
Net interest income
Rate spread
Net interest margin
$ 106,634
$ 101,735
$ 78,292
3.65 %
3.86 %
3.67 %
3.83 %
3.58 %
3.75 %
F-19
Years ended December 31,
2016 over 2015
Volume
Total
Rate
Total
2015 over 2014
Volume
Rate
$ 923,000
437,000 $ (935,000 )
(395,000 )
887,000
4,943,000 7,823,000 (2,880,000 ) 23,282,000 25,113,000 (1,831,000 )
$ (1,371,000 ) $ 2,294,000
253,000
$ (498,000 ) $
492,000
283,000
30,000
213,000
(27,000 )
30,000
(20,000 )
183,000
(7,000 )
78,000
(97,000 )
59,000
(97,000 )
19,000
0
Increase (decrease) in interest
income
Taxable securities
Tax exempt securities
Loans
Interest-earning deposit
balances
Federal funds sold
Net change in tax-equivalent
interest income
6,335,000 6,492,000
(157,000 ) 23,257,000 26,399,000 (3,142,000 )
Increase (decrease) in interest
expense
Interest-bearing demand
deposits
Savings deposits
Money market accounts
Time deposits
Short-term borrowings
Federal Home Loan Bank
advances
Other borrowings
Net change in interest
expense
Net change in tax-
equivalent net interest
income
(385,000 )
(105,000 )
(60,000 )
509,000
54,000
(72,000 )
(1,000 )
33,000
(313,000 )
(104,000 )
(93,000 )
(804,000 ) 1,313,000
52,000
2,000
(420,000 )
(4,000 )
56,000
(420,000 )
35,000
239,000
168,000
118,000
97,000
45,000
(659,000 )
(172,000 )
(62,000 )
(517,000 )
(10,000 )
1,498,000 1,414,000
(479,000 )
(75,000 )
84,000
404,000
129,000
438,000
53,000
305,000
76,000
133,000
1,436,000
93,000 1,343,000
(186,000 ) 1,025,000 (1,211,000 )
$ 4,899,000 $ 6,399,000 $ (1,500,000 ) $ 23,443,000 $ 25,374,000 $ (1,931,000 )
Interest income is primarily generated from the loan portfolio, and to a significantly lesser degree, from securities and other
interest-earning assets. Interest income increased $6.3 million during 2016 from that earned in 2015, totaling $119 million
in 2016 compared to $113 million in the previous year. The increase in interest income is attributable to a higher level of
average earning assets and an increased yield on average earning assets. During 2016 and 2015, earning assets had an
average yield (tax equivalent-adjusted basis) of 4.31% and 4.25%, respectively. The higher yield on average earning assets
in 2016 primarily resulted from an increased yield on securities and a reallocation of earning assets, which more than offset
a decreased yield on loans. The higher-yielding loan portfolio averaged $2.35 billion, or 84.9% of average earning assets,
during 2016, compared to $2.18 billion, or 82.1% of average earning assets, during 2015.
Interest income generated from the loan portfolio increased $4.9 million in 2016 compared to the level earned in 2015;
growth in the loan portfolio during 2016 resulted in a $7.8 million increase in interest income, while a decline in loan yield
from 4.78% in 2015 to 4.65% in 2016 resulted in a $2.9 million decrease in interest income. The lower yield on average
loans mainly resulted from a decreased yield on average commercial loans, which equaled 4.60% in 2016 compared to
4.70% in 2015. The decreased commercial loan yield primarily reflects the ongoing low interest rate environment and
competitive pressures. Accretion of acquired loans totaled $4.9 million during 2016, compared to $5.3 million during
2015.
Interest income generated from the securities portfolio increased $1.2 million in 2016 compared to the level earned in 2015;
an increase in the yield on securities from 2.16% during 2015 to 2.87% during 2016 resulted in a $2.5 million increase in
interest income, while a reduction in the securities portfolio resulted in a $1.3 million decrease in interest income. The
increased yield on securities mainly reflects a significant level of accelerated discount accretion on called U.S. Government
agency bonds being recorded as interest income. The accelerated discount accretion totaled $2.2 million during 2016,
positively impacting the net interest margin by eight basis points. A nominal level of accelerated discount accretion on
called U.S. Government agency bonds was recorded as interest income during 2015. Interest income on interest-earning
deposits increased $0.2 million primarily due to an increased yield.
F-20
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree, from subordinated debentures,
FHLBI advances, sweep accounts, and other borrowings. Interest expense increased $1.4 million during 2016 from that
expensed in 2015, totaling $12.6 million in 2016 compared to $11.2 million in the previous year. The increase in interest
expense is attributable to a higher cost of funds. During 2016 and 2015, interest-bearing liabilities had a weighted average
rate of 0.66% and 0.58%, respectively; an increase in interest expense of $1.3 million was recorded during 2016 due to the
higher cost of funds. The higher weighted average cost of interest-bearing liabilities mainly resulted from an increased cost
of certificates of deposit, which more than offset decreases in the costs of certain interest-bearing non-certificate of deposit
account categories. The higher cost of certificates of deposit was expected in light of purchase accounting amortization
entries, which were associated with fair value measurements recorded on the merger date, ending in July of 2015. A $1.4
million reduction in interest expense on certificates of deposit related to purchase accounting entries was recorded during
2015; no reduction in interest expense was recorded during 2016. Increased rates paid on certificates of deposit,
subordinated debentures, and FHLBI advances also contributed to the higher weighted average cost of interest-bearing
liabilities during 2016. The cost of interest-bearing non-certificate of deposit accounts decreased from 0.15% during 2015
to 0.10% during 2016 in light of rates being lowered during the latter part of 2015. Average interest-bearing liabilities were
$1.91 billion during 2016, down $18.1 million, or 0.9%, from the $1.93 billion average during 2015.
Average certificates of deposit decreased $80.9 million during 2016, which equated to a decline in interest expense of $0.8
million. A $1.3 million increase in interest expense resulted from a higher average rate paid on certificates of deposit,
primarily reflecting the impact of the purchase accounting amortization entries ending in July of 2015. A decrease in other
average interest-bearing deposit accounts, totaling $23.4 million, equated to a decrease in interest expense of less than $0.1
million, while a decrease in the average rate paid on these deposit accounts resulted in a $0.5 million decline in interest
expense.
Average short-term borrowings, comprised entirely of sweep accounts, increased $2.3 million during 2016, resulting in a
nominal increase in interest expense, while a higher average rate paid on these accounts resulted in a $0.1 million increase
in interest expense. Average FHLBI advances increased $93.8 million, resulting in a $1.4 million increase in interest
expense, while a higher average rate paid on the advances resulted in a $0.1 million increase in interest expense. A $9.8
million decrease in average other borrowings, which is comprised of subordinated debentures and deferred director and
officer compensation programs, equated to a $0.5 million decline in interest expense, while a higher average rate paid on
these borrowings resulted in a $0.4 million increase in interest expense.
Net interest income and the net interest margin during 2016 and 2015 were affected by purchase accounting accretion and
amortization entries associated with the fair value measurements recorded on June 1, 2014. An increase in interest income
on loans totaling $4.9 million and an increase in interest expense on subordinated debentures totaling $0.7 million were
recorded during 2016. During 2015, we recorded an increase in interest income on loans totaling $5.3 million and a
decrease in interest expense on deposits and FHLBI advances totaling $1.4 million. In addition, we recorded an increase in
interest expense on subordinated debentures totaling $0.7 million during the same time period. We expect to continue to
record adjustments in interest income on loans and interest expense on subordinated debentures in future periods; however,
the adjustments to interest expense on deposits and FHLBI advances ended in July and June of 2015, respectively. The
resulting increase in interest expense negatively impacted the net interest margin by approximately eight to ten basis points
after July 31, 2015.
Provision for Loan Losses
A loan loss provision expense of $2.9 million was recorded in 2016, compared to a negative provision expense of $1.0
million recorded in 2015. The provision expense recorded during 2016 primarily reflects ongoing loan growth and
assessment changes in our economic and concentration environmental factors, while the negative provision expense
recorded during 2015 resulted from multiple factors, including recoveries of previously charged-off loans, reversals of
specific reserves, a reduced level of loan-rating downgrades and ongoing loan-rating upgrades.
Net loan charge-offs of $0.6 million were recorded during 2016, compared to $3.4 million during the prior year. Of the
$6.3 million in gross loan charge-offs recorded during 2015, $4.2 million was related to one commercial loan relationship
that was resolved during the second quarter of that year. The allowance for originated loans, as a percentage of total
originated loans, was 0.9% as of December 31, 2016 and December 31, 2015. Our allowance for acquired loans totaled
$0.1 million and $0.5 million as of December 31, 2016 and December 31, 2015, respectively.
F-21
Noninterest Income
Noninterest income totaled $21.0 million in 2016, an increase of $5.0 million, or 31.2%, from the $16.0 million earned in
2015. The increase mainly resulted from a $2.9 million pre-tax gain being recorded in the first quarter of 2016 in
association with a trust preferred securities repurchase transaction and higher service charges on deposit and sweep
accounts and mortgage banking income. Service charges on deposit and sweep accounts totaled $4.3 million during 2016,
an increase of $1.0 million, or 28.6%, from the $3.3 million recorded during 2015. The increase in service charges on
deposit and sweep accounts mainly reflects an ongoing project to ensure all depositors are in a product that best meets their
needs and is priced appropriately as well as increased cash management fee income. Mortgage banking income was $3.9
million in 2016, an increase of $0.3 million, or 6.8%, from the $3.6 million recorded during 2015. The increase in
mortgage banking income primarily reflects the positive impact of recently-implemented strategic initiatives, including the
hiring of additional loan originators, introduction of new and enhanced products, loan programs, and increased marketing
efforts. Reimbursements totaling $0.4 million recorded in the third quarter of 2016 related to certain medical insurance
premiums charged in prior years also contributed to the increase in noninterest income.
Noninterest Expense
Noninterest expense during 2016 totaled $77.1 million, a decrease of $2.3 million, or 2.9%, from the $79.4 million
expensed in 2015. The decrease was mainly attributable to lower problem asset costs, loan processing costs, FDIC
insurance premiums, core deposit intangible amortization expense, printing and supply costs, furniture and equipment
costs, and miscellaneous expenses, which more than offset increased employee benefit and data processing costs. Problem
asset costs during 2016 were $0.9 million lower than the amount expensed during 2015. Loan processing costs were $0.5
million during 2016, a decrease of $0.6 million, or 50.8%, from the $1.1 million expensed during 2015, primarily reflecting
the elimination of certain retail loan promotion programs. FDIC insurance premiums during 2016 were $1.2 million, a
decrease of $0.5 million, or 28.0%, from the $1.7 million expensed during 2015; the decrease resulted from improvements
in certain financial ratios and changes to the deposit insurance assessment calculation that became effective in the third
quarter of 2016. Core deposit intangible amortization expense totaled $2.7 million during 2016, compared to $3.0 million
during 2015. Printing and supply costs were $1.1 million in 2016, a decrease of $0.3 million, or 21.3%, from the $1.4
million expensed during 2015; the decrease primarily resulted from an initiative to convert deposit customers from
receiving physical account statements to receiving electronic statements and the implementation of a central purchasing
program. Furniture and equipment costs were $2.1 million during 2016, a decrease of $0.2 million, or 9.1%, from the $2.3
million in costs incurred during 2015, mainly reflecting lower depreciation expense. Miscellaneous expenses in 2015
included the recording of $0.5 million in costs related to an embezzlement committed by an employee at a branch location.
Noninterest expense during 2016 was positively impacted by the cost efficiency program, which will save approximately
$2.7 million per year on a pre-tax basis beginning in 2017; the quarterly cost savings were fully realized starting in the
second quarter of 2016. Employee benefit costs during 2016 were $9.0 million, an increase of $0.4 million, or 4.2%, from
the $8.6 million expensed in 2015, primarily resulting from higher health insurance costs. Data processing costs during
2016 totaled $7.9 million, an increase of $0.2 million, or 3.2%, from the $7.7 million expensed during 2015, primarily
reflecting higher costs related to debit and credit card services.
Federal Income Tax Expense
During 2016, we recorded income before federal income tax of $46.9 million and a federal income tax expense of $15.0
million, compared to income before federal income tax of $38.8 million and a federal income tax expense of $11.8 million
during 2015. The increase in federal income tax expense resulted from the higher level of income before federal income
tax. Our effective tax rate was 31.9% during 2016, compared to 30.4% during 2015.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 and 2014
Summary
We recorded net income of $27.0 million, or $1.63 per basic share and $1.62 per diluted share, for 2015, compared to net
income of $17.3 million, or $1.28 per basic and diluted share, for 2014. The results for 2014 were impacted by the merger
with Firstbank, which was consummated on June 1, 2014; operating results for 2014 include seven months of operations as
a combined organization. After-tax merger-related costs totaled $3.8 million, or $0.28 per basic and diluted share, during
2014. No merger-related costs were recorded in 2015. Our projected annual cost savings as disclosed at the time the
merger was announced were $5.5 million, or approximately $1.4 million quarterly. The targeted quarterly cost savings
were substantially realized during the fourth quarter of 2014 and fully realized during each quarter of 2015.
F-22
The improved earnings performance in 2015 compared to 2014 primarily resulted from increased net interest income,
which more than offset increased overhead costs. The increased net interest income primarily resulted from the higher
level of average earning assets associated with the completion of the merger; an increased net interest margin, resulting
from a decreased cost of funds, also contributed to the higher level of net interest income. The decreased cost of funds in
large part reflects the absorption of Firstbank’s lower-costing deposit base; the full benefit of the lower-costing deposit base
was realized during the 2015 period, while the 2014 period received partial benefit in light of the effective date of the
merger. The continued improvement in the quality of our loan portfolio and associated recoveries of previously charged-
off loans, reversals of specific reserves, reduced level of loan-rating downgrades and ongoing loan-rating upgrades
produced a positive impact on our loan loss reserve calculations and allowed us to make negative provisions to the loan loss
reserve during 2015 and 2014. Increased noninterest income also contributed to the improved earnings performance in
2015; substantially all categories of noninterest income benefitted from the consummation of the merger. The increased
noninterest expense was mainly attributable to higher costs necessary to operate the combined company.
The following table shows some of the key performance and equity ratios for the years ended December 31, 2015 and
2014:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
2015
2014
0.94 %
8.19 %
11.45 %
0.76 %
6.91 %
11.05 %
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest cost of funding those
assets, is our primary source of earnings. Interest income (adjusted for tax-exempt income) and interest expense totaled
$113 million and $11.2 million during 2015, respectively, providing for net interest income of $102 million. During 2014,
interest income and interest expense equaled $89.6 million and $11.3 million, respectively, providing for net interest
income of $78.3 million.
In comparing 2015 with 2014, interest income increased 25.9%, interest expense was down 1.6%, and net interest income
increased 29.9%. The level of net interest income is primarily a function of asset size, as the weighted average interest rate
received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as
types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset quality, liquidity, and
customer behavior also impact net interest income as well as the net interest margin.
The $23.4 million increase in net interest income in 2015 compared to 2014 primarily resulted from a higher level of
average earning assets. Average earning assets include Firstbank’s assets from the date of acquisition. During 2015, the
net interest margin equaled 3.83%, up from 3.75% during 2014. Although our yield on earning assets declined slightly in
2015 compared to 2014 primarily due to decreased yields on average loans and securities, our cost of funds declined at a
greater rate, resulting in the improved net interest margin. The decreased yield on loans reflects the ongoing low interest
rate environment and competitive pressures, while the decline in the yield on securities mainly reflects the boarding of
Firstbank’s lower-yielding portfolio. The decreased cost of funds was positively impacted by the absorption of Firstbank’s
lower-costing interest-bearing liability base.
Interest income is primarily generated from the loan portfolio, and to a significantly lesser degree, from securities and other
interest-earning assets. Interest income increased $23.3 million during 2015 from that earned in 2014, totaling $113
million in 2015 compared to $89.6 million in the previous year. The increase in interest income is attributable to a higher
level of average earning assets, which more than offset a slight decrease in the yield on average earning assets. During
2015, earning assets averaged $2.65 billion, or $564 million higher than average earning assets during 2014; average
earning assets include Firstbank’s assets from the date of acquisition. Average loans increased $525 million, average
securities increased $55.3 million, and average other interest-earning assets decreased $15.9 million. During 2015 and
2014, earning assets had an average yield (tax equivalent-adjusted basis) of 4.25% and 4.29%, respectively. The lower
yield on average earning assets in 2015 primarily resulted from decreased yields on loans and securities, which more than
offset the impact of a change in earning asset mix. The decreased yield on loans reflects the ongoing low interest rate
environment and competitive pressures, while the decline in the yield on securities mainly reflects the boarding of
Firstbank’s lower-yielding portfolio.
F-23
The negative impacts of the lower yields on loans and securities on the yield on average earning assets were largely offset
by assets shifting out of the lower-yielding securities portfolio and other interest-earning asset category and into the higher-
yielding loan portfolio, capitalizing on an opportunity growing out of the merger with Firstbank; the yield on average
earning assets was relatively stable during 2015, ranging from 4.23% to 4.30% on a quarterly basis. Average loans
represented about 82% of average earning assets during 2015, up from approximately 79% during 2014.
Interest income generated from the loan portfolio increased $23.3 million in 2015 compared to the level earned in 2014;
growth in the loan portfolio during 2015 resulted in a $25.1 million increase in interest income, while a decline in loan
yield from 4.89% in 2014 to 4.78% in 2015 resulted in a $1.8 million decrease in interest income. The lower yield on
average loans mainly resulted from a decreased yield on average commercial loans, which equaled 4.70% in 2015
compared to 4.83% in 2014. The commercial loan yield was negatively impacted by the lowering of rates on certain
commercial loans throughout 2015 and 2014 as a result of borrowers warranting decreased loan rates due to improved
financial performance, the renewal of certain maturing term loans at lower rates, and competitive pricing pressures.
Accretion of acquired loans totaled $5.3 million during 2015, compared to $3.2 million during 2014.
Interest income generated from the securities portfolio in 2015 was virtually the same as the amount recorded during 2014
as the impact of a lower yield was substantially offset by the impact of portfolio growth associated with the merger with
Firstbank. The lower yield on average securities equated to a decrease in interest income of $1.3 million, while the higher
average portfolio balance resulted in a $1.3 million increase in interest income. Average securities equaled $396 million
during 2015, up from $341 million during 2014. The yield on securities equaled 2.16% in 2015 compared to 2.52% in
2014; the lower yield on average securities primarily resulted from the boarding of Firstbank’s lower-yielding portfolio.
Interest income earned on federal funds sold decreased $0.1 million in 2015 compared to 2014 due to a lower average
balance, while interest income earned on interest-bearing deposits increased $0.1 million due to a higher average balance,
and to a lesser extent, a slight increase in yield.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree, from subordinated debentures,
FHLBI advances, sweep accounts, and other borrowings. Interest expense decreased $0.1 million during 2015 from that
expensed in 2014, totaling $11.2 million in 2015 compared to $11.3 million in the previous year. The decrease in interest
expense is attributable to a lower cost of funds, which more than offset a higher level of average interest-bearing liabilities,
primarily reflecting the completion of the merger. During 2015 and 2014, interest-bearing liabilities had a weighted
average rate of 0.58% and 0.71%, respectively; a decline in interest expense of $1.2 million was recorded during 2015 due
to the decreased cost of funds. The decline in the weighted average cost of interest-bearing liabilities primarily reflects the
absorption of Firstbank’s lower-costing interest-bearing liability base, maturing fixed-rate certificates of deposit being
renewed at lower rates, replaced by lower-costing funds, or allowed to runoff during 2014 and 2015, and the lowering of
interest rates on certain deposit account categories during 2015. The weighted average cost of interest-bearing liabilities,
equaling 0.56%, 0.54%, 0.60%, and 0.61% during the first, second, third, and fourth quarters of 2015, respectively,
remained relatively stable during 2015. During 2015, interest-bearing liabilities averaged $1.93 billion, or $333 million
higher than average interest-bearing liabilities of $1.60 billion during the prior year. Growth in these liabilities resulted in
increased interest expense of $1.1 million. Interest-bearing liabilities include Firstbank’s liabilities from the date of
acquisition. Average interest-bearing deposits were up $280 million, while average short-term borrowings increased $41.3
million, average other borrowings increased $6.9 million, and average FHLBI advances increased $4.1 million.
Average certificates of deposit increased $9.8 million during 2015, which equated to an increase in interest expense of $0.1
million. A $0.5 million reduction in interest expense resulted from a decrease in the average rate paid as higher-rate
certificates of deposit matured and were renewed at lower rates, replaced with lower-costing funds, or allowed to runoff
throughout 2014 and 2015. An increase in other average interest-bearing deposit accounts, totaling $271 million, equated
to a $0.5 million increase in interest expense, while a decrease in the average rate paid on these deposit accounts resulted in
a $0.9 million decline in interest expense.
Average short-term borrowings, comprised entirely of sweep accounts, increased $41.4 million during 2015, resulting in a
slight increase in interest expense. Average FHLBI advances increased $4.1 million, resulting in a $0.1 million increase in
interest expense, while a higher average rate paid on the advances resulted in a $0.1 million increase in interest expense. A
$6.9 million increase in average other borrowings, which is comprised of subordinated debentures and deferred director and
officer compensation programs, equated to a $0.3 million increase in interest expense, while a higher average rate paid on
these borrowings resulted in a $0.1 million increase in interest expense.
F-24
As expected, net interest income and the net interest margin were affected during 2014 and 2015 by purchase accounting
accretion and amortization entries associated with the fair value measurements recorded on June 1, 2014. An increase in
interest income on loans totaling $3.2 million, as well as a decrease in interest expense on deposits and FHLBI advances
aggregating $1.4 million, were recorded during the last seven months of 2014. An increase in interest expense on
subordinated debentures totaling $0.4 million was also recorded during the same time period. An increase of $5.3 million
in interest income on loans and a decrease of $1.4 million in interest expense on deposits and FHLBI advances were
recorded during 2015; in addition, an increase in interest expense on subordinated debentures totaling $0.7 million was
recorded. We expect to continue to record adjustments in interest income on loans and interest expense on subordinated
debentures in future periods; however, the adjustments to interest expense on deposits and FHLBI advances ended in July
and June of 2015, respectively, in accordance with our fair value measurements at the time of the merger. The resulting
increase in interest expense negatively impacted the net interest margin by approximately eight to ten basis points after July
31, 2015. We partially mitigated this negative impact by reallocating the earning asset mix by investing excess lower-
yielding overnight funds and cash flows from lower-yielding investments into higher-yielding loans.
Provision for Loan Losses
A negative loan loss provision expense of $1.0 million was recorded in 2015, compared to a negative provision expense of
$3.0 million recorded in 2014. The negative provision expense reflects recoveries of previously charged-off loans,
reversals of specific reserves, a reduced level of loan-rating downgrades, and ongoing loan-rating upgrades as the quality of
the loan portfolio continued to improve. Continued progress in the stabilization of economic and real estate market
conditions and resulting collateral valuations also positively impacted provision expense. Negative provision expense was
recorded during the first three quarters of 2015; however, a provision expense of $0.5 million was recorded during the
fourth quarter of 2015. The provision expense was primarily necessitated by loan growth, which more than offset
reductions in the required allowance stemming from the previously mentioned factors.
Net loan charge-offs of $3.4 million were recorded during 2015, compared to net loan recoveries of $0.2 million recorded
during the prior year. Of the $6.3 million in gross loan charge-offs recorded during 2015, $4.2 million was related to one
commercial loan relationship that was resolved during the second quarter. The allowance for originated loans, as a
percentage of total originated loans, was 0.9% as of December 31, 2015, compared to 1.5% as of December 31, 2014. Our
allowance for acquired loans totaled $0.5 million and $0.7 million as of December 31, 2015 and December 31, 2014,
respectively.
Noninterest Income
Noninterest income totaled $16.0 million in 2015, an increase of $6.0 million, or 59.9%, from the $10.0 million earned in
2014. Substantially all categories of noninterest income were higher in 2015 compared to 2014 as a result of the merger,
most notably mortgage banking income, credit and debit card income, and service charges on accounts. A higher level of
income stemming from payments received on acquired loans that had been charged-off prior to the merger date also
contributed to the increased noninterest income. The increased mortgage banking income during 2015 also resulted from
the ongoing low interest rate environment and increased purchase activity in our market areas.
Noninterest Expense
Noninterest expense during 2015 totaled $79.4 million, an increase of $13.8 million, or 21.0%, from the $65.6 million
expensed in 2014. The increase in noninterest expense was mainly attributable to higher costs necessary to operate the
combined company, as 2014 results included only seven months of costs operating as a combined entity. Core deposit
intangible amortization expense totaled $3.0 million during 2015, compared to $1.9 million during 2014. During 2015, we
recorded $0.5 million in costs related to an embezzlement committed by an employee at a branch location that was
discovered through our internal audit procedures near the end of the first quarter of 2015.
Pre-tax merger-related costs totaled $5.4 million during 2014; no merger-related costs were recorded during 2015.
Expenses related to the cost efficiency program, which was announced in the fourth quarter of 2015, totaled $0.8 million
during 2015. Excluding cost efficiency program-related expenses and merger-related costs, noninterest expense totaled
$78.6 million and $60.2 million in 2015 and 2014, respectively.
F-25
Federal Income Tax Expense
During 2015, we recorded income before federal income tax of $38.8 million and a federal income tax expense of $11.8
million, compared to income before federal income tax of $25.2 million and a federal income tax expense of $7.9 million
during 2014. The increase in federal income tax expense resulted from the higher level of income before federal income
tax. Our effective tax rate was 30.4% during 2015, down from 31.2% during 2014. The elevated tax rate during 2014
primarily resulted from the recording of nondeductible merger-related expenses.
CAPITAL RESOURCES
Shareholders’ equity increased $7.0 million during 2016, totaling $341 million as of December 31, 2016. Positively
impacting shareholders’ equity was net income of $31.9 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $18.7 million, our share repurchase program that aggregated $3.7 million and a
change in the net unrealized gains and losses, net of tax effect, on our available for sales securities portfolio of $6.9 million.
Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our
dividend reinvestment plan positively impacted shareholders’ equity by a total of $2.9 million.
We and our bank are subject to regulatory capital requirements administered by state and federal banking agencies. Failure
to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the
financial statements. As of December 31, 2016, our bank’s total risk-based capital ratio was 13.1%, compared to 13.5% at
December 31, 2015. Our bank’s total regulatory capital increased $5.8 million during 2016, primarily reflecting the net
impact of net income totaling $33.2 million and cash dividends paid to Mercantile Bank Corporation aggregating $29.2
million. Our bank’s total risk-based capital ratio was also impacted by a $125 million increase in total risk-weighted assets,
primarily resulting from net loan growth. As of December 31, 2016, our bank’s total regulatory capital equaled $353
million, or $83.7 million in excess of the amount necessary to attain the 10.0% minimum total risk-based capital ratio,
which is among the requirements to be categorized as “well capitalized.”
On 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. During 2016, we repurchased 167,878 shares at a total price of $3.7 million, at an average price per share
of $22.23. 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. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional
repurchases may be made during 2017 under the authorized plan, which would also likely be funded from cash dividends
paid to us from our bank.
On 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 an after-tax gain of approximately $1.8 million, or $0.11 per diluted share. On a
pro forma basis as of December 31, 2015, the repurchase resulted in a nine basis point increase in our tangible equity to
tangible assets ratio and an $0.11 increase in our tangible book value per share, but an approximately 35 basis point decline
in our regulatory tier 1 capital and total risk-based capital ratios. The repurchase was funded via a $9.1 million cash
dividend from our bank, resulting in an approximately 35 basis point decline in the regulatory capital ratios. Subsequent to
the repurchase, our and our bank’s regulatory capital ratios remained well above the minimum thresholds to be categorized
as well capitalized.
LIQUIDITY
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the
repayment of loans and securities. These funds are used to fund loans, meet deposit withdrawals, maintain reserve
requirements and operate our company. Liquidity is primarily achieved through local and out-of-area deposits and liquid
assets such as securities available for sale, matured and called securities, federal funds sold and interest-earning deposit
balances. Asset and liability management is the process of managing the balance sheet to achieve a mix of earning assets
and liabilities that maximizes profitability, while providing adequate liquidity.
F-26
To assist in providing needed funds, we regularly obtained monies from wholesale funding sources. Wholesale funds,
primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $251
million, or 9.4% of combined deposits and borrowed funds as of December 31, 2016, compared to $189 million, or 7.6% of
combined deposits and borrowed funds, as of December 31, 2015.
Sweep accounts decreased $23.1 million during 2016, totaling $132 million at December 31, 2016. The decline primarily
reflects certain customers transferring funds from the sweep product to noninterest-bearing checking accounts reflecting
updated interest rate and fee structures. Our sweep account program entails transferring collected funds from certain
business noninterest-bearing checking accounts to overnight interest-bearing repurchase agreements. Such repurchase
agreements are not deposit accounts and are not afforded federal deposit insurance. All of our repurchase agreements are
accounted for as secured borrowings. Information regarding our repurchase agreements as of December 31, 2016 and
during 2016 is as follows:
Outstanding balance at December 31, 2016
Weighted average interest rate at December 31, 2016
Maximum daily balance twelve months ended December 31, 2016
Average daily balance for twelve months ended December 31, 2016
Weighted average interest rate for twelve months ended December 31, 2016
$
$
$
131,710,000
0.16 %
175,088,000
149,079,000
0.14 %
FHLBI advances increased $107 million during 2016, totaling $175 million as of December 31, 2016. The additional
monies were generally used to fund brokered deposit maturities and loan growth. FHLBI advances are primarily used to
assist in funding loan demand, as well as playing an integral role in our interest rate risk management program. FHLBI
advances are generally collateralized by a blanket lien on our residential mortgage loan portfolio. Our borrowing line of
credit at year-end 2016 totaled $517 million, with availability of $342 million.
We also have the ability to borrow up to $30.0 million on a daily basis through a correspondent bank using an established
unsecured federal funds purchased line of credit. We did not access this line of credit during 2016; in fact, we have not
accessed any federal funds purchased lines of credit since January of 2010. In contrast, our interest-earning deposit account
at the Federal Reserve Bank of Chicago averaged $75.4 million during 2016. We have a line of credit through the Discount
Window of the Federal Reserve Bank of Chicago. Using certain municipal bonds as collateral, we could have borrowed up
to $21.9 million at December 31, 2016. We did not utilize this line of credit during the past seven years, and do not plan to
access this line of credit in future periods.
The following table reflects, as of December 31, 2016, significant fixed and determinable contractual obligations to third
parties by payment date, excluding accrued interest:
One Year
or Less
One to
Three to
Three Years Five Years Five Years
Over
Total
Deposits without a stated maturity
Certificates of deposit
Short-term borrowings
Federal Home Loan Bank advances
Subordinated debentures
Other borrowed money
Property leases
0 $
$ 1,805,568,000 $
0 $
358,259,000 126,246,000 84,912,000
0
131,710,000
0 $ 1,805,568,000
0 569,417,000
0 131,710,000
45,000,000 40,000,000 50,000,000 40,000,000 175,000,000
44,835,000
3,357,000
1,033,000
0 44,835,000
0 3,357,000
0
0
0
415,000
0
0
451,000
167,000
0
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded
loan commitments and standby letters of credit. At December 31, 2016, we had a total of $795 million in unfunded loan
commitments and $26.2 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $641
million were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $154
million were for loan commitments generally expected to close and become funded within the next twelve months. We
regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity
management.
F-27
The following table depicts our loan commitments at the end of the past three years:
12/31/16
12/31/15
12/31/14
Commercial unused lines of credit
Unused lines of credit secured by 1-4 family residential
$
553,345,000 $
522,658,000 $
554,856,000
properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
56,275,000
22,689,000
8,489,000
154,338,000
26,202,000
61,905,000
15,612,000
8,583,000
178,034,000
34,946,000
60,983,000
11,649,000
8,673,000
110,126,000
35,461,000
Total
$
821,338,000 $
821,738,000 $
781,748,000
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events,
economic or market conditions, reductions in earnings performance, declining capital levels or situations beyond our
control could cause liquidity challenges. While we believe it is unlikely that a funding crisis of any significant degree is
likely to materialize, we have developed a comprehensive contingency funding plan that provides a framework for meeting
liquidity disruptions.
MARKET RISK ANALYSIS
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan
assets and therefore have no significant exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates is assumed to be insignificant. Interest rate risk is the
exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the
excess of interest collected on interest-earning assets over the interest paid on interest-bearing liabilities. The rates of
interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since
market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes.
Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of
interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management
that maintains interest rate risk at prudent levels is essential to our safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control
interest rate risk and the quantitative level of exposure. Our interest rate risk management process seeks to ensure that
appropriate policies, procedures, management information systems and internal controls are in place to maintain interest
rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we
assess the existing and potential future effects of changes in interest rates on our financial condition, including capital
adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures
the difference between the dollar amounts of interest-sensitive assets and liabilities that will be refinanced or repriced
during a given time period. A significant repricing gap could result in a negative impact to the net interest margin during
periods of changing market interest rates.
F-28
The following table depicts our GAP position as of December 31, 2016:
Within
Three
Months
Three to
Twelve
Months
One to
Five
Years
After
Five
Years
Total
Assets:
Commercial loans (1)
Residential real estate loans
Consumer loans
Securities (2)
Interest-earning deposits
Allowance for loan losses
Other assets
Total assets
Liabilities:
Interest-bearing checking
Savings deposits
Money market accounts
Time deposits under $100,000
Time deposits $100,000 & over
Short-term borrowings
Federal Home Loan Bank advances
Other borrowed money
Noninterest-bearing checking
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities & shareholders'
equity
2,053,000
1,485,000 30,605,000
$ 916,178,000 $ 162,814,000 $ 664,592,000 $ 286,436,000 $ 2,030,020,000
31,511,000 18,766,000 146,810,000 109,650,000 306,737,000
41,863,000
17,415,000 29,026,000 121,778,000 167,867,000 336,086,000
0 133,396,000
1,750,000
(17,961,000 )
0
0
0 252,430,000
0
1,098,553,000 212,341,000 965,535,000 571,673,000 $ 3,082,571,000
131,396,000
0
0
250,000
0
0
7,720,000
0
0
0
377,929,000
344,988,000
272,051,000
0
0
0
21,947,000 67,935,000 56,287,000
101,444,000 166,933,000 154,871,000
0
131,710,000
0 377,929,000
0 344,988,000
0 272,051,000
0 146,169,000
0 423,248,000
0 131,710,000
10,000,000 35,000,000 90,000,000 40,000,000 175,000,000
48,193,000
48,193,000
0
0 810,600,000
0
11,872,000
0
0
1,308,262,000 269,868,000 301,158,000 40,000,000 2,741,760,000
0 340,811,000
0
0
0
0
0
0
0
0
0
0
1,308,262,000 269,868,000 301,158,000 40,000,000 $ 3,082,571,000
Net asset (liability) GAP
$ (209,709,000 ) $ (57,527,000 ) $ 664,377,000 $ 531,673,000
Cumulative GAP
$ (209,709,000 ) $ (267,236,000 ) $ 397,141,000 $ 928,814,000
Percent of cumulative GAP to total
assets
(6.8% )
(8.7% )
12.9 %
30.1 %
(1) Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using
maturity date and not repricing frequency.
(2) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31,
2016.
The second interest rate risk measurement used is commonly referred to as net interest income simulation analysis. We
believe that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and
therefore, it serves as our primary interest rate risk measurement technique. The simulation model assesses the direction
and magnitude of variations in net interest income resulting from potential changes in market interest rates.
Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities
of interest-sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing.
These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the
model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate
changes and changes in market conditions and our strategies, among other factors.
F-29
We conducted multiple simulations as of December 31, 2016, in which it was assumed that changes in market interest rates
occurred ranging from up 400 basis points to down 400 basis points in equal quarterly instalments over the next twelve
months. The following table reflects the suggested impact on net interest income over the next twelve months in
comparison to estimated net interest income based on our balance sheet structure, including the balances and interest rates
associated with our specific loans, securities, deposits and borrowed funds, as of December 31, 2016.
Interest Rate Scenario
Interest rates down 400 basis points
Interest rates down 300 basis points
Interest rates down 200 basis points
Interest rates down 100 basis points
No change in interest rates
Interest rates up 100 basis points
Interest rates up 200 basis points
Interest rates up 300 basis points
Interest rates up 400 basis points
Dollar Change
Percent Change
In Net
Interest Income
In Net
Interest Income
$
(14,220,000 )
(12,235,000 )
(9,590,000 )
(5,395,000 )
(310,000 )
2,115,000
4,460,000
6,825,000
9,170,000
(14.3%)
(12.3)
(9.6)
(5.4)
(0.3)
2.1
4.5
6.8
9.2
The resulting estimates have been significantly impacted by the current interest rate and economic environment, as
adjustments have been made to critical model inputs with regards to traditional interest rate relationships. This is especially
important as it relates to floating rate commercial loans and out-of-area deposits, which comprise a sizable portion of our
balance sheet.
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other
variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-
bearing liabilities; level of nonperforming assets; economic and competitive conditions; potential changes in lending,
investing, and deposit gathering strategies; client preferences; and other factors.
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying Consolidated Balance Sheets of Mercantile Bank Corporation as of December 31, 2016
and 2015, and the related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders' Equity
and Cash Flows for each of the three years in the period ended December 31, 2016. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Mercantile Bank Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Mercantile Bank Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) and our report dated March 6, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
BDO USA, LLP
Grand Rapids, Michigan
March 6, 2017
F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited Mercantile Bank Corporation’s internal control over financial reporting as of December 31, 2016, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Mercantile Bank Corporation’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Report by Mercantile Bank Corporation’s
Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Mercantile Bank Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Consolidated Balance Sheets of Mercantile Bank Corporation as of December 31, 2016 and 2015, and the
related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows for
each of the three years in the period ended December 31, 2016, and our report dated March 6, 2017 expressed an
unqualified opinion thereon.
/s/ BDO USA, LLP
BDO USA, LLP
Grand Rapids, Michigan
March 6, 2017
F-32
March 6, 2017
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting
that is designed to produce reliable financial statements presented in conformity with generally accepted accounting
principles. There are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an
effective system of internal control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company’s system of internal control over financial reporting that is designed to produce reliable
financial statements presented in conformity with generally accepted accounting principles as of December 31, 2016. This
assessment was based on criteria for effective internal control over financial reporting described in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management believes that, as of December 31, 2016, Mercantile Bank Corporation maintained an
effective system of internal control over financial reporting that is designed to produce reliable financial statements
presented in conformity with generally accepted accounting principles based on those criteria.
The Company’s independent auditors have issued an audit report on the effectiveness of the Company’s internal control
over financial reporting as found on page F-32.
Mercantile Bank Corporation
/s/ Robert B. Kaminski, Jr.
Robert B. Kaminski, Jr.
President and Chief Executive Officer
/s/ Charles E. Christmas
Charles E. Christmas
Executive Vice President, Chief Financial Officer and Treasurer
F-33
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
ASSETS
Cash and due from banks
Interest-earning deposits
Federal funds sold
Total cash and cash equivalents
Securities available for sale
Federal Home Loan Bank stock
Loans
Allowance for loan losses
Loans, net
Premises and equipment, net
Bank owned life insurance
Goodwill
Core deposit intangible
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated debentures
Accrued interest and other liabilities
Total liabilities
Shareholders' equity
2016
2015
$
50,200,000 $
133,396,000
0
183,596,000
42,829,000
46,463,000
599,000
89,891,000
328,060,000 346,992,000
7,567,000
8,026,000
2,378,620,000 2,277,727,000
(15,681,000 )
2,360,659,000 2,262,046,000
(17,961,000 )
45,456,000
67,198,000
49,473,000
9,957,000
30,146,000
46,862,000
58,971,000
49,473,000
12,631,000
29,123,000
$ 3,082,571,000 $ 2,903,556,000
$ 810,600,000 $ 674,568,000
1,564,385,000 1,600,814,000
2,374,985,000 2,275,382,000
131,710,000 154,771,000
68,000,000
175,000,000
55,154,000
44,835,000
16,445,000
15,230,000
2,741,760,000 2,569,752,000
Preferred stock, no par value; 1,000,000 shares authorized; 0 shares
outstanding at December 31, 2016 and December 31, 2015
Common stock, no par value; 40,000,000 shares authorized; 16,416,695
shares outstanding at December 31, 2016 and 16,358,711 shares
outstanding at December 31, 2015
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
0
0
305,488,000 304,819,000
27,722,000
1,263,000
340,811,000 333,804,000
40,904,000
(5,581,000)
Total liabilities and shareholders’ equity
$ 3,082,571,000 $ 2,903,556,000
See accompanying notes to consolidated financial statements.
F-34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2016, 2015 and 2014
Interest income
Loans, including fees
Securities, taxable
Securities, tax-exempt
Other interest-earning assets
Total interest income
Interest expense
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Subordinated debentures and other borrowings
Total interest expense
Net interest income
Provision for loan losses
2016
2015
2014
$
109,049,000 $
6,842,000
2,165,000
401,000
118,457,000
104,106,000 $
5,918,000
2,089,000
215,000
112,328,000
80,824,000
6,417,000
1,643,000
234,000
89,118,000
7,549,000
211,000
2,263,000
2,567,000
12,590,000
7,590,000
157,000
765,000
2,642,000
11,154,000
8,378,000
122,000
636,000
2,204,000
11,340,000
105,867,000
101,174,000
77,778,000
2,900,000
(1,000,000 )
(3,000,000 )
Net interest income after provision for loan losses
102,967,000
102,174,000
80,778,000
Noninterest income
Service charges on deposit and sweep accounts
Credit and debit card fees
Mortgage banking activities
Earnings on bank owned life insurance
Payroll processing
Letter of credit fees
Gain on trust preferred securities repurchase
Other income
Total noninterest income
Noninterest expense
Salaries and benefits
Occupancy
Furniture and equipment rent, depreciation and maintenance
Data processing
Advertising
FDIC insurance costs
Problem asset costs
Efficiency program-related costs
Merger-related costs
Other expense
Total noninterest expenses
4,253,000
4,278,000
3,866,000
1,264,000
1,016,000
493,000
2,970,000
2,898,000
21,038,000
43,524,000
6,063,000
2,119,000
7,939,000
1,586,000
1,236,000
338,000
172,000
0
14,141,000
77,118,000
3,308,000
4,329,000
3,619,000
1,113,000
969,000
457,000
0
2,243,000
16,038,000
42,594,000
5,976,000
2,332,000
7,696,000
1,363,000
1,717,000
1,212,000
765,000
0
15,726,000
79,381,000
2,586,000
2,494,000
1,672,000
1,184,000
782,000
335,000
0
975,000
10,028,000
33,703,000
4,637,000
1,738,000
5,869,000
1,315,000
1,182,000
585,000
0
5,447,000
11,134,000
65,610,000
Income before federal income tax expense
46,887,000
38,831,000
25,196,000
Federal income tax expense
14,974,000
11,811,000
7,865,000
Net income
Earnings per common share:
Basic
Diluted
$
31,913,000 $
27,020,000 $
17,331,000
$
$
1.96 $
1.96 $
1.63 $
1.62 $
1.28
1.28
See accompanying notes to consolidated financial statements.
F-35
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2016, 2015 and 2014
Net income
2016
31,913,000 $
2015
27,020,000 $
2014
17,331,000
$
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale
Fair value of interest rate swap
Total other comprehensive income (loss)
Tax effect of unrealized holding gains (losses) on securities
available for sale
Tax effect of fair value of interest rate swap
Total tax effect of other comprehensive income (loss)
Other comprehensive income (loss), net of tax effect
(10,697,000 )
169,000
(10,528,000 )
1,874,000
0
1,874,000
8,596,000
11,000
8,607,000
3,743,000
(59,000 )
3,684,000
(6,844,000 )
(627,000 )
0
(627,000 )
1,247,000
(3,014,000 )
(4,000 )
(3,018,000 )
5,589,000
Comprehensive income
$
25,069,000 $
28,267,000 $
22,920,000
See accompanying notes to consolidated financial statements.
F-36
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2016, 2015 and 2014
($ in thousands except per share amounts)
Preferred
Stock
Common
Stock
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Shareholders’
Equity
Balances, January 1, 2014
$
0 $ 162,999 $
(4,101 ) $
(5,573) $
153,325
Common stock issued in connection with
Firstbank merger (8,087,272 shares)
Issuance of stock options to replace existing
Firstbank options at merger date
Employee stock purchase plan (1,150 shares)
Dividend reinvestment plan (10,359 shares)
Stock option exercises (30,585 shares)
Stock grants to directors for retainer fees
(7,375 shares)
Stock-based compensation expense
173,310
1,664
23
209
282
155
714
Cash dividends ($2.48 per common share)
(21,452 )
(3,012)
Net income for 2014
17,331
173,310
1,664
23
209
282
155
714
(24,464 )
17,331
Change in net unrealized gain on securities
available for sale, net of tax effect
Change in fair value of interest rate swap, net of
tax effect
5,582
5,582
7
7
Balances, December 31, 2014
$
0 $ 317,904 $
10,218
$
16
$
328,138
See accompanying notes to consolidated financial statements.
F-37
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2016, 2015 and 2014
Retained
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Earnings Comprehensive Shareholders’
Stock
(Deficit) Income/(Loss)
Stock
Equity
Balances, January 1, 2015
$
0 $ 317,904 $
10,218
$
16
$
328,138
Employee stock purchase plan (2,058 shares)
Dividend reinvestment plan (30,467 shares)
Stock option exercises (59,117 shares)
Stock grants to directors for retainer fees
(20,094 shares)
Stock-based compensation expense
44
655
891
403
684
Share repurchase program (788,541 shares)
(15,762 )
Cash dividends ($0.58 per common share)
Net income for 2015
Change in net unrealized gain on securities
available for sale, net of tax effect
Change in fair value of interest rate swap, net of
tax effect
(9,516 )
27,020
44
655
891
403
684
(15,762 )
(9,516 )
27,020
1,247
1,247
0
0
Balances, December 31, 2015
$
0 $ 304,819 $
27,722 $
1,263 $
333,804
See accompanying notes to consolidated financial statements.
F-38
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2016, 2015 and 2014
Retained
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Earnings Comprehensive Shareholders’
Stock
(Deficit) Income/(Loss)
Stock
Equity
Balances, January 1, 2016
$
0 $ 304,819 $
27,722 $
1,263 $
333,804
Employee stock purchase plan (1,362 shares)
Dividend reinvestment plan (58,325 shares)
Stock option exercises (72,711 shares)
Stock grants to directors for retainer fees
(13,000 shares)
Stock-based compensation expense
Share repurchase program (167,878 shares)
Cash dividends ($1.16 per common share)
Net income for 2016
Change in net unrealized gain on securities
available for sale, net of tax effect
Change in fair value of interest rate swap, net of
tax effect
36
1,601
978
327
1,459
(3,732 )
(18,731 )
31,913
36
1,601
978
327
1,459
(3,732 )
(18,731 )
31,913
(6,954 )
(6,954 )
110
110
Balances, December 31, 2016
$
0 $ 305,488 $
40,904 $
(5,581 ) $
340,811
See accompanying notes to consolidated financial statements.
F-39
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2016, 2015 and 2014
Cash flows from operating activities
Net income
$
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
Accretion of acquired loans
Provision for loan losses
Deferred income tax expense
Stock-based compensation expense
Stock grants to directors for retainer fee
Proceeds from sales of mortgage loans held for sale
Origination of mortgage loans held for sale
Net gain on sales of mortgage loans held for sale
Gain on trust preferred securities repurchase
Net gain from sales and valuation write-downs of foreclosed assets
Net loss from sales and valuation write-downs of former bank premises
Net loss from sales of premises and equipment
Net (gain) loss from sales of available for sale securities
Earnings on bank owned life insurance
Net change in:
Accrued interest receivable
Other assets
Accrued interest and other liabilities
Net cash from operating activities
Cash flows from investing activities
Cash received in merger
Purchases of securities available for sale
Proceeds from maturities, calls and repayments of securities available for sale
Proceeds from sales of securities available for sale
Purchases of Federal Home Loan Bank stock
Proceeds from Federal Home Loan Bank stock redemption
Loan originations and payments, net
Purchases of bank owned life insurance
Purchases of premises and equipment, net
Proceeds from sales of former bank premises
Proceeds from sales of foreclosed assets
Net cash from (for) investing activities
Cash flows from financing activities
Net decrease in time deposits
Net increase (decrease) in all other deposits
Net increase (decrease) in securities sold under agreements to repurchase
Proceeds from Federal Home Loan Bank advances
Maturities of Federal Home Loan Bank advances
Proceeds from stock option exercises, net of cashless exercises
Employee stock purchase plan
Dividend reinvestment plan
Repurchase of common stock
Repurchase of trust preferred securities
Payment of cash dividends to common shareholders
Net cash from (for) financing activities
2016
2015
2014
31,913,000 $
27,020,000 $
17,331,000
9,576,000
(4,925,000 )
2,900,000
(812,000 )
1,459,000
327,000
114,757,000
(110,778,000 )
(3,699,000 )
(2,970,000 )
(520,000 )
35,000
174,000
1,000
(1,264,000 )
11,654,000
(5,338,000 )
(1,000,000 )
4,412,000
684,000
403,000
120,880,000
(116,997,000 )
(3,626,000 )
0
(62,000 )
0
55,000
(17,000 )
(1,113,000 )
7,613,000
(3,194,000 )
(3,000,000 )
4,506,000
714,000
155,000
67,422,000
(65,392,000 )
(1,625,000 )
0
(894,000 )
0
25,000
0
(1,184,000 )
122,000
(648,000 )
(1,046,000 )
34,602,000
(321,000 )
(4,815,000 )
4,185,000
36,004,000
(11,000 )
1,795,000
(9,822,000 )
14,439,000
0
(164,336,000 )
172,173,000
264,000
(459,000 )
0
(97,282,000 )
(7,000,000 )
(2,025,000 )
45,000
2,059,000
(96,561,000 )
(20,854,000 )
120,457,000
(23,061,000 )
110,000,000
(3,000,000 )
978,000
36,000
1,601,000
(3,732,000 )
(8,030,000 )
(18,731,000 )
155,664,000
0
(10,645,000 )
93,873,000
1,483,000
0
6,132,000
(188,932,000 )
0
(1,081,000 )
0
2,967,000
(96,203,000 )
(147,106,000 )
146,944,000
(12,798,000 )
20,000,000
(6,000,000 )
891,000
44,000
655,000
(15,762,000 )
0
(9,516,000 )
(22,648,000 )
91,806,000
(19,874,000 )
75,880,000
0
0
5,527,000
(90,853,000 )
0
(2,175,000 )
0
4,427,000
64,738,000
(58,927,000 )
(11,307,000 )
43,780,000
0
(3,000,000 )
282,000
23,000
209,000
0
0
(24,464,000 )
(53,404,000 )
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
93,705,000
89,891,000
183,596,000 $
(82,847,000 )
172,738,000
89,891,000 $
25,773,000
146,965,000
172,738,000
$
See accompanying notes to consolidated financial statements.
F-40
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2016, 2015 and 2014
Supplemental disclosures of cash flows information
Cash paid during the year for:
Interest
Federal income taxes
2016
2015
2014
$
12,477,000 $
15,125,000
11,618,000 $
8,000,000
11,439,000
2,625,000
Noncash financing and investing activities:
Transfers from loans to foreclosed assets
Transfers from bank premises to other real estate owned
Common stock issued in connection with the Firstbank merger
414,000
381,000
0
1,490,000
2,203,000
0
0
0 173,310,000
See accompanying notes to consolidated financial statements.
F-41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Mercantile Bank Corporation
(“Mercantile”) and its subsidiary, Mercantile Bank of Michigan (“Bank”), and of Mercantile Bank Real Estate Co., L.L.C.
(“Mercantile Real Estate”) and Mercantile Insurance Center, Inc. (“Mercantile Insurance”), subsidiaries of our Bank, after
elimination of significant intercompany transactions and accounts.
Mercantile has five separate business trusts: Mercantile Bank Capital Trust I, Firstbank Capital Trust I, Firstbank Capital
Trust II, Firstbank Capital Trust III and Firstbank Capital Trust IV (“our trusts”). Our trusts were formed to issue trust
preferred securities. We issued subordinated debentures to our trusts in return for the proceeds raised from the issuance of
the trust preferred securities. Our trusts are not consolidated, but instead we report the subordinated debentures issued to the
trusts as liabilities.
Nature of Operations: Mercantile was incorporated on July 15, 1997 to establish and own the Bank based in Grand Rapids,
Michigan. The Bank began operations on December 15, 1997. We completed the merger of Firstbank Corporation
(“Firstbank”), a Michigan corporation with approximately $1.5 billion in total assets and 46 branch locations, into
Mercantile as of June 1, 2014.
The Bank is a community-based financial institution. The Bank’s primary deposit products are checking, savings, and term
certificate accounts, and its primary lending products are commercial loans, residential mortgage loans, and instalment
loans. Substantially all loans are secured by specific items of collateral including business assets, real estate or consumer
assets. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are
secured by commercial or residential real estate. The Bank’s loan accounts and retail deposits are primarily with customers
located in the communities in which we have bank office locations. As an alternative source of funds, the Bank has also
issued certificates of deposit to depositors outside of its primary market areas. Substantially all revenues are derived from
banking products and services and investment securities. While we monitor the revenue streams of the various products and
services offered, we manage our business on the basis of one operating segment, banking.
Mercantile Real Estate was organized on July 21, 2003, principally to develop, construct, and own a facility in downtown
Grand Rapids that serves as our Bank’s main office and Mercantile’s headquarters. This facility was placed into service
during the second quarter of 2005.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the
United States of America, management makes estimates and assumptions based on available information. These estimates
and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results
could differ. The allowance for loan losses and the fair values of financial instruments are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand deposits with other financial institutions,
short-term investments (including securities with daily put provisions) and federal funds sold. Cash flows are reported net
for customer loan and deposit transactions, interest-earning time deposits with other financial institutions and short-term
borrowings with maturities of 90 days or less.
Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive
intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold prior
to maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available
for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of
tax. Federal Home Loan Bank stock is carried at cost.
(Continued)
F-42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on
securities are amortized or accreted on the level-yield method without anticipating prepayments, except for mortgage-
backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and
determined using the specific identification method.
Declines in the fair value of debt securities below their amortized cost that are other than temporary (“OTTI”) are reflected
in earnings or other comprehensive income, as appropriate. For those debt securities whose fair value is less than their
amortized cost, we consider our intent to sell the security, whether it is more likely than not that we will be required to sell
the security before recovery and whether we expect to recover the entire amortized cost of the security based on our
assessment of the issuer’s financial condition. In analyzing an issuer’s financial condition, we consider whether the
securities are issued by the federal government or its agencies, and whether downgrades by bond rating agencies have
occurred. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost
and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned
criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be
recognized in the income statement, and 2) OTTI related to other factors, such as liquidity conditions in the market or
changes in market interest rates, which is recognized in other comprehensive income. The credit loss is defined as the
difference between the present value of the cash flows expected to be collected and the amortized cost.
Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at
the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level-yield method without anticipating prepayments. Net unamortized deferred
loan fees amounted to $1.4 million at December 31, 2016 and 2015.
Interest income on commercial loans and mortgage loans is discontinued at the time the loan is 90 days delinquent unless
the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than
when they are 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed
on nonaccrual or charged off at an earlier date if collection of principal and interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of
aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are
recorded as a valuation allowance and charged to earnings. Prior to the merger with Firstbank, such mortgage loans were
sold servicing released. Subsequent to the merger, mortgage loans held for sale are generally sold with servicing rights
retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying
value of the related mortgage loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in
the sale price to the purchaser of the mortgage loan at the same time we make an interest rate commitment to the borrower.
(Continued)
F-43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Year-end mortgage loans held for sale, included in total loans in the balance sheet, were as follows:
Mortgage loans held for sale
Less: Allowance to adjust to lower of cost or market
Mortgage loans held for sale, net
2016
1,035,000 $
0
1,035,000 $
2015
1,316,000
0
1,316,000
$
$
Mortgage Loan Derivatives: We enter into forward contracts and interest rate lock commitments in the ordinary course of
business, which are accounted for as derivatives. The derivatives are not designated as hedges and are carried at fair value.
The net gain or loss on derivatives is included in mortgage banking activities in the income statement. The balance of
derivatives was immaterial at December 31, 2016 and 2015.
Mortgage Banking Activities: Mortgage loan servicing rights are recognized as assets based on the allocated value of
retained servicing rights on mortgage loans sold. Mortgage loan servicing rights are carried at the lower of amortized cost
or fair value and are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights using groupings of the underlying mortgage loans as to interest rates. Any
impairment of a grouping is reported as a valuation allowance.
Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual
percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization
of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking
activities in the statements of income.
Troubled Debt Restructurings: A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons,
grant a concession to a borrower considered to be experiencing financial difficulties that we would not otherwise consider.
A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a
modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest, an
extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new
loan with similar risk, or some combination of these concessions. Troubled debt restructurings can be in either accrual or
nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans. Accruing troubled debt
restructurings are generally excluded from nonperforming loans as it is considered probable that all contractual principal
and interest due under the restructured terms will be collected.
Loans modified as troubled debt restructurings are, by definition, considered to be impaired loans. Impairment for these
loans is measured on a loan-by-loan basis similar to other impaired loans as described below under “Allowance for Loan
Losses.” Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a
general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the
allowance will be impacted by the difference between the results of these two measurement methodologies. Loans modified
as troubled debt restructurings that subsequently default are factored into the determination of the allowance for loan losses
in the same manner as other defaulted loans.
(Continued)
F-44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when we believe the uncollectability of a loan is confirmed.
Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using past loan
loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. We estimate credit losses based on individual loans determined to
be impaired and on all other loans grouped on similar risk characteristics. Our historical loss component is the most
significant of the allowance components and is based on historical loss experience by credit risk grade for commercial
loans and payment status for mortgage and consumer loans. Loans are pooled based on similar risk characteristics
supported by observable data. The historical loss experience component of the allowance represents the results of migration
analysis of historical net charge-offs for portfolios of loans, including groups of commercial loans within each credit risk
grade. For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to
estimate expected future losses to be realized from the pool of loans. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.
A loan is considered impaired when, based on current information and events, it is probable we will be unable to collect the
scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors
considered in determining impairment include payment status and collateral value. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of delay, the reasons for delay, the borrower’s prior payment record and the
amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent. Large
groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the
Bank and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership,
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Our transfers of financial assets are generally limited to commercial loan participations sold and residential mortgage loans
sold in the secondary market.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 33
years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7
years. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major
improvements are capitalized.
Long-lived Assets: Premises and equipment and other long-lived assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable based on future undiscounted cash flows. If impaired, the assets are recorded
at the lower of carrying value or fair value.
Foreclosed Assets: Assets acquired through or in lieu of foreclosure are initially recorded at their estimated fair value net of
estimated selling costs, establishing a new cost basis. If fair value subsequently declines, a valuation allowance is recorded
through noninterest expense, as are collection and operating costs after acquisition. Foreclosed assets, included in other
assets in the balance sheet, totaled $0.5 million and $1.3 million as of December 31, 2016 and 2015, respectively.
(Continued)
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key officers. Bank owned life
insurance is recorded at its cash surrender value, or the amount that can be realized.
Goodwill and Core Deposit Intangible: Goodwill results from business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is
assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent
assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill may not be
recoverable. We may elect to perform a qualitative assessment for the annual impairment test. If the qualitative assessment
indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to
perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. The
quantitative test is a two-step process consisting of comparing the carrying value of the reporting unit to an estimate of its
fair value. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written
down to its estimated fair value. In 2015 and 2016, we elected to perform a qualitative assessment for our annual
impairment test and concluded it is more likely than not our fair value was greater than its carrying amount; therefore, no
further testing was required.
The core deposit intangible that arose from the merger with Firstbank was initially measured at fair value and is being
amortized into noninterest expense over a ten-year period using the sum-of-the-years-digits methodology.
Repurchase Agreements: The Bank sells certain securities under agreements to repurchase. The agreements are treated as
collateralized financing transactions, with the obligations to repurchase the securities sold reflected as liabilities and the
securities underlying the agreements remaining in assets in the Consolidated Balance Sheets.
Financial Instruments and Loan Commitments: Financial instruments include off-balance-sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for
these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded. Instruments, such as standby letters of credit, that are considered financial
guarantees are recorded at fair value.
Stock-Based Compensation: Compensation cost for equity-based awards is measured on the grant date based on the fair
value of the award at that date, and is recognized over the requisite service period, net of estimated forfeitures. Fair value of
stock option awards is estimated using a closed option valuation (Black-Scholes) model. Fair value of restricted stock
awards is based upon the quoted market price of the common stock on the date of grant.
Advertising Costs: Advertising costs are expensed as incurred.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable, the change in deferred
income tax assets and liabilities, and any adjustments related to unrecognized tax benefits. Deferred income tax assets and
liabilities are recognized for the tax consequences of temporary differences between the carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates applicable to future years. A valuation allowance, if needed, reduces
deferred income tax assets to the amount expected to be realized.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information
and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest
rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and
off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and
liabilities not considered financial instruments.
(Continued)
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares and participating
securities outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential
common shares issuable under our stock-based compensation plans using the treasury stock method. Our unvested stock
awards, which contain non-forfeitable rights to dividends whether paid or unpaid (i.e., participating securities), are included
in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, our
unvested stock awards are excluded from the calculations of both basic and diluted earnings per share.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other
comprehensive income (loss) includes unrealized gains and losses on securities available for sale and interest rate swaps
which are also recognized as a separate component of equity.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes
in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge
accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have
historically generally consisted of interest rate swap agreements that qualified for hedge accounting. We do not use
derivatives for trading purposes.
Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash
flows to be received on various assets and liabilities and are effective are reported in other comprehensive income. They are
later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in
the line item in which the hedged cash flows are recorded. If hedge accounting does not apply, changes in the fair value of
derivatives are recognized immediately in current earnings as interest income or expense.
If designated as a hedge, we formally document the relationship between the derivative instrument and the hedged item, as
well as the risk-management objective and the strategy for undertaking the hedge transaction. This documentation includes
linking cash flow hedges to specific assets on the balance sheet. If designated as a hedge, we also formally assess, both at
the hedge’s inception and on an ongoing basis, whether the derivative instrument that is used is highly effective in
offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized immediately in
current earnings as noninterest income or expense. We discontinue hedge accounting when we determine the derivative is
no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or
treatment of the derivatives as a hedge is no longer appropriate or intended.
Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
We do not believe there are any such matters outstanding that would have a material effect on the financial statements.
Reclassifications: Certain items in the prior years’ financial statements have been reclassified to conform to the current year
presentation.
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Standards Updates: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.
This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP,
including those that previously followed industry-specific guidance such as the real estate, construction and software
industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision
of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of
revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard
requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v)
recognize revenue when (or as) the entity satisfies a performance obligation. This ASU was originally effective for annual
and interim periods beginning after December 15, 2016, with three transition methods available – full retrospective,
retrospective and cumulative effect approach. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts
with Customers – Deferral of Effective Date, which delays the implementation of this guidance by one year. Adoption of
this ASU is not expected to have a material effect on our financial position or results of operations.
In January 2016, the FASB issued ASU 2016-1, Recognition and Measurement of Financial Assets and Financial
Liabilities. This ASU requires an entity to (i) measure equity investments at fair value through net income, with certain
exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair
value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv)
calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation
allowance on deferred tax assets related to unrealized losses on available for sale debt securities in combination with other
deferred tax assets. This ASU provides an election to subsequently measure certain nonmarketable equity investments at
cost less any impairment and adjusted for certain observable price changes. This ASU also requires a qualitative
impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments
are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017, and are not expected to have a material effect on our financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU establishes a right-of-use (“ROU”) model that
requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The ASU is effective for annual and interim periods beginning after December 15,
2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or
entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. Adoption of this ASU is not expected to have a material effect on our financial position or
results of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-
Based Payment Accounting. This ASU requires that, prospectively, all tax effects related to share-based payments be made
through the income statement at the time of settlement as opposed to excess tax benefits being recognized in additional
paid-in capital under the current guidance. The ASU also removes the requirement to delay recognition of a tax benefit
until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a
cumulative-effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-
based payments are to be reported as operating activities on the statement of cash flows, a change from the current
requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally,
entities will be allowed to withhold an amount up to the employees’ maximum individual tax rate (as opposed to the
minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change
in withholding requirements will be applied on a modified retrospective approach. This standard will be effective for
annual and interim periods beginning after December 15, 2016. Adoption of this ASU is not expected to have a material
effect on our financial position or results of operations.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU
significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are
not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an
“expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i)
financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures.
This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees.
The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the
disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and
lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit
quality indicator, disaggregated by the year of origination. This ASU is effective for interim and annual reporting periods
beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning
after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective
approach). We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will
have on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. This ASU will make eight targeted changes to how cash receipts and cash payments are
presented and classified in the statement of cash flows and is effective for fiscal years beginning after December 15, 2017.
The new standard will require adoption on a retrospective basis unless it is impractical to apply, in which case it would be
required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the
provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial
statements.
NOTE 2 – BUSINESS COMBINATION
We completed the merger of Firstbank Corporation (“Firstbank”), a Michigan corporation with approximately $1.5 billion
in total assets and 46 branch locations, into Mercantile Bank Corporation as of June 1, 2014 (“Merger Date”). Each share
of Firstbank’s common stock was converted into the right to receive one share of Mercantile common stock, resulting in
Mercantile issuing 8,087,272 shares of its common stock. The merger provided an expanded geographic footprint for the
Company and increased the size of the balance sheet.
The Firstbank transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired,
liabilities assumed and consideration exchanged were recorded at estimated fair value on the Merger Date. Goodwill of
$49.5 million was calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents
the value expected from the synergies created from combining the two banking organizations as well as the economies of
scale expected from combining the operations of the two companies. None of the goodwill is deductible for income tax
purposes as the merger is accounted for as a tax-free exchange.
In most instances, determining the fair value of the acquired assets and assumed liabilities required us to estimate cash
flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest.
The most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash
flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the
loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at
acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with the
applicable accounting guidance for business combinations, there was no carry-over of Firstbank’s previously established
allowance for loan losses.
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 2 – BUSINESS COMBINATION (Continued)
The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under
ASC 310-30 (“acquired impaired”), and loans that do not meet this criteria, which are accounted for under ASC 310-20
(“acquired non-impaired”). In addition, the loans are further categorized into different loan pools based primarily on the
type and purpose of the loan.
NOTE 3 – SECURITIES
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses
recognized in accumulated other comprehensive income (loss) were as follows:
2016
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
2015
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 159,271,000 $ 106,000 $ (7,337,000 ) $ 152,040,000
486,000
47,329,000
(423,000 ) 47,392,000
312,000 (1,549,000 ) 119,047,000
120,284,000
7,631,000
(91,000 )
7,699,000
23,000
1,950,000
(29,000 )
1,979,000
0
$ 336,562,000 $ 927,000 $ (9,429,000 ) $ 328,060,000
$ 146,660,000 $ 1,932,000 $ (1,552,000 ) $ 147,040,000
(304,000 ) 67,074,000
66,670,000
708,000
(205,000 ) 122,023,000
120,679,000 1,549,000
8,914,000
76,000
1,941,000
0
$ 344,796,000 $ 4,265,000 $ (2,069,000 ) $ 346,992,000
8,841,000
1,946,000
(3,000 )
(5,000 )
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 3 – SECURITIES (Continued)
Securities with unrealized losses at year-end 2016 and 2015, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, are as follows:
Description of Securities
2016
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation
bonds
Municipal revenue bonds
Other investments
2015
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation
bonds
Municipal revenue bonds
Other investments
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$ 110,160,000 $ 7,172,000 $ 5,073,000 $ 165,000 $ 115,233,000 $ 7,337,000
423,000
419,000 40,742,000
4,000 37,072,000
3,670,000
189,000 93,629,000 1,549,000
65,895,000 1,360,000 27,734,000
91,000
2,127,000
206,000
29,000
1,479,000
0
$ 183,125,000 $ 8,655,000 $ 70,085,000 $ 774,000 $ 253,210,000 $ 9,429,000
1,921,000
1,479,000
90,000
29,000
1,000
0
$
0 $
18,025,000
1,981,000
0
1,446,000
$ 21,452,000 $
0 $ 76,496,000 $ 1,552,000 $ 76,496,000 $ 1,552,000
304,000
235,000 52,685,000
69,000 34,660,000
4,000 30,134,000
1,134,000
0
205,000
3,000
0
5,000
5,000
78,000 $ 142,424,000 $ 1,991,000 $ 163,876,000 $ 2,069,000
201,000 32,115,000
1,134,000
1,446,000
3,000
0
We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the
length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects
of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value. For those debt securities whose fair value is less than their amortized cost basis,
we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security
before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s
financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.
At December 31, 2016, 441 debt securities and one mutual fund with fair values totaling $253 million had unrealized losses
aggregating $9.4 million. After we considered whether the securities were issued by the federal government or its agencies
and whether downgrades by bond rating agencies had occurred, we determined that unrealized losses were due to changing
interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe
it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no
unrealized losses are deemed to be other-than-temporary.
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 3 – SECURITIES (Continued)
The amortized cost and fair values of debt securities at December 31, 2016, by maturity, are shown in the following table.
The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected
maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are
shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax
equivalent yield.
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage-backed securities
Other investments
Weighted
Average Yield
1.24%
2.09
2.65
2.84
1.77
2.66
2.31%
$
Amortized
Cost
35,608,000 $
81,073,000
84,422,000
86,151,000
47,329,000
1,979,000
Fair
Value
35,638,000
80,872,000
81,587,000
80,621,000
47,392,000
1,950,000
$ 336,562,000 $ 328,060,000
Municipal general obligation bonds totaling $0.3 million and $1.5 million were sold during 2016 and 2015, respectively,
resulting in a nominal net loss and net gain in the respective periods. No securities were sold during 2014.
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $109 million
and $106 million at December 31, 2016 and December 31, 2015, respectively, with estimated market values of $107
million at both dates. Securities issued by all other states and their political subdivisions had a combined amortized cost of
$19.5 million and $24.0 million at December 31, 2016 and December 31, 2015, with estimated market values of $19.5
million and $24.1 million, respectively. Total securities of any other specific issuer, other than the U.S. Government and
its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.
The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure
repurchase agreements was $132 million and $155 million at December 31, 2016 and 2015, respectively. Investments in
FHLBI stock are restricted and may only be resold to, or redeemed by, the issuer.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the
allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily
using the simple interest method based on the principal balance outstanding. Interest is not accrued on loans where
collectability is uncertain. Accrued interest is included in other assets in the Consolidated Balance Sheets. Loan origination
fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan
commitment period as an adjustment to the related loan yield.
(Continued)
F-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired loans are those purchased in the Firstbank merger. These loans were recorded at estimated fair value at the
Merger Date with no carryover of the related allowance. The acquired loans were segregated between those considered to
be performing (“acquired non-impaired loans”) and those with evidence of credit deterioration (“acquired impaired loans”).
Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all
contractually required payments will not be collected. Acquired loans restructured after acquisition are not considered or
reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Merger Date and are accounted
for in pools.
The fair value estimates for acquired loans are based on expected prepayments and the amount and timing of discounted
expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of
the loan are also a component of the initial fair value. In determining the Merger Date fair value of acquired impaired loans,
and in subsequent accounting, we have generally aggregated acquired commercial and consumer loans into pools of loans
with common risk characteristics.
The difference between the fair value of an acquired non-impaired loan and contractual amounts due at the Merger Date is
accreted into interest income over the estimated life of the loan. Contractually required payments represent the total
undiscounted amount of all uncollected principal and interest payments. Acquired non-impaired loans are placed on
nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.
The excess of an acquired impaired loan’s contractually required payments over the amount of its undiscounted cash flows
expected to be collected is referred to as the non-accretable difference. The non-accretable difference, which is neither
accreted into income nor recorded on the Consolidated Balance Sheets, reflects estimated future credit losses and
uncollectable contractual interest expected to be incurred over the life of the acquired impaired loan. The excess cash flows
expected to be collected over the carrying amount of the acquired loan is referred to as the accretable yield. This amount is
accreted into interest income over the remaining life of the acquired loans or pools using the level yield method. The
accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed
assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired
loans.
We evaluate quarterly the remaining contractually required payments receivable and estimate cash flows expected to be
collected over the lives of the impaired loans. Contractually required payments receivable may increase or decrease for a
variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on
variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on
acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value.
These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the
Merger Date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly
principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as
necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in
the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting period’s
estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current
reporting period.
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Increases in expected cash flows of acquired impaired loans subsequent to the Merger Date are recognized prospectively
through adjustments of the yield on the loans or pools over their remaining lives, while decreases in expected cash flows
are recognized as impairment through a provision for loan losses and an increase in the allowance.
Year-end loans disaggregated by class of loan within the loan portfolio segments were as follows:
Originated Loans
Commercial:
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential
December 31, 2016
%
Balance
December 31, 2015
%
Balance
Percent
Increase
(Decrease)
$ 636,771,000
33.8 % $ 577,872,000
35.7 %
10.2 %
26,519,000
363,509,000
652,054,000
1.4
30,138,000
19.3 330,798,000
34.6 520,754,000
1.9
20.5
32.2
2.1
92.4
(12.0 )
9.9
25.2
47.4
15.8
rental
Total commercial
50,045,000
1,728,898,000
2.6
33,954,000
91.7 1,493,516,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
69,831,000
85,819,000
155,650,000
67,816,000
3.7
4.6
55,255,000
8.3 123,071,000
4.2
3.4
7.6
3.0
55.3
26.5
Total originated loans
$ 1,884,548,000
100.0 % $ 1,616,587,000
100.0 %
16.6 %
(Continued)
F-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired Loans
Commercial:
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential
December 31, 2016
Balance
%
December 31, 2015
%
Balance
Percent
Increase
(Decrease)
$ 77,132,000
15.6 % $ 118,431,000
17.9 %
(34.9% )
8,309,000
86,955,000
96,215,000
1.7 14,982,000
17.6 115,121,000
19.5 123,597,000
2.3
17.4
18.7
12.3
68.6
(44.5)
(24.5)
(22.2)
(16.3)
(25.8)
rental
Total commercial
67,838,000
336,449,000
13.7 81,049,000
68.1 453,180,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
48,216,000
109,407,000
157,623,000
9.8 72,830,000
22.1 135,130,000
31.9 207,960,000
11.0
20.4
31.4
(33.8)
(19.0)
(24.2)
Total acquired loans
$ 494,072,000
100.0 % $ 661,140,000
100.0 %
(25.3% )
Total Loans
Commercial:
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential
December 31, 2016
%
Balance
December 31, 2015
%
Balance
Percent
Increase
(Decrease)
$ 713,903,000
30.0 % $ 696,303,000
30.6 %
2.5 %
34,828,000
450,464,000
748,269,000
1.5
45,120,000
18.9 445,919,000
31.5 644,351,000
2.0
19.6
28.3
5.0
85.5
(22.8 )
1.0
16.1
2.5
6.1
rental
Total commercial
117,883,000
2,065,347,000
4.9 115,003,000
86.8 1,946,696,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
118,047,000
195,226,000
313,273,000
5.0 140,646,000
8.2 190,385,000
13.2 331,031,000
6.2
8.3
14.5
(16.1 )
2.5
(5.4 )
Total loans
$ 2,378,620,000
100.0 % $ 2,277,727,000
100.0 %
4.4 %
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total contractually required payments and carrying value of acquired impaired loans were $15.5 million and $6.2
million, respectively, as of December 31, 2016. The total contractually required payments and carrying value of acquired
impaired loans were $24.6 million and $13.1 million, respectively, as of December 31, 2015. Changes in the accretable
yield for acquired impaired loans for the years ended December 31, 2016 and December 31, 2015 were as follows:
Balance at December 31, 2015
Additions
Accretion income
Net reclassification from nonaccretable to accretable
Reductions (1)
Removal due to pool excess recovery (2)
Balance at December 31, 2016
Balance at December 31, 2014
Additions
Accretion income
Net reclassification from nonaccretable to accretable
Reductions (1)
Balance at December 31, 2015
2016
5,193,000
245,000
(2,388,000 )
4,635,000
(1,761,000 )
(4,198,000 )
1,726,000
2015
4,998,000
26,000
(2,607,000 )
4,272,000
(1,496,000 )
5,193,000
$
$
$
$
(1) Reductions primarily reflect the result of exit events, including loan payoffs and charge-offs.
(2) Cost recovery accounting occurs once a pool’s recorded investment is reduced to zero based on the outcome
of the aggregated loan level activity at cash flow estimation. Proceeds received on pools in recovery status
are deemed as recovery income, and are recorded as interest income as payments are received, with accretion
no longer being recognized.
Concentrations within the loan portfolio were as follows at year-end:
Commercial real estate loans to lessors of
non-residential buildings
$ 562,902,000
23.7 % $ 506,721,000
22.2 %
2016
2015
Percentage
of
Loan
Portfolio
Balance
Percentage
of
Loan
Portfolio
Balance
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Year-end nonperforming originated loans were as follows:
Loans past due 90 days or more still accruing interest
Nonaccrual loans
Total nonperforming loans
Year-end nonperforming acquired loans were as follows:
Loans past due 90 days or more still accruing interest
Nonaccrual loans
Total nonperforming loans
The recorded principal balance of all nonperforming loans was as follows:
Commercial:
Commercial and industrial
Vacant land, land development, and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
2016
2015
$
$
0 $
3,328,000
3,328,000 $
0
1,954,000
1,954,000
2016
2015
$
$
0 $
2,611,000
2,611,000 $
5,000
3,485,000
3,490,000
December 31,
2016
December 31,
2015
$
2,296,000 $
95,000
285,000
488,000
17,000
3,181,000
458,000
155,000
1,797,000
79,000
157,000
2,646,000
496,000
2,262,000
2,758,000
771,000
2,027,000
2,798,000
Total nonperforming loans
$
5,939,000 $
5,444,000
Acquired impaired loans are not reported as nonperforming loans based on acquired impaired loan accounting.
Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the
same criteria applied to the originated loan portfolio.
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2016:
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
0
0
0
0
0
0
0
0
0
0
Originated Loans
Commercial:
Commercial and
industrial
Vacant land, land
$
0 $ 27,000 $
0 $
27,000 $ 636,744,000 $ 636,771,000 $
development, and
residential construction
Real estate – owner
occupied
Real estate – non-owner
occupied
Real estate – multi-
family and residential
rental
Total commercial
0
0
0
0
0
0
0
0
0
27,000
0
0
0
0
0
0
26,519,000
26,519,000
0 363,509,000 363,509,000
0 652,054,000 652,054,000
0
50,045,000
27,000 1,728,871,000 1,728,898,000
50,045,000
Retail:
Home equity and other
1- 4 family mortgages
Total retail
46,000
98,000
69,831,000
0 144,000
758,000 122,000 337,000 1,217,000
85,819,000
804,000 220,000 337,000 1,361,000 154,289,000 155,650,000
69,687,000
84,602,000
Total past due loans $ 804,000 $ 247,000 $ 337,000 $ 1,388,000 $ 1,883,160,000 $ 1,884,548,000 $
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
0
0
0
0
0
0
0
0
0
0
Acquired Loans
Commercial:
Commercial and
industrial
Vacant land, land
$
0 $ 11,000 $ 16,000 $
27,000 $
77,105,000 $
77,132,000 $
development, and
residential construction
Real estate – owner
occupied
Real estate – non-owner
occupied
Real estate – multi-
0
0
0
0
8,309,000
8,309,000
62,000
0
50,000 112,000
86,843,000
86,955,000
0
0 353,000 353,000
95,862,000
96,215,000
family and residential
rental
Total commercial
0
62,000
0
67,838,000
11,000 436,000 509,000 335,940,000 336,449,000
67,821,000
17,000
17,000
Retail:
Home equity and other
1- 4 family mortgages
Total retail
26,000
258,000
48,216,000
1,255,000 467,000 439,000 2,161,000 107,246,000 109,407,000
1,513,000 493,000 484,000 2,490,000 155,133,000 157,623,000
45,000 329,000
47,887,000
Total past due loans $ 1,575,000 $ 504,000 $ 920,000 $ 2,999,000 $ 491,073,000 $ 494,072,000 $
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2015:
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
Originated Loans
Commercial:
Commercial and
industrial
Vacant land, land
$
0 $
0 $
0 $
0 $ 577,872,000 $ 577,872,000 $
development, and
residential construction
0
0
0
0
30,138,000
30,138,000
Real estate – owner
occupied
Real estate – non-owner
occupied
Real estate – multi-
432,000
0
9,000 441,000 330,357,000 330,798,000
0
0
0
0 520,754,000 520,754,000
family and residential
rental
Total commercial
Retail:
Home equity and other
1- 4 family mortgages
Total retail
0
432,000
0
0
0
33,954,000
9,000 441,000 1,493,075,000 1,493,516,000
33,954,000
0
67,816,000
186,000 108,000
107,000
55,255,000
293,000 203,000 356,000 852,000 122,219,000 123,071,000
0 294,000
95,000 356,000 558,000
67,522,000
54,697,000
Total past due loans $ 725,000 $ 203,000 $ 365,000 $ 1,293,000 $ 1,615,294,000 $ 1,616,587,000 $
(Continued)
F-60
0
0
0
0
0
0
0
0
0
0
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
Acquired Loans
Commercial:
Commercial and
industrial
Vacant land, land
$
0 $
5,000 $ 541,000 $ 546,000 $ 117,885,000 $ 118,431,000 $
development, and
residential construction
27,000
0
0
27,000
14,955,000
14,982,000
Real estate – owner
occupied
Real estate – non-owner
occupied
Real estate – multi-
323,000 425,000 1,142,000 1,890,000 113,231,000 115,121,000
53,000 703,000
79,000 835,000 122,762,000 123,597,000
family and residential
rental
Total commercial
Retail:
Home equity and other
1- 4 family mortgages
Total retail
223,000
81,049,000
0 277,000
626,000 1,187,000 1,762,000 3,575,000 449,605,000 453,180,000
80,772,000
54,000
44,000
395,000
72,830,000
960,000 354,000 416,000 1,730,000 133,400,000 135,130,000
1,355,000 398,000 444,000 2,197,000 205,763,000 207,960,000
28,000 467,000
72,363,000
Total past due loans $ 1,981,000 $ 1,585,000 $ 2,206,000 $ 5,772,000 $ 655,368,000 $ 661,140,000 $
(Continued)
F-61
0
0
0
0
0
0
0
0
0
0
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with no related allowance recorded were as follows as of December 31, 2016:
With no related allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$ 1,498,000 $ 1,498,000
$ 1,574,000
487,000
0
0
130,000
95,000
0
0
130,000
2,115,000 1,723,000
114,000
1,270,000
1,384,000
114,000
630,000
744,000
32,000
270,000
3,752,000
43,000
5,671,000
99,000
813,000
912,000
Total with no related allowance recorded
$ 3,499,000 $ 2,467,000
$ 6,583,000
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with an allowance recorded and total impaired originated loans were as follows as of December
31, 2016:
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$ 2,405,000 $ 2,382,000 $ 673,000 $
717,000
999,000
906,000
28,000 1,011,000
999,000
97,000 2,095,000
906,000
247,000 3,641,000
5,020,000 5,020,000
1,040,000 1,040,000
812,000
258,000
10,370,000 10,347,000 1,303,000 8,276,000
434,000
204,000
638,000
412,000
157,000
569,000
203,000
66,000
269,000
449,000
144,000
593,000
Total with an allowance recorded
$ 11,008,000 $ 10,916,000 $ 1,572,000 $ 8,869,000
Total impaired loans:
Commercial
Retail
Total impaired originated loans
$ 12,485,000 $ 12,070,000 $ 1,303,000 $ 13,947,000
2,022,000 1,313,000
269,000 1,505,000
$ 14,507,000 $ 13,383,000 $ 1,572,000 $ 15,452,000
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with no related allowance recorded were as follows as of December 31, 2016:
With no related allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$
853,000 $
826,000
$ 1,074,000
0
0
1,281,000 1,210,000
789,000
89,000
3,214,000 2,914,000
928,000
152,000
531,000
351,000
2,081,000 1,629,000
2,612,000 1,980,000
0
1,145,000
932,000
303,000
3,454,000
389,000
1,562,000
1,951,000
Total with no related allowance recorded
$ 5,826,000 $ 4,894,000
$ 5,405,000
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with an allowance recorded and total impaired acquired loans were as follows as of December 31,
2016:
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$
19,000 $
19,000 $
2,000 $
207,000
0
48,000
0
0
67,000
0
48,000
0
0
67,000
0
3,000
0
0
5,000
0
38,000
0
5,000
250,000
0
172,000
172,000
0
172,000
172,000
0
4,000
4,000
0
120,000
120,000
Total with an allowance recorded
$
239,000 $ 239,000 $
9,000 $
370,000
Total impaired loans:
Commercial
Retail
Total impaired acquired loans
$ 3,281,000 $ 2,981,000 $
2,784,000 2,152,000
$ 6,065,000 $ 5,133,000 $
5,000 $ 3,704,000
4,000 2,071,000
9,000 $ 5,775,000
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with no related allowance recorded were as follows as of December 31, 2015:
With no related allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$ 1,509,000 $ 1,501,000
$ 1,683,000
0
712,000
0
505,000
5,696,000 5,696,000
0
0
7,917,000 7,702,000
14,000
1,328,000
1,342,000
5,000
657,000
662,000
81,000
927,000
3,703,000
186,000
6,580,000
153,000
637,000
790,000
Total with no related allowance recorded
$ 9,259,000 $ 8,364,000
$ 7,370,000
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with an allowance recorded and total impaired originated loans were as follows as of December
31, 2015:
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$
352,000 $
305,000 $
165,000 $ 2,314,000
245,000 1,952,000
2,017,000 1,655,000
242,000 7,285,000
5,867,000 1,314,000
201,000 9,265,000
4,841,000 4,841,000
1,028,000 1,028,000
365,000 1,219,000
14,105,000 9,143,000 1,218,000 22,035,000
600,000
165,000
765,000
562,000
128,000
690,000
209,000
47,000
256,000
227,000
538,000
765,000
Total with an allowance recorded
$ 14,870,000 $ 9,833,000 $ 1,474,000 $ 22,800,000
Total impaired loans:
Commercial
Retail
Total impaired originated loans
$ 22,022,000 $ 16,845,000 $ 1,218,000 $ 28,615,000
2,107,000 1,352,000
256,000 1,555,000
$ 24,129,000 $ 18,197,000 $ 1,474,000 $ 30,170,000
(Continued)
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with no related allowance recorded were as follows as of December 31, 2015:
With no related allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$ 1,528,000 $ 1,494,000
$ 1,444,000
0
0
2,233,000 1,952,000
880,000
404,000
5,093,000 4,730,000
880,000
452,000
471,000
310,000
1,804,000 1,548,000
2,275,000 1,858,000
0
818,000
565,000
1,520,000
4,347,000
400,000
994,000
1,394,000
Total with no related allowance recorded
$ 7,368,000 $ 6,588,000
$ 5,741,000
(Continued)
F-68
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with an allowance recorded and total impaired acquired loans were as follows as of December 31,
2015:
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Unpaid
Contractual
Principal
Balance
Recorded
Principal
Balance
Related
Allowance
Year-To-
Date
Average
Recorded
Principal
Balance
$
383,000 $ 376,000 $ 102,000 $
127,000
0
51,000
0
23,000
457,000
0
51,000
0
23,000
450,000
0
4,000
0
0
106,000
0
823,000
0
21,000
971,000
0
175,000
175,000
0
175,000
175,000
0
6,000
6,000
0
185,000
185,000
Total with an allowance recorded
$
632,000 $ 625,000 $ 112,000 $ 1,156,000
Total impaired loans:
Commercial
Retail
Total impaired acquired loans
$ 5,550,000 $ 5,180,000 $ 106,000 $ 5,318,000
2,450,000 2,033,000
6,000 1,579,000
$ 8,000,000 $ 7,213,000 $ 112,000 $ 6,897,000
Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby
the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt
restructurings totaled $1.2 million, $2.4 million and $1.8 million during 2016, 2015 and 2014, respectively. Interest
income recognized on nonaccrual loans totaled less than $0.1 million, $1.7 million and less than $0.1 million during 2016,
2015 and 2014, respectively, reflecting the collection of interest at the time of principal pay-off. Lost interest income on
nonaccrual loans totaled less than $0.1 million, $0.3 million and $0.1 million during 2016, 2015 and 2014, respectively.
(Continued)
F-69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are
graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical
factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All
commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The
risk assessment for retail loans is primarily based on the type of collateral.
Loans by credit quality indicators were as follows as of December 31, 2016:
Originated Loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial
Vacant Land,
Land
Development,
and Residential
Construction
Commercial
and
Industrial
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and Residential
Rental
Internal credit risk grade
groupings:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
commercial
$
440,219,000 $
190,170,000
6,382,000
16,378,000 $
10,046,000
95,000
238,890,000 $
123,517,000
1,102,000
542,294,000 $
109,304,000
456,000
29,793,000
19,082,000
1,170,000
$
636,771,000 $
26,519,000 $
363,509,000 $
652,054,000 $
50,045,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
69,831,000 $
85,819,000
(Continued)
F-70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired Loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial
Vacant Land,
Land
Development,
and Residential
Construction
Commercial
and
Industrial
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and Residential
Rental
Internal credit risk grade
groupings:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
commercial
$
40,911,000 $
35,233,000
988,000
1,887,000 $
6,164,000
258,000
36,246,000 $
49,255,000
1,454,000
57,671,000 $
37,040,000
1,504,000
39,574,000
28,015,000
249,000
$
77,132,000 $
8,309,000 $
86,955,000 $
96,215,000 $
67,838,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
48,216,000 $
109,407,000
(Continued)
F-71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans by credit quality indicators were as follows as of December 31, 2015:
Originated Loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial
Vacant Land,
Land
Development,
and Residential
Construction
Commercial
and
Industrial
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and Residential
Rental
Internal credit risk grade
groupings:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
commercial
$
417,120,000 $
160,454,000
298,000
18,118,000 $
10,365,000
1,655,000
230,629,000 $
98,332,000
1,837,000
400,350,000 $
120,404,000
0
19,121,000
13,806,000
1,027,000
$
577,872,000 $
30,138,000 $
330,798,000 $
520,754,000 $
33,954,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
67,816,000 $
55,255,000
(Continued)
F-72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired Loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial
Vacant Land,
Land
Development,
and Residential
Construction
Commercial
and
Industrial
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and Residential
Rental
Internal credit risk grade
groupings:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
commercial
$
67,978,000 $
47,589,000
2,864,000
3,095,000 $
11,364,000
523,000
45,807,000 $
63,563,000
5,751,000
71,197,000 $
50,066,000
2,334,000
44,763,000
35,288,000
998,000
$
118,431,000 $
14,982,000 $
115,121,000 $
123,597,000 $
81,049,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
72,830,000 $
135,130,000
(Continued)
F-73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
All commercial loans are graded using the following number system:
Grade 1. Excellent credit rating that contain very little, if any, risk of loss.
Grade 2. Strong sources of repayment and have low repayment risk.
Grade 3. Good sources of repayment and have limited repayment risk.
Grade 4. Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that
render the credit more vulnerable to a negative event.
Grade 5. Marginally acceptable sources of repayment and exhibit defined weaknesses and negative characteristics.
Grade 6. Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses.
Generally, if the credit does not stabilize or if further deterioration is observed in the near term, the loan
will likely be downgraded and placed on the Watch List (i.e., list of lending relationships that receive
increased scrutiny and review by the Board of Directors and senior management).
Grade 7. Defined weaknesses or negative trends that merit close monitoring through Watch List status.
Grade 8. Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral,
resulting in a distinct possibility of loss requiring close monitoring through Watch List status.
Grade 9. Vital weaknesses exist where collection of principal is highly questionable.
Grade 10. Considered uncollectable and of such little value that their continuance as an asset is not warranted.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of
collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial
statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral
and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness
of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue
creditor’s rights in order to preserve our collateral position.
(Continued)
F-74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for originated loan losses and recorded investments in originated loans for the year-ended December 31,
2016 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
13,672,000 $ 1,421,000 $
1,031,000
(1,153,000 )
583,000
16,026,000 $ 1,882,000 $
2,247,000
(980,000 )
1,087,000
140,000 $
(180,000 )
0
0
(40,000 ) $
15,233,000
3,098,000
(2,133,000 )
1,670,000
17,868,000
Ending balance: individually evaluated for
impairment
$
1,303,000 $
269,000 $
0 $
1,572,000
Ending balance: collectively evaluated for impairment $
14,723,000 $ 1,613,000 $
(40,000 ) $
16,296,000
Total loans:
Ending balance
$ 1,728,898,000 $ 155,650,000
$ 1,884,548,000
Ending balance: individually evaluated for impairment
$
12,070,000 $ 1,313,000
$
13,383,000
Ending balance: collectively evaluated for impairment
$ 1,716,828,000 $ 154,337,000
$ 1,871,165,000
The allowance for acquired loan losses for the year-ended December 31, 2016 is as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
420,000 $
(303,000 )
0
(42,000 )
75,000 $
$
28,000 $
105,000
(72,000 )
(43,000 )
18,000 $
0 $
0
0
0
0 $
448,000
(198,000 )
(72,000 )
(85,000 )
93,000
The negative loan recoveries reflected for acquired loans during 2016 resulted from reversals of prior period recoveries
associated with certain purchased credit impaired loans that were subject to pre-acquisition charge-offs. Post-acquisition
payments received on these loans were previously reported as loan loss recoveries in prior periods; during 2016 these
recoveries were reversed and reported as recovery income if associated with specifically reviewed purchase credit impaired
loans or retained gains if associated with purchase credit impaired pooled loans.
(Continued)
F-75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for originated loan losses and recorded investments in originated loans for the year-ended December 31,
2015 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
17,736,000 $ 1,487,000 $
1,006,000
(1,771,000 )
(1,280,000 )
(4,915,000 )
208,000
2,622,000
13,672,000 $ 1,421,000 $
76,000 $
64,000
0
0
140,000 $
19,299,000
(701,000 )
(6,195,000 )
2,830,000
15,233,000
Ending balance: individually evaluated for
impairment
$
1,218,000 $
256,000 $
0 $
1,474,000
Ending balance: collectively evaluated for impairment $
12,454,000 $ 1,165,000 $
140,000 $
13,759,000
Total loans:
Ending balance
$ 1,493,516,000 $ 123,071,000
$ 1,616,587,000
Ending balance: individually evaluated for impairment
$
16,845,000 $ 1,352,000
$
18,197,000
Ending balance: collectively evaluated for impairment
$ 1,476,671,000 $ 121,719,000
$ 1,598,390,000
The allowance for acquired loan losses for the year-ended December 31, 2015 is as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
738,000 $
(286,000 )
(77,000 )
45,000
420,000 $
4,000 $
(13,000 )
(7,000 )
44,000
28,000 $
0 $
0
0
0
0 $
742,000
(299,000 )
(84,000 )
89,000
448,000
(Continued)
F-76
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for originated loan losses and recorded investments in originated loans for the year-ended December 31,
2014 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
20,455,000 $ 2,358,000 $
(721,000 )
(3,140,000 )
(554,000 )
(876,000 )
404,000
1,297,000
17,736,000 $ 1,487,000 $
8,000 $
68,000
0
0
76,000 $
22,821,000
(3,793,000 )
(1,430,000 )
1,701,000
19,299,000
Ending balance: individually evaluated for
impairment
$
9,374,000 $
778,000 $
0 $
10,152,000
Ending balance: collectively evaluated for impairment $
8,362,000 $
709,000 $
76,000 $
9,147,000
Total loans:
Ending balance
$ 1,153,189,000 $ 92,927,000
$ 1,246,116,000
Ending balance: individually evaluated for
impairment
$
45,021,000 $ 2,835,000
$
47,856,000
Ending balance: collectively evaluated for impairment $ 1,108,168,000 $ 90,092,000
$ 1,198,260,000
The allowance for acquired loan losses for the year-ended December 31, 2014 is as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
0 $
791,000
(55,000 )
2,000
738,000 $
0 $
2,000
(16,000 )
18,000
4,000 $
0 $
0
0
0
0 $
0
793,000
(71,000 )
20,000
742,000
In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Firstbank’s
previously established allowance for loan losses.
(Continued)
F-77
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the year-ended December 31, 2016 were as follows:
Pre-
Post-
Modification Modification
Recorded
Principal
Balance
Recorded
Principal
Balance
Number of
Contracts
Originated Loans
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Acquired Loans
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
8 $
1,445,000 $
2,103,000
0
1
1
4
14
3
1
4
0
167,000
462,000
165,000
2,239,000
0
167,000
462,000
276,000
3,008,000
240,000
33,000
273,000
240,000
40,000
280,000
18 $
2,512,000 $
3,288,000
0 $
0
3
2
1
6
4
1
5
0 $
0
0
739,000
209,000
7,000
955,000
0
739,000
209,000
7,000
955,000
93,000
19,000
112,000
94,000
19,000
113,000
11 $
1,067,000 $
1,068,000
(Continued)
F-78
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the year-ended December 31, 2015 were as follows:
Pre-
Post-
Modification Modification
Recorded
Principal
Balance
Recorded
Principal
Balance
Number of
Contracts
Originated Loans
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Acquired Loans
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
9 $
1,876,000 $
1,901,000
0
0
0
0
9
1
0
1
0
0
0
0
1,876,000
0
0
0
0
1,901,000
146,000
0
146,000
146,000
0
146,000
10 $
2,022,000 $
2,047,000
3 $
624,000 $
624,000
0
7
5
4
19
0
1
1
0
494,000
714,000
287,000
2,119,000
0
494,000
714,000
287,000
2,119,000
0
143,000
143,000
0
143,000
143,000
20 $
2,262,000 $
2,262,000
(Continued)
F-79
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over
30 days past due during the year-ended December 31, 2016 (amounts as of period end):
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Number of
Contracts
Recorded
Principal
Balance
0 $
0
0
0
0
0
0
0
0
0 $
0
0
0
0
0
0
0
0
0
0
The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30
days past due during the year-ended December 31, 2016 (amounts as of period end):
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Number of
Contracts
Recorded
Principal
Balance
0 $
0
0
0
0
0
0
0
0
0 $
0
0
0
0
0
0
0
0
0
0
(Continued)
F-80
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over
30 days past due during the year-ended December 31, 2015 (amounts as of period end):
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Number of
Contracts
Recorded
Principal
Balance
0 $
0
0
0
0
0
0
0
0
0 $
0
0
0
0
0
0
0
0
0
0
The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30
days past due during the year-ended December 31, 2015 (amounts as of period end):
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Number of
Contracts
Recorded
Principal
Balance
0 $
0
1
0
0
1
0
0
0
1 $
0
0
18,000
0
0
18,000
0
0
0
18,000
(Continued)
F-81
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the year-ended December 31, 2016 is as
follows:
Commercial
Vacant Land,
Land
Development,
and
Residential
Commercial
and
Commercial
Real Estate -
Non-Owner
Industrial Construction Occupied Occupied
Commercial
Real Estate -
Owner
Commercial
Real Estate -
Multi-Family
and
Residential
Rental
Commercial Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
Retail Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
$ 2,028,000 $ 2,086,000 $ 1,400,000 $ 10,657,000 $
0
(591,000 ) (6,004,000 )
0
457,000
906,000 $ 5,110,000 $
0
(598,000 )
0
0
$ 1,503,000 $ 1,488,000 $
0
(555,000 )
0
30,000
0
97,000
0
476,000
0
(30,000 )
0
270,000
716,000
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
146,000 $
0
(1,000 )
0
240,000
385,000 $
128,000
0
(11,000 )
0
40,000
157,000
(Continued)
F-82
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the year-ended December 31, 2016 is as
follows:
Commercial
Vacant Land,
Land
Development,
and
Residential
Construction
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and
Residential
Rental
Commercial
and
Industrial
Commercial Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
$ 1,686,000 $
(48,000 )
(513,000 )
0
0
$ 1,125,000 $
0
0 $ 1,652,000 $
0
0 (1,514,000 )
0
0
762,000
0
900,000 $
0 $
647,000 $
0
(110,000 )
0
191,000
728,000 $
331,000
0
(278,000 )
0
7,000
60,000
Retail Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
141,000 $
0
(30,000 )
0
97,000
208,000 $
316,000
0
(9,000 )
0
19,000
326,000
(Continued)
F-83
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the year-ended December 31, 2015 is as
follows:
Commercial
Vacant Land,
Land
Development,
and
Residential
Commercial
and
Commercial
Real Estate -
Non-Owner
Industrial Construction Occupied Occupied
Commercial
Real Estate -
Owner
Commercial
Real Estate -
Multi-Family
and
Residential
Rental
Commercial Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
Retail Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
$ 7,026,000 $ 2,680,000 $ 17,160,000 $ 17,439,000 $
0
0
(594,000 ) (11,562,000 ) (6,782,000 )
(6,648,000 )
0
0
1,650,000
0
$ 2,028,000 $ 2,086,000 $ 1,400,000 $ 10,657,000 $
0 (4,198,000 )
0
0
0
0
505,000
0
(29,000 )
0
0
476,000
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
0 $
0
0
0
146,000
146,000 $
1,967,000
(148,000 )
(1,691,000 )
0
0
128,000
(Continued)
F-84
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the year-ended December 31, 2015 is as
follows:
Commercial
Vacant Land,
Land
Development,
and
Residential
Construction
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and
Residential
Rental
Commercial
and
Industrial
Commercial Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
$ 1,439,000 $
0
(444,000 )
0
691,000
$ 1,686,000 $
0 $ 1,569,000 $
(31,000 )
0
(590,000 )
0
0
0
0
704,000
0 $ 1,652,000 $
64,000 $
0
(9,000 )
0
592,000
647,000 $
381,000
(42,000 )
(342,000 )
0
334,000
331,000
Retail Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
26,000 $
0
(39,000 )
0
154,000
141,000 $
178,000
0
(3,000 )
0
141,000
316,000
(Continued)
F-85
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the year-ended December 31, 2014 is as
follows:
Commercial
Vacant Land,
Land
Development,
and
Residential
Construction
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and
Residential
Rental
Commercial
and
Industrial
Commercial Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
Retail Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
$ 1,656,000 $ 4,501,000 $ 1,816,000 $ 22,312,000 $ 2,620,000
(420,000 )
(4,719,000 ) (2,343,000 ) (5,191,000 ) (1,695,000 )
0
0
505,000
(67,000 )
(871,000 )
0
(21,000 )
6,329,000
318,000
$ 7,026,000 $ 2,680,000 $ 17,160,000 $ 17,439,000 $
(48,000 )
2,898,000 17,746,000
(11,000 )
0
0
0
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
0 $
0
0
0
0
0 $
1,987,000
0
(224,000 )
0
204,000
1,967,000
(Continued)
F-86
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the last seven months of 2014 is as follows:
Commercial
Vacant Land,
Land
Development,
and
Residential
Construction
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and
Residential
Rental
Commercial
and
Industrial
Commercial Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
$
0 $
0
(2,000 )
0
1,441,000
$ 1,439,000 $
0 $
0 $
0
0
0
0
0
0
0 1,569,000
0 $ 1,569,000 $
0 $
0
0
0
64,000
64,000 $
0
0
(18,000 )
0
399,000
381,000
Retail Loan Portfolio:
Beginning Balance
Charge-Offs
Payments
Transfers to ORE
Net Additions/Deletions
Ending Balance
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
0 $
0
0
0
26,000
26,000 $
0
0
0
0
178,000
178,000
(Continued)
F-87
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance related to loans categorized as troubled debt restructurings was as follows:
Commercial:
Commercial and industrial
Vacant land, land development, and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
December 31,
2016
December 31,
2015
$
9,000 $
28,000
100,000
247,000
258,000
642,000
221,000
186,000
115,000
201,000
365,000
1,088,000
48,000
4,000
52,000
14,000
6,000
20,000
Total related allowance
$
694,000 $
1,108,000
In general, our policy dictates that a renewal or modification of an 8- or 9-rated commercial loan meets the criteria of a
troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt
restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a
distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable
ability on our part to collect principal; we believe borrowers warranting such ratings would have difficulty obtaining
financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk
characteristics, we believe 8- or 9-rated loans renewed or modified were done so at below market rates. Loans that are
identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when
assessing these credits in our allowance for loan losses calculation.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
Land and improvements
Buildings
Furniture and equipment
Less: accumulated depreciation
2016
2015
$
17,285,000 $
39,691,000
17,195,000
74,171,000
28,715,000
16,529,000
39,394,000
16,978,000
72,901,000
26,039,000
Total premises and equipment
$
45,456,000 $
46,862,000
(Continued)
F-88
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 5 - PREMISES AND EQUIPMENT, NET (Continued)
Future lease payments total $1.0 million, comprised of $0.4 million in one year, $0.4 million in one to three years and $0.2
million in three to five years. Depreciation expense totaled $2.9 million in 2016, $3.0 million in 2015, and $2.3 million in
2014.
NOTE 6 – MORTGAGE LOAN SERVICING
Mortgage loans serviced for others are not reported as assets in the Consolidated Balance Sheets. The year-end aggregate
unpaid principal balances of mortgage loans serviced for others were as follows:
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation
Federal Home Loan Bank
Total mortgage loans serviced for others
2016
2015
$
$
597,389,000 $
10,501,000
607,890,000 $
598,510,000
4,675,000
603,185,000
Custodial escrow balances maintained in connection with serviced loans were $4.6 million and $3.0 million as of
December 31, 2016 and December 31, 2015, respectively.
Activity for capitalized mortgage loan servicing rights during 2016 and 2015 was as follows:
Balance at beginning of year
Additions
Amortized to expense
2016
2015
$
6,121,000 $
1,378,000
(1,955,000 )
6,712,000
1,487,000
(2,078,000 )
Balance at end of year
$
5,544,000 $
6,121,000
We determined that no valuation allowance was necessary as of December 31, 2016 or December 31, 2015. The estimated
fair value of mortgage servicing rights was $8.0 million and $7.8 million as of December 31, 2016 and December 31, 2015,
respectively. The fair value of mortgage servicing rights is estimated using a valuation model that calculates the present
value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates,
discount rates, servicing costs and other economic factors, which are determined based on current market conditions.
During 2016, fair value was determined using a discount rate of 7.01%, a weighted average constant prepayment rate of
11.5%, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.68%. During
2015, fair value was determined using a discount rate of 7.10%, a weighted average constant prepayment rate of 11.7%,
depending on the stratification of the specific right, and a weighted average delinquency rate of 0.90%.
(Continued)
F-89
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 6 – MORTGAGE LOAN SERVICING (Continued)
The weighted average amortization period was 3.6 years as of December 31, 2016 and December 31, 2015. Estimated
amortization as of December 31, 2016 is as follows:
2017
2018
2019
2020
2021
Thereafter
$
1,277,000
1,057,000
884,000
729,000
597,000
1,000,000
NOTE 7 – CORE DEPOSIT INTANGIBLE ASSETS, NET
The gross carrying amount of core deposit intangible assets totaled $17.5 million as of December 31, 2016 and December
31, 2015. As of December 31, 2016, the accumulated amortization on core deposit intangible assets was $7.5 million,
providing for a net carry balance of $10.0 million. As of December 31, 2015, the accumulated amortization on core deposit
intangible assets was $4.9 million, providing for a net carry balance of $12.6 million.
The scheduled amortization expense on core deposit intangible assets in future periods is:
2017
2018
2019
2020
2021
Thereafter
$
2,357,000
2,039,000
1,721,000
1,403,000
1,086,000
1,351,000
(Continued)
F-90
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 8 – DEPOSITS
Deposits at year-end are summarized as follows:
December 31, 2016
%
Balance
December 31, 2015
%
Balance
Percent
Increase
(Decrease)
Noninterest-bearing demand
Interest-bearing checking
Money market
Savings
Time, under $100,000
Time, $100,000 and over
Total local deposits
$ 810,600,000
377,929,000
272,051,000
344,988,000
146,169,000
347,058,000
2,298,795,000
34.1 % $ 674,568,000
15.9 403,354,000
11.5 274,395,000
14.5 332,794,000
6.2 155,655,000
14.6 313,247,000
96.8 2,154,013,000
Out-of-area time, under $100,000
Out-of-area time, $100,000 and over
Total out-of-area deposits
0
76,190,000
76,190,000
NM
149,000
3.2 121,220,000
3.2 121,369,000
29.6 %
17.7
12.1
14.6
6.9
13.8
94.7
< 0.1
5.3
5.3
20.2 %
(6.3 )
(0.9 )
3.7
(6.1 )
10.8
6.7
NM
(37.1 )
(37.2 )
Total deposits
$ 2,374,985,000
100.0 % $ 2,275,382,000
100.0 %
4.4%
Out-of-area time deposits consist of deposits obtained from depositors outside of our primary market areas exclusively
through deposit brokers.
The following table depicts the maturity distribution for time deposits at year-end:
In one year or less
In one to two years
In two to three years
In three to four years
In four to five years
2016
2015
$
358,259,000 $
92,042,000
34,204,000
35,523,000
49,389,000
305,122,000
145,775,000
71,988,000
37,527,000
29,859,000
Total certificates of deposit
$
569,417,000 $
590,271,000
The following table depicts the maturity distribution for time deposits with balances of $100,000 or more at year-end:
Up to three months
Three months to six months
Six months to twelve months
Over twelve months
2016
2015
$
101,444,000 $
87,277,000
79,656,000
154,871,000
73,783,000
50,375,000
91,786,000
218,523,000
Total certificates of deposit
$
423,248,000 $
434,467,000
Total time deposits of more than $250,000 totaled $214 million and $180 million at year-end 2016 and 2015, respectively.
(Continued)
F-91
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information regarding securities sold under agreements to repurchase at year-end is summarized below:
Outstanding balance at year-end
Weighted average interest rate at year-end
Average daily balance during the year
Weighted average interest rate during the year
2016
2015
$
$
131,710,000 $
0.16 %
154,771,000
0.11 %
149,079,000 $
0.14 %
146,826,000
0.11 %
Maximum daily balance during the year
$
175,088,000 $
168,211,000
Securities sold under agreements to repurchase (“repurchase agreements”) generally have original maturities of less than
one year. Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as
liabilities. Securities involved with the repurchase agreements are recorded as assets of our Bank and are held in
safekeeping by a correspondent bank. Repurchase agreements are offered principally to certain large deposit customers.
Repurchase agreements are secured by securities with an aggregate fair value equal to the aggregate outstanding balance.
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $175 million at December 31, 2016, and were
expected to mature at varying dates from March 2017 through April 2023, with fixed rates of interest from 1.04% to 2.11%
and averaging 1.48%. FHLBI advances totaled $68.0 million at December 31, 2015, and were expected to mature at
varying dates ranging from December 2016 through August 2022, with fixed rates of interest from 1.22% to 2.11% and
averaging 1.49%.
Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to the maturity date. The
advances are generally collateralized by a blanket lien on our residential mortgage loan portfolio. Our borrowing line of
credit as of December 31, 2016 totaled $517 million, with availability of $342 million.
Scheduled maturities as of December 31, 2016:
2017
2018
2019
2020
2021
Thereafter
$
45,000,000
20,000,000
20,000,000
20,000,000
30,000,000
40,000,000
(Continued)
F-92
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 11 - FEDERAL INCOME TAXES
The consolidated income tax expense is as follows:
Current expense
Deferred expense
Change in valuation allowance
Tax expense
2016
2015
2014
$
$
15,786,000 $
(699,000 )
(113,000 )
14,974,000 $
7,399,000 $
4,592,000
(180,000 )
11,811,000 $
3,359,000
4,506,000
0
7,865,000
A reconciliation of the differences between the federal income tax expense recorded and the amount computed by applying
the federal statutory rate to income before income taxes is as follows:
Tax at statutory rate (35%)
Increase (decrease) from
Tax-exempt interest
Bank owned life insurance
Change in valuation allowance
Other
Tax expense
2016
2015
2014
$
16,410,000 $
13,591,000 $
8,819,000
(876,000 )
(440,000 )
(113,000 )
(7,000 )
14,974,000 $
(781,000 )
(384,000 )
(180,000 )
(435,000 )
11,811,000 $
(621,000 )
(415,000 )
0
82,000
7,865,000
$
(Continued)
F-93
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 11 - FEDERAL INCOME TAXES (Continued)
Significant components of deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows:
Deferred income tax assets
Allowance for loan losses
Deferred compensation
Stock compensation
Nonaccrual loan interest income
Deferred loan fees
Capital loss carryforward
Fair value write-downs on foreclosed properties
Fair value of interest rate swap
Unrealized loss on securities
Other
Deferred tax asset before valuation allowance
Valuation allowance
Deferred tax asset after valuation allowance
Deferred income tax liabilities
Depreciation
Prepaid expenses
Core deposit intangible
Mortgage loan servicing rights
Unrealized gain on securities
Business combination adjustments
Other
Deferred tax liability
$
2016
2015
6,286,000 $
1,175,000
786,000
623,000
496,000
157,000
24,000
30,000
2,976,000
408,000
12,961,000
(157,000 )
12,804,000
5,488,000
1,367,000
767,000
602,000
504,000
270,000
115,000
89,000
0
283,000
9,485,000
(270,000 )
9,215,000
928,000
463,000
3,423,000
1,940,000
0
2,183,000
199,000
9,136,000
1,128,000
378,000
4,349,000
2,142,000
768,000
1,091,000
188,000
10,044,000
Total net deferred tax asset (liability)
$
3,668,000
$
(829,000 )
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of
the benefits related to such assets will not be realized. At December 31, 2016 and 2015, we carried a valuation allowance of
$0.2 million and $0.3 million, respectively, against capital loss carryforwards generated by the disposal of certain capital
investments acquired in our merger with Firstbank. During 2016 and 2015, we reversed $0.1 million and $0.2 million,
respectively, of the valuation allowance due to generation of capital gains during the year. The remaining $0.5 million of
capital loss carryforwards will expire at December 31, 2020 and we continue to carry a valuation allowance against the
related deferred tax asset. We believe the remainder of our deferred tax assets is more likely than not to be realized.
We had no unrecognized tax benefits at any time during 2016 or 2015 and do not anticipate any significant increase in
unrecognized tax benefits during 2017. Should the accrual of any interest or penalties relative to unrecognized tax benefits
be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals existed at any time
during 2016 or 2015. Our U.S. federal income tax returns are no longer subject to examination for all years before 2013.
(Continued)
F-94
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 12 – STOCK-BASED COMPENSATION
Stock-based compensation plans are used to provide directors and employees with an increased incentive to contribute to
our long-term performance and growth, to align the interests of directors and employees with the interests of our
shareholders through the opportunity for increased stock ownership and to attract and retain directors and employees. No
stock option or restricted stock grants were made during 2013 due to the pending merger with Firstbank. During 2014 and
2015, stock option and restricted stock grants were provided to certain employees through the Stock Incentive Plan of 2006.
During 2016, stock option and restricted stock grants were provided to certain employees through the Stock Incentive Plan
of 2016. Stock grants were provided to directors as retainer payments during 2014 and 2015 through the Stock Incentive
Plan of 2006, and during 2016 through the Stock Incentive Plan of 2016. The Stock Incentive Plan of 2006 expired on
January 18, 2016, and was effectively replaced with the Stock Incentive Plan of 2016 that was approved by shareholders in
May, 2016.
Under the Stock Incentive Plan of 2006 and the Stock Incentive Plan of 2016, incentive awards may include, but are not
limited to, stock options, restricted stock, stock appreciation rights and stock awards. Incentive awards that are stock
options or stock appreciation rights are granted with an exercise price not less than the closing price of our common stock
on the date of grant. Price, vesting and expiration date parameters are determined by Mercantile’s Compensation
Committee on a grant-by-grant basis. No payments are required from employees for restricted stock awards. The restricted
stock awards granted during 2014, 2015 and 2016 fully vest after three years. The stock options granted during 2014, 2015
and 2016, which were at 110% of the market price on the date of grant, fully vest after two years and expire after seven
years. At year-end 2016, there were approximately 407,000 shares authorized for future incentive awards.
In conjunction with the Firstbank merger, all of our outstanding restricted stock awards, which were scheduled to vest in
full in November, 2014, became fully vested on June 1, 2014, resulting in the recognition of compensation expense of $0.2
million in the second quarter of 2014 to reflect the accelerated vesting of the restricted stock awards. The unrecognized
compensation cost related to unvested stock options was less than $0.1 million as of December 31, 2016, which will be
recognized as expense in 2017. The unrecognized compensation cost related to restricted stock grants was $4.3 million as
of December 31, 2016, which will be recognized as expense over the next three years.
Also in conjunction with the Firstbank merger, we issued Mercantile stock options in replacement of all outstanding
Firstbank stock option grants that had been previously issued to Firstbank employees under the Firstbank Corporation
Stock Option and Restricted Stock Plan of 1997 and the Firstbank Corporation 2006 Stock Compensation Plan. In general,
stock option grants for 50 shares or less fully vested after one year from date of grant, while stock option grants for more
than 50 shares vested over a five-year period at 20% of the grant per annum starting one year from date of grant. The stock
option grants expire ten years from date of grant. There were approximately 282,200 Mercantile stock options issued as a
result of the merger, with about 258,400 of the stock option grants fully vested and exercisable on the date of merger. The
remaining 23,800 stock option grants vested during 2015.
(Continued)
F-95
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
A summary of restricted stock activity from grants issued under Mercantile plans during the past three years is as follows:
2016
2015
2014
Weighted
Average
Fair Value
Shares
Shares
Weighted
Average
Fair Value
Shares
Weighted
Average
Fair Value
Nonvested at beginning
of year
Granted
Vested
Forfeited
Nonvested at end of year
155,501 $
86,250
(7,622 )
(5,786 )
228,343 $
22.25
32.19
20.23
21.90
26.09
101,490 $
65,933
(4,666 )
(7,256 )
155,501 $
20.13
25.14
20.13
20.13
22.25
63,800 $
101,490
(63,300 )
(500 )
101,490 $
14.30
20.13
14.30
14.30
20.13
A summary of stock option activity from grants issued under Mercantile plans during the past three years is as follows:
2016
2015
2014
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding at beginning
of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at
year-end
11,308 $
6,500
(1,000 )
0
16,808 $
24.50
36.22
22.15
NA
29.17
35,335 $
4,820
(2,700 )
(26,147 )
11,308 $
31.09
27.66
6.21
35.88
24.50
60,876 $
6,488
(2,845 )
(29,184 )
35,335 $
33.11
22.15
17.74
34.60
31.09
5,488 $
22.15
0 $
NA
28,847 $
33.11
The fair value of each stock option award is estimated on the date of grant using a closed option valuation (Black-Scholes)
model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities on our
common stock. Historical data is used to estimate stock option expense and post-vesting termination behavior. The
expected term of stock options granted is based on historical data and represents the period of time that stock options
granted are expected to be outstanding, which takes into account that the stock options are not transferable. The risk-free
interest rate for the expected term of the stock option is based on the U.S. Treasury yield curve in effect at the time of the
stock option grant.
(Continued)
F-96
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
The fair value of stock options granted during 2016, 2015 and 2014 was determined using the following weighted-average
assumptions as of the grant date.
Risk-free interest rate
Expected option life (years)
Expected stock price volatility
Dividend yield
2016
2015
2014
1.78%
5
26%
2.5%
1.67%
5
29%
2.5%
1.56%
5
26%
2.5%
Options issued under Mercantile plans outstanding at year-end 2016 were as follows:
Range of
Exercise
Prices
$20.00 - $24.00
$24.01 - $28.00
$36.00 - $40.00
Outstanding at year end
Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Exercisable
Weighted
Average
Exercise
Price
Number
Number
5,488
4,820
6,500
16,808
4.9 $
5.9
6.9
6.0 $
22.15
27.66
36.22
29.17
5,488 $ 22.15
NA
NA
5,488 $ 22.15
0
0
Information related to options issued under various Mercantile plans outstanding at year-end 2016, 2015 and 2014 is as
follows:
2016
2015
2014
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
22.15 $
36.22
6.7
22.15 $
27.66
6.3
6.21
35.88
2.0
Information related to stock option grants and exercises issued under various Mercantile plans during 2016, 2015 and 2014
is as follows:
2016
2015
2014
Aggregate intrinsic value of stock options exercised
Cash received from stock option exercises
Tax benefit realized from stock option exercises
Weighted average per share fair value of stock options granted
$
6,000 $
22,000
0
5.25
36,000 $
17,000
0
4.41
11,000
50,000
0
2.72
(Continued)
F-97
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 12– STOCK-BASED COMPENSATION (Continued)
The aggregate intrinsic value of all stock options issued under Mercantile plans outstanding and exercisable at December
31, 2016 was $0.1 million. Shares issued as a result of the exercise of stock option grants have been authorized and were
previously unissued shares.
A summary of stock option activity from grants issued under Firstbank plans that became part of Mercantile’s plans upon
consummation of the merger on June 1, 2014 is as follows:
2016
2015
2014
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
123,887 $
0
0
(71,711 )
(7,901 )
44,275 $
12.64
NA
NA
13.33
22.00
9.86
217,982 $
0
0
(56,417 )
(37,678 )
123,887 $
14.89
NA
NA
15.50
21.39
12.64
0 $
0
282,178
(27,740 )
(36,456 )
217,982 $
NA
NA
15.48
8.34
24.46
14.89
Outstanding at beginning
of year
Granted
Replaced as part of merger
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at
year-end
44,275 $
9.86
123,887 $
12.64
210,777 $
15.22
Options issued under Firstbank plans outstanding at year-end 2016 were as follows:
Range of
Exercise
Prices
$ 4.00 - $ 8.00
$ 8.01 - $12.00
$12.01 - $16.00
Outstanding at year end
Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Exercisable
Weighted
Average
Exercise
Price
Number
Number
23,975
6,700
13,600
44,275
2.2
2.7
0.7
1.8
$
$
6.73
8.60
16.00
9.86
23,975 $
6,700
13,600
44,275 $
6.73
8.60
16.00
9.86
Information related to options issued under Firstbank plans outstanding at year-end 2016, 2015 and 2014 is as follows:
2016
2015
2014
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
5.19 $
16.00
1.8
5.19 $
22.00
2.7
5.19
24.46
3.1
(Continued)
F-98
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
Information related to stock option grants and exercises issued under Firstbank plans during 2016, 2015 and 2014 is as
follows:
2016
2015
2014
Aggregate intrinsic value of stock options exercised
Cash received from stock option exercises
Tax benefit realized from stock option exercises
Weighted average per share fair value of stock options granted
$
1,945,000 $
956,000
681,000
NA
420,000 $
874,000
147,000
NA
333,000
232,000
116,000
NA
The aggregate intrinsic value of all stock options issued under various Firstbank plans outstanding and exercisable at
December 31, 2016 was $1.2 million. Shares issued as a result of the exercise of stock option grants have been authorized
and previously unissued shares.
On January 2, 2015, we granted a total of 5,994 shares of common stock to our Corporate, Bank and Regional Advisory
Boards of Directors for retainer payments for the period of January 1, 2015 through May 31, 2015. The associated $0.1
million cost was expensed on a straightline basis over the first five months of 2015. On May 28, 2015, we granted a total
of 14,100 shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer
payments for the period of June 1, 2015 through May 31, 2016. The associated $0.3 million cost was expensed on a
straightline basis over the respective twelve month period. On June 6, 2016, we granted a total of 13,000 shares of
common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of
June 1, 2016 through May 31, 2017. The associated $0.3 million cost is being expensed on a straightline basis over the
respective twelve month period.
NOTE 13 – RELATED PARTIES
Certain directors and executive officers of the Bank, including their immediate families and companies in which they are
principal owners, were loan customers of the Bank. At year-end 2016 and 2015, the Bank had $11.5 million and $14.0
million in loan commitments to directors and executive officers, of which $8.9 million and $11.2 million were outstanding
at year-end 2016 and 2015, respectively, as reflected in the following table. The line item entitled “Adjustments” primarily
relates to Board member retirements in 2015.
Beginning balance
New loans
Repayments
Adjustments
Ending balance
2016
2015
$
11,151,000 $
4,652,000
(6,921,000 )
0
9,002,000
3,371,000
(965,000 )
(257,000 )
$
8,882,000 $
11,151,000
Related party deposits and repurchase agreements totaled $19.8 million and $18.5 million at year-end 2016 and 2015,
respectively.
(Continued)
F-99
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 14 – COMMITMENTS AND OFF-BALANCE-SHEET RISK
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit.
Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Standby letters of credit are conditional commitments issued by our Bank to guarantee the
performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements.
These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the
balance sheet. Our maximum exposure to loan loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount
of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-
balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is
generally obtained based on management’s credit assessment of the borrower. If required, estimated loss exposure
resulting from these instruments is expensed and recorded as a liability. There was no liability balance for these
instruments as of December 31, 2016 and 2015.
At year-end 2016 and 2015, the rates on existing off-balance sheet instruments were substantially equivalent to current
market rates, considering the underlying credit standing of the counterparties.
Our maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at year-end was as
follows:
Commercial unused lines of credit
Unused lines of credit secured by 1 – 4 family residential properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
Total commitments
2016
2015
$
553,345,000 $
56,275,000
22,689,000
8,489,000
154,338,000
26,202,000
522,658,000
61,905,000
15,612,000
8,583,000
178,034,000
34,946,000
$
821,338,000 $
821,738,000
Commitments to make loans generally reflect our binding obligations to existing and prospective customers to extend
credit, including line of credit facilities secured by accounts receivable and inventory, and term debt secured by either real
estate or equipment. In most instances, line of credit facilities are for a one-year term and are at a floating rate tied to the
Wall Street Journal Prime Rate or the 30-Day Libor rate. For term debt secured by real estate, customers are generally
offered a floating rate tied to the Wall Street Journal Prime Rate or the 30-Day Libor rate, and a fixed rate currently ranging
from 4.00% to 7.00%. These credit facilities generally balloon within five years, with payments based on amortizations
ranging from 10 to 20 years. For term debt secured by non-real estate collateral, customers are generally offered a floating
rate tied to the Wall Street Journal Prime Rate or the 30-Day Libor rate, and a fixed rate currently ranging from 4.00% to
7.50%. These credit facilities generally mature and fully amortize within three to seven years.
(Continued)
F-100
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 14 – COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
Certain of our commercial loan customers have entered into interest rate swap agreements directly with our correspondent
banks. To assist our commercial loan customers in these transactions, and to encourage our correspondent banks to enter
into the interest rate swap transactions with minimal credit underwriting analyses on their part, we have entered into risk
participation agreements with the correspondent banks whereby we agree to make payments to the correspondent banks
owed by our commercial loan customers under the interest rate swap agreement in the event that our commercial loan
customers do not make the payments. We are not a party to the interest rate swap agreements under these arrangements.
As of December 31, 2016, the total notional amount of the underlying interest rate swap agreements was $13.8 million,
with a net fair value from our commercial loan customers’ perspective of negative $1.8 million. These risk participation
agreements are considered financial guarantees in accordance with applicable accounting guidance and are therefore
recorded as liabilities at fair value, generally equal to the fees collected at the time of their execution. These liabilities are
accreted into income during the terms of the interest rate swap agreements, generally ranging from an original term of four
to fifteen years, and totaled less than $0.1 million at December 31, 2016 and December 31, 2015.
The following instruments are considered financial guarantees under current accounting guidance. These instruments are
carried at fair value.
2016
2015
Contract
Amount
Carrying
Value
Contract
Amount
Carrying
Value
Standby letters of credit
$ 26,202,000 $
156,000 $ 34,946,000 $
182,000
We were required to have $9.2 million and $9.1 million of cash on hand or on deposit with the Federal Reserve Bank of
Chicago to meet regulatory reserve and clearing requirements at December 31, 2016 and December 31, 2015, respectively.
NOTE 15 – BENEFIT PLANS
We have a 401(k) benefit plan that covers substantially all of our employees. The percent of our matching contributions to
the 401(k) benefit plan is determined annually by the Board of Directors. The matching contribution was 4.25% as of
January 1, 2014. Matching contributions, if made, are immediately vested. Our 2016, 2015 and 2014 matching 401(k)
contributions charged to expense were $1.2 million, $1.2 million and $0.9 million, respectively.
We have a deferred compensation plan in which all persons serving on the Board of Directors may defer all or portions of
their annual retainer and meeting fees, with distributions to be paid upon termination of service as a director or specific
dates selected by the director. We also have a non-qualified deferred compensation program in which selected officers may
defer all or portions of salary and bonus payments. The deferred amounts, totaling $3.4 million and $3.9 million as of
December 31, 2016 and 2015, respectively, are categorized as other liabilities in the Consolidated Balance Sheets, and are
paid interest at a rate equal to the Wall Street Journal Prime Rate. Interest expense was less than $0.1 million per year
during the last three years.
(Continued)
F-101
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 15 – BENEFIT PLANS (Continued)
The Mercantile Bank Corporation Employee Stock Purchase Plan of 2014 is a non-compensatory plan intended to
encourage full- and part-time employees of Mercantile and its subsidiaries to promote our best interests and to align
employees’ interests with the interests of our shareholders by permitting employees to purchase shares of our common
stock through regular payroll deductions. Shares are purchased on the last business day of each calendar quarter at a price
equal to the consolidated closing bid price of our common stock reported on The Nasdaq Stock Market. A total of 250,000
shares of common stock may be issued under the existing plan; however, the number of shares may be adjusted to reflect
any stock dividends and other changes in our capitalization. The number of shares issued totaled 1,362 and 2,058 in 2016
and 2015, respectively. As of December 31, 2016, there were 245,430 shares available under our current plan.
NOTE 16 – HEDGING ACTIVITIES
Our interest rate risk policy includes guidelines for measuring and monitoring interest rate risk. Within these guidelines,
parameters have been established for maximum fluctuations in net interest income. Possible fluctuations are measured and
monitored using net interest income simulation. Our policy provides for the use of certain derivative instruments and
hedging activities to aid in managing interest rate risk to within policy parameters.
In February 2012, we entered into an interest rate swap agreement with a correspondent bank to hedge the floating rate on
the subordinated debentures issued to Mercantile Bank Capital Trust I, which became effective in January 2013 and
matures in January 2018. The $32.0 million of subordinated debentures have a rate equal to the 90-Day Libor Rate plus a
fixed spread of 218 basis points, and are subject to repricing quarterly. The interest rate swap agreement provides for us to
pay our correspondent bank a fixed rate, while our correspondent bank will pay us the 90-Day Libor Rate on a $32.0
million notional amount. The quarterly re-set dates for the floating rate on the interest rate swap agreement are the same as
the re-set dates for the floating rate on the subordinated debentures. The interest rate swap agreement is accounted for
under hedge accounting guidelines; therefore, fluctuations in the fair value of the interest rate swap agreement, net of tax
effect, are recorded in other comprehensive income. As of December 31, 2016 and 2015, the fair value of the interest rate
swap agreement was recorded as a liability in the amount of $0.1 million and $0.3 million, respectively.
Effective January 26, 2016, the notional amount of the interest rate swap agreement was reduced from $32.0 million down
to $21.0 million, reflecting the $11.0 million repurchase of the associated trust preferred securities on that date. We
recorded interest expense of approximately $154,000 in January 2016 as part of the transaction, in large part reflecting the
market value of the interest rate swap on that date of the $11.0 million portion.
(Continued)
F-102
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 17 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount, estimated fair value and level within the fair value hierarchy of financial instruments were as follows at
year-end (dollars in thousands):
Financial assets
Cash
Cash equivalents
Securities available for sale
Federal Home Loan Bank
stock
Loans, net
Bank owned life insurance
Accrued interest receivable
Financial liabilities
Deposits
Securities sold under
agreements to repurchase
Federal Home Loan Bank
advances
Subordinated debentures
Accrued interest payable
Interest rate swap
Level in
Fair Value
Hierarchy
2016
2015
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
Level 2
$
(1)
(2)
Level 3
Level 2
Level 2
$
11,493
172,103
328,060
$
11,493
172,103
328,060
$
12,496
77,395
346,992
12,496
77,395
346,992
8,026
2,360,659
67,198
7,714
8,026
2,354,311
67,198
7,714
7,567
2,262,046
58,971
7,836
7,567
2,261,026
58,971
7,836
Level 2
2,374,985
2,286,548
2,275,382
2,208,724
Level 2
131,710
131,710
154,771
154,771
Level 2
Level 2
Level 2
(1)
175,000
44,835
1,592
84
174,734
45,220
1,592
84
68,000
55,154
1,479
253
68,858
55,760
1,479
253
(1)
(2)
See Note 18 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets
and liabilities.
It is not practical to determine the fair value of FHLBI stock due to transferability restrictions.
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and
payable, bank owned life insurance, demand deposits, securities sold under agreements to repurchase, and variable rate
loans and deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if
no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans
and deposits and for variable rate loans and deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of subordinated
debentures and Federal Home Loan Bank advances is based on current rates for similar financing. Fair value of the interest
rate swap is determined primarily utilizing market-consensus forecasted yield curves. Fair value of off-balance sheet items
is estimated to be nominal.
(Continued)
F-103
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 18 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer
the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most
advantageous market for the asset or liability. The price of the principal (or most advantageous) market used to measure
the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual
and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are
buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing
to transact.
We are required to use valuation techniques that are consistent with the market approach, the income approach and/or the
cost approach. The market approach uses prices and other relevant information generated by market transactions involving
identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts,
such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount
that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should
be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in
pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect our own estimates about the assumptions market participants would use in pricing
the asset or liability based on the best information available in the circumstances. In that regard, we utilize a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as
of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in
active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that
are observable or can be derived from or corroborated by observable market data by correlation or other means.
Level 3: Significant unobservable inputs that reflect our own estimates about the assumptions that market participants
would use in pricing an asset or liability.
The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial
assets and liabilities on a recurring or nonrecurring basis:
Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value
measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using
independent pricing models. Level 2 securities include U.S. Government agency debt obligations, mortgage-backed
securities issued or guaranteed by U.S. Government agencies, municipal general obligation and revenue bonds, and mutual
funds. Level 3 securities include bonds issued by certain relatively small municipalities located within our markets that
have very limited marketability due to their size and lack of ratings from a recognized rating service. We carry these bonds
at historical cost, which we believe approximates fair value, unless our periodic financial analysis or other information
becomes known which necessitates a valuation allowance. There was no such valuation allowance as of December 31,
2016 or 2015. We have no Level 1 securities available for sale.
(Continued)
F-104
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 18 – FAIR VALUE MEASUREMENTS (Continued)
Mortgage loans held for sale. Mortgage loans held for sale are carried at the lower of aggregate cost or fair value and are
measured on a nonrecurring basis. Fair value is based on independent quoted market prices, where applicable, or the prices
for other mortgage whole loans with similar characteristics. As of December 31, 2016 and 2015, we determined that the
fair value of our mortgage loans held for sale approximated the recorded cost of $1.0 million and $1.3 million, respectively.
Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair
value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the
observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table
below at initial recognition of impairment and on an ongoing basis until recovery or charge-off.
Foreclosed assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less
costs to sell upon transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently
adjust estimated fair value on foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value
estimates.
Derivatives. The interest rate swap agreement is measured at fair value on a recurring basis. We measure fair value
utilizing models that use primarily market observable inputs, such as forecasted yield curves, and accordingly, the interest
rate swap agreement is classified as Level 2.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 are as follows:
Available for sale securities
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Derivatives
Interest rate swap agreement
Total
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 152,040,000 $
47,392,000
119,047,000
7,631,000
1,950,000
0 $ 152,040,000 $
0 47,392,000
0 112,648,000
7,631,000
0
1,950,000
0
0
0
6,399,000
0
0
(84,000 )
$ 327,976,000 $
(84,000 )
0
0
0 $ 321,577,000 $ 6,399,000
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2016. The $2.0 million reduction in Level 3
municipal general obligation bonds during 2016 reflects the scheduled maturities of such bonds.
(Continued)
F-105
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 18 – FAIR VALUE MEASUREMENTS (Continued)
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 are as follows:
Available for sale securities
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Derivatives
Interest rate swap agreement
Total
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 147,040,000 $
67,074,000
122,023,000
8,914,000
1,941,000
0 $ 147,040,000 $
0 67,074,000
0 113,604,000
8,914,000
0
1,941,000
0
0
0
8,419,000
0
0
(253,000 )
$ 346,739,000 $
(253,000 )
0
0
0 $ 338,320,000 $ 8,419,000
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2015.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2016 are as
follows:
Quoted
Prices
in Active
Significant
Markets for Other
Significant
Observable Unobservable
Identical
Assets
Inputs
(Level 2)
Inputs
(Level 3)
Total
(Level 1)
Impaired loans
Foreclosed assets
Total
$ 9,896,000 $
469,000
$ 10,365,000 $
0 $
0
0 $
0 $ 9,896,000
0
469,000
0 $ 10,365,000
(Continued)
F-106
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 18 – FAIR VALUE MEASUREMENTS (Continued)
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2015 are as
follows:
Quoted
Prices
in Active
Markets for
Identical
Assets
Total
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Impaired loans
Foreclosed assets
Total
$ 8,970,000 $
1,293,000
$ 10,263,000 $
0 $
0
0 $
0 $ 8,970,000
0
1,293,000
0 $ 10,263,000
The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on
impaired loans and foreclosed assets are reviewed periodically. Our credit policies establish criteria for obtaining
appraisals and determining internal value estimates. We may also adjust outside appraisals and internal evaluations based
on identifiable trends within our markets, such as sales of similar properties or assets, listing prices and offers received. In
addition, we may discount certain appraised and internal value estimates to address current distressed market conditions.
For real estate dependent loans and foreclosed assets, we generally assign a 15% to 25% discount factor for commercial-
related properties, and a 25% to 50% discount factor for residential-related properties. In a vast majority of cases, we
assign a 10% discount factor for estimated selling costs.
NOTE 19 – EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
Basic
Net income attributable to common shares
$
31,913,000 $
27,020,000 $
17,331,000
2016
2015
2014
Weighted average common shares outstanding
16,292,086
16,609,263
13,510,991
Basic earnings per common share
Diluted
Net income attributable to common shares
$
$
1.96 $
1.63 $
1.28
31,913,000 $
27,020,000 $
17,331,000
Weighted average common shares outstanding for basic
earnings per common share
16,292,086
16,609,263
13,510,991
Add: Dilutive effects of share-based awards
18,644
32,877
30,913
Average shares and dilutive potential common shares
16,310,730
16,642,140
13,541,904
Diluted earnings per common share
$
1.96 $
1.62 $
1.28
Stock options for approximately 11,000, 40,000 and 168,000 shares of common stock were antidilutive and were not
included in determining dilutive earnings per share in 2016, 2015 and 2014, respectively.
(Continued)
F-107
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 20 – SUBORDINATED DEBENTURES
We have five business trusts that are wholly-owned subsidiaries of Mercantile, four of which were assumed by Mercantile
in conjunction with the Firstbank merger. A fair value discount of $15.0 million was recorded at the time of the merger,
which is being amortized at $0.7 million annually over the following 21.5 years. Each of the trusts was formed to issue
Preferred Securities that were sold in private sales, as well as selling Common Securities to Mercantile. The proceeds from
the Preferred and Common Securities sales were used by the trusts to purchase Floating Rate Notes issued by Mercantile.
The rates of interest, interest payment dates, call features and maturity dates of each Floating Rate Note are identical to its
respective Preferred Securities. The net proceeds from the issuance of the Floating Rate Notes were used for a variety of
purposes, including contributions to the Bank as capital to provide support for asset growth and the funding of stock
repurchase programs and certain acquisitions.
The only significant assets of our trusts are the Floating Rate Notes, and the only significant liabilities of our trusts are the
Preferred Securities. The Floating Rate Notes are categorized on our Consolidated Balance Sheets as subordinated
debentures and the interest expense is recorded on our Consolidated Statements of Income under interest expense on other
borrowings.
On 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. 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.
The following table depicts our five business trusts as of December 31, 2016:
Trust Name
Preferred
Securities
Outstanding
Interest Rate
Maturity Date
Mercantile Bank Capital Trust I
$21,000,000
3 Month Libor + 218 bps
September 16, 2034
Firstbank Capital Trust I
$10,000,000
3 Month Libor + 199 bps
October 18, 2034
Firstbank Capital Trust II
$10,000,000
3 Month Libor + 127 bps
April 7, 2036
Firstbank Capital Trust III
$7,500,000
3 Month Libor + 135 bps
July 30, 2037
Firstbank Capital Trust IV
$7,500,000
3 Month Libor + 135 bps
July 30, 2037
NOTE 21 - 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.
(Continued)
F-108
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 21 - REGULATORY MATTERS (Continued)
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 2016 and 2015, 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, 2016 that we believe have changed our Bank’s
categorization.
Our actual capital levels (dollars in thousands) and minimum required levels were:
Actual
Amount
Ratio
Minimum Required
for Capital
Adequacy Purposes
Amount Ratio
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Amount Ratio
2016
Total capital (to risk weighted
assets)
Consolidated
Bank
Tier 1 capital (to risk weighted
assets)
Consolidated
Bank
Common equity (to risk
weighted assets)
Consolidated
Bank
Tier 1 capital (to average
assets)
Consolidated
Bank
$ 354,278
353,243
13.1 % $ 215,819
215,605
13.1
8.0 % $
8.0
NA
269,506
NA
10.0 %
336,316
335,282
12.5
12.4
161,864
161,704
6.0
6.0
NA
215,605
293,555
335,282
10.9
12.4
121,398
121,278
4.5
4.5
NA
175,179
336,316
335,282
11.2
11.1
120,486
120,383
4.0
4.0
NA
150,479
NA
8.0
NA
6.5
NA
5.0
(Continued)
F-109
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 21 - REGULATORY MATTERS (Continued)
Actual
Amount
Ratio
Minimum Required
for Capital
Adequacy Purposes
Amount Ratio
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Amount Ratio
2015
Total capital (to risk weighted
assets)
Consolidated
Bank
Tier 1 capital (to risk weighted
assets)
Consolidated
Bank
Common equity (to risk
weighted assets)
Consolidated
Bank
Tier 1 capital (to average
assets)
Consolidated
Bank
$ 345,539
347,433
13.5 % $ 205,602
205,624
13.5
8.0 % $
8.0
NA
257,030
NA
10.0 %
329,858
331,752
12.8
12.9
154,201
154,218
6.0
6.0
NA
205,624
280,171
331,752
10.9
12.9
115,804
115,664
4.5
4.5
NA
167,070
329,858
331,752
11.6
11.6
114,138
114,280
4.0
4.0
NA
142,850
NA
8.0
NA
6.5
NA
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 is being
phased in over three years beginning in 2016. The capital buffer requirement effectively raises 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, 2016, 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.
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 2016, under the most restrictive of these
regulations, our Bank could distribute approximately $54.6 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 14, 2016, our Board of Directors declared a cash
dividend on our common stock in the amount of $0.16 per share that was paid on March 23, 2016 to shareholders of record
as of March 11, 2016. On April 14, 2016, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.16 per share that was paid on June 23, 2016 to shareholders of record as of June 10, 2016. On July 14, 2016,
our Board of Directors declared a cash dividend on our common stock in the amount of $0.17 per share that was paid on
September 21, 2016 to shareholders of record as of September 9, 2016. On October 13, 2016, our Board of Directors
declared a cash dividend on our common stock in the amount of $0.17 per share that was paid on December 21, 2016 to
shareholders of record as of December 9, 2016. In addition, on October 13, 2016, our Board of Directors declared a special
cash dividend on our common stock in the amount of $0.50 per share that was paid on December 21, 2016 to shareholders
of record as of December 9, 2016.
(Continued)
F-110
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 21 - REGULATORY MATTERS (Continued)
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 will be paid on March 22, 2017 to shareholders of record as of March 10, 2017.
On 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. During 2016, we repurchased 167,878 shares at a total price of $3.7 million, at an average price per share
of $22.23. 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. The stock buybacks have been funded from cash dividends paid to us from our Bank.
Additional repurchases may be made during 2017 under the authorized plan, which would also likely be funded from cash
dividends paid to us from our Bank.
Our consolidated capital levels as of December 31, 2016 and 2015 include $42.8 million and $53.1 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 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, 2016 and 2015, all
$42.8 million and $53.1 million, respectively, of the trust preferred securities were included as Tier 1 capital of Mercantile.
On 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 an after-tax gain of approximately $1.8 million, or $0.11 per diluted share. On a
pro forma basis as of December 31, 2015, the repurchase resulted in a nine basis point increase in our tangible equity to
tangible assets ratio and an $0.11 increase in our tangible book value per share, but an approximately 35 basis point decline
in our regulatory tier 1 capital and total risk-based capital ratios. The repurchase was funded via a $9.1 million cash
dividend from our Bank, resulting in a similar approximately 35 basis point decline in the regulatory capital ratios.
Subsequent to the repurchase, our and our Bank’s regulatory capital ratios remained well above the minimum thresholds to
be categorized as well capitalized.
NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2016, accumulated other comprehensive income, net of tax effects (as applicable), consisted of a net
unrealized loss on available for sale securities of $5.5 million and the fair value of an interest rate swap of negative $0.1
million. At December 31, 2015, accumulated other comprehensive income, net of tax effects (as applicable), consisted of a
net unrealized gain on available for sale securities of $1.4 million and the fair value of an interest rate swap of negative
$0.2 million. At December 31, 2014, accumulated other comprehensive loss, net of tax effects (as applicable), consisted of
a net unrealized gain on available for sale securities of $0.2 million and the fair value of an interest rate swap of negative
$0.2 million.
(Continued)
F-111
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 23 - QUARTERLY FINANCIAL DATA (Unaudited)
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2015
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Net
Income
Earnings per Share
Basic
Diluted
$ 28,889,000 $ 25,882,000 $ 8,549,000 $
30,147,000 27,100,000 7,434,000
29,706,000 26,450,000 7,845,000
29,715,000 26,435,000 8,085,000
$ 27,589,000 $ 24,849,000 $ 6,646,000 $
27,663,000 25,041,000 6,558,000
28,501,000 25,625,000 7,336,000
28,575,000 25,659,000 6,480,000
0.52 $
0.46
0.48
0.49
0.39 $
0.39
0.45
0.40
0.52
0.46
0.48
0.49
0.39
0.39
0.45
0.40
NOTE 24 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Investment in bank subsidiary
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Subordinated debentures
Shareholders’ equity
2016
2015
$
4,257,000 $
365,291,000
20,665,000
4,940,000
368,248,000
20,940,000
$
390,213,000 $
394,128,000
$
4,567,000 $
44,835,000
340,811,000
5,170,000
55,154,000
333,804,000
Total liabilities and shareholders’ equity
$
390,213,000 $
394,128,000
(Continued)
F-112
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 24 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Income
Interest and dividends from subsidiaries
Total income
Expenses
Interest expense
Other operating expenses
Total expenses
Income before income tax benefit and equity in undistributed
net income of subsidiary
Federal income tax benefit
2016
2015
2014
$
32,521,000 $
32,521,000
24,166,000 $
24,166,000
12,139,000
12,139,000
2,490,000
2,953,000
5,443,000
2,569,000
2,276,000
4,845,000
2,145,000
3,552,000
5,697,000
27,078,000
19,321,000
6,442,000
(836,000 )
(2,051,000 )
(1,758,000 )
Equity in undistributed net income of subsidiary
3,999,000
5,648,000
9,131,000
Net income
$
31,913,000 $
27,020,000 $
17,331,000
Comprehensive income
$
25,069,000 $
28,267,000 $
22,920,000
(Continued)
F-113
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 24 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from operating
2016
2015
2014
$
31,913,000 $
27,020,000 $
17,331,000
activities:
Equity in undistributed net income of subsidiary
Stock-based compensation expense
Stock grants to directors for retainer fees
Gain on trust preferred securities repurchase
Change in other assets
Change in other liabilities
Net cash from operating activities
Cash flows from investing activities
Net capital investment into subsidiaries
Net cash for investing activities
Cash flows from financing activities
Stock option exercises, net of cashless exercises
Employee stock purchase plan
Dividend reinvestment plan
Repurchase of common shares
Cash dividends on common stock
Repurchase of trust preferred securities
Net cash for financing activities
(3,999,000)
1,459,000
327,000
(2,970,000 )
387,000
78,000
27,195,000
(5,648,000 )
684,000
403,000
0
11,000
4,717,000
27,187,000
(9,131,000 )
714,000
155,000
0
(8,163,000 )
21,979,000
22,885,000
0
0
0
0
0
0
978,000
36,000
1,601,000
(3,732,000 )
(18,731,000 )
(8,030,000 )
(27,878,000 )
891,000
44,000
655,000
(15,762,000 )
(9,516,000 )
0
(23,688,000 )
282,000
23,000
209,000
0
(24,464,000 )
0
(23,950,000 )
Net change in cash and cash equivalents
(683,000)
3,499,000
(1,065,000 )
Cash and cash equivalents at beginning of period
4,940,000
1,441,000
2,506,000
Cash and cash equivalents at end of period
$
4,257,000 $
4,940,000 $
1,441,000
F-114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 6, 2017.
MERCANTILE BANK CORPORATION
/s/ Robert B. Kaminski, Jr.
Robert B. Kaminski, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on March 6, 2017.
/s/ David M. Cassard
David M. Cassard, Director
/s/ Edward J. Clark
Edward J. Clark, Director
/s/ Michelle L. Eldridge
Michelle L. Eldridge, Director
/s/ Jeff A. Gardner
Jeff A. Gardner, Director
/s/ Edward B. Grant
Edward B. Grant, Director
/s/ Robert B. Kaminski, Jr.
Robert B. Kaminski, Jr.
Director, President and Chief Executive Officer
(principal executive officer)
/s/ Michael H. Price
Michael H. Price, Executive Chairman of the Board
/s/ Thomas R. Sullivan
Thomas R. Sullivan, Director
/s/ Charles E. Christmas
Charles E. Christmas, Executive Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
CORPORATE
JOURNEY
MERCANTILE BANK OF MICHIGAN
2017 STRATEGIC PLANNING TEAM
Mark S. Augustyn
Senior Vice President, West Region President
Charles E. Christmas
Executive Vice President, Chief Financial Officer
Amy W.M. Kam
Vice President, Executive Administrator
Robert B. Kaminski, Jr.
Chief Executive Officer
David L. Miller
Senior Vice President,
Training and Communications Director
Douglas J. Ouellette
Senior Vice President,
Chief Community Banking Officer,
Central Region President
Michael H. Price
Executive Chairman of the Board
Raymond E. Reitsma
President of the Bank
Richard D. Rice
Senior Vice President, Operations Manager
John R. Schulte
Senior Vice President, Chief Information Officer
Michelle L. Shangraw
Senior Vice President, Retail Banking Director
Lonna L. Wiersma
Senior Vice President, Human Resource Director
Robert T. Worthington
Senior Vice President,
Chief Operating Officer and General Counsel
SHAREHOLDER INFORMATION
Annual Meeting
The Corporation’s Annual Meeting of Shareholders
will be held on Thursday, May 25, 2017, at
Kent Country Club, 1600 College Ave. NE,
Grand Rapids, MI 49505 at 9:00 a.m. local time.
Administrative Headquarters
310 Leonard Street NW, 4th Floor
Grand Rapids, MI 49504
616.406.3000 or 888.345.6296
Legal Counsel
Dickinson Wright PLLC
500 Woodward Avenue, Suite 4000
Detroit, MI 48226-3425
www.dickinson-wright.com
Independent Certified Public Accountants
BDO USA, LLP
200 Ottawa Avenue NW, Suite 300
Grand Rapids, MI 49503-2654
www.bdo.com
Investor Relations
Lambert, Edwards & Associates
47 Commerce
Grand Rapids, MI 49503
www.lambert-edwards.com
Common Stock Listing
NASDAQ Global Select Market
Symbol: MBWM
Stock Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
Shareholder Inquiries 1.800.733.5001
www.computershare.com/investor
SEC Form 10-K
Copies of the Corporation’s Annual Report
on Form 10-K, as filed with the Securities and
Exchange Commission, are available to shareholders
without charge upon written request.
mercbank.com
Mercantile Bank Corporation does not discriminate on
the basis of race, color, age, religion, sex, sexual orientation,
gender identity, national origin, disability or veteran status
in employment or the provision of services.
Please mail your request to:
Charles E. Christmas
Mercantile Bank Corporation
310 Leonard Street NW, 4th Floor
Grand Rapids, MI 49504
LOOKING BACK. FOCUSED FORWARD.
EVERY
JOURNEY...
is unique, and often full of twists and turns.
Looking back, we reflect on how we’ve grown and what
we’ve learned. Focused forward, we anticipate the path
ahead, knowing we can do even greater things because
of where we’ve been.
2016 was an incredible journey for us at Mercantile, and
it’s largely because of the connections we’ve shared with
you: our customers, our communities, our employees and
our shareholders—we could not have done it without you.
Thanks for being an essential part of our journey.
JOURNEY
MISSION STATEMENT
ANNUAL REPORT 2016
The mission of Mercantile Bank Corporation
is to provide value in a highly professional and
personalized manner.
We recognize that our most important partners
are our customers. We will satisfy our customers'
need for security and achievement of their goals
and dreams by delivering top quality service that
distinguishes us from our competitors.
Our employees are our most valuable asset.
Our exceptional team members are committed
to maintaining an environment of personal growth
and development.
We recognize the importance of being strong
supporters of the diverse communities in which
we live and serve. We pledge to help make them
stronger through investments of time and resources.
We believe that by fulfilling our mission to our
customers, employees and communities, we will
provide our shareholders with an excellent return
on their investment in Mercantile Bank Corporation.
310 Leonard Street NW
Grand Rapids, MI 49504
888.345.6296
mercbank.com
Mercantile Bank of Michigan and Michigan’s Community Bank
are registered trademarks of Mercantile Bank Corporation.
002CSN78D9
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