MISSION STATEMENT
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.
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AT THE
CORE
ANNUAL REPORT 2017
CORE CORPORATE
MERCANTILE BANK OF MICHIGAN
2018 STRATEGIC PLANNING TEAM
Mark S. Augustyn
Senior Vice President, Chief Lending Officer
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
Raymond E. Reitsma
President of the Bank
John R. Schulte
Lonna L. Wiersma
Senior Vice President, Human Resource Director
Robert T. Worthington
Senior Vice President,
Chief Operating Officer and General Counsel
Senior Vice President, Chief Information Officer
Michelle L. Shangraw
Lambert, Edwards & Associates
Senior Vice President, Retail Banking Director
47 Commerce
SHAREHOLDER INFORMATION
Annual Meeting
The Corporation’s Annual Meeting of
Shareholders will be held on Thursday,
May 24, 2018, 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 800.453.8700
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
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
OURCORE
From the moment you walk inside
our door, you know Mercantile Bank
is different.
We focus on doing what it takes to make your day that much brighter.
On getting to know you. And serving you in the best way possible.
Because Mercantile was built around the needs of our customers—not
the other way around—our vision remains focused on delivering a
unique blend of personalized service and innovative technologies
our connected lifestyles demand.
As we continue to grow
and evolve, our commitment
to our core values is what
makes us the bank of choice
for businesses and individuals
looking for a trusted and caring
financial partner. For us, this
means taking pride in our
performance. Holding ourselves
accountable to high standards
of service. And maintaining
our commitment to our
customers, our communities
and our culture.
OUR CUSTOMERS
Our commitment to customers
OUR COMMUNITIES
Making a difference in our
OUR CULTURE
Relationships matter at
remains unwavering. We
communities is an important
Mercantile. We believe our
recognize they’re our most
part of who we are. Together
employees are exceptional,
important partners, and we
with our employees, we strive
and we’re fully committed
make every effort to let them
to find creative ways to serve the
to their success. From
know we care. Our focus on
Michigan communities in which
training to benefits to tuition
exceptional service continues
to influence everything we
we live and work. Whether that
means giving our time, expertise
reimbursement, we believe
in supporting our team and
do—from the shores of Lake
or financial support, we work
maintaining a culture of
Michigan to Troy and from
hard to cultivate a culture of
excellence. Simply because
Kalamazoo to West Branch.
generosity and service.
it’s the right thing to do.
2 MERCANTILE BANK CORPORATION
2017 ANNUAL REPORT AT THE CORE
2
COREVALUES
2017 was a landmark year for Mercantile
Bank Corporation.
Twenty years ago, in December 1997, Mercantile Bank opened its doors
in downtown Grand Rapids, Michigan. From that successful beginning,
we have continued to grow and now maintain a market presence in a
significant portion of the state of Michigan. We marked this anniversary
with another strong year of profitability, growth, quality and efficiency.
While we celebrate the accomplishments of 2017, we also look forward
to the future with great anticipation.
3 MERCANTILE BANK CORPORATION
As our company has continued to
grow and evolve along with the entire
financial services industry, our core
values remain the same. It is these
core values that allow Mercantile to
be the bank of choice for so many
businesses and individuals who are
seeking a knowledgeable and caring
financial partner on whom they can rely.
Understanding our clients’ needs and
building long-term relationships with
them are the approaches to banking
that we have embraced since our
beginning. Our staff also has a sharp
focus on maintaining a culture of
excellence in all that we do.
These are the foundational
building blocks for the
way we do business,
and they provide
maximum benefit
to all of our
constituents—
clients, employees,
communities and
shareholders.
2017 ANNUAL REPORT AT THE CORE
4
During 2017, Mercantile reported a net profit
of $31.3 million, reflecting core operational
net income growth of 8.4%. Supporting our
strong bottom line is a solid and steady net
interest margin of 3.79%.
FINANCIALCORE
BUSINESS LOANS WERE UP
$138
MILLION
A key driver of our performance
is loan growth. Our unique brand
of relationship banking continues to
resonate with our clients and potential
clients. In 2017, loans grew at a rate
of nearly 8%, reflecting balanced
expansion in our loan portfolio.
Business loans were up $138 million,
with growth in commercial, industrial
and commercial real estate loans.
The retail mortgage portfolio grew
$59.3 million, reflecting the very
positive results of one of our major
initiatives and the great work of
our mortgage team.
5 MERCANTILE BANK CORPORATION
NET INCOME
*Impacted by Merger Event
TOTAL ASSETS
$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
,
0
0
0
7
2
4
,
1
$
3
3
0
7
1
$
,
*
1
3
3
7
1
$
,
0
2
0
7
2
$
,
3
1
9
,
1
3
$
4
7
2
,
1
3
$
,
0
0
4
3
9
8
2
$
,
,
0
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6
4
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,
,
0
0
6
2
8
0
3
$
,
,
4
0
7
6
8
2
3
$
,
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
EPS GROWTH
*Impacted by Merger Event
STOCK PRICE GROWTH
*Impacted by Merger Event
%
0
0
5
.
2014
%
6
6
2
.
%
0
.
1
2
2017
2013
2015
2016
*
%
4
4
3
-
.
%
1
.
3
-
NONPERFORMING ASSETS
(% of Total Assets)
%
7
6
0
.
%
9
0
.
1
%
3
2
0
.
%
1
2
0
.
%
9
2
0
.
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%
%
8
0
3
.
2014
%
7
6
1
.
%
6
3
5
.
2017
2013
2015
2016
*
%
6
2
-
.
%
2
6
-
.
NET INTEREST MARGIN
%
3
7
3
.
%
5
7
3
.
%
3
8
3
.
%
6
8
3
.
%
9
7
3
.
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2017 ANNUAL REPORT AT THE CORE
6
with investment in and development of the front line staff
growth in two major areas: mortgage banking and treasury
management. Mercantile rebuilt its retail mortgage operation
increasing noninterest income was
evident in our 2017 performance.
as well as operational support. These investments are
accompanied by an improved mortgage processing platform,
resulting in a significant expansion of this line of business.
We recognized a significant opportunity for continued
E Mercantile’s ongoing focus on
R
O
C
T
N
E
M
P
O
L
E
V
E
D
7 MERCANTILE BANK CORPORATION
In treasury management services,
Mercantile’s tradition of innovative
products and services has allowed
us to continue strong support
of the needs of our commercial
clients. Our suite of products, which
includes payment cards, human
capital management, receivables
and payables solutions, and remote
deposit, are attractive offerings for
our client acquisition activities.
Mercantile expanded its footprint during 2017 with a new
banking office in Troy, Michigan. We are excited about the
team of bankers brought to our company to help us open
this office and their ability to deliver relationship banking
to prospective clients in southeast Michigan.
8 MERCANTILE BANK CORPORATION
COMMUNITYCORE
The accomplishments of our company are
only made possible through the efforts of
our staff of hard-working, multi-talented
and dedicated bankers.
Mercantile team members are passionate about their work and they
diligently strive to provide world-class banking to our clients every day.
9 MERCANTILE BANK CORPORATION
COMMUNITYCORE
Our employees help create a unique culture that in 2017 afforded us
recognition for the 13th straight year as one of ‘West Michigan’s Best
and Brightest Companies to Work For.’ Mercantile was also selected
as a winner of the 2017 Pillar Award by the Grand Rapids Women’s
Resource Center for our continuous efforts to ensure a workplace
of equal opportunity for all.
As community bankers, we live and work among our clients and are
deeply rooted in our communities. We believe that being a strong
partner in the markets we serve benefits all members of the community.
Our employees volunteer their time and talent to many nonprofit
organizations and community activities. During 2017, Mercantile staff
members donated over 31,000 hours of their time, while our company
contributed over $500,000 in support of these organizations and
community projects.
MERCANTILE STAFF
MEMBERS DONATED OVER
31,000
HOURS OF THEIR TIME
2017 ANNUAL REPORT AT THE CORE
10
FUTURECORE
We remain energized about the economic
rebound we have witnessed in the state
of Michigan over the last several years.
Unemployment rates and job growth in Michigan now track
closely with the national averages, and in some of our markets,
the economic metrics are among
the strongest in the nation.
Michigan’s median home prices
continue to rise. The result is
a solid operating environment
for clients and our company.
11 MERCANTILE BANK CORPORATION
The financial services industry continues
to undergo significant change, fueled by
advancements in technology. We are excited
about the opportunities these advancements
will provide to develop new and innovative
products and services. Our clients view us
as entrepreneurial with the ability to add
value as they pursue financial success. With
this approach to business, we continually
strive for growth and further improvement
to our company’s performance. We are
thankful for the confidence and support of
our shareholders, and we look forward to a
bright future as Michigan’s Community Bank®.
Robert B. Kaminski, Jr.
President and Chief Executive Officer
12 MERCANTILE BANK CORPORATION
BOARD OF
DIRECTORS
STANDING LEFT TO RIGHT
Michelle L. Eldridge
Owner, Clear Ridge
Wealth Management
Edward J. Clark
Chairman and Chief Executive
Officer, American Seating Company
Robert B. Kaminski, Jr.
President and
Chief Executive Officer
Thomas R. Sullivan
Retired Banking Executive
SEATED LEFT TO RIGHT
EXECUTIVE OFFICERS
Edward B. Grant, CPA, PhD
Retired Public Broadcasting
Executive
Jeff A. Gardner, CPM
Owner, Gardner Group
Michael H. Price
Executive Chairman
of the Board of Directors
David M. Cassard
Retired Real Estate Executive
Charles E. Christmas
Executive Vice President,
Chief Financial Officer
and Treasurer
Robert B. Kaminski
President and
Chief Executive Officer
Michael H. Price
Executive Chairman
of the Board of Directors
Robert T. Worthington
Senior Vice President,
Chief Operating Officer,
General Counsel and Secretary
13 MERCANTILE BANK CORPORATION
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, 2017
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, a smaller reporting
company or emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ___ Accelerated filer X
Non-accelerated filer ___ Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $506 million.
As of March 1, 2018, there were issued and outstanding 16,594,812 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 24, 2018 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 Department of Insurance and Financial Services. 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 expanded into Southeast Michigan in 2017, opening a banking office in Troy during the
first quarter.
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 Wall Street Reform and Consumer Protection Act (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 or 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 engages 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 have expanded as a result of the
adoption in July, 2010 of 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, 2017, we employed 584 full-time and 117 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 various types of consumer loans, including new and used automobile and boat
loans, credit cards and overdraft protection lines of credit 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 three years. In
addition, a random sampling of retail loans is 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, 2017, loans placed in nonaccrual status totaled $7.1 million, or 0.3% of total
loans, compared to $5.9 million, or 0.2% of total loans, at December 31, 2016. No loans were past due 90 days or more
and still accruing interest at year-end 2017 or 2016.
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 2017 we placed most
weight on the period starting December 31, 2010 through December 31, 2017. 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 also face new competition as a result of our expansion 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, Central, and Southeastern 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 66% 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. Many 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 (“FOMC”) took the initial step in that process by
raising the Federal funds rate by 25 basis points in December 2015, the first such action since December 2008.
Subsequently, the FOMC refined the normalization principles and announced greater detail about its planned approach. In
September 2017, the FOMC announced the start of gradual reduction in the Federal Reserve’s securities holdings,
commencing in October 2017. In each of March, June, and December 2017, the FOMC raised the Federal funds rate by 25
basis points, and announced its intention to continue to raise the Federal funds rate gradually over the next few years.
There can be no assurance that these reductions in the Federal Reserve’s securities holdings, and increases in the Federal
funds rate, will continue to occur, that they will be gradual if they do 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.
On February 3, 2017, however, President Trump signed Executive Order 13772, specifying new core principles
for regulating the U.S. financial system. Among other things, the President directed the Secretary of the Treasury, in
consultation with federal regulatory agencies, to review existing laws and regulations and report on the extent to which they
were consistent with the core principles. Beginning in February 2017, Congress passed, and the President signed, more
than a dozen resolutions under the Congressional Review Act, repealing various federal regulations, including regulations
adopted by the CFPB. Certain bills pending in Congress would, if enacted, repeal or substantially amend various
provisions of the Dodd-Frank Act. Proposals to modify existing regulations in light of the new core principles are under
consideration by various federal regulatory agencies, including the CFPB. There can be no assurance that any such
legislation will be enacted, or that changes in existing regulations will be adopted to implement the new core principles.
11
Thus, the effect of financial services legislation and regulations remains uncertain. The implementation, amendment, or
repeal of federal financial services laws or regulations 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.
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 is being 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.
Changes in the method of determining Libor, or the replacement of Libor with an alternative reference rate, may
adversely affect interest income or expense.
Many of the commercial loans we make bear interest at a floating rate based on Libor, the London inter-bank
offered rate. We pay interest on certain subordinated notes related to our trust preferred securities, and a related interest
rate swap agreement, at rates based on Libor
On July 27, 2017, the United Kingdom Financial Conduct Authority, which oversees Libor, formally announced
that it could not assure the continued existence of Libor in its current form beyond the end of 2021, and that an orderly
transition process to one or more alternative benchmarks should begin. In June 2017, the Alternative Reference Rates
Committee, a steering committee comprised of large U.S. financial institutions organized by the Federal Reserve,
announced that it had selected a modified version of the unpublished Broad Treasuries Financing Rate as the preferred
alternative reference rate for U.S. dollar obligations. That rate, now referred to as the Secured Overnight Funding Rate
(“SOFR”), is determined based upon actual transactions in certain portions of the bi-lateral and tri-party overnight
repurchase agreement markets for certain U.S. Treasury obligations. The Federal Reserve Bank of New York has stated
that it expected to begin publication of the SOFR in the first half of 2018.
In February 2018, an international consortium of market participant trade associations published the IBOR Global
Benchmark Survey 2018 Transition Roadmap (“Roadmap”). The Roadmap summarizes the background to the use of inter-
bank offered rate benchmarks, discusses perceived reasons for reform, and identifies problems that may be encountered in
making a transition to new interest rate benchmarks. Those potential problems include market adoption, liquidity, legal,
valuation and risk management, infrastructure, tax, accounting, governance and control, and regulatory issues.
It is unclear whether, or in what form, Libor will continue to exist after 2021. Any transition to an alternative
benchmark will require careful consideration and implementation so as not to disrupt the stability of financial markets. If
Libor ceases to exist, we may need to take a variety of actions, including negotiating certain of our agreements based on an
alternative benchmark that may be established, if any. There is no guarantee that a transition from Libor to an alternative
benchmark will not result in financial market disruptions, significant changes in benchmark rates, or adverse changes in the
value of certain of our loans, and our income and expense.
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.
14
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.
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.
15
We face the risk of cyber-attack to our computer systems.
In the ordinary course of business, we collect and store sensitive data, including proprietary business information
and personally identifiable information of our customers and employees in systems and on networks. The secure
processing, maintenance and use of this information is critical to our operations. To date, we have not experienced a
significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but our
systems and those of our customers and third-party service providers are under constant threat, and it is possible that we
could experience a significant event in the future. Cybersecurity threats include 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. Risks and exposures related to cybersecurity attacks are expected to remain high for the
foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use
of Internet banking, mobile banking and other technology-based products and services by us and our customers.
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.
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates
that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that
their risk management processes also address the risk posed by compromised customer credentials, including security
measures to reliably authenticate customers accessing internet-based services of the financial institution. The other
statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning
processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack
involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery
of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical
service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject
to various regulatory sanctions, including financial penalties.
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 2017 fiscal year and that remain
unresolved.
16
Item 2. Properties.
Our headquarters is located in our bank’s main office facility in Grand Rapids, Michigan. Our bank operates 49
banking offices primarily concentrated throughout Western and Central Michigan, most of which are full-service facilities.
We also opened a banking office in Troy, Michigan during the first quarter of 2017. 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. Forty-three
of the banking offices are owned by our bank, and six are 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, 2018,
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.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
37.97 $
36.05
35.86
38.08
24.37 $
25.40
27.99
38.68
30.65 $
30.42
28.92
33.75
20.84 $
21.05
23.42
26.48
0.18
0.18
0.19
0.19
0.16
0.16
0.17
0.67
17
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 12, 2017, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.18 per share that was paid on March 22, 2017 to shareholders of record as of March 10, 2017. On April 13, 2017, our
Board of Directors declared a cash dividend on our common stock in the amount of $0.18 per share that was paid on June
21, 2017 to shareholders of record as of June 9, 2017. On July 13, 2017, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.19 per share that was paid on September 20, 2017 to shareholders of record as of
September 8, 2017. On October 12, 2017, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.19 per share that was paid on December 20, 2017 to shareholders of record as of December 8, 2017.
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 30, 2015, we announced that our Board of Directors had authorized a new program to repurchase up to
$20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other
means in accordance with applicable regulations. On April 19, 2016, we announced a $15.0 million expansion of the stock
repurchase plan. Since inception, we have purchased a total of 956,419 shares at a total price of $19.5 million, at an
average price per share of $20.38; no shares were purchased under the authorized plan during 2017. The stock buybacks
have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods
under the authorized plan, which would also likely be funded from cash dividends paid to us from our bank.
On January 11, 2018, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.22 per share that will be paid on March 21, 2018 to shareholders of record as of March 9, 2018.
18
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 2017.
(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, 2012 through December 31, 2017. The
following is based on an investment of $100 on December 31, 2012 in our common stock, the Nasdaq Composite Index and
the SNL Bank Nasdaq Index, with dividends reinvested where applicable.
19
Total Return Performance
Mercantile Bank Corporation
NASDAQ Composite Index
SNL Bank NASDAQ Index
300
250
200
150
100
l
e
u
a
V
x
e
d
n
I
50
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Index
Mercantile Bank Corporation
NASDAQ Composite
SNL Bank NASDAQ
12/31/12
100.00
100.00
100.00
12/31/13
133.98
140.12
143.73
12/31/14
146.39
160.78
148.86
12/31/15
175.72
171.97
160.70
12/31/16
280.70
187.22
222.81
12/31/17
269.47
242.71
234.58
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.
20
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
As of December 31, 2017, 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, 2017.
There have been no significant changes in our internal control over financial reporting during the quarter ended
December 31, 2017, 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, 2017. 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, 2017. 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 24, 2018 Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which
will be filed with the Securities and Exchange Commission before April 30, 2018, 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.
21
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.
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, 2017, relating to compensation plans under
which equity securities are authorized for issuance.
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)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
Plan Category
Equity compensation plans approved by security holders (1)
30,908 $
18.67
314,000 (2)
Equity compensation plans not approved by security holders
0
0
0
Total
30,908 $
18.67
314,000
(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.
22
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 5, 2018 – BDO USA, LLP
Consolidated Balance Sheets --- December 31, 2017 and 2016
Consolidated Statements of Income for each of the three years in the period ended December 31, 2017
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,
2017
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended
December 31, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017
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.
23
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2017 and 2016
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2017 and 2016
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:
2017
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
Consolidated Balance Sheet Data:
Total assets
Cash and cash equivalents
Securities
Loans
Allowance for loan losses
Bank owned life insurance
$
2016
2014(*)
2015
(Dollars in thousands except per share data)
$ 112,328
$ 118,457
11,154
12,590
101,174
105,867
(1,000 )
2,900
16,038
21,038
79,381
77,118
38,831
46,887
11,811
14,974
27,020
31,913
89,118
11,340
77,778
(3,000 )
10,028
65,610
25,196
7,865
17,331
$
$
$
2013
58,242
10,786
47,456
(7,200 )
6,872
36,403
25,125
8,092
17,033
$
$
$ 125,543
15,795
109,748
2,950
19,001
79,716
46,083
14,809
31,274
$
$ 3,286,704
200,101
346,780
2,558,552
19,501
68,689
$ 3,082,571
183,596
336,086
2,378,620
17,961
67,198
$ 2,903,556
89,891
354,559
2,277,727
15,681
58,971
$ 2,893,379
172,738
446,611
2,089,277
20,041
57,861
$ 1,426,966
146,965
143,139
1,053,243
22,821
51,377
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated debentures
Shareholders’ equity
2,522,365
118,748
220,000
45,517
365,870
2,374,985
131,710
175,000
44,835
340,811
2,275,382
154,771
68,000
55,154
333,804
2,276,915
167,569
54,022
54,472
328,138
1,118,911
69,305
45,000
32,990
153,325
Consolidated Financial Ratios:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
1.00 %
8.82 %
11.28 %
1.07 %
9.35 %
11.42 %
0.94 %
8.19 %
11.45 %
0.76 %
6.91 %
11.05 %
1.22 %
11.36 %
10.77 %
Nonperforming loans to total loans
Allowance for loan losses to total originated
loans
0.28 %
0.25 %
0.24 %
1.41 %
0.64 %
0.88 %
0.95 %
0.94 %
1.55 %
2.17 %
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
11.27 %
10.74 %
12.21 %
12.88 %
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 %
$
$
1.90
1.90
$
1.96
1.96
$
1.63
1.62
$
1.28
1.28
1.96
1.95
Tangible book value per share at end of period
Dividends declared
Dividend payout ratio
18.61
0.74
38.52 %
17.14
1.16
58.70 %
16.61
0.58
35.22 %
15.49
2.48
141.16 %
17.54
0.45
22.83 %
(*) – 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 2017 we placed most weight
on the period starting December 31, 2010 through December 31, 2017. 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 2016 and 2017, 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 $31.3 million, or $1.90 per diluted share, for 2017. For 2016, we recorded net income of $31.9
million, or $1.96 per diluted share. Excluding the impacts of certain one-time transactions, diluted earnings per share
during 2017 and 2016 equaled $1.89 and $1.76, respectively. These transactions included a bank owned life insurance
death benefit claim during the first quarter of 2017, the revaluation of our net deferred tax asset in response to the Tax Cuts
and Jobs Act becoming law in late 2017, the repurchase of trust preferred securities at a large discount during the first
quarter of 2016, and accelerated purchase discount accretion on called U.S. Government agency bonds during 2016.
The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.28% of total loans as of
December 31, 2017. Gross loan charge-offs during 2017 totaled $3.2 million, while recoveries of prior period loan charge-
offs totaled $1.8 million, providing for net loan charge-offs of $1.4 million, or only 0.06% 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 $529 million in 2017, similar to the $549 million and $532
million we booked during 2016 and 2015, respectively. We also experienced net increases in commercial lines of credit
during the past three years, in large part reflecting lines that are part of new commercial lending relationships established
during recent quarterly periods. Net loan growth equaled $180 million during 2017, compared to $101 million and $188
million during 2016 and 2015, respectively, with all years reflecting the impact of scheduled monthly payments as well as
expected and unexpected commercial loan payoffs. During 2017, total commercial loans grew $138 million, or 6.7%,
reflecting growth in the commercial and industrial, commercial real estate owner occupied and commercial real estate non-
owner occupied segments. The new loan pipeline remains strong, and at year-end 2017, we had $154 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 31%, commercial
and industrial loans equaling 29%, commercial real estate owner occupied loans comprising 21% and residential mortgage
and consumer loans aggregating 14% of total loans as of December 31, 2017. As a percent of total commercial loans,
commercial and industrial loans and commercial real estate owner occupied loans combined equaled 58% at year-end 2017,
compared to 56% at December 31, 2016.
Our funding structure is also well diversified. As of December 31, 2017, noninterest-bearing checking accounts comprised
31% of total funds, interest-bearing checking and securities sold under agreements to repurchase (“sweep accounts”)
combined for 18%, savings and money market deposit accounts aggregated to 26% and local time deposits accounted for
14%. Wholesale funds, comprised of brokered deposits and Federal Home Loan Bank of Indianapolis (“FHLBI”)
advances, represented 11% of total funds.
FINANCIAL CONDITION
Our total assets increased $204 million during 2017, and totaled $3.29 billion as of December 31, 2017. Total loans
increased $180 million, securities available for sale were up $7.7 million and interest-earning deposits grew $11.6 million.
Total deposits increased $147 million and FHLBI advances were up $45.0 million, while sweep accounts were down $13.0
million during 2017.
Earning Assets
Average earning assets equaled 92.8% of average total assets during 2017, similar to the 92.5% during 2016. 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 85.2% of average earning assets during 2017, compared to 84.9% in 2016,
while securities and other interest-earning assets combined comprised 14.8% of average earning assets during 2017,
compared to 15.1% in 2016. We anticipate the level of earning assets to total assets remaining relatively stable at
approximately 93%.
F-7
Our loan portfolio has historically been primarily comprised of commercial loans. Commercial loans increased $138
million during 2017, and at December 31, 2017 totaled $2.20 billion, or 86.1% of the loan portfolio. As of December 31,
2016, the commercial loan portfolio comprised 86.8% of total loans. Owner occupied commercial real estate (“CRE”)
loans increased $75.9 million, commercial and industrial loans were up $39.9 million and non-owner occupied CRE loans
increased $43.4 million, while multi-family and residential rental loans declined $16.0 million and vacant land, land
development and residential construction loans were down $5.0 million. As a percent of total commercial loans,
commercial and industrial loans and owner occupied CRE loans combined equaled 58.1% as of December 31, 2017,
compared to 56.4% as of December 31, 2016.
We have significantly enhanced our commercial loan calling efforts over the past several years. We are very pleased with
the $1.61 billion in new commercial term loan fundings over the past three years, and our current commercial loan pipeline
reports indicate continued strong commercial loan funding opportunities in future periods. Also, as of December 31, 2017,
availability on existing construction and development loans totaled $154 million, with most of those commitments expected
to be drawn during 2018. Further, we have made additional lending commitments totaling $185 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
significant 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.
Residential mortgage loans increased $59.3 million during 2017, totaling $255 million or 10.0% of total loans, at December
31, 2017. We originated $223 million in residential mortgage loans during 2017, an almost 37% increase from the volume
originated in 2016, in large part reflecting our enhanced residential mortgage banking operation over the past couple of
years. We sold $108 million of the residential mortgage loans originated in 2017, or about 48%, generally comprised of
longer-term fixed rate mortgage loans. The remaining $115 million was added to our balance sheet, in large part comprised
of adjustable rate residential mortgage loans. We are pleased with the success of our strategic initiative to grow our
residential mortgage banking operation, and expect origination volume to increase in future periods. We expect to sell 50%
to 55% of the new residential mortgage loan originations in 2018, with a vast majority of the loans added to our balance
sheet to be comprised of adjustable rate mortgage loans. Other consumer-related loans declined $17.6 million during 2017,
and at December 31, 2017 totaled $100 million, or 3.9% of the loan portfolio. Other consumer-related loans equaled 5.0%
of total loans as of December 31, 2016. We expect this loan portfolio segment to decline in future periods as scheduled
principal payments exceed origination volumes.
F-8
The following table summarizes our loan portfolio:
12/31/17
12/31/16
12/31/15
12/31/14
12/31/13
Commercial:
Commercial & Industrial
Land Development & Construction
Owner Occupied Commercial Real
$ 753,764,000 $ 713,903,000 $ 696,303,000 $ 550,629,000 $ 286,373,000
36,741,000
51,977,000
34,828,000
29,873,000
45,120,000
Estate
526,328,000 450,464,000 445,919,000 430,406,000 261,877,000
Non-Owner Occupied Commercial
Real Estate
Multi-Family & Residential Rental
Total Commercial
791,685,000 748,269,000 644,351,000 559,594,000 364,066,000
101,918,000 117,883,000 115,003,000 122,772,000
37,639,000
2,203,568,000 2,065,347,000 1,946,696,000 1,715,378,000 986,696,000
Retail:
1-4 Family Mortgages
Home Equity & Other Consumer
Loans
Total Retail
Total Loans
254,559,000 195,226,000 190,385,000 214,695,000
31,467,000
100,425,000 118,047,000 140,646,000 159,204,000
354,984,000 313,273,000 331,031,000 373,899,000
35,080,000
66,547,000
$ 2,558,552,000 $ 2,378,620,000 $ 2,277,727,000 $ 2,089,277,000 $ 1,053,243,000
The following table presents total loans outstanding as of December 31, 2017, 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
$ 114,903,000 $ 24,124,000 $ 54,714,000 $ 193,741,000
82,211,000 125,236,000 131,648,000 339,095,000
45,409,000
12,702,000 29,335,000
523,594,000 443,967,000 226,295,000 1,193,856,000
570,250,000 159,891,000 22,534,000 752,675,000
33,776,000
$ 1,306,807,000 $ 807,927,000 $ 443,818,000 $ 2,558,552,000
3,147,000 25,374,000
5,255,000
3,372,000
$ 117,767,000 $ 748,981,000 $ 374,529,000 $ 1,241,277,000
1,189,040,000 58,946,000 69,289,000 1,317,275,000
$ 1,306,807,000 $ 807,927,000 $ 443,818,000 $ 2,558,552,000
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 $9.4 million (0.3% of total assets) as of December 31, 2017, compared to $6.4 million (0.2% of total
assets) as of December 31, 2016. The volume of nonperforming assets has generally been on a steady trend over the past
several years. 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 a steady 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
12/31/17 12/31/16 12/31/15 12/31/14 12/31/13
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
$
0 $
0
40,000
0
3,381,000 2,739,000 2,917,000 4,229,000 4,219,000
3,381,000 2,755,000 2,940,000 4,313,000 4,259,000
84,000 $
0
16,000 $
0
23,000 $
0
35,000
0
2,241,000
0
2,276,000
95,000
0
155,000
0
209,000
389,000
0
0
285,000 2,131,000 18,091,000
885,000
169,000
378,000
108,000
488,000
868,000 2,394,000 18,678,000 1,443,000
1,444,000 2,293,000
23,000
1,486,000 2,316,000
42,000
69,000 6,401,000 1,016,000
0
41,000
110,000 6,443,000 1,016,000
42,000
Total
$ 7,143,000 $ 5,939,000 $ 5,444,000 $ 29,434,000 $ 6,718,000
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
12/31/17 12/31/16 12/31/15 12/31/14 12/31/13
$
0 $
0
193,000
193,000
0 $
0
144,000
144,000
0 $ 329,000 $
0
0
598,000
722,000
598,000 1,051,000
427,000
22,000
207,000
656,000
0
0
2,031,000
36,000
2,067,000
0
0
325,000
0
325,000
0
0
612,000
83,000
695,000
92,000
0
0
0
247,000
164,000
697,000 1,939,000
944,000 2,195,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
$ 2,260,000 $ 469,000 $ 1,293,000 $ 1,995,000 $ 2,851,000
F-10
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
2017
2016
2015
2014
2013
$ 5,939,000 $ 5,444,000 $ 29,434,000 $ 6,718,000 $ 18,970,000
(232,000 )
7,604,000 5,655,000 4,543,000 25,871,000 1,726,000
0
(4,234,000 ) (4,166,000 ) (23,641,000 ) (2,063,000 ) (10,934,000 )
(313,000 ) (3,044,000 )
(1,934,000 )
(981,000 ) (4,844,000 )
(779,000 )
(48,000 )
(13,000 )
Total
$ 7,143,000 $ 5,939,000 $ 5,444,000 $ 29,434,000 $ 6,718,000
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION
2017
2016
2015
2014
2013
Beginning balance
Additions
Sale proceeds
Valuation write-downs
$ 469,000 $ 1,293,000 $ 1,995,000 $ 2,851,000 $ 6,970,000
725,000 2,186,000 2,593,000 2,181,000
4,401,000
(677,000 ) (1,428,000 ) (2,377,000 ) (3,183,000 ) (5,585,000 )
(715,000 )
(511,000 )
(1,933,000 )
(266,000 )
(121,000 )
Total
$ 2,260,000 $ 469,000 $ 1,293,000 $ 1,995,000 $ 2,851,000
Gross loan charge-offs equaled $3.2 million during 2017, while recoveries of prior period charge-offs totaled $1.8 million.
Resulting net loan charge-offs equaled $1.4 million, or only 0.06% of average total loans. 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. 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.
F-11
The following table summarizes changes in the allowance for originated loan losses for the past five years:
Originated loans outstanding at year-
end
$ 2,169,957,000 $ 1,884,548,000 $ 1,616,587,000 $ 1,246,116,000 $ 1,053,243,000
2017
2016
2015
2014
2013
Daily average balance of originated
loans outstanding during the year
Balance of allowance for originated
$ 2,054,809,000 $ 1,784,978,000 $ 1,428,150,000 $ 1,141,682,000 $ 1,050,961,000
loans at beginning of year
$
17,868,000 $
15,233,000 $
19,299,000 $
22,821,000 $
28,677,000
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
(2,272,000 )
(20,000 )
(687,000 )
(204,000 )
(3,183,000 )
(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 )
1,445,000
129,000
131,000
102,000
1,807,000
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
Net loan (charge-offs) recoveries
(1,376,000 )
(463,000 )
(3,365,000 )
271,000
1,344,000
Provision for loan losses for originated
loans
Balance of allowance for originated
2,641,000
3,098,000
(701,000 )
(3,793,000 )
(7,200,000 )
loans at end of year
$
19,133,000 $
17,868,000 $
15,233,000 $
19,299,000 $
22,821,000
Ratio of net loan (charge-offs)
recoveries to average loans
outstanding during the year
Ratio of allowance to originated loans
outstanding at year-end
(0.07%)
(0.03%)
(0.24%)
0.02%
0.13%
0.88%
0.95%
0.94%
1.55%
2.17%
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):
12/31/2017
Loan
12/31/2016
Loan
12/31/2015
Loan
12/31/2014
Loan
12/31/2013
Loan
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Commercial,
financial and
agricultural $ 15,616
77.8 % $ 15,035
85.8 % $ 12,017
80.7 % $ 16,112
82.8 % $ 17,860
84.0 %
Construction
and land
development 1,260
Residential
real estate
Instalment
loans to
individuals
Unallocated
Total
406
93
1,758
7.6
991
6.0 1,655
10.9 1,012
8.8 1,858
8.9
13.3 1,374
6.4 1,235
6.4 1,974
7.2 3,027
6.8
1.3
0.0
508
(40 )
1.8
0.0
186
140
2.0
0.0
125
76
1.2
0.0
68
8
0.3
0.0
$ 19,133 100.0 % $ 17,868 100.0 % $ 15,233 100.0 % $ 19,299 100.0 % $ 22,821 100.0 %
The following table depicts the ratio of our allowance to nonperforming loans:
12/31/17
12/31/16
12/31/15
12/31/14
12/31/13
Ratio of allowance to
nonperforming loans
273.0%
302.4%
288.0%
68.1%
339.7%
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 2017 we placed most weight
on the period starting December 31, 2010 through December 31, 2017. 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 $19.1 million as of December 31, 2017, or 0.9% of total originated loans
outstanding, compared to 1.0% at year-end 2016. The allowance for acquired loans equaled $0.4 million as of December
31, 2017, compared to $0.1 million at year-end 2016. As of December 31, 2017, the allowance for originated loans was
comprised of $17.3 million in general reserves relating to non-impaired loans, $1.4 million in specific reserve allocations
relating to nonaccrual loans, and $0.4 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 $8.6 million at December 31, 2017, consisting of $2.5 million that are on nonaccrual
status and $6.1 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 $0.9 million as of December 31, 2017 had been subject to previous partial charge-offs aggregating $1.4
million. Those partial charge-offs were recorded as follows: $0.7 million in 2017, less than $0.1 million in 2016, 2015,
2013 and 2012, $0.4 million in 2011 and $0.2 million in 2010. As of December 31, 2017, 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:
12/31/17
12/31/16
12/31/15
12/31/14
12/31/13
Performing
Nonperforming
$
6,128,000 $ 12,480,000 $ 19,336,000 $ 24,001,000 $ 30,247,000
4,645,000
2,434,000
2,358,000 26,433,000
1,132,000
Total
$
8,562,000 $ 13,612,000 $ 21,694,000 $ 50,434,000 $ 34,892,000
F-14
Securities available for sale increased $7.7 million during 2017, totaling $336 million as of December 31, 2017. The
securities portfolio equaled 11.3% of average earning assets during 2017. During 2017, purchases of U.S. Government
agency bonds totaled $35.6 million, U.S. Government agency issued or guaranteed mortgage-backed securities aggregated
$10.2 million and municipal bonds totaled $21.2 million. Proceeds from matured and called U.S. Government agency and
municipal bonds during 2017 totaled $18.8 million and $20.6 million, respectively, with another $13.0 million from
principal paydowns on mortgage-backed securities. In addition, proceeds from the sales of U.S. Government agency issued
or guaranteed mortgage-backed securities and municipal bonds totaled $5.0 million and $2.6 million, respectively. At
December 31, 2017, the securities portfolio was primarily comprised of U.S. Government agency bonds (51%), municipal
bonds (37%) and U.S. Government agency issued or guaranteed mortgage-backed securities (12%). 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, 2017 totaled $336 million, including a net unrealized loss of $6.2 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:
12/31/17
12/31/16
12/31/15
Carrying
Value
Percent
Carrying
Value
Percent
Carrying
Value
Percent
U.S. Government agency debt
obligations
$
169,700,000
50.5 % $ 152,040,000
46.3 % $ 147,040,000
42.4 %
Mortgage-backed securities
38,792,000
11.6 47,392,000
14.5 67,074,000
19.3
Municipal general obligations
121,293,000
36.1 119,047,000
36.3 122,023,000
35.2
Municipal revenue bonds
3,978,000
1.2
7,631,000
2.3
8,914,000
Other investments
1,981,000
0.6
1,950,000
0.6
1,941,000
2.6
0.5
Totals
$ 335,744,000
100.0 % $ 328,060,000
100.0 % $ 346,992,000
100.0 %
FHLBI stock totaled $11.0 million as of December 31, 2017, compared to $8.0 million as of December 31, 2016. The $3.0
million increase reflects stock purchases to support the increased level of FHLBI advances during 2017. 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, 2017, 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
$
9,278,000
17,718,000
59,564,000
83,140,000
169,700,000
20,397,000
47,220,000
38,380,000
19,274,000
125,271,000
38,792,000
1,981,000
1.56 %
1.68
2.30
2.84
2.46
1.82
2.29
2.90
3.21
2.54
2.17
2.71
$
335,744,000
2.46 %
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 3.1% of
average earning assets during 2017, compared to 2.8% during 2016. 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 1.6% of total assets during 2017, with no significant changes expected in future
periods. Net premises and fixed assets equaled $46.0 million as of December 31, 2017, or 1.4% of total assets. Net
purchases during 2017 totaled $5.4 million, while depreciation expense aggregated to $3.0 million. Foreclosed and
repossessed assets totaled $2.3 million at December 31, 2017, compared to $0.5 million at December 31, 2016; the $1.8
million increase during the current year primarily reflects the transfer of a bank-owned parcel of real estate, which is no
longer being considered for use as a bank facility, in the amount of $1.6 million from fixed assets to other real estate
owned. The parcel of real estate is expected to be sold in the next six months for an amount that approximates current book
value. 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 $147 million during 2017, totaling $2.52 billion as of December 31, 2017. Out-of-area deposits
increased $26.5 million during 2017, and equaled 4.1% of total deposits at year-end 2017, compared to 3.2% as of
December 31, 2016. FHLBI advances increased $45.0 million during 2017, totaling $220 million as of December 31,
2017.
Noninterest-bearing checking accounts increased $55.8 million during 2017, generally due to deposit account openings as
part of recently established commercial lending relationships and transfers from sweep accounts to new noninterest-bearing
checking accounts reflecting updated interest rate and fee structures. Interest-bearing checking accounts increased $9.8
million, while savings deposits declined $17.5 million, the latter primarily reflecting typical fluctuations in certain public
unit savings accounts. Money market deposit accounts increased $155 million during 2017, while local time deposits
decreased $82.3 million, in large part reflecting one depositor transferring their funds from time deposits to money market
deposit accounts. This negotiated transfer was completed at the request of the depositor to ease recordkeeping burdens;
although the funds are no longer in time deposit products, we believe the stability of this long-standing deposit relationship
is unchanged. In addition, money market deposit accounts increased due to an enhanced high balance money market
deposit account product offering that was initiated in mid-2017.
F-16
Sweep accounts decreased $13.0 million during 2017, totaling $119 million as of December 31, 2017. 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.
FHLBI advances increased $45.0 million during 2017, totaling $220 million as of December 31, 2017. 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 2017 totaled $731 million, with availability of $511 million.
Shareholders’ equity increased $25.1 million during 2017, totaling $366 million as of December 31, 2017. Positively
impacting shareholders’ equity was net income of $31.3 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $12.0 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 $2.3 million.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Summary
We recorded net income of $31.3 million, or $1.90 per basic and diluted share, for 2017, compared to net income of $31.9
million, or $1.96 per basic and diluted share, for 2016. Excluding the impacts of certain one-time transactions, net income
was $31.2 million, or $1.89 per basic and diluted share, in 2017, and $28.7 million, or $1.76 per basic and diluted share, in
2016. A bank owned life insurance death benefit claim in the first quarter of 2017 increased net income during 2017 by
$1.4 million, or $0.09 per basic and diluted share, while the revaluation of the net deferred tax asset in response to the Tax
Cuts and Jobs Act becoming law in December 2017 decreased net income in the current year by $1.3 million, or $0.08 per
basic and diluted share. 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. We also recorded
accelerated discount accretion on called U.S. Government agency bonds during 2016 that increased net income by $1.4
million, or $0.09 per basic and diluted share.
Our earnings performance in 2017 benefited from increased net interest income, which more than offset increased
noninterest expense. The increased net interest income resulted from a higher level of average earning assets. The
increased noninterest expense was primarily attributable to expected increases in various operating expenses stemming
from recent expansion initiatives and increased salary expense, mainly reflecting annual employee merit pay increases, the
hiring of additional staff, a larger bonus accrual, and greater stock-based compensation expense. Growth in our primary
noninterest income revenue streams, including treasury management income, credit and debit card interchange fees,
mortgage banking activity income, payroll processing revenue, and customer service fees, also contributed to the improved
earnings performance.
The following table shows some of the key performance and equity ratios for the years ended December 31, 2017 and
2016:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
2017
2016
1.00 %
8.82 %
11.28 %
1.07 %
9.35 %
11.42 %
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
$126 million and $15.8 million during 2017, respectively, providing for net interest income of $111 million. During 2016,
interest income and interest expense equaled $119 million and $12.6 million, respectively, providing for net interest income
of $107 million.
F-17
In comparing 2017 with 2016, interest income increased 6.0%, interest expense was up 25.5%, and net interest income
increased 3.7%. 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 $3.9 million increase in net interest income in 2017 compared to 2016 resulted from a higher level of average earning
assets, which more than offset a lower net interest margin. During 2017, earning assets averaged $2.92 billion, or $152
million higher than average earning assets during 2016. Average loans increased $138 million, average other interest-
earning assets increased $13.1 million, and average securities increased $0.6 million. During 2017, the net interest margin
equaled 3.79%, down from 3.86% during 2016 due to a higher cost of funds, which more than offset an increased yield on
average earning assets. The higher cost of funds primarily resulted from increased costs of certain non-time deposits, time
deposits, and borrowed funds. The improved yield on average earning assets mainly resulted from an increased yield on
loans, primarily reflecting higher interest rates on variable-rate commercial loans stemming from recent Federal Open
Market Committee (“FOMC”) rate hikes, which more than offset a decreased yield on securities, mainly reflecting a
decreased level of accelerated purchase discount accretion on called U.S. Government agency bonds.
The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities
and shareholders’ equity during 2017, 2016 and 2015. 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 both 2017 and 2016 and $0.6 million in 2015 for this non-GAAP, but industry standard, adjustment.
This adjustment equated to a three basis point increase in our net interest margin during both 2017 and 2016 and a two
basis point increase in our net interest margin during 2015.
F-18
(Dollars in
thousands)
2 0 1 7
Years ended December 31,
2 0 1 6
2 0 1 5
Average
Balance Interest
$ 224,786 $ 5,326
Average
Rate
Average
Balance Interest
2.37 % $ 224,297 $ 6,842
Average
Rate
Average
Balance Interest
3.05 % $ 281,476 $ 5,918
Average
Rate
2.10 %
115,984 3,103
Total securities 340,770 8,429
2.68 115,875
2.47 340,172
2,932
9,774
2.53 114,603
2.87 396,079
2,650
8,568
2.31
2.16
Taxable securities
Tax-exempt
securities
Savings deposits
Money market
accounts
Time deposits
Loans
Interest-earning
deposits
Federal funds sold
Total earning
2,483,440 116,816
4.70 2,345,308 109,049
4.65 2,178,276 104,106
4.78
90,925 1,096
0
0
1.21
0.00
77,852
11
401
<1
0.51
0.25
68,234
10,719
188
27
0.28
0.25
assets
2,915,135 126,341
4.33 2,763,343 119,224
4.31 2,653,308 112,889
4.25
Allowance for loan
losses
Cash and due from
banks
Other non-earning
(18,949 )
48,061
(16,895 )
45,890
(18,082 )
46,714
assets
198,426
195,446
199,557
Total assets
$ 3,142,673
$ 2,987,784
$ 2,881,497
Interest-bearing
demand deposits $ 377,933 $
341,175
507
351
0.13 % $ 360,180 $
0.10 340,076
336
296
0.09 % $ 404,866 $
0.09 341,265
721
401
0.18 %
0.12
354,145 2,122
516,525 6,382
0.60 290,528
1.24 577,062
360
6,557
0.12 268,071
1.14 657,938
420
6,048
0.16
0.92
Total interest-
bearing deposits 1,589,778 9,362
0.59 1,567,846
7,549
0.48 1,672,140
7,590
0.45
Short-term
borrowings
116,615
190
0.16 149,079
211
0.14 146,826
157
0.11
Federal Home Loan
Bank advances
Other borrowings
Total interest-
bearing
liabilities
217,849 3,657
48,453 2,586
1.68 149,344
48,711
5.34
2,263
2,567
1.51
5.27
55,556
58,509
765
2,642
1.38
4.52
1,972,695 15,795
0.80 1,914,980 12,590
0.66 1,933,031 11,154
0.58
Demand deposits
Other liabilities
802,024
13,506
Total liabilities 2,788,225
354,448
Average equity
715,550
15,914
2,646,444
341,340
606,750
11,929
2,551,710
329,787
Total liabilities
and equity
$ 3,142,673
$ 2,987,784
$ 2,881,497
Net interest income
Rate spread
Net interest margin
$ 110,546
$ 106,634
$ 101,735
3.53 %
3.79 %
3.65 %
3.86 %
3.67 %
3.83 %
F-19
Years ended December 31,
2017 over 2016
Volume
Total
Rate
Total
2016 over 2015
Volume
Rate
$ (1,516,000 ) $
171,000
15,000 $ (1,531,000 ) $ 923,000 $ (1,371,000 ) $ 2,294,000
253,000
283,000
3,000
7,767,000 6,485,000 1,282,000 4,943,000 7,823,000 (2,880,000 )
168,000
30,000
695,000
0
77,000
0
618,000
0
213,000
(27,000 )
30,000
(20,000 )
183,000
(7,000 )
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
7,117,000 6,580,000
537,000 6,335,000 6,492,000
(157,000 )
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
171,000
55,000
1,762,000
(175,000 )
(21,000 )
154,000
17,000
1,000
54,000
95,000 1,667,000
546,000
29,000
(721,000 )
(50,000 )
(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
1,394,000 1,129,000
(14,000 )
19,000
265,000 1,498,000 1,414,000
(479,000 )
(75,000 )
33,000
84,000
404,000
3,205,000
457,000 2,748,000 1,436,000
93,000 1,343,000
$ 3,912,000 $ 6,123,000 $ (2,211,000 ) $ 4,899,000 $ 6,399,000 $ (1,500,000 )
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 $7.1 million during 2017 from that earned in 2016, totaling $126 million
in 2017 compared to $119 million in the previous year. The increase in interest income is primarily attributable to a higher
level of average earning assets; a slightly higher yield on average earning assets also contributed to the increased interest
income. During 2017 and 2016, earning assets had an average yield (tax equivalent-adjusted basis) of 4.33% and 4.31%,
respectively. The improved yield on average earning assets mainly resulted from an increased yield on loans, primarily
reflecting higher interest rates on variable-rate commercial loans stemming from the previously-mentioned FOMC rate
hikes, which more than offset a decreased yield on securities, mainly reflecting a decreased level of accelerated purchase
discount accretion on called U.S. Government agency bonds. A change in earning asset mix also contributed to the
increased yield on average earning assets; average loans represented 85.2% of average earning assets during 2017, up from
84.9% during 2016.
Interest income generated from the loan portfolio increased $7.8 million in 2017 compared to the level earned in 2016;
growth in the loan portfolio during 2017 resulted in a $6.5 million increase in interest income, while an increase in loan
yield from 4.65% in 2016 to 4.70% in 2017 resulted in a $1.3 million increase in interest income. The higher yield on
loans mainly resulted from an increased yield on commercial loans, which more than offset a decreased yield on residential
mortgage loans. The yield on commercial loans equaled 4.70% during 2017, up from 4.60% during 2016 as the positive
impacts of the FOMC rate hikes in December 2016 and March, June, and December 2017 more than offset the negative
impacts of loans being originated and renewed at lower rates in light of the ongoing relatively low interest rate environment
and competitive pressures. The decline in the yield on residential mortgage loans from 5.10% during 2016 to 4.70% during
2017 primarily reflected the booking of adjustable-rate mortgages with initial rates that were generally lower than the
existing portfolio’s average rate. Interest income on acquired loans totaled $4.6 million in 2017, compared to $4.9 million
in 2016.
F-20
Interest income generated from the securities portfolio decreased $1.3 million in 2017 compared to the level earned in
2016; a decline in the yield on securities from 2.87% during 2016 to 2.47% during 2017 resulted in a $1.4 million decrease
in interest income, while an increase in the average balance of the securities portfolio resulted in an increase in interest
income of less than $0.1 million. The decreased yield on securities mainly reflects a lower 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 was recorded as interest income during 2017. Interest income on other interest-earning
assets increased $0.7 million primarily due to an increased yield.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree, from borrowed funds. Interest
expense increased $3.2 million during 2017 from that expensed in 2016, totaling $15.8 million in 2017 compared to $12.6
million in the previous year. The increase in interest expense resulted from a higher cost of funds and an increase in
interest-bearing liabilities. During 2017 and 2016, interest-bearing liabilities had a weighted average rate of 0.80% and
0.66%, respectively; an increase in interest expense of $2.7 million was recorded during 2017 due to the higher cost of
funds. The higher weighted average cost of interest-bearing liabilities mainly resulted from increased costs of certain
interest-bearing non-time deposits, time deposits, and borrowed funds. The cost of interest-bearing non-time deposit
accounts increased from 0.10% during 2016 to 0.28% during 2017, primarily reflecting one large depositor transferring
funds from time deposits into a money market account product at rates higher than the average rate on the money market
product at the time of transfer and the offering of a high balance money market account product with a higher rate. The
cost of time deposits increased from 1.14% during 2016 to 1.24% during 2017, primarily reflecting higher costs of public
unit certificates of deposit $100,000 and over and brokered certificates of deposit $100,000 and over. The cost of borrowed
funds increased from 1.45% during 2016 to 1.68% during 2017 primarily due to a change in borrowing mix and an
increased cost of FHLBI advances. Average lower-costing sweep accounts represented 30.4% of average borrowed funds
during 2017, down from 42.9% during 2016, while average higher-costing FHLBI advances represented 56.9% and 43.0%
of average borrowed funds during the respective periods. Longer-term FHLBI advances totaling $90 million were obtained
during 2017 to meet loan funding and interest rate risk management needs. Average interest-bearing liabilities were $1.97
billion during 2017, up $57.7 million, or 3.0%, from the $1.91 billion average during 2016.
An increase in interest-bearing non-time deposits during 2017, totaling $82.5 million, equated to an increase in interest
expense of $0.1 million, while a higher average rate paid on these deposit accounts resulted in a $1.9 million increase in
interest expense. Average time deposits decreased $60.5 million during 2017, in large part reflecting the aforementioned
transfer of funds into a money market account product; the decreased balance equated to a decline in interest expense of
$0.7 million. A $0.5 million increase in interest expense resulted from a higher average rate paid on time deposits.
Average short-term borrowings, comprised entirely of sweep accounts, declined $32.5 million during 2017, resulting in a
$0.1 million decrease in interest expense, while a higher average rate paid on these accounts resulted in a nominal increase
in interest expense. Average FHLBI advances increased $68.5 million, resulting in a $1.1 million increase in interest
expense, while a higher average rate paid on the advances resulted in a $0.3 million increase in interest expense. A $0.3
million decrease in average other borrowings, coupled with a slight increase in the average rate paid on these borrowings,
resulted in a nominal increase in interest expense.
Net interest income and the net interest margin during 2017 and 2016 were also affected by purchase accounting accretion
and amortization entries associated with the fair value measurements recorded effective June 1, 2014. Increases in interest
income on loans totaling $4.6 million and $4.9 million were recorded during 2017 and 2016, respectively. An increase in
interest expense on subordinated debentures totaling $0.7 million was recorded during both 2017 and 2016. Purchased loan
accretion amounts vary from period to period as a result of periodic cash flow re-estimations, loan payoffs, and payment
performance.
Provision for Loan Losses
A loan loss provision expense of $3.0 million was recorded in 2017, compared to a provision expense of $2.9 million
recorded in 2016. The provision expense recorded during 2017 primarily reflects ongoing loan growth and an assessment
change in our economic conditions environmental factor, while the provision expense incurred during 2016 mainly reflects
loan growth and an assessment change in our concentrations environmental factor.
F-21
Net loan charge-offs of $1.4 million were recorded during 2017, compared to $0.6 million during the prior year. The
allowance for originated loans, as a percentage of total originated loans, was 0.9% and 1.0% as of December 31, 2017 and
December 31, 2016, respectively. Our allowance for acquired loans totaled $0.4 million and $0.1 million as of December
31, 2017 and December 31, 2016, respectively.
Noninterest Income
Noninterest income totaled $19.0 million in 2017, a decrease of $2.0 million, or 9.7%, from the $21.0 million earned in
2016. Our primary noninterest income revenue streams, including treasury management income, credit and debit card
interchange fees, mortgage banking activity income, payroll processing revenue, and customer service fees, increased $1.2
million, or 8.5%, on a combined basis in 2017 compared to the prior year. The increase in mortgage banking activity
income primarily reflects the positive impact of strategic initiatives that were implemented in the latter half of 2016 and
throughout 2017, including the hiring of additional loan originators, introduction of new and enhanced products, loan
programs and increased marketing efforts. Noninterest income during both 2017 and 2016 benefited from certain one-time
transactions, including a $1.4 million bank owned life insurance death benefit claim in 2017 and a $2.9 million pre-tax gain
associated with a trust preferred securities repurchase transaction and $0.4 million in reimbursements related to certain
medical insurance premiums charged in prior years in 2016.
Noninterest Expense
Noninterest expense during 2017 totaled $79.7 million, an increase of $2.6 million, or 3.4%, from the $77.1 million
expensed in 2016. The higher level of expense primarily resulted from increased salary expense and expected increases in
various operating expenses stemming from recent expansion initiatives. Salary expense was $37.2 million during 2017, an
increase of $2.7 million, or 7.8%, from the $34.5 million expensed during 2016. The increased salary expense primarily
reflects annual employee merit pay increases, the hiring of additional staff, a larger bonus accrual, and greater stock-based
compensation expense. A significant portion of the increased salary expense resulting from staff additions reflects the
opening of the southeast Michigan office. Employee benefit costs during 2017 were $8.2 million, a decrease of $0.8
million, or 9.0%, from the $9.0 million expensed in 2016, primarily reflecting lower health insurance costs. Occupancy
and furniture and equipment costs increased $0.2 million on a combined basis in 2017, mainly resulting from higher
depreciation expense. Data processing costs totaled $8.2 million in 2017, up $0.3 million, or 3.6%, from the $7.9 million
expensed in 2016, primarily reflecting higher costs related to credit and debit card services. FDIC insurance premiums
during 2017 were $1.0 million, a decrease of $0.3 million, or 22.3%, from the $1.3 million expensed during 2016; the
decrease mainly resulted from changes to the deposit insurance assessment calculation that became effective in the third
quarter of 2016.
Federal Income Tax Expense
During 2017, we recorded income before federal income tax of $46.1 million and a federal income tax expense of $14.8
million, compared to income before federal income tax of $46.9 million and a federal income tax expense of $15.0 million
during 2016. Our effective tax rate was 32.1% during 2017, compared to 31.9% during 2016. The decrease in federal
income tax expense during 2017 compared to 2016 period resulted from the lower level of income before federal income
tax. The higher effective tax rate in 2017 compared to the prior year reflects the impact of the revaluation of our net
deferred tax asset in response to the Tax Cuts and Jobs Act, which resulted in increased federal income tax expense of $1.3
million in the current year. The aforementioned nontaxable bank owned life insurance death benefit claim positively
impacted the effective tax rate in 2017.
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.
F-22
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.
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.
F-23
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.
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.
F-24
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. 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 an
assessment change in our concentrations environmental factor, 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.
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.
F-25
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. 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.
CAPITAL RESOURCES
Shareholders’ equity increased $25.1 million during 2017, totaling $366 million as of December 31, 2017. Positively
impacting shareholders’ equity was net income of $31.3 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $12.0 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 $2.3 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, 2017, our bank’s total risk-based capital ratio was 12.6%, compared to 13.1% at
December 31, 2016. Our bank’s total regulatory capital increased $18.1 million during 2017, primarily reflecting the net
impact of net income totaling $33.3 million and cash dividends paid to Mercantile Bank Corporation aggregating $16.1
million. Our bank’s total risk-based capital ratio was also impacted by a $249 million increase in total risk-weighted assets,
primarily resulting from net commercial loan growth. As of December 31, 2017, our bank’s total regulatory capital
equaled $371 million, or $77.0 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. Since inception, we have purchased a total of 956,419 shares at a total price of $19.5 million, at an
average price per share of $20.38; no shares were purchased under the authorized plan during 2017. The stock buybacks
have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods
under the authorized plan, which would also likely be funded from cash dividends paid to us from our bank.
F-26
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.
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 $323
million, or 11.3% of combined deposits and borrowed funds as of December 31, 2017, compared to $251 million, or 9.4%
of combined deposits and borrowed funds, as of December 31, 2016.
Sweep accounts decreased $13.0 million during 2017, totaling $119 million as of December 31, 2017. 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, 2017 and during 2017 is as follows:
Outstanding balance at December 31, 2017
Weighted average interest rate at December 31, 2017
Maximum daily balance twelve months ended December 31, 2017
Average daily balance for twelve months ended December 31, 2017
Weighted average interest rate for twelve months ended December 31, 2017
$
$
$
118,748,000
0.16 %
142,459,000
116,587,000
0.16 %
FHLBI advances increased $45.0 million during 2017, totaling $220 million as of December 31, 2017. 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 2017 totaled $731 million, with availability of $511 million.
We also have the ability to borrow up to $50.0 million on a daily basis through a correspondent bank using an established
unsecured federal funds purchased line of credit. We accessed this line of credit on two occasions during 2017; prior to
these borrowings, we had 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 $88.4 million during 2017. 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 $19.9 million at December 31, 2017. 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, 2017, 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 $
$ 2,008,787,000 $
0 $
283,844,000 155,779,000 73,955,000
0
118,748,000
0 $ 2,008,787,000
0 513,578,000
0 118,748,000
20,000,000 70,000,000 80,000,000 50,000,000 220,000,000
45,517,000
3,203,000
1,442,000
0 45,517,000
0 3,203,000
241,000
0
0
360,000
0
0
520,000
321,000
0
F-27
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, 2017, we had a total of $986 million in unfunded loan
commitments and $26.0 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $801
million were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $185
million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We
regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity
management.
The following table depicts our loan commitments at the end of the past three years:
12/31/17
12/31/16
12/31/15
Commercial unused lines of credit
Unused lines of credit secured by 1-4 family residential
$
682,202,000 $
553,345,000 $
522,658,000
properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
61,606,000
39,807,000
17,629,000
184,923,000
26,030,000
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
Total
$ 1,012,197,000 $
821,338,000 $
821,738,000
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, 2017:
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:
1,899,000
1,248,000 25,374,000
$ 1,159,620,000 $ 61,829,000 $ 657,317,000 $ 306,915,000 $ 2,185,681,000
63,584,000 18,627,000 125,236,000 131,648,000 339,095,000
33,776,000
16,140,000 27,578,000 95,042,000 208,020,000 346,780,000
0 144,974,000
1,500,000
(19,501,000 )
0
0
0 255,899,000
0
1,384,717,000 109,282,000 904,469,000 651,838,000 $ 3,286,704,000
143,474,000
0
0
0
0
0
5,255,000
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
0
0
0
118,748,000
387,758,000
327,530,000
427,119,000
0
0
0
17,691,000 50,933,000 83,670,000
50,258,000 164,962,000 146,064,000
0
0
0 20,000,000 150,000,000
0
0
0
0
0
0
1,377,824,000 235,895,000 379,734,000
0
48,720,000
0
0
0
0
0 387,758,000
0 327,530,000
0 427,119,000
0 152,294,000
0 361,284,000
0 118,748,000
50,000,000 220,000,000
48,720,000
0
0 866,380,000
11,001,000
0
50,000,000 2,920,834,000
0 365,870,000
1,377,824,000 235,895,000 379,734,000
50,000,000 $ 3,286,704,000
Net asset (liability) GAP
Cumulative GAP
$
$
Percent of cumulative GAP to total
assets
6,893,000 $
(126,613,000 ) $
524,735,000 $ 601,838,000
6,893,000 $ (119,720,000 ) $
405,015,000 $
1,006,853,000
0.2%
(3.6% )
12.3%
30.6%
(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,
2017.
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, 2017, 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, 2017.
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
$
(19,430,000 )
(16,260,000 )
(12,100,000 )
(6,540,000 )
(770,000 )
1,450,000
3,610,000
5,800,000
7,950,000
(17.6%)
(14.7)
(11.0)
(5.9)
(0.7)
1.3
3.3
5.3
7.2
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
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation (the “Company”) and
subsidiaries as of December 31, 2017 and 2016, 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, 2017, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31,
2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, 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 5, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ BDO USA, LLP
BDO USA, LLP
We have served as the Company’s auditor since 2006.
Grand Rapids, Michigan
March 5, 2018
F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Mercantile Bank Corporation’s (the “Company’s”) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes, and our report dated March 5, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ BDO USA, LLP
BDO USA, LLP
Grand Rapids, Michigan
March 5, 2018
F-32
March 5, 2018
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, 2017. 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, 2017, 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, 2017 and 2016
ASSETS
Cash and due from banks
Interest-earning deposits
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
2017
2016
55,127,000 $
$
50,200,000
144,974,000 133,396,000
200,101,000 183,596,000
335,744,000 328,060,000
8,026,000
11,036,000
2,558,552,000 2,378,620,000
(17,961,000 )
2,539,051,000 2,360,659,000
(19,501,000 )
46,034,000
68,689,000
49,473,000
7,600,000
28,976,000
45,456,000
67,198,000
49,473,000
9,957,000
30,146,000
$ 3,286,704,000 $ 3,082,571,000
$ 866,380,000 $ 810,600,000
1,655,985,000 1,564,385,000
2,522,365,000 2,374,985,000
118,748,000 131,710,000
220,000,000 175,000,000
44,835,000
15,230,000
2,920,834,000 2,741,760,000
45,517,000
14,204,000
Preferred stock, no par value; 1,000,000 shares authorized; 0 shares
outstanding at December 31, 2017 and December 31, 2016
Common stock, no par value; 40,000,000 shares authorized; 16,592,125
shares outstanding at December 31, 2017 and 16,416,695 shares
outstanding at December 31, 2016
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
0
0
309,772,000 305,488,000
40,904,000
(5,581,000 )
365,870,000 340,811,000
61,001,000
(4,903,000 )
Total liabilities and shareholders’ equity
$ 3,286,704,000 $ 3,082,571,000
See accompanying notes to consolidated financial statements.
F-34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2017, 2016 and 2015
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
2017
2016
2015
$
116,816,000 $
5,326,000
2,305,000
1,096,000
125,543,000
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
9,362,000
190,000
3,657,000
2,586,000
15,795,000
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
109,748,000
105,867,000
101,174,000
2,950,000
2,900,000
(1,000,000 )
Net interest income after provision for loan losses
106,798,000
102,967,000
102,174,000
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
Other expense
Total noninterest expenses
4,233,000
4,760,000
4,421,000
2,731,000
1,305,000
348,000
0
1,203,000
19,001,000
45,397,000
6,186,000
2,168,000
8,222,000
1,608,000
960,000
355,000
0
14,820,000
79,716,000
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
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
15,726,000
79,381,000
Income before federal income tax expense
46,083,000
46,887,000
38,831,000
Federal income tax expense
Net income
Earnings per common share:
Basic
Diluted
14,809,000
14,974,000
11,811,000
$
31,274,000 $
31,913,000 $
27,020,000
$
$
1.90 $
1.90 $
1.96 $
1.96 $
1.63
1.62
See accompanying notes to consolidated financial statements.
F-35
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2017, 2016 and 2015
2017
2016
2015
Net income
$
31,274,000 $
31,913,000 $
27,020,000
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
2,297,000
82,000
2,379,000
(10,697,000 )
169,000
(10,528,000 )
(804,000 )
(28,000 )
(832,000 )
1,547,000
3,743,000
(59,000 )
3,684,000
(6,844,000 )
1,874,000
0
1,874,000
(627,000 )
0
(627,000 )
1,247,000
Comprehensive income
$
32,821,000 $
25,069,000 $
28,267,000
See accompanying notes to consolidated financial statements.
F-36
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2017, 2016 and 2015
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Retained Comprehensive Shareholders’
Stock
Earnings 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/(loss) 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-37
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2017, 2016 and 2015
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Retained Comprehensive Shareholders’
Stock
Earnings 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/(loss) 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-38
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2017, 2016 and 2015
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Retained Comprehensive Shareholders’
Stock
Earnings Income/(Loss)
Stock
Equity
Balances, January 1, 2017
$
0 $ 305,488 $
40,904 $
(5,581 ) $
340,811
Employee stock purchase plan (1,351 shares)
Dividend reinvestment plan (48,012 shares)
Stock option exercises, net of shares tendered
(28,082 shares)
Stock grants to directors for retainer fees
(11,712 shares)
Stock-based compensation expense
Cash dividends ($0.74 per common share)
Net income for 2017
Change in net unrealized gain/(loss) on securities
available for sale, net of tax effect
Reclassification of stranded tax effect related to
available for sale securities resulting from Tax
Cuts and Jobs Act
Change in fair value of interest rate swap, net of
tax effect
46
1,576
318
363
1,981
(12,046 )
31,274
46
1,576
318
363
1,981
(12,046 )
31,274
1,493
1,493
869 (869 )
0
54
54
Balances, December 31, 2017
$
0 $ 309,772 $
61,001 $
(4,903 ) $
365,870
See accompanying notes to consolidated financial statements.
F-39
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2017, 2016 and 2015
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 (benefit)
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 and disposals 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
2017
2016
2015
31,274,000 $
31,913,000 $
27,020,000
10,358,000
(2,338,000 )
2,950,000
831,000
1,981,000
363,000
111,311,000
(108,857,000 )
(3,972,000 )
0
(319,000 )
133,000
71,000
(37,000 )
(2,731,000 )
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 )
(1,056,000 )
(354,000 )
(943,000 )
38,665,000
122,000
(648,000 )
(1,046,000 )
34,602,000
(321,000 )
(4,815,000 )
4,185,000
36,004,000
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
Proceeds from bank owned life insurance cash value release and death
benefits
Purchases of premises and equipment, net
Proceeds from sales of former bank premises
Proceeds from sales of foreclosed assets
Net cash for investing activities
(67,027,000 )
52,504,000
7,619,000
(3,010,000 )
0
(178,373,000 )
(1,500,000 )
2,720,000
(5,423,000 )
25,000
993,000
(191,472,000 )
(164,336,000 )
172,173,000
264,000
(459,000 )
0
(97,282,000 )
(7,000,000 )
(10,645,000 )
93,873,000
1,483,000
0
6,132,000
(188,932,000 )
0
0
(2,025,000 )
45,000
2,059,000
(96,561,000 )
0
(1,081,000 )
0
2,967,000
(96,203,000 )
Cash flows from financing activities
Net decrease in time deposits
Net increase in all other deposits
Net 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
(55,839,000 )
203,219,000
(12,962,000 )
90,000,000
(45,000,000 )
318,000
46,000
1,576,000
0
0
(12,046,000 )
169,312,000
(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
(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 )
See accompanying notes to consolidated financial statements.
F-40
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2017, 2016 and 2015
2017
2016
2015
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
16,505,000
183,596,000
200,101,000 $
93,705,000
89,891,000
183,596,000 $
(82,847,000 )
172,738,000
89,891,000
$
Supplemental disclosures of cash flows information
Cash paid during the year for:
Interest
Federal income taxes
Noncash financing and investing activities:
Transfers from loans to foreclosed assets
Transfers from bank premises to other real estate owned
$
15,468,000 $
14,225,000
12,477,000 $
15,125,000
11,618,000
8,000,000
887,000
1,736,000
414,000
381,000
2,203,000
0
See accompanying notes to consolidated financial statements.
F-41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017
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 $1.0 million and $1.4 million, respectively, at December 31, 2017 and 2016.
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. 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, 2017
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
2017
2,553,000 $
0
2,553,000 $
2016
1,035,000
0
1,035,000
$
$
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, 2017 and 2016.
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, 2017
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 $2.3 million and $0.5 million as of December 31, 2017 and 2016, respectively.
(Continued)
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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 2016 and 2017, 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, 2017
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, 2017
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. Since the
guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted
for under GAAP, the new guidance will not have an impact on interest income. We have completed an overall assessment
of revenue streams and reviewed the related contracts potentially affected by the ASU. We will adopt this ASU on January
1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings. We
have determined that this ASU will not have a material effect on our financial position or results of operations. Expanded
disclosure requirements will be included in the March 31, 2018 Form 10-Q.
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.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 did not have a material effect on our
financial position or results of operations.
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. We are also in the process of selecting a software vendor for applying this
new ASU, which we plan to implement later in 2018.
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.
In January 2017, the FASB issued ASU No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
impairment. This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. Under this ASU, an entity should perform the Step 1 annual, or interim, goodwill impairment test by
comparing the fair value of a reporting unit with its carrying value. If the carrying amount exceeds the fair value, an entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform
the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is
effective January 1, 2020 and early adoption is permitted. The ASU should be applied prospectively. We adopted this
guidance on January 1, 2017. The adoption of this guidance had no material impact on our financial position, results of
operations or cash flows.
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This
ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change
for securities held at a discount; the discount continues to be amortized to maturity. Previously, entities were allowed to
amortize to contractual maturity or to call date. This ASU is effective for annual reporting periods beginning after
December 15, 2018, and early adoption is permitted. The provisions of this ASU will not have an impact on our financial
position or results of operations as we have always amortized premiums to the earliest call date.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. The ASU changes the recognition and presentation requirements of hedge accounting,
including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that
affect earnings in the same income statement line as the hedged item. The ASU also eases certain documentation and
assessment requirements and modifies the accounting components excluded from the assessment of hedge effectiveness.
This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
Early adoption is permitted. 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 February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income. This ASU requires reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amount of the reclassification is the
difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate income tax rate.
Because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the
underlying guidance that requires that the effect of a change in tax laws of rates be included in income from continuing
operations is not affected. This ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is
permitted. We early adopted this ASU, which resulted in the reclassification of $0.9 million from accumulated other
comprehensive income to retained earnings at December 31, 2017.
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-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
2017
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
2016
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
$ 175,953,000 $
38,967,000
121,040,000
3,978,000
2,010,000
99,000 $ (6,352,000 ) $ 169,700,000
(510,000 ) 38,792,000
335,000
(638,000 ) 121,293,000
891,000
3,978,000
30,000
1,981,000
0
$ 341,948,000 $ 1,355,000 $ (7,559,000 ) $ 335,744,000
(30,000 )
(29,000 )
$ 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
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 3 – SECURITIES (Continued)
Securities with unrealized losses at year-end 2017 and 2016, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, are as follows:
Description of Securities
2017
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation
bonds
Municipal revenue bonds
Other investments
2016
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
$ 35,677,000 $ 434,000 $ 115,374,000 $ 5,918,000 $ 151,051,000 $ 6,352,000
510,000
10,179,000
354,000 31,263,000
156,000 21,084,000
12,807,000
0
1,510,000
638,000
114,000 54,703,000
30,000
1,187,000
29,000
0
$ 60,173,000 $ 733,000 $ 192,348,000 $ 6,826,000 $ 252,521,000 $ 7,559,000
524,000 67,510,000
1,187,000
1,510,000
30,000
0
0
29,000
$ 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
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, 2017, 325 debt securities and one mutual fund with fair values totaling $253 million had unrealized losses
aggregating $7.6 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-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 3 – SECURITIES (Continued)
The amortized cost and fair values of debt securities at December 31, 2017, 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
1.74%
2.12
2.52
2.90
2.17
2.71
2.46%
$
Fair
Amortized
Value
Cost
29,675,000
29,667,000 $
64,938,000
65,093,000
100,128,000
97,943,000
106,083,000 102,415,000
38,792,000
1,981,000
$ 341,948,000 $ 335,744,000
38,967,000
2,010,000
Mortgage-backed securities totaling $5.0 million were sold in 2017, resulting in a nominal net gain. No mortgage-backed
securities were sold in 2016 or 2015. Municipal general obligation bonds totaling $2.6 million, $0.3 million and $1.5
million were sold during 2017, 2016 and 2015, respectively, resulting in a nominal net gain/loss.
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $112 million
and $109 million at December 31, 2017 and December 31, 2016, respectively, with estimated market values of $112
million and $107 million at the respective dates. Securities issued by all other states and their political subdivisions had a
combined amortized cost of $12.9 million and $19.5 million at December 31, 2017 and December 31, 2016, with estimated
market values of $13.0 million and $19.5 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 $119 million and $132 million at December 31, 2017 and 2016, 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-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired loans were recorded at estimated fair value at acquisition. 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 acquisition 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
acquisition. 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-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Increases in expected cash flows of acquired impaired loans subsequent to acquisition 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, 2017
%
Balance
December 31, 2016
%
Balance
Percent
Increase
(Decrease)
$ 680,805,000
31.3 % $ 636,771,000
33.8 %
6.9 %
23,682,000
456,065,000
708,824,000
1.1
26,519,000
21.0 363,509,000
32.7 652,054,000
1.4
19.3
34.6
2.6
91.7
(10.7 )
25.5
8.7
29.6
11.9
rental
Total commercial
64,852,000
1,934,228,000
3.0
50,045,000
89.1 1,728,898,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
69,675,000
166,054,000
235,729,000
3.2
7.7
69,831,000
85,819,000
10.9 155,650,000
3.7
4.6
8.3
(0.2 )
93.5
51.4
Total originated loans
$ 2,169,957,000
100.0 % $ 1,884,548,000
100.0 %
15.1 %
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
December 31, 2017
Balance
%
December 31, 2016
%
Balance
Percent
Increase
(Decrease)
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
$ 72,959,000
18.8 % $ 77,132,000
15.6 %
6,191,000
70,263,000
82,861,000
1.6
8,309,000
18.1 86,955,000
21.3 96,215,000
(5.4%)
(25.5)
(19.2)
(13.9)
(45.4)
(19.9)
1.7
17.6
19.5
13.7
68.1
rental
Total commercial
37,066,000
269,340,000
9.5 67,838,000
69.3 336,449,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
30,750,000
88,505,000
119,255,000
7.9 48,216,000
22.8 109,407,000
30.7 157,623,000
9.8
22.1
31.9
(36.2)
(19.1)
(24.3)
Total acquired loans
$ 388,595,000
100.0 % $ 494,072,000
100.0 %
(21.3%)
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, 2017
%
Balance
December 31, 2016
%
Balance
Percent
Increase
(Decrease)
$ 753,764,000
29.4 % $ 713,903,000
30.0 %
5.6 %
29,873,000
526,328,000
791,685,000
1.2
34,828,000
20.6 450,464,000
30.9 748,269,000
rental
Total commercial
101,918,000
2,203,568,000
4.0 117,883,000
86.1 2,065,347,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
100,425,000
254,559,000
354,984,000
3.9 118,047,000
10.0 195,226,000
13.9 313,273,000
5.0
8.2
13.2
1.5
18.9
31.5
4.9
86.8
(14.2 )
16.8
5.8
(13.5 )
6.7
(14.9 )
30.4
13.3
Total loans
$ 2,558,552,000
100.0 % $ 2,378,620,000
100.0 %
7.6 %
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total contractually required payments and carrying value of acquired impaired loans were $11.9 million and $5.2
million, respectively, as of December 31, 2017. 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. Changes in the accretable
yield for acquired impaired loans for the years ended December 31, 2017 and December 31, 2016 were as follows:
Balance at December 31, 2016
Additions
Accretion income
Net reclassification from nonaccretable to accretable
Reductions (1)
Balance at December 31, 2017
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
2017
1,726,000
223,000
(562,000 )
367,000
(350,000 )
1,404,000
2016
5,193,000
245,000
(2,388,000 )
4,635,000
(1,761,000 )
(4,198,000 )
1,726,000
$
$
$
$
(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
$ 547,841,000
21.4 % $ 562,902,000
23.7 %
2017
2016
Percentage
of
Loan
Portfolio
Balance
Percentage
of
Loan
Portfolio
Balance
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
2017
2016
$
$
0 $
3,672,000
3,672,000 $
0
3,328,000
3,328,000
2017
2016
$
$
0 $
3,471,000
3,471,000 $
0
2,611,000
2,611,000
December 31,
2017
December 31,
2016
$
1,444,000 $
35,000
2,241,000
0
178,000
3,898,000
2,296,000
95,000
285,000
488,000
17,000
3,181,000
577,000
2,668,000
3,245,000
496,000
2,262,000
2,758,000
Total nonperforming loans
$
7,143,000 $
5,939,000
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-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2017:
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 $
0 $ 178,000 $ 178,000 $ 680,627,000 $ 680,805,000 $
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
Retail:
Home equity and other
1- 4 family mortgages
Total retail
647,000
0
647,000
0
35,000
35,000
23,647,000
23,682,000
0 1,244,000 1,244,000 454,821,000 456,065,000
0
0
0 708,824,000 708,824,000
64,852,000
0
0 1,457,000 1,457,000 1,932,771,000 1,934,228,000
64,852,000
0
0
11,000
86,000 744,000
69,675,000
0 250,000 250,000 165,804,000 166,054,000
11,000 336,000 994,000 234,735,000 235,729,000
68,931,000
Total past due loans $ 647,000 $ 11,000 $ 1,793,000 $ 2,451,000 $ 2,167,506,000 $ 2,169,957,000 $
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
$
40,000 $
0 $ 114,000 $ 154,000 $
72,805,000 $
72,959,000 $
development, and
residential construction
14,000
0
0
14,000
6,177,000
6,191,000
Real estate – owner
occupied
Real estate – non-owner
occupied
Real estate – multi-
634,000
0 271,000 905,000
69,358,000
70,263,000
0
0
0
0
82,861,000
82,861,000
family and residential
rental
Total commercial
Retail:
0
688,000
0 108,000 108,000
37,066,000
0 493,000 1,181,000 268,159,000 269,340,000
36,958,000
Home equity and other
1- 4 family mortgages
Total retail
30,750,000
408,000 52,000 154,000 614,000
690,000 333,000 661,000 1,684,000
88,505,000
1,098,000 385,000 815,000 2,298,000 116,957,000 119,255,000
30,136,000
86,821,000
Total past due loans $ 1,786,000 $ 385,000 $ 1,308,000 $ 3,479,000 $ 385,116,000 $ 388,595,000 $
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
98,000
46,000
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-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with no related allowance recorded were as follows as of December 31, 2017:
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
$
765,000 $
178,000
$ 694,000
454,000
35,000
1,528,000 1,452,000
0
0
349,000
349,000
3,096,000 2,014,000
680,000
693,000
1,126,000
456,000
1,819,000 1,136,000
65,000
442,000
36,000
221,000
1,458,000
526,000
596,000
1,122,000
Total with no related allowance recorded
$ 4,915,000 $ 3,150,000
$ 2,580,000
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017:
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
$ 3,038,000 $ 2,989,000 $ 963,000 $ 3,314,000
449,000
0
0
239,000 1,663,000
1,409,000 1,391,000
0 2,055,000
0
0
429,000
0
0
0
4,447,000 4,380,000 1,202,000 7,910,000
0
1,225,000 1,147,000
110,000
1,390,000 1,257,000
165,000
652,000
13,000
922,000
122,000
665,000 1,044,000
Total with an allowance recorded
$ 5,837,000 $ 5,637,000 $ 1,867,000 $ 8,954,000
Total impaired loans:
Commercial
Retail
Total impaired originated loans
$ 7,543,000 $ 6,394,000 $ 1,202,000 $ 9,368,000
3,209,000 2,393,000
665,000 2,166,000
$ 10,752,000 $ 8,787,000 $ 1,867,000 $ 11,534,000
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with no related allowance recorded were as follows as of December 31, 2017:
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
$ 1,039,000 $ 1,021,000
$ 1,039,000
0
1,027,000
238,000
237,000
0
659,000
237,000
218,000
2,541,000 2,135,000
694,000
507,000
2,703,000 2,153,000
3,397,000 2,660,000
12,000
1,005,000
738,000
408,000
3,202,000
417,000
1,885,000
2,302,000
Total with no related allowance recorded
$ 5,938,000 $ 4,795,000
$ 5,504,000
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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,
2017:
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
$
0 $
0 $
0 $
10,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
38,000
0
0
48,000
0
137,000
137,000
Total with an allowance recorded
$
0 $
0 $
0 $
185,000
Total impaired loans:
Commercial
Retail
Total impaired acquired loans
$ 2,541,000 $ 2,135,000 $
3,397,000 2,660,000
$ 5,938,000 $ 4,795,000 $
0 $ 3,250,000
0 2,439,000
0 $ 5,689,000
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-68
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
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 $0.4 million, $1.2 million and $2.4 million during 2017, 2016 and 2015, respectively. Interest
income recognized on nonaccrual loans totaled $0.5 million, less than $0.1 million, and $1.7 million during 2017, 2016 and
2015, respectively, reflecting the collection of interest at the time of principal pay-off. Lost interest income on nonaccrual
loans totaled $0.3 million, $0.1 million and $0.3 million during 2017, 2016 and 2015, respectively.
(Continued)
F-70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017:
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
$
469,537,000 $
189,851,000
21,417,000
15,090,000 $
8,557,000
35,000
326,700,000 $
123,024,000
6,341,000
559,388,000 $
149,135,000
301,000
42,951,000
21,552,000
349,000
$
680,805,000 $
23,682,000 $
456,065,000 $
708,824,000 $
64,852,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
69,675,000 $
166,054,000
(Continued)
F-71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
$
46,263,000 $
25,654,000
1,042,000
1,446,000 $
4,745,000
0
28,706,000 $
39,565,000
1,992,000
52,674,000 $
30,102,000
85,000
17,499,000
19,212,000
355,000
$
72,959,000 $
6,191,000 $
70,263,000 $
82,861,000 $
37,066,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
30,750,000 $
88,505,000
(Continued)
F-72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
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:
Total retail
$
69,831,000 $
85,819,000
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
(Continued)
F-73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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,
2017 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
16,026,000 $ 1,882,000 $
1,360,000
1,148,000
(891,000 )
(2,292,000 )
233,000
1,574,000
16,456,000 $ 2,584,000 $
(40,000 ) $
133,000
0
0
93,000 $
17,868,000
2,641,000
(3,183,000 )
1,807,000
19,133,000
Ending balance: individually evaluated for
impairment
$
1,202,000 $
665,000 $
0 $
1,867,000
Ending balance: collectively evaluated for impairment $
15,254,000 $ 1,919,000 $
93,000 $
17,266,000
Total loans:
Ending balance
$ 1,934,228,000 $ 235,729,000
$ 2,169,957,000
Ending balance: individually evaluated for impairment
$
6,394,000 $ 2,393,000
$
8,787,000
Ending balance: collectively evaluated for impairment
$ 1,927,834,000 $ 233,336,000
$ 2,161,170,000
The allowance for acquired loan losses for the year-ended December 31, 2017 is as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
75,000 $
210,000
(12,000 )
18,000
291,000 $
18,000 $
99,000
(40,000 )
0
77,000 $
0 $
0
0
0
0 $
93,000
309,000
(52,000 )
18,000
368,000
(Continued)
F-76
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
2,247,000
(1,153,000 )
(980,000 )
583,000
1,087,000
16,026,000 $ 1,882,000 $
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-77
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-78
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the year-ended December 31, 2017 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 $
3,771,000 $
3,831,000
0
4
0
0
12
8
0
8
0
1,195,000
0
0
4,966,000
0
1,195,000
0
0
5,026,000
670,000
0
670,000
671,000
0
671,000
20 $
5,636,000 $
5,697,000
2 $
399,000 $
399,000
0
1
0
0
3
7
4
11
0
33,000
0
0
432,000
0
33,000
0
0
432,000
192,000
200,000
392,000
195,000
200,000
395,000
14 $
824,000 $
827,000
(Continued)
F-79
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-80
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017 (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, 2017 (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
1 $
0
0
0
0
1
2
0
2
114,000
0
0
0
0
114,000
102,000
0
102,000
3 $
216,000
(Continued)
F-81
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-82
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the year-ended December 31, 2017 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
$ 1,503,000 $ 1,488,000 $
0
(1,105,000 )
0
0
0
(2,021,000 )
0
3,507,000
$ 2,989,000 $
0
(242,000 )
0
906,000 $ 5,110,000 $
0
(232,000 )
0
935,000 (4,878,000 )
0 $
383,000 $ 1,599,000 $
716,000
0
(405,000 )
0
(311,000 )
0
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
$
$
385,000 $
0
(57,000 )
0
799,000
1,127,000 $
157,000
0
(11,000 )
0
0
146,000
(Continued)
F-83
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the year-ended December 31, 2017 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
$ 1,125,000 $
0
(550,000 )
0
426,000
$ 1,001,000 $
0 $
0
(33,000 )
0
33,000
0 $
900,000 $
(249,000 )
(257,000 )
0
33,000
427,000 $
728,000 $
0
60,000
0
(922,000 ) (1,084,000 )
(291,000 )
0
722,000 1,065,000
41,000
237,000 $
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
$
$
208,000 $
(25,000 )
(121,000 )
0
157,000
219,000 $
326,000
0
(188,000 )
0
255,000
393,000
(Continued)
F-84
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-85
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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 $ 1,652,000 $
0
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-86
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-87
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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-88
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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,
2017
December 31,
2016
$
107,000 $
0
141,000
0
0
248,000
196,000
0
196,000
9,000
28,000
100,000
247,000
258,000
642,000
48,000
4,000
52,000
Total related allowance
$
444,000 $
694,000
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
2017
2016
$
18,046,000 $
41,179,000
17,398,000
76,623,000
30,589,000
17,285,000
39,691,000
17,195,000
74,171,000
28,715,000
Total premises and equipment
$
46,034,000 $
45,456,000
Future lease payments total $1.4 million, comprised of $0.4 million in one year, $0.5 million in one to three years, $0.3
million in three to five years and $0.2 million in over five years. Depreciation expense totaled $3.0 million in 2017, $2.9
million in 2016, and $3.0 million in 2015.
(Continued)
F-89
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
2017
2016
$
$
600,495,000 $
13,136,000
613,631,000 $
597,389,000
10,501,000
607,890,000
Custodial escrow balances maintained in connection with serviced loans were $4.7 million and $4.6 million as of
December 31, 2017 and December 31, 2016, respectively.
Activity for capitalized mortgage loan servicing rights during 2017 and 2016 was as follows:
Balance at beginning of year
Additions
Amortized to expense
2017
2016
$
5,544,000 $
1,229,000
(1,667,000 )
6,121,000
1,378,000
(1,955,000 )
Balance at end of year
$
5,106,000 $
5,544,000
We determined that no valuation allowance was necessary as of December 31, 2017 or December 31, 2016. The estimated
fair value of mortgage servicing rights was $8.4 million and $8.0 million as of December 31, 2017 and December 31, 2016,
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 2017, fair value was determined using a discount rate of 7.50%, a weighted average constant prepayment rate of
11.8%, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.73%. 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%.
The weighted average amortization period was 3.4 years and 3.6 years as of December 31, 2017 and December 31, 2016,
respectively. Estimated amortization as of December 31, 2017 is as follows:
2018
2019
2020
2021
2022
Thereafter
$
1,213,000
1,036,000
867,000
708,000
557,000
725,000
(Continued)
F-90
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 7 – CORE DEPOSIT INTANGIBLE ASSETS, NET
The gross carrying amount of core deposit intangible assets totaled $17.5 million as of December 31, 2017 and December
31, 2016. As of December 31, 2017, the accumulated amortization on core deposit intangible assets was $9.9 million,
providing for a net carry balance of $7.6 million. 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.
The scheduled amortization expense on core deposit intangible assets in future periods is:
2018
2019
2020
2021
2022
Thereafter
$
2,039,000
1,721,000
1,403,000
1,086,000
768,000
583,000
NOTE 8 – DEPOSITS
Deposits at year-end are summarized as follows:
December 31, 2017
%
Balance
December 31, 2016
%
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
$ 866,380,000
387,758,000
427,119,000
327,530,000
152,294,000
258,626,000
2,419,707,000
34.3 % $ 810,600,000
15.4 377,929,000
16.9 272,051,000
13.0 344,988,000
6.0 146,169,000
10.3 347,058,000
95.9 2,298,795,000
Out-of-area time, under $100,000
Out-of-area time, $100,000 and over
Total out-of-area deposits
0
102,658,000
102,658,000
NM
4.1
4.1
0
76,190,000
76,190,000
34.1 %
15.9
11.5
14.5
6.2
14.6
96.8
NM
3.2
3.2
6.9 %
2.6
57.0
(5.1 )
4.2
(25.5 )
5.3
NM
34.7
34.7
Total deposits
$ 2,522,365,000
100.0 % $ 2,374,985,000
100.0 %
6.2 %
Out-of-area time deposits consist of deposits obtained from depositors outside of our primary market areas exclusively
through deposit brokers.
(Continued)
F-91
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 8 – DEPOSITS (Continued)
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
2017
2016
$
283,844,000 $
77,689,000
78,090,000
33,061,000
40,894,000
358,259,000
92,042,000
34,204,000
35,523,000
49,389,000
Total certificates of deposit
$
513,578,000 $
569,417,000
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
2017
2016
$
50,258,000 $
68,011,000
96,951,000
146,064,000
101,444,000
87,277,000
79,656,000
154,871,000
Total certificates of deposit
$
361,284,000 $
423,248,000
Total time deposits of more than $250,000 totaled $266 million and $214 million at year-end 2017 and 2016, respectively.
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
2017
2016
$
$
118,748,000 $
0.16 %
131,710,000
0.16 %
116,587,000 $
0.16 %
149,079,000
0.14 %
Maximum daily balance during the year
$
142,459,000 $
175,088,000
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.
(Continued)
F-92
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $220 million at December 31, 2017, and were
expected to mature at varying dates from May 2018 through April 2024, with fixed rates of interest from 1.04% to 2.39%
and averaging 1.72%. FHLBI advances totaled $175 million at December 31, 2016, and were expected to mature at varying
dates ranging from March 2017 through April 2023, with fixed rates of interest from 1.04% to 2.11% and averaging 1.48%.
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, 2017 totaled $731 million, with availability of $511 million.
Scheduled maturities as of December 31, 2017:
2018
2019
2020
2021
2022
Thereafter
$20,000,000
40,000,000
30,000,000
40,000,000
40,000,000
50,000,000
NOTE 11 - FEDERAL INCOME TAXES
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act
reduced our corporate federal tax rate from 35% to 21% effective January 1, 2018 and changed certain other provisions. As
a result, we are required to re-measure our deferred tax assets and liabilities using the enacted rate at which we expect them
to be recovered or settled. The effect of this re-measurement is recorded to income tax expense in the year the tax law is
enacted. For 2017, the re-measurement of our net deferred tax asset resulted in additional income tax expense of $1.3
million. Concurrent with the enactment of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”),
which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the Act
over a period of up to twelve months in the reporting period in which the adjustment is identified. We applied SAB 118
effective December 22, 2017, and will continue to refine the measurement of the net deferred tax balance during the
preparation of our 2017 tax return as additional guidance and information becomes available.
The consolidated income tax expense is as follows:
Current expense
Deferred expense
Effect of federal tax law change
Change in valuation allowance
Tax expense
2017
2016
2015
$
$
13,978,000
(505,000 )
1,336,000
0
14,809,000
$
$
15,786,000
(699,000 )
0
(113,000 )
14,974,000
$
$
7,399,000
4,592,000
0
(180,000 )
11,811,000
(Continued)
F-93
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 11 - FEDERAL INCOME TAXES (Continued)
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
Effect of federal tax law change
Change in valuation allowance
Other
Tax expense
2017
2016
2015
$
16,129,000 $
16,410,000 $
13,591,000
(1,030,000 )
(948,000 )
1,336,000
0
(678,000 )
14,809,000 $
(876,000 )
(440,000 )
0
(113,000 )
(7,000 )
14,974,000 $
(781,000 )
(384,000 )
0
(180,000 )
(435,000 )
11,811,000
$
Significant components of deferred tax assets and liabilities as of December 31, 2017 and 2016 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
Business combination adjustments
Other
Deferred tax liability
$
2017
2016
4,095,000 $
673,000
501,000
425,000
211,000
94,000
23,000
0
1,303,000
311,000
7,636,000
(94,000 )
7,542,000
727,000
244,000
1,565,000
1,072,000
1,784,000
146,000
5,538,000
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
928,000
463,000
3,423,000
1,940,000
2,183,000
199,000
9,136,000
Total net deferred tax asset
$
2,004,000 $
3,668,000
(Continued)
F-94
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 11 - FEDERAL INCOME TAXES (Continued)
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, 2017 and 2016, we carried a valuation allowance of
$0.1 million and $0.2 million, respectively, against capital loss carryforwards generated by the disposal of certain capital
investments acquired in our merger with Firstbank. During 2017 and 2016, we reversed $0.0 million and $0.1 million,
respectively, of the valuation allowance due to generation of capital gains during the year. The remaining $0.1 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 2017 or 2016 and do not anticipate any significant increase in
unrecognized tax benefits during 2018. 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 2017 or 2016. Our U.S. federal income tax returns are no longer subject to examination for all years before 2014.
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.
During 2014 and 2015, stock option and restricted stock grants were provided to certain employees through the Stock
Incentive Plan of 2006. During 2016 and 2017, restricted stock grants were provided to certain employees through the
Stock Incentive Plan of 2016. Stock option grants were also provided to certain employees during 2016 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 and 2017 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, 2016 and 2017 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 2017, there were approximately 314,000 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. The unrecognized compensation cost related to restricted
stock grants was $5.7 million as of December 31, 2017, 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, 2017
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:
2017
2016
2015
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
228,343 $
94,592
(74,979 )
(8,319 )
239,637 $
26.09
37.11
20.17
23.75
32.37
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
A summary of stock option activity from grants issued under Mercantile plans during the past three years is as follows:
2017
2016
2015
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Exercise
Price
Outstanding at beginning
of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at
year-end
16,808 $
0
(1,000 )
0
15,808 $
29.17
NA
22.15
NA
29.62
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
9,308 $
25.00
5,488 $
22.15
0 $
NA
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.
The fair value of stock options granted during 2016 and 2015 was determined using the following weighted-average
assumptions as of the grant date. No stock options were granted in 2017.
Risk-free interest rate
Expected option life (years)
Expected stock price volatility
Dividend yield
(Continued)
F-96
2016
2015
1.78%
5
26%
2.5%
1.67%
5
29%
2.5%
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
Options issued under Mercantile plans outstanding at year-end 2017 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
4,488
4,820
6,500
15,808
3.9
4.9
5.9
5.0
$
$
22.15
27.66
36.22
29.62
4,488
4,820
0
9,308
22.15
27.66
NA
25.00
Information related to options issued under various Mercantile plans outstanding at year-end 2017, 2016 and 2015 is as
follows:
2017
2016
2015
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
22.15 $
36.22
5.0
22.15 $
36.22
6.7
22.15
27.66
6.3
Information related to stock option grants and exercises issued under various Mercantile plans during 2017, 2016 and 2015
is as follows:
2017
2016
2015
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
$
15,000 $
0
0
2.72
6,000 $
22,000
0
5.25
36,000
17,000
0
4.41
The aggregate intrinsic value of all stock options issued under Mercantile plans outstanding and exercisable at December
31, 2017 was $0.1 million. Shares issued as a result of the exercise of stock option grants have been authorized and were
previously unissued shares.
(Continued)
F-97
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 12– STOCK-BASED COMPENSATION (Continued)
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:
2017
2016
2015
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
44,275 $
0
(27,675 )
(1,500 )
15,100 $
9.86
NA
11.50
6.33
7.20
123,887 $
0
(71,711 )
(7,901 )
44,275 $
12.64
NA
13.33
22.00
9.86
217,982 $
0
(56,417 )
(37,678 )
123,887 $
14.89
NA
15.50
21.39
12.64
Outstanding at beginning
of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at
year-end
15,100 $
7.20
44,275 $
9.86
123,887 $
12.64
Options issued under Firstbank plans outstanding at year-end 2017 were as follows:
Range of
Exercise
Prices
Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Exercisable
Weighted
Average
Exercise
Price
Number
Number
$ 4.00 - $ 8.00
$ 8.01 - $12.00
Outstanding at year end
12,400
2,700
15,100
1.6
1.9
1.7
$
$
6.89
8.60
7.20
12,400 $
2,700
15,100 $
6.89
8.60
7.20
Information related to options issued under Firstbank plans outstanding at year-end 2017, 2016 and 2015 is as follows:
2017
2016
2015
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
6.89 $
8.60
1.7
5.19 $
16.00
1.8
5.19
22.00
2.7
(Continued)
F-98
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
Information related to stock option grants and exercises issued under Firstbank plans during 2017, 2016 and 2015 is as
follows:
2017
2016
2015
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
$
594,000 $
318,000
208,000
NA
1,945,000 $
956,000
681,000
NA
420,000
874,000
147,000
NA
The aggregate intrinsic value of all stock options issued under various Firstbank plans outstanding and exercisable at
December 31, 2017 was $0.4 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 about 6,000 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 about
14,000 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 about 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 was expensed on a straightline basis over the respective twelve month
period. On May 25, 2017, we granted about 12,000 shares of common stock to our Corporate, Bank and Regional
Advisory Boards of Directors for retainer payments for the period of June 1, 2017 through May 31, 2018. The associated
$0.4 million 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 2017 and 2016, the Bank had $20.5 million and $11.5
million in loan commitments to directors and executive officers, of which $14.5 million and $8.9 million were outstanding
at year-end 2017 and 2016, respectively, as reflected in the following table.
Beginning balance
New loans
Repayments
Ending balance
2017
2016
$
8,882,000 $
6,374,000
(783,000 )
11,151,000
4,652,000
(6,921,000 )
$
14,473,000 $
8,882,000
Related party deposits and repurchase agreements totaled $15.4 million and $19.8 million at year-end 2017 and 2016,
respectively.
(Continued)
F-99
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017 and 2016.
At year-end 2017 and 2016, 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
2017
2016
$
682,202,000 $
61,606,000
39,807,000
17,629,000
184,923,000
26,030,000
553,345,000
56,275,000
22,689,000
8,489,000
154,338,000
26,202,000
$ 1,012,197,000 $
821,338,000
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, 2017
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, 2017, all such interest rate swap agreements had been terminated by our commercial loan customers.
These risk participation agreements were 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 were accreted into income during the terms of the interest rate swap agreements, generally
ranging from an original term of four to fifteen years.
The following instruments are considered financial guarantees under current accounting guidance. These instruments are
carried at fair value.
2017
2016
Contract
Amount
Carrying
Value
Contract
Amount
Carrying
Value
Standby letters of credit
$ 26,030,000 $
122,000 $ 26,202,000 $
156,000
We were required to have $9.6 million and $9.2 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, 2017 and December 31, 2016, 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 has been 4.25% since
January 1, 2014. Matching contributions, if made, are immediately vested. Our 2017, 2016 and 2015 matching 401(k)
contributions charged to expense were $1.3 million, $1.2 million and $1.2 million, respectively. Effective April 1, 2018,
the matching contribution will be 5.00%.
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 $3.2 million and $3.4 million as of
December 31, 2017 and 2016, 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, 2017
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 1,351 and 1,362 in 2017
and 2016, respectively. As of December 31, 2017, there were approximately 244,000 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
matured 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 provided for us to
pay our correspondent bank a fixed rate, while our correspondent bank paid 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 were the same as the
re-set dates for the floating rate on the subordinated debentures. The interest rate swap agreement was accounted for under
hedge accounting guidelines; therefore, fluctuations in the fair value of the interest rate swap agreement, net of tax effect,
were recorded in other comprehensive income. As of December 31, 2017 and 2016, the fair value of the interest rate swap
agreement was recorded as a liability in the amount of less than $0.1 million and $0.1 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, 2017
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
Loans held for sale
Mortgage servicing rights
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
2017
2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
Level 2
$
(1)
(2)
Level 3
Level 2
Level 2
Level 2
$
11,565
188,536
335,744
$
11,565
188,536
335,744
$
11,493
172,103
328,060
11,493
172,103
328,060
11,036
2,536,498
2,553
5,106
8,770
11,036
2,520,063
2,553
8,373
8,770
8,026
2,359,624
1,035
5,544
7,714
8,026
2,353,276
1,035
7,997
7,714
Level 2
2,522,365
2,368,188
2,374,985
2,286,548
Level 2
118,748
118,748
131,710
131,710
Level 2
Level 2
Level 2
(1)
220,000
45,517
1,919
2
217,130
45,732
1,919
2
175,000
44,835
1,592
84
174,734
45,220
1,592
84
(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, 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. 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. 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, 2017
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 an impairment. There was no such impairment as of December 31, 2017 or 2016. We
have no Level 1 securities available for sale.
(Continued)
F-104
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017 and 2016, we determined that the
fair value of our mortgage loans held for sale approximated the recorded cost of $2.6 million and $1.0 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. The fair values of
impaired loans are determined using either the sales comparison approach or income approach; respective unobservable
inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate
capitalization rates.
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. The fair values of parcels of other real estate owned are determined using either the sales comparison approach
or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between
comparable sales and the utilization of appropriate capitalization rates.
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, 2017 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)
$ 169,700,000 $
38,792,000
121,293,000
3,978,000
1,981,000
0 $ 169,700,000 $
0 38,792,000
0 116,102,000
3,978,000
0
1,981,000
0
0
0
5,191,000
0
0
(2,000 )
$ 335,742,000 $
0
0
0 $ 330,551,000 $ 5,191,000
(2,000 )
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2017. The $1.2 million reduction in Level 3
municipal general obligation bonds during 2017 reflects the scheduled maturities of such bonds.
(Continued)
F-105
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 18 – FAIR VALUE MEASUREMENTS (Continued)
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.
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, 2017 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
$ 5,836,000 $
2,260,000
$ 8,096,000 $
0 $
0
0 $
0 $ 5,836,000
0
2,260,000
0 $ 8,096,000
(Continued)
F-106
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 18 – FAIR VALUE MEASUREMENTS (Continued)
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
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
$
31,274,000 $
31,913,000 $
27,020,000
2017
2016
2015
Weighted average common shares outstanding
16,478,968
16,292,086
16,609,263
Basic earnings per common share
Diluted
Net income attributable to common shares
$
$
1.90 $
1.96 $
1.63
31,274,000 $
31,913,000 $
27,020,000
Weighted average common shares outstanding for basic
earnings per common share
16,478,968
16,292,086
16,609,263
Add: Dilutive effects of share-based awards
10,102
18,644
32,877
Average shares and dilutive potential common shares
16,489,070
16,310,730
16,642,140
Diluted earnings per common share
$
1.90 $
1.96 $
1.62
Stock options for approximately 7,000, 11,000 and 40,000 shares of common stock were antidilutive and were not included
in determining dilutive earnings per share in 2017, 2016 and 2015, respectively.
(Continued)
F-107
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, 2017:
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, 2017
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 2017 and 2016, 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, 2017 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
Ratio
Amount
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio
Amount
2017
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
$ 379,417
371,346
12.9 % $ 235,723
235,515
12.6
8.0 % $
8.0
NA
294,393
NA
10.0 %
359,915
351,844
316,472
351,844
359,915
351,844
12.2
12.0
10.7
12.0
11.3
11.0
176,792
176,636
132,594
132,477
127,782
127,698
6.0
6.0
4.5
4.5
4.0
4.0
NA
235,515
NA
191,356
NA
159,623
NA
8.0
NA
6.5
NA
5.0
(Continued)
F-109
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
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
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, 2017, our bank would meet all capital adequacy
requirements under the Basel III capital rules on a fully phased-in basis as if all such requirements were currently in effect.
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 2017, under the most restrictive of these
regulations, our Bank could distribute approximately $42.6 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 12, 2017, our Board of Directors declared a cash
dividend on our common stock in the amount of $0.18 per share that was paid on March 22, 2017 to shareholders of record
as of March 10, 2017. On April 13, 2017, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.18 per share that was paid on June 21, 2017 to shareholders of record as of June 9, 2017. On July 13, 2017,
our Board of Directors declared a cash dividend on our common stock in the amount of $0.19 per share that was paid on
September 20, 2017 to shareholders of record as of September 8, 2017. On October 12, 2017, our Board of Directors
declared a cash dividend on our common stock in the amount of $0.19 per share that was paid on December 20, 2017 to
shareholders of record as of December 8, 2017.
(Continued)
F-110
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 21 - REGULATORY MATTERS (Continued)
On January 11, 2018, our Board of Directors declared a cash dividend on our common stock in the amount of $0.22 per
share that will be paid on March 21, 2018 to shareholders of record as of March 9, 2018.
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. Since inception, we have purchased a total of 956,419 shares at a total price of $19.5 million, at an
average price per share of $20.38; no shares were purchased under the authorized plan during 2017. The stock buybacks
have been funded from cash dividends paid to us from our Bank. Additional repurchases may be made in future periods
under the authorized plan, which would also likely be funded from cash dividends paid to us from our Bank.
Our consolidated capital levels as of December 31, 2017 and 2016 include $43.4 million and $42.8 million, respectively, of
trust preferred securities subject to certain limitations. Under applicable Federal Reserve guidelines, the trust preferred
securities constitute a restricted core capital element. The guidelines provide that the aggregate amount of restricted core
elements that may be included in 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, 2017 and 2016, all
$43.4 million and $42.8 million, respectively, of the trust preferred securities were included as Tier 1 capital of Mercantile.
NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2017, accumulated other comprehensive income, net of tax effects (as applicable), consisted of a net
unrealized loss on available for sale securities of $4.9 million and the fair value of an interest rate swap of less than
negative $0.1 million. 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.
NOTE 23 - QUARTERLY FINANCIAL DATA (Unaudited)
2017
First quarter
Second quarter
Third quarter
Fourth quarter
2016
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Net
Income
Earnings per Share
Basic
Diluted
$ 28,704,000 $ 25,509,000 $ 7,615,000 $
30,903,000 27,193,000 7,343,000
33,034,000 28,644,000 8,337,000
32,902,000 28,402,000 7,979,000
$ 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
0.46 $
0.45
0.51
0.48
0.52 $
0.46
0.48
0.49
0.46
0.45
0.51
0.48
0.52
0.46
0.48
0.49
Net income for the fourth quarter of 2017 was impacted by $1.3 million in federal income tax expense to revalue net
deferred tax assets relating to the federal tax law change.
(Continued)
F-111
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
2017
2016
$
9,704,000 $
383,941,000
20,435,000
4,257,000
365,291,000
20,665,000
$
414,080,000 $
390,213,000
$
2,693,000 $
45,517,000
365,870,000
4,567,000
44,835,000
340,811,000
Total liabilities and shareholders’ equity
$
414,080,000 $
390,213,000
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
2017
2016
2015
$
16,203,000 $
16,203,000
32,521,000 $
32,521,000
24,166,000
24,166,000
2,496,000
3,651,000
6,147,000
2,490,000
2,953,000
5,443,000
2,569,000
2,276,000
4,845,000
10,056,000
27,078,000
19,321,000
(4,060,000 )
(836,000 )
(2,051,000 )
Equity in undistributed net income of subsidiary
17,158,000
3,999,000
5,648,000
Net income
$
31,274,000 $
31,913,000 $
27,020,000
Comprehensive income
$
32,821,000 $
25,069,000 $
28,267,000
(Continued)
F-112
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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
2017
2016
2015
$
31,274,000
$
31,913,000
$
27,020,000
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
(17,158,000 )
1,981,000
363,000
0
(230,000 )
(677,000 )
15,553,000
(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
0
0
0
0
0
0
318,000
46,000
1,576,000
0
(12,046,000 )
0
(10,106,000 )
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 )
Net change in cash and cash equivalents
5,447,000
(683,000 )
3,499,000
Cash and cash equivalents at beginning of period
4,257,000
4,940,000
1,441,000
Cash and cash equivalents at end of period
$
9,704,000
$
4,257,000 $
4,940,000
F-113
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 5, 2018.
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 5, 2018.
/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)
CORE CORPORATE
MERCANTILE BANK OF MICHIGAN
2018 STRATEGIC PLANNING TEAM
Mark S. Augustyn
Senior Vice President, Chief Lending Officer
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
Raymond E. Reitsma
President of the Bank
John R. Schulte
Senior Vice President, Chief Information Officer
Michelle L. Shangraw
SHAREHOLDER INFORMATION
Annual Meeting
The Corporation’s Annual Meeting of
Shareholders will be held on Thursday,
May 24, 2018, 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 800.453.8700
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
Senior Vice President, Retail Banking Director
47 Commerce
Lonna L. Wiersma
Senior Vice President, Human Resource Director
Robert T. Worthington
Senior Vice President,
Chief Operating Officer and General Counsel
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
OURCORE
From the moment you walk inside
our door, you know Mercantile Bank
is different.
We focus on doing what it takes to make your day that much brighter.
On getting to know you. And serving you in the best way possible.
Because Mercantile was built around the needs of our customers—not
the other way around—our vision remains focused on delivering a
unique blend of personalized service and innovative technologies
our connected lifestyles demand.
MISSION STATEMENT
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.
002CSN8BA4
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ANNUAL REPORT 2017