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 services
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.
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Mercantile Bank of Michigan and Michigan’s Community Bank
are registered trademarks of Mercantile Bank Corporation.
002CSNA7D1
Mercantile Bank Corporation, 310 Leonard Street NW, Grand Rapids, MI 49504, 800.453.8700
mercbank.com
2019 ANNUAL REPORT
CORPORATE INFORMATION
MERCANTILE BANK OF MICHIGAN
2020 STRATEGIC PLANNING TEAM
MERCANTILE BANK CORPORATION
SHAREHOLDER INFORMATION
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 Marketing Director
Douglas J. Ouellette
Senior Vice President
Chief Community Banking Officer
Raymond E. Reitsma
President
John R. Schulte
Senior Vice President
Chief Information Officer
Tara M. Randall
Senior Vice President
Retail Banking Director
Scott P. Setlock
Senior Vice President
Lonna L. Wiersma
Senior Vice President
Human Resource Director
Mortgage and Consumer Lending Department Head
Robert T. Worthington
Senior Vice President
Chief Operating Officer and General Counsel
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.
Annual Meeting
The Corporation’s Annual Meeting of Shareholders will
be held on Thursday, May 28, 2020, at the Mercantile
Bank Corporation Headquarters,
310 Leonard Street NW, Grand Rapids, MI 49504 at
9:00 am local time.
Corporation Headquarters
310 Leonard Street NW
Grand Rapids, MI 49504
616.406.3000 or 800.453.8700
Legal Counsel
Dickinson Wright, PLLC
500 Woodward Avenue, Suite 4000
Detroit, MI 48226
www.dickinson-wright.com
Independent Certified Public Accountants
BDO USA, LLP
200 Ottawa Avenue NW, Suite 300
Grand Rapids, MI 49503
Investor Relations
Lambert & Co.
47 Commerce Avenue SW
Grand Rapids, MI 49503
www.lambert.com
Common Stock Listing
NASDAQ Global Select Market
Symbol: MBWM
Stock Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
Shareholder Inquiries 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.
Please mail your request to:
Charles E. Christmas
Mercantile Bank Corporation
310 Leonard Street NW
Grand Rapids, MI 49504
LETTER TO OUR SHAREHOLDERS
With the close of the
decade in 2019, we are
pleased to report another
year of strong performance
for Mercantile Bank
Corporation. The year
was highlighted by solid
profitability, successful
new client acquisition and
growth, excellent asset
quality, efficient operations,
stellar community service
and the continued
positioning of our
company as a sustainable
organization for the future.
In 2019, Mercantile once
again demonstrated the
ability to generate steady
and disciplined loan
growth. Despite a highly
competitive environment in
all of our markets, our brand
of relationship-banking
continues to resonate well
with commercial and retail
clients.
Mercantile bankers
take the time to
understand the needs
of our customers and
they maintain the role
of a trusted advisor
who can help clients
fulfill their financial
aspirations and
dreams.
It is this mutually beneficial
approach to banking that
allows us to continue
growing the Bank with
quality assets at profitable
margins that are reflective
of the added value we
provide in our relationships.
Mercantile has
been successful at
generating organic
loan growth while
demonstrating very
strong asset quality.
We have been able to
maintain our nonperforming
assets at industry-leading
low levels throughout 2019,
reflecting steady economic
conditions in our markets
and strong portfolio
administration by our
lending staff.
An area of strategic
focus for Mercantile is
growth of its noninterest
income, and in 2019, we
continued the expansion
of the components of
that revenue category.
Most exceptional was the
tremendous production
generated by our Retail
Mortgage Department.
This performance has
been made possible by
a multi-faceted strategy
commenced over the
last few years, consisting
of the addition of new
commission-based
mortgage lenders, a
new mortgage platform,
and new processes and
procedures while under
the direction of dynamic
leadership. These attributes
position Mercantile for
some great successes in
the years to come. In 2019,
mortgage production was
a record $369 million,
compared to $214 million
in 2018. Total mortgage
banking income was $8.5
million, which was more
than double the mortgage
banking income for
2018, fully leveraging the
strategic initiatives outlined
above as well as a favorable
interest rate environment.
Success was also witnessed
in other areas of our
noninterest income in 2019.
Growth in our treasury
management services area
was strong, with human
capital management
related revenue and card
services income each up
approximately 11 percent
compared to 2018.
Mercantile is
committed to
providing innovative,
high quality products
and services to its
clients.
We feel that there will
continue to be tremendous
opportunities in the future
as the financial services
industry evolves at an
accelerated pace.
MERCANTILE BANK CORPORATION 2019 ANNUAL REPORT | 1
The Michigan economy
continues to perform in
a manner that we would
describe as steady,
providing a business
climate that affords growth
opportunities for our
clients. While the auto labor
strike last summer and
announced manufacturer
layoffs during the year
resulted in a slowdown in
some manufacturing areas,
job creation is positive and
the unemployment rate
remains at very low levels.
The Board of Directors,
management and staff
of Mercantile remain
committed to fulfilling
their responsibilities as
a reliable and dedicated
community partner.
In each of the markets we
serve, the Mercantile team
members are extremely
active in giving back to
the communities. In 2019,
our staff donated over
33,000 hours to nonprofit
organizations and other
causes by serving on
boards and committees,
as well as volunteering
as event organizers and
participants. Through these
efforts, 649 employees,
representing 94 percent
of our workforce,
participated in assisting
1,320 organizations for an
estimated value to those
organizations of $833,000.
Our employees lend
their time and talent for
the betterment of our
communities to address
such needs as poverty,
education, affordable
housing, substance
abuse, diversity and
inclusion, mental health
and many others.
One of the most significant
efforts is our support of
financial literacy. In 2019,
Mercantile held 391 financial
education classes impacting
7,739 citizens throughout
our footprint in Michigan.
Our company also
provides financial support
to many organizations,
including direct charitable
donations of approximately
$900,000 in 2019. These
are organizations that
work tirelessly to fulfill
the community’s needs,
and about which our
employees exhibit a
strong passion. Through
this financial support,
we hope to broaden the
reach and impact of these
nonprofit organizations as
we strive to help make our
communities better places
to live and work for all
citizens.
In an effort to positively
impact housing needs
in our communities,
through partnership with
the Federal Home Loan
Bank of Indianapolis
(FHLBI), Mercantile
facilitated 35 grants in the
amount of $251,000 and
another 15 grants totaling
approximately $108,000
for home improvements
and mortgage loan down
payment assistance,
respectively. We also
assisted two nonprofit
organizations in our
communities obtain
Affordable Housing
Program grants of
approximately $900,000
through the FHLBI to
provide 46 units of
affordable housing for
homeless individuals and
persons with developmental
disabilities.
There are many
other ways in which
the Mercantile team
engages with our
communities.
Our college internship
program was once again
a huge success during the
summer of 2019. Twenty-
two students joined us
from May through August,
with placements occurring
in eleven departments
throughout the Bank. The
program allows the interns
to work a minimum of 20
hours per week during their
MERCANTILE BANK CORPORATION 2019 ANNUAL REPORT | 2 summer break, providing
them with the hands-on
experience of working at
a financial institution and
exposing them to aspects
of the Mercantile culture
including some mentoring
opportunities with our team
members. Hiring quality
employees is currently one
of the biggest challenges
for most companies and
this program provides us
with an opportunity to
engage with emerging
talent that will soon be
entering the workforce.
The work of our staff
is recognized in our
industry and in our
communities through
various awards.
In each of our key
relationships, collaboration
is a foundational principle
and a critical aspect
of Mercantile’s overall
sustainability.
Our employees are
extremely engaged and
allow us to be a strong
community partner.
Similarly, the Mercantile
team delivers products
and services to consumers
and businesses in the
markets we serve. Fulfilling
clients’ needs fuels solid
performance and allows
us to produce excellent
results for our shareholders.
Employees, customers,
communities and
shareholders — these are
the critical relationships
that we work so diligently
to cultivate, build and
strengthen.
A solid relationship is
required with each of
these partners for the
company to reach its full
potential.
The successes of 2019
enabled Mercantile to
close out the decade of
the “twenty-tens” in strong
fashion. As we open a
new decade, Mercantile is
extremely well-positioned
to continue building
on our past efforts and
successes, which will allow
us to remain a sustainable
organization into the future.
ROBERT B. KAMINSKI, JR.,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
In 2019, Mercantile and its staff were bestowed the following awards:
West Michigan’s 101 Best & Brightest Companies to Work For®
Community Builder Award — Greater Ottawa County United Way
Financial Literacy Award — Michigan Bankers Association
Grand Rapids Best Bank — Best of Grand Rapids Magazine Readers’ Poll
Gratiot County 4-H Outstanding Supporter of the Year
Collaboration Award — Best Client Fintech Partnership and Development
- Q2 Company
MERCANTILE BANK CORPORATION 2019 ANNUAL REPORT | 3
BOARD OF DIRECTORS
David M. Cassard
Retired Real Estate Executive
Edward J. Clark
Chairman and Chief Executive Officer, American Seating Company
Michelle L. Eldridge
Owner, Clear Ridge Wealth Management
Jeff A. Gardner, CPM
Owner, Gardner Group
Edward B. Grant, CPA, PhD
Retired Public Broadcasting Executive
Robert B. Kaminski, Jr.
President and Chief Executive Officer
Michael H. Price
Chairman of the Board, Retired Banking Executive
EXECUTIVE OFFICERS
Charles E. Christmas
Executive Vice President, Chief Financial Officer and Treasurer of Mercantile Bank
Corporation and Mercantile Bank of Michigan
Robert B. Kaminski, Jr.
President and Chief Executive Officer of Mercantile Bank Corporation and Chief
Executive Officer of Mercantile Bank of Michigan
Raymond E. Reitsma
Executive Vice President of Mercantile Bank Corporation and President of Mercantile
Bank of Michigan
Lonna L. Wiersma
Senior Vice President, Human Resource Director of Mercantile Bank Corporation and
Mercantile Bank of Michigan
Robert T. Worthington
Senior Vice President, Chief Operating Officer, General Counsel and Secretary of
Mercantile Bank Corporation and Mercantile Bank of Michigan
MERCANTILE BANK CORPORATION 2019 ANNUAL REPORT | 4 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, 2019
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)
310 Leonard Street NW, Grand Rapids, Michigan
(Address of principal executive offices)
38-3360865
(I.R.S. Employer Identification No.)
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
Trading Symbol(s)
MBWM
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 every Interactive Data File required to be submitted 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 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 $518 million. As of February 28, 2020, there were issued and outstanding 16,332,104 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 28, 2020 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.
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 40 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, Fairview,
Forest Hills, Grand Rapids, Hastings, Holland, Howard City, Ionia, Ithaca, Kalamazoo, Lakeview, Lansing, Lowell,
Merrill, Mt. Pleasant, Paw Paw, Portage, Remus, Rose City, Shepherd, St. Charles, St. Helen, St. Johns, Troy, Vestaburg,
West Branch, and Wyoming.
Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts
checking, savings and time deposits. Our bank owns 32 automated teller machines ("ATM") and eight video banking
machines at a majority of our office locations 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.
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.
2
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 Corporation (“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.
Firstbank Corporation Merger
We completed our merger with 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.
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 Economic Growth, Regulatory Relief,
and Consumer Protection Act (“EGRRCPA”), 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 engage in the expanded activities.
Our bank is subject to restrictions imposed by federal and state law and regulations. Among other things, these
restrictions apply to any extension of credit to us or to our other subsidiaries, to securities borrowing or lending,
derivatives, and repurchase transactions with us or our other subsidiaries, to investments in stock or other securities that we
issue, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or
services from, and sales of certain types of assets to, us or our other subsidiaries. Michigan banking laws place restrictions
on various aspects of banking, including branching, payment of dividends, loan interest rates and capital and surplus
requirements. Federal law restricts our ability to borrow from our bank by limiting the aggregate amount we may borrow
and by requiring that all loans to us be secured in designated amounts by specified forms of collateral.
With respect to the acquisition of banking organizations, we are generally required to obtain the prior approval of
the Federal Reserve Board before we can acquire all or substantially all of the assets of any bank, or acquire ownership or
control of any voting shares of any bank or bank holding company, if, after the acquisition, we would own or control more
than 5% of the voting shares of the bank or bank holding company. Acquisitions of banking organizations across state
lines are subject to restrictions imposed by federal and state laws and regulations.
The scope of regulations and supervision of various aspects of our business 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, on May 24, 2018, EGRRCPA amended certain provisions of the Dodd-Frank Act
to tailor them to the specific circumstances of various categories of financial institutions and transactions. 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, 2019, we employed 570 full-time and 113 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
generally able to approve loans ranging from $1.0 million and $2.5 million. We have established higher approval limits for
our bank’s Chief Lending Officer, President and Chief Executive Officer 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. 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 $80.1 million, require approval by our bank’s Board of Directors.
We generally 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 and EGRRCPA, 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, with the fixed interest rate loans generally sold to various 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.
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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, 2019, loans placed in nonaccrual status totaled $2.3 million, or 0.1% of total
loans, compared to $4.1 million, or 0.2% of total loans, at December 31, 2018. No loans were past due 90 days or more
and still accruing interest at year-end 2019 or 2018.
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 2019 we placed most
weight on the period starting December 31, 2010 through December 31, 2019. 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, 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 and EGRRCPA),
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 65% of our total commercial loans, or about 56% 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 and EGRRCPA), 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 execute or integrate potential future acquisitions successfully could impede us from realizing all of
the benefits of the acquisitions, which could weaken our operations.
In addition to pursuing organic growth, we may also pursue strategic acquisition opportunities that we believe will
fit our core philosophy and culture, enhance our profitability and provide appropriate risk-adjusted returns. These
acquisition opportunities could be material to our business and involve a number of risks, including the following:
° intense competition from other banking organizations and other acquirers for potential merger candidates
drives market pricing;
° time and expense associated with identifying and evaluating potential acquisitions and negotiating potential
transactions may divert human and capital resources without producing the desired returns;
° estimates and judgments used to evaluate credit, operations, management and market risks with respect to the
target institution or assets are inherently complex and may be inaccurate;
° potential exposure to unknown or contingent liabilities of targets; and
° regulatory timeframes for review of applications may limit the number and frequency of transactions we may
be able to consummate.
10
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 administrative 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.
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.
Our inability to overcome these risks could have an adverse effect on our ability to implement our business
strategy, which, in turn, could have an adverse effect on our business, financial condition and results of operations.
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 a gradual reduction in the Federal Reserve’s securities holdings,
commencing in October 2017. In each of March, June, September and December 2018, 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. In January 2019, the FOMC announced its intention to continue to implement monetary policy in a regime in which
an ample supply of reserves ensures that control of the Federal funds and other short-term interest rates is exercised
primarily through adjustment of its administered rates. The FOMC stated that it was prepared to adjust the details of the
reduction of its balance sheet in light of economic and financial developments, and would be prepared to use its full range
of tools, including changing the size and composition of its balance sheet, if future economic conditions warranted a more
accommodative monetary policy than could be achieved solely by reducing the Federal funds rate.
11
In July 2019, the FOMC announced the cessation of the reduction in its securities portfolio and reduced the
Federal funds rate by 25 basis points. In August 2019, the FOMC commenced reinvestment of principal payments received
from agency debt and agency mortgage-backed securities (“MBS”) in Treasury securities and agency MBS, as well as the
rollover of maturing Treasury securities in its portfolio. In September 2019, the FOMC again lowered the Federal funds
rate by 25 basis points. In October 2019, the FOMC issued a reaffirmation of its January 2019 statement, and announced
that in light of recent and expected increases in the Federal Reserve’s non-reserve liabilities and in order to maintain ample
reserve balances over time at or above levels prevailing in early September 2019, the Federal Reserve would purchase
Treasury bills at least into the second quarter of 2020. The statement also announced that the Federal Reserve would
conduct term and overnight repurchase agreement operations at least through January 2020 to ensure that the supply of
reserves remained ample, even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money
market pressures. At its regular October 2019 meeting, the FOMC again lowered the Federal funds rate by 25 basis points.
There can be no assurance that the operations announced in October 2019 will continue, that they will be effective to
accomplish their stated policy goals, or as to the actual impact of those operations and 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. The Treasury Department has published several reports in response to the
Executive Order. In addition, 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.
On May 24, 2018, EGRRCPA was enacted, amending numerous provisions of the Dodd-Frank Act. While some
of the changes affect only much larger institutions, a number of provisions relax or eliminate restrictions applicable to us
and our bank. Among these latter changes are: simplified capital adequacy requirements; exemption from the proprietary
trading and other restrictions of the Volcker Rule; less frequent periodic supervisory examinations; reductions in certain
periodic reporting requirements; exclusion of specified amounts of reciprocal deposits, received by our bank from other
insured depository institutions, from the “brokered deposit” limitations of the Federal Deposit Insurance Act; revised
capital treatment for certain high volatility commercial real estate loans; and relaxation of certain requirements applicable
to residential mortgage loans made to our customers.
12
While some of those EGRRCPA changes became effective immediately upon enactment, many others required
implementing regulations by the federal banking agencies before becoming effective. At the dates indicated, the federal
banking agencies adopted regulations in final form, applicable to us and our bank, implementing EGRRCPA provisions
simplifying capital adequacy requirements (September 2019), granting exemption from the proprietary trading and other
restrictions of the Volcker Rule (July 2019), reducing the frequency of periodic supervisory examinations (December
2018), reducing certain periodic reporting requirements (June 2019), excluding specified amounts of reciprocal deposits,
received by our bank from other insured depository institutions, from the “brokered deposit” limitations of the Federal
Deposit Insurance Act (March 2019), providing clarifications and revised capital treatment for certain high volatility
commercial real estate loans as well as clarifying the capital treatment of certain financings of one-to-four family
residential properties and the development of land (November 2019), and relaxing appraisal requirements for certain real
property mortgage transactions (September 2019).
Other proposals to modify existing regulations are pending. For example, the FDIC (which regulates our bank) and
the Office of the Comptroller of the Currency (“OCC”) proposed in December 2019 significant revisions to their respective
versions of the existing uniform regulations (jointly adopted by the Federal Reserve, FDIC, and the OCC) that implement
the Community Reinvestment Act. The Federal Reserve (which regulates our company) has not proposed changes to its
version of the existing joint regulations. There can be no assurance whether or when any proposed changes in existing
regulations will be adopted.
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.
13
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.
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 or total consolidated on-balance sheet foreign
exposure exceeding specified amounts (that are greatly in excess of those of us and our bank), which elect to use the
advanced measurement approach for calculating risk-weighted assets, or which 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.
14
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 was 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.
In July 2019, the federal banking agencies adopted final rules applicable to banking organizations, like us and our
bank, that are not Advanced Approaches Entities. Those rules, which became effective January 1, 2020, provide simpler
regulatory capital requirements with respect to mortgage servicing assets, certain deferred tax assets arising from temporary
differences, and investments in the capital of unconsolidated financial institutions, than those previously applied. The same
rule-making also simplified the calculation for the amount of capital issued by a consolidated subsidiary of a banking
organization and held by third parties (sometimes referred to as a minority interest) that is includable in regulatory capital.
The 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.
On May 24, 2018, EGRRCPA was enacted, amending numerous provisions of the Dodd-Frank Act. Among other
things, the new law directs the federal banking agencies to develop a Community Bank Leverage Ratio (“CBLR”). The
CBLR, to be set between 8% and 10% of tangible equity capital to average total consolidated assets, would apply to
Qualified Community Banks. The law defines Qualified Community Banks as those depository institutions and depository
institution holding companies having total consolidated assets of less than $10 billion that meet other specified risk criteria,
to be determined by regulations of the federal banking agencies based on factors prescribed in the statute. A Qualified
Community Bank satisfying the CBLR, by reason of the EGRRCPA provision, would be deemed to be in compliance with
all applicable leverage and risk-based capital requirements and, in the case of a depository institution, be deemed “well-
capitalized” for purposes of the Federal Deposit Insurance Act.
In February 2019, the federal banking agencies published in the Federal Register a notice of proposed rule-making
to implement this EGRRCPA capital adequacy provision. Final rules were adopted by each of the federal banking agencies
in November 2019, which became effective January 1, 2020. The final rules represent an alternative to the capital
adequacy rules that became applicable to us and our bank on January 1, 2015, and that are described above (the generally
applicable rules).
The final rules are available to each “Qualifying Community Banking Organization” as defined in the final rules (a
“QCBO”). To be a QCBO, a banking organization must satisfy the following criteria: (i) not be an Advanced Approaches
Entity; (ii) have a leverage capital ratio greater than 9%; (iii) total consolidated assets of less than $10 billion; (iv) total off-
balance sheet exposures (excluding certain derivatives) of 25% or less of total consolidated assets; and (v) a sum of total
trading assets and trading liabilities of 5% or less of total consolidated assets. For this purpose, the leverage capital ratio of
a banking organization is the ratio of its Tier 1 capital to its average total consolidated assets.
A banking organization meeting the QCBO criteria may elect to opt in to the CBLR framework (an electing
banking organization). An electing banking organization is deemed to have met the “well-capitalized” ratio requirements
of, and otherwise to be in compliance with, the generally applicable rules. It will not be required to calculate and report
risk-based capital ratios under the generally applicable rules. In the case of an electing banking organization that is an
insured bank, it will also be considered to have met the well-capitalized ratio requirements of the prompt corrective action
provisions of the Federal Deposit Insurance Act.
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If an electing banking organization subsequently fails to satisfy any of the criteria of a QCBO, but continues to
report a leverage capital ratio greater than 8%, it may continue to use the CBLR framework for a grace period of up to two
quarters. As long as the electing banking organization can return to compliance with all of the QCBO criteria within the
two quarters, it will continue to be deemed to meet the “well-capitalized” ratio requirements and be in compliance with the
generally applicable rules. A banking organization will be required to comply with the generally applicable rules, and file
the relevant regulatory reports, if it: (i) is unable to restore compliance with all of the QCBO criteria (including the greater
than 9% leverage capital ratio) during the two-quarter grace period; (ii) reports a leverage capital ratio of 8% or less; or (iii)
ceases to satisfy the QCBO criteria because of a merger transaction.
In February 2019, the federal banking agencies published in the Federal Register a notice of proposed rule-making
to implement this EGRRCPA capital adequacy provision. The proposal would establish a CBLR of 9% tangible equity to
average total consolidated assets. Under the proposal, a bank or bank holding company having less than $10 billion in
average total consolidated assets would need to meet several requirements in order to be a Qualified Community Bank.
The proposed requirements include that the bank or bank holding company: have no affiliation with a banking organization
subject to the advanced approaches capital rule; have mortgage servicing rights of 25% or less of CBLR tangible equity;
have deferred tax assets arising from temporary timing differences, net of valuation allowances, of 25% or less of CBLR
tangible equity; have off-balance-sheet exposures (excluding derivative exposures and unconditionally cancellable
commitments) of 25% or less of total consolidated assets; have total trading assets and trading liabilities of 5% or less of
total consolidated assets; and have a CBLR greater than 9%. As required by EGRRCPA, the proposal also includes
detailed provisions addressing the treatment of a formerly Qualified Community Bank that failed to satisfy one or more of
the proposed requirements, or whose CBLR fell below 9%. There can be no assurance whether, or when, this proposed
rule-making will lead to the adoption of regulations, or as to the content of any regulations eventually adopted.
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 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 (“ARRC”), 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 began
publication of the SOFR in April 2018.
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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.
In May 2018, the Chicago Mercantile Exchange began trading SOFR futures contracts. The existence of a futures
market may permit the development of a SOFR term curve. In July 2018, the Federal National Mortgage Association
(“FNMA”) issued bonds using SOFR (an overnight rate) as a pricing mechanism. This was possible because of an unusual
bond structure, in which interest was payable quarterly, but the interest reset period was daily.
In January 2019, ICE Benchmark Administration, the current provider of Libor, proposed for comment to market
participants a U.S. Dollar ICE Bank Yield Index. This index would be based on two types of U.S. dollar-denominated
transaction data: primary market wholesale, unsecured funding transactions for large, internationally active banks; and
secondary market transactions in wholesale, unsecured bonds issued by large, internationally active banks. These data
would be used to construct a yield curve from which one-month, three-month and six-month settings could be obtained.
Following comments from market participants on its initial proposal, in October 2019, the ICE Benchmark Administration
announced changes to the methodology of calculation of its index (which it is continuing to test), and its intent both to seek
contractual commitments from large, internationally active banks to provide primary market U.S. dollar funding data, and
to develop a robust governance framework for the production of its index. If those steps were accomplished and the
resulting index were accepted by market participants, it might furnish commercial bank-based term rates more directly
comparable to the existing structure of Libor than the government securities repurchase agreement-based overnight SOFR.
During 2019, among other things, the ARRC published a white paper on ways in which market participants could
use SOFR in cash markets, conducted surveys of market participants, engaged with cognizant U.S. government agencies
regarding tax, securities, and derivatives issues presented by the transition from Libor, published sample transition
provisions for a variety of types of loan and note agreements, and investigated methods by which a forward-looking term
SOFR index could be established. To facilitate the development of a generally-recognized forward-looking SOFR index,
the Federal Reserve Bank of New York (“FRBNY”) recently announced that, on March 2, 2020, it would begin publication
of 30-, 90-, and 180-day SOFR Averages, as well as a SOFR Index. The announcement described the respective methods
of calculation of the SOFR Averages and the SOFR Index, and specifics regarding their publication. FRBNY also stated
that, following launch of the SOFR Averages and the SOFR Index, it would consider the potential benefits of introducing
calendar month-based rates and/or adding further tenors as additional reference rates.
In July 2019, both FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”) announced their
intention to develop new adjustable-rate mortgage loan products based on SOFR. In February 2020, FNMA and FHLMC
each announced that they would: (i) require inclusion of ARRC-recommended transition language in all single-family
adjustable rate mortgage (“ARM”) loans closed on or after June 1, 2020; (ii) require all Libor-based single-family and
multi-family ARM loans to have loan application dates on or before September 30, 2020 in order to be eligible for
acquisition; and (iii) cease acquisition of single-family and multi-family Libor ARM loans on or before December 31,
2020. In addition, each of FNMA and FHLMC stated that they anticipate beginning acquisition of SOFR ARM loans
during the second half of 2020, using an index based upon SOFR averages.
Bank regulatory agencies reiterated their resolve that the banking organizations they supervise should be prepared
for the phase-out of Libor. In December 2019, the OCC highlighted the issue in its semiannual risk perspective, noting that
its examiners will be monitoring institutions’ exposure to Libor and their strategies to mitigate resulting risks. Also in
December 2019, the New York Department of Financial Services wrote to each of its regulated institutions, noting the
impending unavailability of Libor, the development of SOFR, and the risks posed by transition, and required by February
2020, a written response from each institution regarding its own risk assessment and planning. In January 2020, the Bank
of England and the United Kingdom Financial Conduct Authority underscored the unavailability of Libor after 2021, and
demanded to see “clear evidence of engagement” from February 2020 that institutions were making the transition from
Libor in their operations.
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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.
Our accounting policies and methods are the basis for how we prepare our consolidated financial statements, and
they require management to make estimates about matters that are inherently uncertain.
Accounting policies and processes are fundamental to how we record and report our financial condition and results
of operations. We must exercise judgment in selecting and applying many of these accounting policies and processes so
they comply with U.S. GAAP. In some cases, we must select the accounting policy or method to apply from two or more
alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially different
results than would have been reported under a different alternative.
We have identified certain accounting policies as being critical because they require us to make difficult,
subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under
different conditions or using different assumptions or estimates. We have established detailed policies and control
procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied
consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies
occurs in an appropriate manner. Because of the uncertainty surrounding management’s judgments and the estimates
pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior
period financial statements. For additional information, see “Critical Accounting Policies and Estimates” beginning on
page F-4 of this Annual Report and “Note 1 – Summary of Significant Accounting Policies” beginning on page F-42 of this
Annual Report.
We continually encounter technological change, and we may have fewer resources than our competitors to continue
to invest in technological improvements.
The banking industry is undergoing technological changes with frequent introductions of new technology-driven
products and services. In addition to better serving customers, the effective use of technology increases efficiency and
enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of
our customers by using technology to provide products and services that will satisfy customer demands for convenience as
well as create additional efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements than we do. There can be no assurance that we will be able to effectively implement
new technology-driven products and services or be successful in marketing these products and services to our customers.
Our Articles of Incorporation and By-laws and the laws of the State of Michigan contain provisions that may
discourage or prevent a takeover of our company and reduce any takeover premium.
Our Articles of Incorporation and By-laws, and the corporate laws of the State of Michigan, include provisions
which are designed to provide our Board of Directors with time to consider whether a hostile takeover offer is in our and
our shareholders’ best interest. These provisions, however, could discourage potential acquisition proposals and could
delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common
stock to participate in tender offers, including tender offers at a price above the then-current market price for our common
stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for
their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they
may deem to be in their best interest.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or
discourage various types of hostile takeover activities. In addition to these provisions and the provisions of our Articles of
Incorporation and By-laws, federal law requires the Federal Reserve Board’s approval prior to acquiring “control” of a
bank holding company. All of these provisions may delay or prevent a change in control without action by our
shareholders and could adversely affect the price of our common stock.
18
The full impact of recent changes in U.S. tax laws remains uncertain.
The enactment of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017 made significant changes to the
Internal Revenue Code, many of which are highly complex and may require interpretations and implementing regulations.
As a result of the Act’s reduction of the corporate income tax rate from 35% to 21%, we recorded a one-time, non-cash
charge to federal income tax expense of $1.3 million during the fourth quarter of 2017 to reduce the value of our net
deferred tax assets. See Note 11 of our Consolidated Financial Statements.
Furthermore, the expected impact of certain aspects of the statute remains unclear and subject to change. The
Act includes a number of provisions that will have an impact on the banking industry, borrowers and the market for
residential real estate. These changes include: a lower limit on the deductibility of mortgage interest on single-family
residential mortgage loans; the elimination of interest deductions for home equity loans; a limitation on the deductibility of
business interest expense; and a limitation on the deductibility of property taxes and state and local income taxes. The Act
may have an adverse effect on the market for and the valuation of residential properties, as well as on the demand for such
loans in the future, and could make it harder for borrowers to make their loan payments. The value of the properties
securing such loans in our loan portfolio may be adversely impacted as a result of the changing economics of home
ownership. Such an impact could require an increase in our provision for loan losses, which would reduce our profitability
and could materially adversely affect our business, financial condition and results of operations.
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.
19
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. In August 2019, the federal bank regulatory agencies issued a
statement recommending that banking organizations use a standardized approach to assess and improve cybersecurity
preparedness. The agencies noted that the use of standardized tools, such as the FFIEC Cybersecurity Assessment Tool,
makes firms better able to track their progress over time, and to share information and best practices with other financial
institutions, a behavior which the bank regulatory agencies encourage. Although guidance of this nature does not have the
full force and effect of law, it sets out supervisory priorities and expectations regarding safe and sound operation. Failure
to observe such guidance may result in supervisory identification of unsafe or unsound practices or other deficiencies in
risk management or other areas that do not constitute violations of law or regulation.
The value of securities in our investment securities portfolio may be negatively affected by disruptions in securities
markets.
Prices and volumes of transactions in the nation’s securities markets can be affected suddenly by economic crises,
or by other national or international crises, such as national disasters, acts of war or terrorism, changes in commodities
markets, or instability in foreign governments. Disruptions in securities markets may detrimentally affect the value of
securities that we hold in our investment portfolio, such as through reduced valuations due to the perception of heightened
credit and liquidity risks. There can be no assurance that declines in market value associated with these disruptions will not
result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a
material adverse effect on our net income and capital levels.
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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 2019 fiscal year and that remain
unresolved.
Item 2.
Properties.
Our headquarters is located in our bank’s main office facility in Grand Rapids, Michigan. Our bank operates 40
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. All of our
banking offices are owned by our bank except for three that 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, 2020,
there were approximately 1,400 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.
21
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.
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
35.82 $
34.69
34.24
37.32
37.50 $
37.98
38.47
35.16
27.86 $
30.58
29.78
31.60
32.60 $
33.00
32.98
26.40
0.26
0.26
0.27
0.27
0.22
0.22
0.24
1.00
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 or repurchase equity securities is
subject to limitations under various laws and regulations and to prudent and sound banking practices.
On January 17, 2019, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.26 per share that was paid on March 20, 2019 to shareholders of record as of March 8, 2019. On April 11, 2019, our
Board of Directors declared a cash dividend on our common stock in the amount of $0.26 per share that was paid on June
19, 2019 to shareholders of record as of June 7, 2019. On July 11, 2019, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.27 per share that was paid on September 18, 2019 to shareholders of record as of
September 6, 2019. On October 10, 2019, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.27 per share that was paid on December 18, 2019 to shareholders of record as of December 6, 2019.
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 was paid on March 21, 2018 to shareholders of record as of March 9, 2018. On April 12, 2018, our
Board of Directors declared a cash dividend on our common stock in the amount of $0.22 per share that was paid on June
20, 2018 to shareholders of record as of June 8, 2018. On July 12, 2018, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.24 per share that was paid on September 19, 2018 to shareholders of record as of
September 7, 2018. On October 11, 2018, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.25 per share that was paid on December 19, 2018 to shareholders of record as of December 7, 2018. In
addition, on October 11, 2018, our Board of Directors declared a special cash dividend on our common stock in the amount
of $0.75 per share that was paid on December 19, 2018 to shareholders of record as of December 7, 2018.
On January 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.28 per share that will be paid on March 18, 2020 to shareholders of record as of March 6, 2020.
22
Issuer Purchases of Equity Securities
On May 7, 2019, we announced that our Board of Directors had authorized a program to repurchase up to $20.0
million of our common stock from time to time in open market transactions at prevailing market prices or by other means
in accordance with applicable regulations. The actual timing, number and value of shares repurchased under the program
will be determined by management in its discretion and will depend on a number of factors, including the market price of
Mercantile’s stock, general market and economic conditions, Mercantile’s capital position, financial performance and
alternative uses of capital, and applicable legal requirements. The program may be discontinued at any time. This stock
repurchase plan was instituted in conjunction with the completion of our existing repurchase program that was introduced
in January 2015 and later expanded in April 2016.
During 2019, we repurchased a total of 233,300 shares at a total price of $7.2 million, at an average price per share
of $30.79. During 2018, we repurchased a total of 199,905 shares at a total price of $5.9 million, at an average price per
share of $29.73. During the period of January 2015 through December 2019, we repurchased a total of about 1.4 million
shares at a total price of $32.6 million, at an average price per share of $23.47. The stock buybacks have been funded from
cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan
or a new plan, which would also likely be funded from cash dividends paid to us from our bank. Repurchases made during
the fourth quarter of 2019 are detailed in the table below.
(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 $ 16,418,000
0 16,418,000
0 16,418,000
0 $ 16,418,000
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
Per Share
31.94
NA
NA
31.94
2,287 $
0
0
2,287 $
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, 2014 through December 31, 2019. The
following is based on an investment of $100 on December 31, 2014 in our common stock, the Nasdaq Composite Index and
the SNL Bank Nasdaq Index, with dividends reinvested where applicable.
23
Total Return Performance
Mercantile Bank Corporation
NASDAQ Composite Index
SNL Bank NASDAQ Index
250
200
150
100
l
e
u
a
V
x
e
d
n
I
50
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Index
Mercantile Bank Corporation
NASDAQ Composite Index
SNL Bank NASDAQ Index
Item 6.
Selected Financial Data.
Period Ending
12/31/14
100.00
100.00
100.00
12/31/15
120.04
106.96
107.95
12/31/16
191.75
116.45
149.68
12/31/17
184.08
150.96
157.58
12/31/18
155.14
146.67
132.82
12/31/19
206.82
200.49
166.75
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.
24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
As of December 31, 2019, 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, 2019.
There have been no significant changes in our internal control over financial reporting during the quarter ended
December 31, 2019, 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, 2019. 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, 2019. 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 28, 2020 Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which
will be filed with the Securities and Exchange Commission before April 30, 2020, 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.
25
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, 2019, relating to compensation plans under
which equity securities are authorized for issuance.
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
Plan Category
Equity compensation plans approved by security holders (1)
10,700 $
30.25
102,000 (2)
Equity compensation plans not approved by security holders
0
0
0
Total
10,700 $
30.25
102,000
(1) Primarily includes Mercantile’s 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.
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.
26
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 2, 2020 – BDO USA, LLP
Consolidated Balance Sheets --- December 31, 2019 and 2018
Consolidated Statements of Income for each of the three years in the period ended December 31, 2019
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,
2019
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended
December 31, 2019
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2019
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 immediately preceding 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.
27
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2019 and 2018
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2019 and 2018
CONTENTS
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-3
F-4
F-31
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
F-33
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-34
F-35
F-36
F-37
F-40
F-42
F-2
SELECTED FINANCIAL DATA
Consolidated Results of Operations:
2019
2018
2017
(Dollars in thousands except per share data)
2016
2015
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
33,803
21,899
$ 158,337 $ 141,981 $ 125,543
15,795
124,534 120,082 109,748
2,950
19,001
79,716
46,083
14,809
31,274
1,100
19,010
86,170
51,822
9,798
42,024 $
1,750
26,956
89,280
60,460
11,004
49,456 $
$
$ 3,632,915 $ 3,363,907 $ 3,286,704
233,731
75,354 200,101
352,657 353,388 346,780
2,856,667 2,753,085 2,558,552
19,501
68,689
22,380
69,647
23,889
70,297
2,690,384 2,463,708 2,522,365
Deposits
Securities sold under agreements to repurchase 102,675 103,519 118,748
354,000 350,000 220,000
Federal Home Loan Bank advances
Subordinated debentures
45,517
416,561 375,249 365,870
Shareholders’ equity
46,199
46,881
$ 118,457 $ 112,328
11,154
105,867 101,174
12,590
2,900
21,038
77,118
46,887
14,974
31,913 $
(1,000 )
16,038
79,381
38,831
11,811
27,020
$
$ 3,082,571 $ 2,903,556
183,596
89,891
336,086 354,559
2,378,620 2,277,727
15,681
58,971
17,961
67,198
2,374,985 2,275,382
131,710 154,771
68,000
175,000
55,154
44,835
340,811 333,804
Consolidated Financial Ratios:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
1.39 %
12.52 %
11.09 %
1.28 %
11.33 %
11.33 %
1.00 %
8.82 %
11.28 %
1.07 %
9.35 %
11.42 %
0.94 %
8.19 %
11.45 %
Nonperforming loans to total loans
Allowance for loan losses to total originated
loans
0.08 %
0.15 %
0.28 %
0.25 %
0.24 %
0.89 %
0.88 %
0.88 %
0.95 %
0.94 %
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
11.28 %
11.00 %
12.36 %
13.09 %
11.41 %
10.41 %
11.80 %
12.50 %
11.27 %
10.74 %
12.21 %
12.88 %
11.17 %
10.88 %
12.47 %
13.13 %
11.56 %
10.89 %
12.83 %
13.45 %
$
3.01 $
3.01
2.53 $
2.53
$
1.90
1.90
1.96 $
1.96
1.63
1.62
Tangible book value per share at end of period
Dividends declared
Dividend payout ratio
22.12
1.06
34.59 %
19.37
1.68
65.44 %
18.61
0.74
38.52 %
17.14
1.16
58.70 %
16.61
0.58
35.22 %
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; the impact of technological advances;
governmental and regulatory policy changes; changes in the method of determining Libor, or the replacement of Libor with
an alternative reference rate; the 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 2019 we placed most weight
on the period starting December 31, 2010 through December 31, 2019. 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: 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: 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. 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 2018 and 2019, 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.
FINANCIAL OVERVIEW
We recorded net income of $49.5 million, or $3.01 per diluted share, for 2019. For 2018, we recorded net income of $42.0
million, or $2.53 per diluted share. Full-year 2019 earnings benefited from bank owned life insurance claims and the net
impact of gains and losses on sales and write-downs of former branch facilities, increasing reported net income by $2.7
million, or $0.16 per diluted share. In addition, the full-year benefit of interest income related to purchased loan accounting
entries increased net income during 2019 by $1.1 million, or $0.07 per diluted share, and net income during 2018 by $3.2
million, or $0.19 per diluted share. Excluding the impacts of these transactions, diluted earnings per share increased almost
19% during 2019 compared to 2018, in large part reflecting growth in net interest income and mortgage banking income
that more than offset increases in various noninterest expense categories.
F-6
The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.08% of total loans as of
December 31, 2019. Gross loan charge-offs during 2019 totaled $0.9 million, while recoveries of prior period loan charge-
offs totaled $0.7 million, providing for net loan charge-offs of $0.2 million, or 0.01% 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 remain strong, and we also experienced net increases in commercial lines of credit.
Net commercial loan growth equaled $81.4 million during 2019, compared to $157 million, $138 million and $119 million
during 2018, 2017 and 2016, respectively. Net commercial loan growth in 2019 was negatively impacted by several
commercial real estate loan payoffs late in the year involving larger borrowing relationships that refinanced the underlying
real estate with secondary market participants that offered long-term, fixed rate non-recourse financing options. The new
commercial loan pipeline remains strong, and at year-end 2019, we had $105 million in unfunded loan commitments on
commercial construction and development projects that are in the construction phase. Our residential mortgage lending
operations continued to expand during 2019, with total residential mortgage loan originations increasing from $214 million
in 2018 to $369 million during 2019. We sold about 70% of the new loan volume to secondary market participants, while
retaining the remainder, primarily consisting of adjustable rate residential mortgage loans. Residential mortgage loans
residing on our balance sheet increased $32.2 million during 2019.
We believe our loan portfolio is well diversified, with loan composition remaining relatively consistent over the past
several years. At December 31, 2019, commercial and industrial loans comprised 30%, commercial real estate non-owner
occupied loans comprised 29%, commercial real estate owner occupied loans comprised 20% and residential mortgage and
consumer loans aggregated 15% of total loans. As a percent of total commercial loans, commercial and industrial loans
and commercial real estate owner occupied loans combined equaled 58% at both year-end 2019 and 2018.
Our funding structure is also well diversified. As of December 31, 2019, noninterest-bearing checking accounts comprised
29% of total funds, interest-bearing checking and securities sold under agreements to repurchase (“sweep accounts”)
combined for 14%, savings and money market deposit accounts aggregated 25% and local time deposits accounted for
17%. Wholesale funds, comprised of brokered deposits and Federal Home Loan Bank of Indianapolis (“FHLBI”)
advances, represented 15% of total funds.
FINANCIAL CONDITION
Our total assets increased $269 million during 2019, and totaled $3.63 billion as of December 31, 2019. Total loans
increased $104 million and interest-earning deposits were up $170 million, while securities available for sale declined $2.7
million. Total deposits increased $227 million and FHLBI advances were up $4.0 million. Local deposit growth exceeded
net loan growth, with the excess funds maintained with the Federal Reserve Bank of Chicago.
Earning Assets
Average earning assets equaled 93.4% of average total assets during 2019, similar to the 93.0% during 2018. The loan
portfolio continued to comprise a majority of earning assets, followed by securities and interest-earning deposits. Average
total loans equaled 85.8% of average earning assets during 2019, compared to 86.4% in 2018, while securities and other
interest-earning assets combined comprised 14.2% of average earning assets during 2019, compared to 13.6% in 2018. We
anticipate the level of earning assets to total assets to remain relatively stable at approximately 93%.
Our loan portfolio has historically been primarily comprised of commercial loans. Commercial loans increased $81.4
million during 2019, and at December 31, 2019 totaled $2.44 billion, or 85.5% of the loan portfolio. As of December 31,
2018, the commercial loan portfolio comprised 85.7% of total loans. Commercial and industrial loans were up $23.8
million, owner occupied commercial real estate (“CRE”) loans were up $30.4 million, non-owner occupied CRE loans
increased $19.1 million and vacant land, land development and residential construction loans were up $11.2 million.
Multi-family and residential rental loans declined $3.1 million. As a percent of total commercial loans, commercial and
industrial loans and owner occupied CRE loans combined equaled 58.4% as of December 31, 2019, compared to 58.1% at
December 31, 2018.
F-7
New commercial term loan originations remain strong, and we also experienced net increases in commercial lines of credit.
Net commercial loan growth equaled $81.4 million during 2019, compared to $157 million, $138 million and $119 million
during 2018, 2017 and 2016, respectively. Net commercial loan growth in 2019 was negatively impacted by several
commercial real estate loan payoffs late in the year involving larger borrowing relationships that refinanced the underlying
real estate with secondary market participants that offered long-term, fixed rate non-recourse financing options. The new
commercial loan pipeline remains strong, and at year-end 2019, we had $105 million in unfunded loan commitments on
commercial construction and development projects that are in the construction phase. Our commercial loan officers also
report significant additional opportunities they are currently discussing with existing borrowers and potential new
customers. 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.
Residential mortgage loans increased $32.2 million during 2019, totaling $340 million, or 11.9% of total loans, at
December 31, 2019. We originated $369 million in residential mortgage loans during 2019, compared to $214 million in
2018. Notwithstanding an ongoing low level of inventory of homes listed for sale throughout our markets, the volume of
residential mortgage loans originated for the purchase of homes in 2019 increased by over 27% when compared to 2018, in
large part reflecting an increased residential mortgage loan origination staff. In addition, the increased staff and a lower
residential mortgage loan interest rate environment provided for growth in the volume of residential mortgage loans for
refinance activities by over 163% in 2019 when compared to 2018. We sold $257 million of the residential mortgage loans
originated in 2019, or about 70%, generally comprised of longer-term fixed rate residential mortgage loans. The remaining
$112 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 over the past several
years. We expect to sell 55% to 60% of the new residential mortgage loan originations in 2020, with a vast majority of the
loans added to our balance sheet to be comprised of adjustable rate residential mortgage loans. Other consumer-related
loans declined $10.1 million during 2019, and at December 31, 2019 totaled $75.4 million, or 2.6% of the loan portfolio.
Other consumer-related loans equaled 3.1% of total loans as of December 31, 2018. We expect this loan portfolio segment
to decline in future periods as scheduled principal payments exceed origination volumes.
The following table summarizes our loan portfolio:
Commercial:
Commercial & Industrial
Land Development &
Construction
Owner Occupied Commercial
Real Estate
Non-Owner Occupied
Commercial Real Estate
Multi-Family & Residential Rental
Total Commercial
Retail:
1-4 Family Mortgages
Home Equity & Other Consumer
12/31/19
12/31/18
12/31/17
12/31/16
12/31/15
$ 846,551,000 $ 822,723,000 $ 753,764,000 $ 713,903,000 $ 696,303,000
56,119,000
44,885,000
29,873,000
34,828,000
45,120,000
579,003,000
548,619,000
526,328,000
450,464,000
445,919,000
835,346,000
124,525,000
816,282,000
127,597,000
2,441,544,000 2,360,106,000
791,685,000
101,918,000
748,269,000
117,883,000
2,203,568,000 2,065,347,000
644,351,000
115,003,000
1,946,696,000
339,749,000
307,540,000
254,559,000
195,226,000
190,385,000
Loans
Total Retail
75,374,000
415,123,000
85,439,000
392,979,000
100,425,000
354,984,000
118,047,000
313,273,000
140,646,000
331,031,000
Total Loans
$2,856,667,000 $2,753,085,000 $2,558,552,000 $2,378,620,000 $2,277,727,000
F-8
The following table presents total loans outstanding as of December 31, 2019, 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
$ 176,870,000 $ 36,512,000 $ 44,033,000 $ 257,415,000
77,307,000 150,595,000 178,563,000 406,465,000
75,366,000
33,541,000
397,371,000 646,522,000 219,199,000 1,263,092,000
611,469,000 155,540,000 64,708,000 831,717,000
22,612,000
$ 1,300,171,000 $ 1,042,827,000 $ 513,669,000 $ 2,856,667,000
36,587,000
17,071,000
3,613,000
1,928,000
5,238,000
$ 165,608,000 $ 938,170,000 $ 389,584,000 $ 1,493,362,000
1,134,563,000 104,657,000 124,085,000 1,363,305,000
$ 1,300,171,000 $ 1,042,827,000 $ 513,669,000 $ 2,856,667,000
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.
Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed
properties, totaled $2.7 million (0.1% of total assets) as of December 31, 2019, compared to $5.0 million (0.2% of total
assets) as of December 31, 2018. The volume of nonperforming assets has remained low over the past several years.
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.
F-9
The following tables provide a breakdown of nonperforming assets by property type:
NONPERFORMING LOANS
12/31/19 12/31/18 12/31/17 12/31/16 12/31/15
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
$
34,000 $
0
23,000
0
2,104,000 3,157,000 3,381,000 2,739,000 2,917,000
2,138,000 3,157,000 3,381,000 2,755,000 2,940,000
16,000 $
0
0 $
0
0 $
0
0
0
134,000
0
134,000
0
0
35,000
0
950,000 2,241,000
0
950,000 2,276,000
0
95,000
0
155,000
0
285,000 2,131,000
108,000
488,000
868,000 2,394,000
0
12,000
12,000
17,000 1,444,000 2,293,000
17,000
23,000
42,000
34,000 1,486,000 2,316,000
69,000
41,000
110,000
Total
$ 2,284,000 $ 4,141,000 $ 7,143,000 $ 5,939,000 $ 5,444,000
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
12/31/19 12/31/18 12/31/17 12/31/16 12/31/15
$
0 $
0
260,000
260,000
0 $
0
398,000
398,000
0 $
0
193,000
193,000
0 $
0
144,000
144,000
0
0
598,000
598,000
0
0
192,000
0
192,000
0
0
0
0
413,000 2,031,000
36,000
413,000 2,067,000
0
0
0
325,000
0
325,000
0
0
612,000
83,000
695,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
$ 452,000 $ 811,000 $ 2,260,000 $ 469,000 $ 1,293,000
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
2019
2018
2017
2016
2015
$ 4,141,000 $ 7,143,000 $ 5,939,000 $ 5,444,000 $ 29,434,000
698,000 2,909,000 7,604,000 5,655,000 4,543,000
(48,000 )
(232,000 )
(126,000 )
(2,140,000 ) (5,028,000 ) (4,234,000 ) (4,166,000 ) (23,641,000 )
(981,000 ) (4,844,000 )
(708,000 ) (1,934,000 )
(175,000 )
(289,000 )
(13,000 )
Total
$ 2,284,000 $ 4,141,000 $ 7,143,000 $ 5,939,000 $ 5,444,000
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION
2019
2018
2017
2016
2015
Beginning balance
Additions
Sale proceeds
Valuation write-downs
$ 811,000 $ 2,260,000 $ 469,000 $ 1,293,000 $ 1,995,000
725,000 2,186,000
(677,000 ) (1,428,000 ) (2,377,000 )
(511,000 )
(121,000 )
462,000 1,114,000 4,401,000
(792,000 ) (2,380,000 )
(183,000 ) (1,933,000 )
(29,000 )
Total
$ 452,000 $ 811,000 $ 2,260,000 $
469,000 $ 1,293,000
Gross loan charge-offs during 2019 totaled $0.9 million, while recoveries of prior period loan charge-offs totaled $0.7
million, providing for net loan charge-offs of $0.2 million, or 0.01% 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.
F-11
The following table summarizes changes in the allowance for originated loan losses for the past five years:
2019
2018
2017
2016
2015
Originated loans outstanding at
year-end
$ 2,614,725,000
$ 2,452,446,000
$ 2,169,957,000
$ 1,884,548,000
$ 1,616,587,000
Daily average balance of originated
loans outstanding during the year $ 2,584,234,000
$ 2,295,251,000
$ 2,054,809,000
$ 1,784,978,000
$ 1,428,150,000
Balance of allowance for originated
loans at beginning of year
$
21,554,000
$
19,133,000
$
17,868,000
$
15,233,000
$
19,299,000
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
Net loan (charge-offs)
recoveries
Provision for loan losses for
originated loans
Balance of allowance for originated
(455,000 )
(367,000 )
(2,272,000 )
(980,000 )
(4,910,000 )
0
(361,000 )
(67,000 )
(883,000 )
(61,000 )
(551,000 )
(210,000 )
(1,189,000 )
(20,000 )
(687,000 )
(204,000 )
(3,183,000 )
0
(809,000 )
(344,000 )
(2,133,000 )
(4,000 )
(1,053,000 )
(228,000 )
(6,195,000 )
302,000
1,757,000
1,445,000
754,000
2,535,000
24,000
239,000
63,000
628,000
832,000
531,000
90,000
3,210,000
129,000
131,000
102,000
1,807,000
334,000
522,000
60,000
1,670,000
122,000
122,000
51,000
2,830,000
(255,000 )
2,021,000
(1,376,000 )
(463,000 )
(3,365,000 )
1,867,000
400,000
2,641,000
3,098,000
(701,000 )
loans at end of year
$
23,166,000 $
21,554,000
$
19,133,000 $
17,868,000 $
15,233,000
Ratio of net loan (charge-offs)
recoveries to average loans
outstanding during the year
Ratio of allowance to originated
loans outstanding at year-end
(0.01% )
0.09%
(0.07% )
(0.03% )
(0.24% )
0.89%
0.88%
0.88%
0.95%
0.94%
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):
12/31/2019
12/31/2018
12/31/2017
Loan
Loan
Loan
12/31/2016
Loan
12/31/2015
Loan
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Commercial,
financial
and
agricultural $ 20,599
76.0 % $ 19,228
86.7 % $ 15,616
77.8 % $ 15,035
85.8 % $ 12,017
80.7 %
Construction
and land
development
Residential
real estate
Instalment
loans to
individuals
Unallocated
Total
340
9.0
270
2.0 1,260
7.6
991
6.0 1,655
10.9
1,863
14.2 1,778
10.0 1,758
13.3 1,374
6.4 1,235
6.4
294
70
0.8
0.0
234
44
1.3
0.0
406
93
1.3
0.0
508
(40 )
1.8
0.0
186
140
2.0
0.0
$ 23,166 100.0 % $ 21,554 100.0 % $ 19,133 100.0 % $ 17,868 100.0 % $ 15,233 100.0 %
The following table depicts the ratio of our allowance to nonperforming loans:
12/31/19
12/31/18
12/31/17
12/31/16
12/31/15
Ratio of allowance to
nonperforming loans
1,045.9%
540.4%
273.0%
302.4%
288.0%
The increasing trend of the ratio of our allowance to nonperforming loans over the past several years generally reflects the
combined impact of an increased allowance balance and reduction in nonperforming loans.
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 2019 we placed most weight
on the period starting December 31, 2010 through December 31, 2019. 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 $23.2 million as of December 31, 2019, or 0.9% of total originated loans
outstanding. The allowance for originated loans equaled 0.9% of total loans at year-end 2018. The allowance for acquired
loans equaled $0.7 million as of December 31, 2019, compared to $0.8 million at year-end 2018. As of December 31,
2019, the allowance for originated loans was comprised of $21.8 million in general reserves relating to non-impaired loans
and $1.4 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 $12.1 million at December 31, 2019, consisting of $0.3 million that are on nonaccrual
status and $11.8 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 $0.3 million as of December 31, 2019 had been subject to previous partial charge-offs aggregating $0.5
million. Those partial charge-offs were recorded as follows: less than $0.1 million in 2019, 2018, 2017, 2016, 2015 and
2013, and $0.3 million in 2011. As of December 31, 2019, 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:
12/31/19
12/31/18
12/31/17
12/31/16
12/31/15
Performing
Nonperforming
$ 11,788,000 $ 19,223,000 $
229,000
353,000
6,128,000 $ 12,480,000 $ 19,336,000
2,358,000
1,132,000
2,434,000
Total
$ 12,141,000 $ 19,452,000 $
8,562,000 $ 13,612,000 $ 21,694,000
F-14
Securities available for sale decreased $2.7 million during 2019, totaling $335 million as of December 31, 2019. The
securities portfolio equaled 10.3% of average earning assets during 2019, compared to 10.9% during 2018. During 2019,
purchases of U.S. Government agency bonds totaled $36.0 million, U.S. Government agency issued or guaranteed
mortgage-backed securities aggregated $8.4 million and municipal bonds totaled $17.6 million. Proceeds from matured
and called U.S. Government agency and municipal bonds during 2019 totaled $47.6 million and $21.5 million,
respectively, with another $10.4 million from principal paydowns on mortgage-backed securities. No bonds were sold
during 2019. At December 31, 2019, the securities portfolio was primarily comprised of U.S. Government agency bonds
(56%), municipal bonds (31%) and U.S. Government agency issued or guaranteed mortgage-backed securities (13%). 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, 2019 totaled $335 million, including a net unrealized gain of
$4.7 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:
12/31/19
12/31/18
12/31/17
Carrying
Value
Percent
Carrying
Value
Percent
Carrying
Value
Percent
U.S. Government agency debt
obligations
$ 186,410,000
55.7 % $ 187,077,000
55.5 % $ 169,700,000
50.5 %
Mortgage-backed securities
42,470,000
12.7 43,658,000
12.9 38,792,000
11.6
Municipal general obligations
101,079,000
30.2 102,497,000
30.4 121,293,000
36.1
Municipal revenue bonds
4,196,000
1.3
3,634,000
1.1
3,978,000
Other investments
500,000
0.1
500,000
0.1
1,981,000
1.2
0.6
Totals
$ 334,655,000
100.0 % $ 337,366,000
100.0 % $ 335,744,000
100.0 %
FHLBI stock totaled $18.0 million as of December 31, 2019, compared to $16.0 million as of December 31, 2018. The
$2.0 million increase reflects stock purchases to support the increased level of FHLBI advances during the course of 2019.
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 17 of the Notes to
Consolidated Financial Statements for additional information.
F-15
The following table shows by class of maturities as of December 31, 2019, 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
$
1,998,000
27,279,000
56,587,000
100,546,000
186,410,000
12,139,000
26,110,000
50,373,000
16,653,000
105,275,000
42,470,000
500,000
1.50 %
1.95
2.45
3.07
2.70
2.13
2.81
2.92
3.24
2.85
2.76
5.88
$
334,655,000
2.76 %
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 3.4% of
average earning assets during 2019, compared to 2.3% during 2018. We anticipate the level of these earning assets to
average approximately 2% of average earning assets in future periods.
Non-Earning Assets
Cash and due from bank balances averaged 1.5% of total assets during 2019, with no significant changes expected in future
periods. Net premises and fixed assets equaled $57.3 million as of December 31, 2019, or 1.6% of total assets. Net
purchases during 2019 totaled $13.5 million, while depreciation expense aggregated to $3.9 million. An addition to our
main office comprised a majority of the increase in fixed assets during 2019. Foreclosed and repossessed assets totaled
$0.5 million at December 31, 2019, compared to $0.8 million at December 31, 2018. Although we expect periodic
transfers from loans to foreclosed and repossessed assets in future periods reflecting our collection efforts on certain
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 $227 million during 2019, totaling $2.69 billion as of December 31, 2019. Out-of-area deposits
increased $20.2 million during 2019, and equaled 5.0% of total deposits at year-end 2019, compared to 4.6% as of
December 31, 2018. FHLBI advances increased $4.0 million during 2019, totaling $354 million as of December 31, 2019.
Noninterest-bearing checking accounts increased $35.1 million during 2019, generally due to deposit account openings as
part of recently established commercial lending relationships. Interest-bearing checking accounts decreased $6.7 million
and savings deposits declined $47.7 million, in large part due to individuals using deposited funds for investments and
various expenditures. Money market deposit accounts increased $75.0 million during 2019, primarily reflecting increased
deposit balances from certain existing large deposit customers. Local time deposits increased $151 million, generally
reflecting the impact of a time deposit campaign in early 2019 and increased deposit balances from certain existing large
deposit customers.
Sweep accounts decreased $0.8 million during 2019, totaling $103 million as of December 31, 2019. Our sweep account
program entails transferring collected funds from certain business noninterest-bearing checking accounts to overnight
interest-bearing repurchase agreements. Such repurchase agreements are not deposit accounts and are not afforded federal
deposit insurance. All of our repurchase agreements are accounted for as secured borrowings.
F-16
FHLBI advances increased $4.0 million during 2019, totaling $354 million as of December 31, 2019. 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 2019 totaled $813 million, with availability of $453 million.
Shareholders’ equity increased $41.3 million during 2019, totaling $417 million as of December 31, 2019. Positively
impacting shareholders’ equity was net income of $49.5 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $17.1 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 $1.3 million. Share repurchases reduced shareholders’ equity by $7.2 million during 2019. Positively
impacting shareholders’ equity during 2019 was an $11.9 million after-tax increase in the market value of available for sale
securities.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
Summary
We recorded net income of $49.5 million, or $3.01 per basic and diluted share, for 2019, compared to net income of $42.0
million, or $2.53 per basic and diluted share, for 2018. Bank owned life insurance claims and the net impact of gains and
losses on sales and write-downs of former branch facilities increased reported net income during 2019 by approximately
$2.7 million, or $0.16 per diluted share. Interest income related to purchased loan accounting entries increased net income
during 2019 by $1.1 million, or $0.07 per diluted share, and net income during 2018 by $3.2 million, or $0.19 per diluted
share. Excluding the impacts of these transactions, diluted earnings per share increased $0.44, or 18.8%, during 2019
compared to 2018.
Our earnings performance in 2019 benefited from increased net interest income and noninterest income, which more than
offset increased provision expense and noninterest expense. The improved net interest income resulted from a higher level
of earning assets. Noninterest income during 2019 included bank owned life insurance claims and gains on the sales of
former branch facilities, while noninterest income during 2018 included a one-time accounting adjustment related to
mortgage banking activities. In addition to increasing in 2019 compared to 2018 on a reported basis, noninterest income
also grew after excluding the impacts of these transactions. Growth in noninterest income primarily resulted from
increased mortgage banking activity income; increases in credit and debit card income, service charges on accounts, and
payroll processing revenue also contributed to the improved level of noninterest income. The amount of provision expense
necessitated by net loan growth during 2018 was partially mitigated by net loan recoveries being recorded during the
period, resulting in a lower provision expense during 2018 compared to 2019. The higher level of noninterest expense
primarily reflects increased salary costs.
The following table shows some of the key performance and equity ratios for the years ended December 31, 2019 and
2018:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
2019
2018
1.39 %
12.52 %
11.09 %
1.28 %
11.33 %
11.33 %
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
$159 million and $33.8 million during 2019, respectively, providing for net interest income of $125 million. During 2018,
interest income and interest expense equaled $142 million and $21.9 million, respectively, providing for net interest income
of $120 million.
F-17
In comparing 2019 with 2018, interest income increased 11.5%, interest expense was up 54.4%, 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 $4.4 million increase in net interest income in 2019 compared to 2018 resulted from an increased level of average
earning assets, which more than offset a lower net interest margin. During 2019, earning assets averaged $3.33 billion, or
$285 million higher than average earning assets during 2018. Average loans increased $224 million, average interest-
earning deposits increased $45.0 million, and average securities increased $15.6 million. During 2019, the net interest
margin equaled 3.75%, down from 3.96% during 2018 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 time deposits and
borrowed funds and a change in funding mix. The improved yield on average earning assets mainly resulted from an
increased yield on commercial loans, primarily reflecting higher interest rates on variable-rate loans stemming from the
Federal Open Market Committee (“FOMC”) raising the targeted federal funds rate by 25 basis points on four occasions
during 2018. The positive impact of these rate increases more than offset the negative impact of decreased interest rates on
variable-rate commercial loans resulting from the FOMC lowering the targeted federal funds rate by 25 basis points on
three occasions during the last six months of 2019.
The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities
and shareholders’ equity during 2019, 2018 and 2017. 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 21.0% in 2019 and 2018, and 35.0% in 2017.
Securities interest income was increased by $0.2 million in 2019, $0.3 million in 2018 and $0.8 million in 2017 for this
non-GAAP, but industry standard, adjustment. This adjustment equated to a one basis point increase in our net interest
margin during 2019 and 2018 and a three basis point increase in our net interest margin during 2017.
F-18
Taxable securities
Tax-exempt
securities
(Dollars in
thousands)
2 0 1 9
Years ended December 31,
2 0 1 8
2 0 1 7
Average
Balance Interest
$ 259,221 $ 7,919
Average
Rate
Average
Balance Interest
3.05 % $ 233,372 $ 6,736
Average
Rate
Average
Balance Interest
2.89 % $ 224,786 $ 5,326
Average
Rate
2.37 %
2,471
Total securities 359,512 10,390
100,291
2.46 110,514
2.89 343,886
2,509
9,245
2.27 115,984
2.69 340,770
3,103
8,429
2.68
2.47
Savings deposits
Money market
accounts
Time deposits
Loans
Interest-earning
deposits
Total earning
2,853,021 145,816
5.11 2,628,906 131,763
5.01 2,483,440 116,816
4.70
114,527
2,371
2.07
69,559
1,243
1.79
90,925
1,096
1.21
assets
3,327,060 158,577
4.77 3,042,351 142,251
4.68 2,915,135 126,341
4.33
Allowance for loan
losses
Cash and due from
banks
Other non-earning
(23,914 )
53,151
(21,173 )
48,207
(18,949 )
48,061
assets
205,348
203,252
198,426
Total assets
$ 3,561,645
$ 3,272,637
$ 3,142,673
Interest-bearing
checking accounts $ 315,735 $
276,852
529
319
0.17 % $ 359,371 $
0.12 320,387
552
381
0.15 % $ 377,933 $
0.12 341,175
507
351
0.13 %
0.10
485,044
5,664
644,904 14,752
1.17 474,651
2.29 478,741
5,322
7,614
1.12 354,145
1.59 516,525
2,122
6,382
0.60
1.24
Total interest-
bearing deposits 1,722,535 21,264
1.23 1,633,150 13,869
0.85 1,589,778
9,362
0.59
Short-term
borrowings
106,630
295
0.28 102,076
273
0.27 116,615
190
0.16
Federal Home Loan
Bank advances
Other borrowings
Total interest-
bearing
liabilities
369,688
49,427
8,977
3,267
2.43 239,068
49,048
6.60
4,647
3,110
1.94 217,849
48,453
6.34
3,657
2,586
1.68
5.34
2,248,280 33,803
1.50 2,023,342 21,899
1.08 1,972,695 15,795
0.80
Checking accounts
Other liabilities
902,180
16,273
Total liabilities 3,166,733
394,913
Average equity
863,384
15,115
2,901,841
370,796
802,024
13,506
2,788,225
354,448
Total liabilities
and equity
Net interest income
Rate spread
Net interest margin
$ 3,561,645
$ 3,272,637
$ 3,142,673
$ 124,774
$ 120,352
$ 110,546
3.27 %
3.75 %
3.60 %
3.96 %
3.53 %
3.79 %
F-19
Years ended December 31,
2019 over 2018
Volume
Total
Rate
Total
2018 over 2017
Volume
Rate
Increase (decrease) in interest
income
Taxable securities
Tax exempt securities
Loans
Interest-earning deposit
balances
Federal funds sold
$ 1,183,000 $
(38,000 )
711,000 $ 472,000 $ 1,410,000 $ 210,000 $ 1,200,000
(453,000 )
(594,000 )
(189,000 )
14,053,000 11,413,000 2,640,000 14,947,000 7,054,000 7,893,000
151,000
(141,000 )
1,128,000
0
906,000
0
222,000
0
147,000
0
(298,000 )
0
445,000
0
Net change in tax-equivalent
interest income
16,326,000 12,841,000 3,485,000 15,910,000 6,825,000 9,085,000
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
(23,000 )
(62,000 )
342,000
45,000
48,000
(12,000 )
30,000
224,000 3,200,000
7,138,000 3,155,000 3,983,000 1,232,000
83,000
(71,000 )
(50,000 )
118,000
22,000
12,000
10,000
71,000
(26,000 )
(22,000 )
52,000
899,000 2,301,000
(494,000 ) 1,726,000
109,000
(26,000 )
4,330,000 2,974,000 1,356,000
133,000
157,000
24,000
990,000
524,000
378,000
32,000
612,000
492,000
11,904,000 6,162,000 5,742,000 6,104,000
741,000 5,363,000
$ 4,422,000 $ 6,679,000 $ (2,257,000 ) $ 9,806,000 $ 6,084,000 $ 3,722,000
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 $16.3 million during 2019 from that earned in 2018, totaling $159
million in 2019 compared to $142 million in the previous year. The increase in interest income is attributable to an
increased level of, and a higher yield on, average earning assets. During 2019 and 2018, earning assets had an average
yield (tax equivalent-adjusted basis) of 4.77% and 4.68%, respectively. The improved yield on average earning assets
mainly resulted from an increased yield on commercial loans, primarily reflecting higher interest rates on variable-rate
loans stemming from the previously-mentioned FOMC rate hikes. Increased yields on securities and interest-earning
deposit balances also contributed to the higher yield on average earning assets.
Interest income generated from the loan portfolio increased $14.1 million in 2019 compared to the level earned in 2018;
growth in the loan portfolio during 2019 resulted in an $11.4 million increase in interest income, while an increase in loan
yield from 5.01% in 2018 to 5.11% in 2019 resulted in a $2.7 million increase in interest income. The higher yield on loans
mainly resulted from an increased yield on commercial loans. The yield on commercial loans equaled 5.21% during 2019,
up from 5.11% during 2018 primarily due to the FOMC rate hikes in 2018. Interest income related to purchased loan
accounting entries totaled $1.4 million in 2019, compared to $4.0 million in 2018.
F-20
Interest income generated from the securities portfolio increased $1.1 million in 2019 compared to the level earned in 2018;
an increase in the yield on securities from 2.69% during 2018 to 2.89% during 2019 resulted in a $0.6 million increase in
interest income, while an increase in the average balance of the securities portfolio resulted in an increase in interest
income of $0.5 million. The increased yield on securities mainly reflects $0.3 million in accelerated discount accretion on
called U.S. Government agency bonds being recorded as interest income during 2019; no accelerated discount accretion
was recorded during 2018. Interest income on interest-earning deposits increased $1.1 million in 2019 compared to the
level earned in 2018; a higher average balance of interest-earning deposits resulted in a $0.9 million increase in interest
income, while an increase in the yield on these balances resulted in a $0.2 million increase in interest income. The growth
in average interest-earning deposits during 2019 primarily stemmed from certain deposit-gathering initiatives, an increase
in wholesale funds, and several large commercial loan paydowns.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree, from borrowed funds. Interest
expense increased $11.9 million during 2019 from that expensed in 2018, totaling $33.8 million in 2019 compared to $21.9
million in the previous year. The increase in interest expense resulted from an increase in the average balance of interest-
bearing liabilities and a higher cost of funds. Average interest-bearing liabilities were $2.25 billion during 2019, up $225
million, or 11.1%, from the $2.02 billion average during 2018; the growth in average interest-bearing liabilities resulted in
an increase in interest expense of $6.2 million. During 2019 and 2018, interest-bearing liabilities had a weighted average
rate of 1.50% and 1.08%, respectively; an increase in interest expense of $5.7 million was recorded during 2019 due to the
higher cost of funds. The higher average cost of interest-bearing liabilities mainly resulted from increased costs of time
deposits and borrowed funds and a change in funding mix. The cost of time deposits increased from 1.59% during 2018 to
2.29% during 2019 due to higher rates being paid on each category of time deposits, primarily reflecting the rising interest
rate environment during 2018. A higher-costing time deposit special campaign, which was introduced in mid-first quarter
2019 and ended in early April 2019, also contributed to the increased cost of time deposits. The cost of borrowed funds
increased from 2.06% during 2018 to 2.39% during 2019, mainly reflecting a higher cost of FHLBI advances, which
equaled 2.43% and 1.94% during 2019 and 2018, respectively. The higher cost of FHLBI advances primarily reflects the
rising interest rate environment during 2018 and the lengthening of the average weighted maturity of the advance portfolio.
Longer-term FHLBI advances totaling $194 million were obtained during the last eight months of 2018 and first month of
2019 to meet various funding needs. Average higher-costing time deposits and borrowed funds represented 28.7% and
23.4%, respectively, of average interest-bearing liabilities during 2019, compared to 23.7% and 19.3%, respectively, during
2018. Increased reliance on more costly wholesale funds during 2019, most of which occurred in late 2018 and January
2019, was necessitated by various funding requirements, including ongoing loan growth and seasonal deposit withdrawals
by certain business customers for bonus and tax payments. Average lower-costing interest-bearing non-time deposits
represented 47.9% of average interest-bearing liabilities during 2019, down from 57.0% during 2018.
A higher average rate paid on interest-bearing non-time deposits during 2019 resulted in a $0.3 million increase in interest
expense, while a $76.8 million decrease in the average balance of these deposits equated to nominal decrease in interest
expense. A $4.0 million increase in interest expense during 2019 resulted from a higher average rate paid on time deposits.
Average time deposits increased $166 million during 2019; the increased average balance equated to an increase in interest
expense of $3.1 million. Slight increases in the average balance of, and average rate paid on, short-term borrowings,
comprised almost entirely of sweep accounts, resulted in nominal increases in interest expense during 2019. Average
FHLBI advances increased $131 million during 2019, resulting in a $3.0 million increase in interest expense, while a
higher average rate paid on the advances resulted in a $1.3 million increase in interest expense. A $0.4 million increase in
average other borrowings resulted in a nominal increase in interest expense, while a higher average rate paid on the
borrowings resulted in a $0.1 million increase in interest expense.
Net interest income and the net interest margin during 2019 and 2018 were affected by purchase accounting accretion and
amortization associated with fair value measurements. Increases in interest income on loans totaling $1.4 million and $4.0
million were recorded during 2019 and 2018, respectively. Purchased loan accretion amounts vary from period to period as
a result of periodic cash flow re-estimations, loan payoffs, and payment performance.
F-21
Provision for Loan Losses
A loan loss provision expense of $1.8 million was recorded in 2019, compared to a provision expense of $1.1 million
recorded in 2018. The provision expense recorded during both 2019 and 2018 mainly reflected ongoing net loan growth.
In addition, the provision expense recorded during 2019 depicted an increased allocation related to a change in the nature
and volume of the consumer mortgage loan portfolio environmental factor, while the provision expense recorded during
2018 reflected increased allocations related to changes in the competition, economic conditions, and concentrations
environmental factors. The amount of provision expense necessitated by net loan growth and environmental factor changes
during 2018 was partially mitigated by net loan recoveries being recorded during the period.
Net loan charge-offs of $0.2 million were recorded during 2019, while net loan recoveries of $1.8 million were recorded
during 2018. The allowance for originated loans, as a percentage of total originated loans, was 0.9% as of both December
31, 2019 and December 31, 2018. Our allowance for acquired loans totaled $0.7 million and $0.8 million as of December
31, 2019 and December 31, 2018, respectively.
Noninterest Income
Noninterest income was $27.0 million during 2019, compared to $19.0 million during 2018. Noninterest income during
2019 included bank owned life insurance claims totaling $2.6 million and gains on the sales of former branch facilities
totaling $0.8 million, while noninterest income during 2018 included a one-time $0.9 million accounting adjustment related
to mortgage banking activities in prior years. Excluding these transactions, noninterest income increased $5.4 million, or
29.9%, during 2019 compared to 2018. The improved level of noninterest income in 2019 compared to 2018 primarily
resulted from increased mortgage banking activity income stemming from the success of continuing strategic initiatives
designed to increase market presence, along with a higher level of refinance activity resulting from a decrease in residential
mortgage loan interest rates and a higher percentage of originated loans being sold. Growth in credit and debit card
income, service charges on accounts, and payroll processing fees also contributed to the improved level of noninterest
income in 2019.
Noninterest Expense
Noninterest expense during 2019 was $89.3 million, an increase of $3.1 million, or 3.6%, from the $86.2 million expensed
during 2018. The higher level of expense primarily resulted from increased salary costs, mainly reflecting annual
employee merit pay increases, higher residential mortgage loan lender commissions, and increased stock-based
compensation expense. Pay increases for all hourly employees, which went into effect on April 1, 2018, also contributed to
the higher level of salary costs during 2019. Data processing costs were up $0.7 million during 2019 compared to 2018
primarily due to increases in debit and credit card and internet banking expenses stemming from growth in transaction
volume and new product offerings, along with increased software amortization expense mainly resulting from the
implementation of certain software solutions. Occupancy and furniture and equipment costs increased $0.5 million on a
combined basis in 2019 compared to 2018 mainly due to higher depreciation expense, in large part stemming from an
expansion of our main office and equipment purchases. Federal Deposit Insurance Corporation deposit insurance
premiums were down $0.7 million in 2019 compared to 2018 as a result of deposit insurance credits being applied against
regular assessments.
Federal Income Tax Expense
During 2019, we recorded income before federal income tax of $60.5 million and a federal income tax expense of $11.0
million, compared to income before federal income tax of $51.8 million and a federal income tax expense of $9.8 million
during 2018. The increase in federal income tax expense in 2019 compared to 2018 resulted from the higher level of
income before federal income tax. Our effective tax rate was 18.2% during 2019, compared to 18.9% during 2018. The
aforementioned nontaxable bank owned life insurance claims positively impacted the effective tax rate in 2019.
F-22
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018 and 2017
Summary
We recorded net income of $42.0 million, or $2.53 per basic and diluted share, for 2018, compared to net income of $31.3
million, or $1.90 per basic and diluted share, for 2017. Our earnings performance in 2018 benefited from increased net
interest income, lower provision expense, and decreased federal income tax expense, which more than offset increased
noninterest expense. The improved net interest income resulted from an increased net interest margin and a higher level of
average earning assets. The decreased provision expense mainly reflects the positive impact of net loan recoveries being
recorded during the current year. The lower level of federal income tax expense depicts a reduction in our federal corporate
income tax rate, which was lowered from 35.0% to 21.0% on January 1, 2018, as a result of the enactment of the Tax Cuts
and Jobs Act. The increased noninterest expense was primarily attributable to higher salary costs, mainly reflecting annual
employee merit pay increases, higher stock-based compensation, and a one-time pay increase for all hourly employees.
Growth in several of our primary noninterest income revenue streams, including credit and debit card interchange fees,
treasury management income, and payroll processing revenue, 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, 2018 and
2017:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
2018
2017
1.28 %
11.33 %
11.33 %
1.00 %
8.82 %
11.28 %
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
$142 million and $21.9 million during 2018, respectively, providing for net interest income of $120 million. During 2017,
interest income and interest expense equaled $126 million and $15.8 million, respectively, providing for net interest income
of $111 million.
In comparing 2018 with 2017, interest income increased 12.6%, interest expense was up 38.6%, and net interest income
increased 8.9%. The level of net interest income is primarily a function of asset size, as the weighted average interest rate
received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as
types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset quality, liquidity, and
customer behavior also impact net interest income as well as the net interest margin.
The $9.8 million increase in net interest income in 2018 compared to 2017 resulted from a higher net interest margin and an
increased level of average earning assets. During 2018, the net interest margin equaled 3.96%, up from 3.79% during 2017
due to an increased yield on average earning assets, which more than offset a higher cost of funds. The improved yield on
average earning assets mainly resulted from an increased yield on commercial loans, primarily reflecting higher interest
rates on variable-rate loans stemming from the Federal Open Market Committee (“FOMC”) raising the targeted federal
funds rate by 25 basis points on four occasions during 2018 and three occasions during 2017. The higher cost of funds
primarily resulted from increased costs of certain non-time deposits, time deposits, and borrowed funds. During 2018,
earning assets averaged $3.04 billion, or $127 million higher than average earning assets during 2017. Average loans
increased $145 million, average interest-earning deposits decreased $21.4 million, and average securities increased $3.1
million.
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 $15.9 million during 2018 from that earned in 2017, totaling $142
million in 2018 compared to $126 million in the previous year. The increase in interest income is attributable to a higher
yield on average earning assets and an increased level of average earning assets. During 2018 and 2017, earning assets had
an average yield (tax equivalent-adjusted basis) of 4.68% and 4.33%, respectively. The improved yield on average earning
assets mainly resulted from an increased yield on commercial loans, primarily reflecting higher interest rates on variable-
rate loans stemming from the previously-mentioned FOMC rate hikes. A change in earning asset mix and higher yields on
securities and interest-earning deposit balances also contributed to the increased yield on average earning assets. The
change in earning asset mix mainly reflects loan growth and a reduction in interest-earning deposit balances. On average,
higher-yielding loans represented 86.4% of earning assets during 2018, up from 85.2% during 2017, while lower-yielding
interest-earning deposit balances represented 2.3% of earning assets during 2018, down from 3.1% during 2017. The
increased yields on securities and interest-earning deposit balances primarily reflect the rising interest rate environment.
Interest income generated from the loan portfolio increased $14.9 million in 2018 compared to the level earned in 2017; an
increase in loan yield from 4.70% in 2017 to 5.01% in 2018 resulted in a $7.9 million increase in interest income, while
growth in the loan portfolio during 2018 resulted in a $7.0 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 5.11% during 2018, up from 4.70% during 2017 primarily due to
the FOMC rate hikes in 2017 and 2018. The decline in the yield on residential mortgage loans from 4.70% during 2017 to
4.32% during 2018 primarily reflected the booking of adjustable-rate mortgages with initial rates that were generally lower
than the existing portfolio’s average rate. Interest income related to purchased loan accounting entries totaled $4.0 million
in 2018, compared to $4.6 million in 2017.
Interest income generated from the securities portfolio increased $0.8 million in 2018 compared to the level earned in 2017;
an increase in the yield on securities from 2.47% during 2017 to 2.69% during 2018 resulted in a $0.7 million increase in
interest income, while an increase in the average balance of the securities portfolio resulted in an increase in interest
income of $0.1 million. Proceeds from called and matured securities were reinvested into similar securities and additional
securities were purchased to keep the securities portfolio at a desired level; the purchased securities’ coupon rates were
generally higher than the existing portfolio’s average rate, reflecting the rising interest rate environment. Interest income
on interest-earning deposit balances increased $0.1 million 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 $6.1 million during 2018 from that expensed in 2017, totaling $21.9 million in 2018 compared to $15.8
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 2018 and 2017, interest-bearing liabilities had a weighted average rate of 1.08% and
0.80%, respectively; an increase in interest expense of $5.4 million was recorded during 2018 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 0.28% during 2017 to 0.54% during 2018, primarily reflecting increased rates on certain account
categories in response to the increasing interest rate environment; the increased cost also reflects a 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, both of which occurred during the second quarter of 2017. The cost of time deposits increased from 1.24%
during 2017 to 1.59% during 2018 due to higher rates being paid on each category of time deposits, reflecting the rising
interest rate environment. The cost of borrowed funds increased from 1.68% during 2017 to 2.06% during 2018, mainly
reflecting higher costs of FHLBI advances and subordinated debentures and a change in borrowing mix. The cost of
FHLBI advances increased from 1.68% during 2017 to 1.94% during 2018; longer-term advances totaling $240 million
were obtained during the last ten months of 2017 and first nine months of 2018 to meet loan funding and interest rate risk
management needs. The cost of subordinated debentures was 6.54% during 2018, up from 5.53% during 2017 due to
increased Libor rates stemming from the rising interest rate environment. Average higher-costing FHLBI advances
represented 61.3% of average borrowed funds during 2018, up from 56.9% during 2017, while average lower-costing
sweep accounts represented 25.9% and 30.4% of average borrowed funds during 2018 and 2017, respectively. Average
interest-bearing liabilities were $2.02 billion during 2018, up $50.6 million, or 2.6%, from the $1.97 billion average during
2017.
F-24
An increase in interest-bearing non-time deposits during 2018, totaling $81.2 million, equated to an increase in interest
expense of $0.9 million, while a higher average rate paid on these deposit accounts resulted in a $2.4 million increase in
interest expense. A $1.7 million increase in interest expense resulted from a higher average rate paid on time deposits.
Average time deposits decreased $37.8 million during 2018, reflecting a decline in public unit certificates of deposit
$100,000 and over and the aforementioned transfer of funds into a money market account product; the decreased balance
equated to a decline in interest expense of $0.5 million.
Average short-term borrowings, comprised almost entirely of sweep accounts, declined $14.5 million during 2018,
resulting in a decrease in interest expense of less than $0.1 million, while a higher average rate paid on these accounts
resulted in a $0.1 million increase in interest expense. Average FHLBI advances increased $21.2 million, resulting in a
$0.4 million increase in interest expense, while a higher average rate paid on the advances resulted in a $0.6 million
increase in interest expense. A $0.6 million increase in average other borrowings resulted in a nominal increase in interest
expense, while a higher average rate paid on the borrowings resulted in a $0.5 million increase in interest expense.
Net interest income and the net interest margin during 2018 and 2017 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 $4.0 million and $4.6 million were recorded during 2018 and 2017, respectively. An increase in
interest expense on subordinated debentures totaling $0.7 million was recorded during both 2018 and 2017. 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 $1.1 million was recorded in 2018, compared to a provision expense of $3.0 million
recorded in 2017. The provision expense recorded during 2018 and 2017 primarily reflects ongoing loan growth and
periodic adjustments to loan loss reserve environmental factors.
Net loan recoveries of $1.8 million were recorded during 2018, while net loan charge-offs of $1.4 million were recorded
during 2017. The allowance for originated loans, as a percentage of total originated loans, was 0.9% as of both December
31, 2018 and December 31, 2017. Our allowance for acquired loans totaled $0.8 million and $0.4 million as of December
31, 2018 and December 31, 2017, respectively.
Noninterest Income
Noninterest income totaled $19.0 million in both 2018 and 2017. Noninterest income during 2018 included a one-time
$0.9 million accounting adjustment related to mortgage banking activities in prior years, while noninterest income in 2017
included a $1.4 million bank owned life insurance death benefit claim; excluding these transactions, noninterest income
increased $0.5 million, or 2.9%, during 2018 compared to 2017. Growth in credit and debit card fees, payroll processing
revenue, and treasury management income during 2018 more than offset a decline in mortgage banking activity income.
Although we believe our market share increased during 2018, mortgage banking activity income declined during the year
compared to 2017 primarily due to the impacts of a limited supply of homes for sale in our markets and lower refinance
activity due to rising residential mortgage loan interest rates.
Noninterest Expense
Noninterest expense during 2018 was $86.2 million, an increase of $6.5 million, or 8.1%, from the $79.7 million expensed
during 2017. The higher level of expense primarily resulted from increased salary costs, mainly reflecting annual
employee merit pay increases and higher stock-based compensation expense. In addition, a one-time pay increase for all
hourly employees that totaled $1.6 million on an annualized basis became effective on April 1, 2018. Occupancy and
furniture and equipment costs increased $0.8 million on a combined basis in 2018, mainly resulting from higher
depreciation and rent expenses. The increased rent expense primarily stemmed from the opening of our southeast Michigan
office in early 2017.
Federal Income Tax Expense
During 2018, we recorded income before federal income tax of $51.8 million and a federal income tax expense of $9.8
million, compared to income before federal income tax of $46.1 million and a federal income tax expense of $14.8 million
during 2017. The lower level of federal income tax expense primarily reflects a reduced corporate income tax rate
stemming from the enactment of the Tax Cuts and Jobs Act; the rate was lowered from 35.0% to 21.0% effective January 1,
2018. Our effective tax rate was 18.9% during 2018, compared to 32.1% during 2017.
F-25
CAPITAL RESOURCES
Shareholders’ equity increased $41.3 million during 2019, totaling $417 million as of December 31, 2019. Positively
impacting shareholders’ equity was net income of $49.5 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $17.1 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 $1.3 million. Share repurchases reduced shareholders’ equity by $7.2 million during 2019. Positively
impacting shareholders’ equity during 2019 was an $11.9 million after-tax increase in the market value of available for sale
securities.
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, 2019, our bank’s total risk-based capital ratio was 13.0%, compared to 12.3% at
December 31, 2018. Our bank’s total regulatory capital increased $36.3 million during 2019, primarily reflecting the net
impact of net income totaling $55.6 million and cash dividends paid to Mercantile Bank Corporation aggregating $22.1
million. Our bank’s total risk-based capital ratio was also impacted by a $111 million increase in total risk-weighted assets,
primarily resulting from net commercial loan growth. As of December 31, 2019, our bank’s total regulatory capital
equaled $425 million, or $97.3 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.”
We maintain a stock repurchase program, which is discussed in Part II, Item 5 “Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities” in this Annual Report.
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 $487
million, or 15.5% of combined deposits and borrowed funds as of December 31, 2019, compared to $474 million, or 16.2%
of combined deposits and borrowed funds, as of December 31, 2018.
Sweep accounts decreased $0.8 million during 2019, totaling $103 million as of December 31, 2019. 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, 2019 and during 2019 is as follows:
Outstanding balance at December 31, 2019
Weighted average interest rate at December 31, 2019
Maximum daily balance twelve months ended December 31, 2019
Average daily balance for twelve months ended December 31, 2019
Weighted average interest rate for twelve months ended December 31, 2019
$
$
$
102,675,000
0.17 %
133,411,000
105,234,000
0.24 %
FHLBI advances increased $4.0 million during 2019, totaling $354 million as of December 31, 2019. 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 2019 totaled $813 million, with availability of $453 million.
F-26
We also have the ability to borrow up to $70.0 million on a daily basis through correspondent banks using established
unsecured federal funds purchased lines of credit. The average balance of federal funds purchased equaled $1.4 million
during 2019. In contrast, our interest-earning deposit account at the Federal Reserve Bank of Chicago averaged $102
million during 2019. 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 $32.9 million at December 31, 2019. We did
not utilize this line of credit during the past nine years, and do not plan to access this line of credit in future periods.
The following table reflects, as of December 31, 2019, significant fixed and determinable contractual obligations to third
parties by payment date, excluding accrued interest:
One Year
or Less
One to
Three Years Five Years Five Years
Three to
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 $
$ 2,035,975,000 $
0 $
360,395,000 255,992,000 38,022,000
0
102,675,000
0 $ 2,035,975,000
0 654,409,000
0 102,675,000
40,000,000 164,000,000 130,000,000 20,000,000 354,000,000
46,881,000
2,745,000
3,805,000
0 46,881,000
0 2,745,000
882,000 1,246,000
0
0
1,063,000
0
0
614,000
0
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded
loan commitments and standby letters of credit. At December 31, 2019, we had a total of $1.02 billion in unfunded loan
commitments and $22.8 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $914
million were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $102
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:
12/31/19
12/31/18
12/31/17
Commercial unused lines of credit
Unused lines of credit secured by 1-4 family residential
$
776,493,000 $
784,895,000 $
682,202,000
properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
60,858,000
58,199,000
18,135,000
101,961,000
22,798,000
57,378,000
47,432,000
20,231,000
101,517,000
25,322,000
61,606,000
39,807,000
17,629,000
184,923,000
26,030,000
Total
$ 1,038,444,000 $ 1,036,775,000 $ 1,012,197,000
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.
F-27
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, 2019:
Within
Three
Months
Three to
Twelve
Months
One to
Five
Years
After
Five
Years
Total
Assets:
Commercial loans (1)
Residential real estate loans
Consumer loans
Securities (2)
Interest-earning deposits
Allowance for loan losses
Other assets
Total assets
Liabilities:
Interest-bearing checking
Savings deposits
Money market accounts
Time deposits under $100,000
Time deposits $100,000 & over
Short-term borrowings
Federal Home Loan Bank
advances
Other borrowed money
Noninterest-bearing checking
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities & shareholders'
equity
Net asset (liability) GAP
2,622,000
$ 1,096,971,000 $ 122,280,000 $ 875,161,000 $ 333,178,000 $ 2,427,590,000
49,703,000 27,604,000 150,595,000 178,563,000 406,465,000
17,071,000
22,612,000
78,500,000 241,041,000 352,657,000
0 180,469,000
(23,889,000 )
0
0 267,011,000
1,344,871,000 166,385,000 1,123,827,000 754,710,000 $ 3,632,915,000
991,000
19,106,000 14,010,000
1,500,000
0
0
176,469,000
0
0
2,500,000
0
0
1,928,000
332,373,000
269,318,000
509,368,000
0
0
0
44,306,000 61,925,000
0
0
0
91,892,000
100,635,000 153,529,000 202,122,000
0
102,675,000
0
49,626,000
0
0
0 40,000,000 294,000,000
0
0
0
0
0
0
1,408,301,000 255,454,000 588,014,000
0
0
0
0 332,373,000
0 269,318,000
0 509,368,000
0 198,123,000
0 456,286,000
0 102,675,000
20,000,000 354,000,000
0
49,626,000
0 924,916,000
19,669,000
0
20,000,000 3,216,354,000
0 416,561,000
20,000,000 $ 3,632,915,000
1,408,301,000 255,454,000 588,014,000
$
(63,430,000 ) $ (89,069,000 ) $ 535,813,000 $ 734,710,000
Cumulative GAP
$
(63,430,000 ) $ (152,499,000 ) $ 383,314,000 $ 1,118,024,000
Percent of cumulative GAP to total
assets
(1.7% )
(4.2% )
10.6%
30.8%
(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,
2019.
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, 2019, in which it was assumed that changes in market interest rates
occurred ranging from up 300 basis points to down 200 basis points in equal quarterly instalments over the next twelve
months. The following table reflects the suggested dollar and percentage changes in net interest income over the next twelve
months in comparison to the $121 million in net interest income projected using our balance sheet amounts and anticipated
replacement rates as of December 31, 2019. The resulting estimates are generally within our policy parameters established
to manage and monitor interest rate risk.
Interest Rate Scenario
Interest rates down 200 basis points
Interest rates down 100 basis points
Interest rates up 100 basis points
Interest rates up 200 basis points
Interest rates up 300 basis points
Dollar Change
Percent Change
In Net
Interest Income
In Net
Interest Income
$
(9,530,000 )
(5,560,000 )
4,650,000
9,230,000
13,780,000
(7.9%)
(4.6)
3.8
7.6
11.4
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”) as of
December 31, 2019 and 2018, 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, 2019, 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 at December 31, 2019 and 2018,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, 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 2, 2020 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 regarding 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 2, 2020
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, 2019, 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, 2019,
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, 2019 and 2018, 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, 2019, and the related notes, and our report dated March 2, 2020 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 2, 2020
F-32
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, 2019. 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, 2019, 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, 2019 and 2018
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, net
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
Commitments and contingent liabilities (Note 14)
2019
2018
$
53,262,000 $
180,469,000
233,731,000
64,872,000
10,482,000
75,354,000
334,655,000 337,366,000
16,022,000
18,002,000
2,856,667,000 2,753,085,000
(22,380,000 )
2,832,778,000 2,730,705,000
(23,889,000 )
57,327,000
70,297,000
49,473,000
3,840,000
32,812,000
48,321,000
69,647,000
49,473,000
5,561,000
31,458,000
$ 3,632,915,000 $ 3,363,907,000
$ 924,916,000 $ 889,784,000
1,765,468,000 1,573,924,000
2,690,384,000 2,463,708,000
102,675,000 103,519,000
354,000,000 350,000,000
46,199,000
25,232,000
3,216,354,000 2,988,658,000
46,881,000
22,414,000
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized; 0 shares
outstanding at December 31, 2019 and December 31, 2018
Common stock, no par value; 40,000,000 shares authorized; 16,425,136
shares outstanding at December 31, 2019 and 16,534,256 shares
outstanding at December 31, 2018
Retained earnings
Accumulated other comprehensive gain/(loss)
Total shareholders’ equity
0
0
305,035,000 308,005,000
75,483,000
107,831,000
(8,239,000 )
3,695,000
416,561,000 375,249,000
Total liabilities and shareholders’ equity
$ 3,632,915,000 $ 3,363,907,000
See accompanying notes to consolidated financial statements.
F-34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2019, 2018 and 2017
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
2019
2018
2017
$
145,816,000 $
7,919,000
2,231,000
2,371,000
158,337,000
131,763,000 $
6,736,000
2,239,000
1,243,000
141,981,000
116,816,000
5,326,000
2,305,000
1,096,000
125,543,000
21,264,000
295,000
8,977,000
3,267,000
33,803,000
13,869,000
273,000
4,647,000
3,110,000
21,899,000
9,362,000
190,000
3,657,000
2,586,000
15,795,000
124,534,000
120,082,000
109,748,000
1,750,000
1,100,000
2,950,000
Net interest income after provision for loan losses
122,784,000
118,982,000
106,798,000
Noninterest income
Service charges on deposit and sweep accounts
Credit and debit card fees
Mortgage banking activities
Payroll processing
Earnings on bank owned life insurance
Letter of credit fees
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
Other expense
Total noninterest expenses
4,584,000
5,925,000
8,485,000
1,626,000
3,886,000
278,000
2,172,000
26,956,000
53,833,000
7,061,000
2,583,000
9,235,000
1,446,000
225,000
140,000
14,757,000
89,280,000
4,358,000
5,354,000
4,109,000
1,462,000
1,287,000
245,000
2,195,000
19,010,000
50,910,000
6,711,000
2,470,000
8,557,000
1,648,000
930,000
90,000
14,854,000
86,170,000
4,233,000
4,760,000
4,421,000
1,305,000
2,731,000
348,000
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
14,820,000
79,716,000
Income before federal income tax expense
60,460,000
51,822,000
46,083,000
Federal income tax expense
11,004,000
9,798,000
14,809,000
Net income
$
49,456,000 $
42,024,000 $
31,274,000
Earnings per common share:
Basic
Diluted
$
$
3.01 $
3.01 $
2.53 $
2.53 $
1.90
1.90
See accompanying notes to consolidated financial statements.
F-35
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2019, 2018 and 2017
2019
2018
2017
Net income
$
49,456,000 $
42,024,000 $
31,274,000
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
15,106,000
0
15,106,000
(4,225,000 )
2,000
(4,223,000 )
(3,172,000 )
0
(3,172,000 )
11,934,000
846,000
(1,000 )
845,000
(3,378,000 )
2,297,000
82,000
2,379,000
(804,000 )
(28,000 )
(832,000 )
1,547,000
Comprehensive income
$
61,390,000 $
38,646,000 $
32,821,000
See accompanying notes to consolidated financial statements.
F-36
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2019, 2018 and 2017
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-37
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2019, 2018 and 2017
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Retained Comprehensive Shareholders’
Stock
Earnings Income/(Loss)
Stock
Equity
Balances, January 1, 2018
$
0 $ 309,772 $
61,001 $
(4,903 ) $
365,870
Reclassification of equity securities related to
ASU 2016-01 adoption
Employee stock purchase plan (1,579 shares)
Dividend reinvestment plan (37,450 shares)
Stock option exercises (11,481 shares)
Stock grants to directors for retainer fees
(12,404 shares)
Stock-based compensation expense
Share repurchase program (199,905 shares)
Cash dividends ($1.68 per common share)
Net income for 2018
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
(42 )
42
52
1,165
108
441
2,410
(5,943 )
(27,500 )
42,024
0
52
1,165
108
441
2,410
(5,943 )
(27,500 )
42,024
(3,379 )
(3,379 )
1
1
Balances, December 31, 2018
$
0 $ 308,005 $
75,483 $
(8,239 ) $
375,249
See accompanying notes to consolidated financial statements.
F-38
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2019, 2018 and 2017
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Retained Comprehensive Shareholders’
Stock
Earnings Income/(Loss)
Stock
Equity
Balances, January 1, 2019
$
0 $ 308,005 $
75,483 $
(8,239 ) $
375,249
Employee stock purchase plan (1,507 shares)
Dividend reinvestment plan (21,503 shares)
Stock option exercises (8,200 shares)
Stock grants to directors for retainer fees
(11,905 shares)
Stock-based compensation expense
Share repurchase program (233,300 shares)
Cash dividends ($1.06 per common share)
Net income for 2019
Change in net unrealized gain/(loss) on
securities available for sale, net of tax effect
50
729
128
375
2,931
(7,183 )
(17,108 )
49,456
50
729
128
375
2,931
(7,183 )
(17,108 )
49,456
11,934
11,934
Balances, December 31, 2019
$
0 $ 305,035 $ 107,831 $
3,695 $
416,561
See accompanying notes to consolidated financial statements.
F-39
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019, 2018 and 2017
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
Net gain from sales and valuation write-downs of foreclosed assets
Net (gain) loss from sale and write-downs on former bank premises
Net loss from sales and disposals of premises and equipment
Net gain 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
2019
2018
2017
49,456,000 $
42,024,000 $
31,274,000
9,553,000
(686,000 )
1,750,000
26,000
2,931,000
375,000
261,021,000
(256,767,000 )
(8,108,000 )
(254,000 )
(436,000 )
294,000
0
(3,886,000 )
9,766,000
(1,373,000 )
1,100,000
(372,000 )
2,410,000
441,000
101,146,000
(96,179,000 )
(3,536,000 )
(169,000 )
(78,000 )
134,000
0
(1,287,000 )
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 )
(319,000 )
133,000
71,000
(37,000 )
(2,731,000 )
(48,000 )
(7,636,000 )
(2,818,000 )
44,767,000
(1,126,000 )
(2,193,000 )
11,029,000
61,737,000
(1,056,000 )
(354,000 )
(943,000 )
38,665,000
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
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
(62,084,000 )
79,478,000
0
(1,980,000 )
(99,620,000 )
(4,500,000 )
(48,664,000 )
40,308,000
0
(4,986,000 )
(193,556,000 )
0
7,708,000
(13,484,000 )
854,000
790,000
(92,838,000 )
0
(6,318,000 )
1,964,000
772,000
(210,480,000 )
(67,027,000 )
52,504,000
7,619,000
(3,010,000 )
(178,373,000 )
(1,500,000 )
2,720,000
(5,423,000 )
25,000
993,000
(191,472,000 )
Cash flows from financing activities
Net (decrease) increase in time deposits
Net (decrease) 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
Repurchases of common stock
Payment of cash dividends to common shareholders
Net cash from financing activities
170,921,000
55,755,000
(844,000 )
44,000,000
(40,000,000 )
128,000
50,000
729,000
(7,183,000 )
(17,108,000 )
206,448,000
(30,091,000 )
(28,566,000 )
(15,229,000 )
160,000,000
(30,000,000 )
108,000
52,000
1,165,000
(5,943,000 )
(27,500,000 )
23,996,000
(55,839,000 )
203,219,000
(12,962,000 )
90,000,000
(45,000,000 )
318,000
46,000
1,576,000
0
(12,046,000 )
169,312,000
See accompanying notes to consolidated financial statements.
F-40
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2019, 2018 and 2017
2019
2018
2017
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
158,377,000
75,354,000
233,731,000 $
(124,747,000 )
200,101,000
75,354,000 $
16,505,000
183,596,000
200,101,000
$
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
$
32,103,000 $
11,975,000
21,569,000 $
10,075,000
15,468,000
14,225,000
337,000
258,000
744,000
296,000
887,000
1,736,000
See accompanying notes to consolidated financial statements.
F-41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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 (“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, 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. Our 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.
Our bank is a community-based financial institution. Our 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. We have no material foreign loans or significant overdraft balances. Our
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, our 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.
Our real estate company 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.
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.
We have evaluated subsequent events for potential recognition and/or disclosure through the date these financial statements
were issued.
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 and Cash Equivalents and 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.
(Continued)
F-42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. 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.
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 impairment (“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 $0.5 million and $0.9 million, respectively, at December 31, 2019 and 2018.
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, 2019
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
2019
4,978,000 $
0
4,978,000 $
2018
1,122,000
0
1,122,000
$
$
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, 2019 and 2018.
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, 2019
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 generally 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. These historical loss percentages are adjusted (both
upwards and downwards) for certain qualitative environmental factors, including economic trends, credit quality trends,
valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasing interest rates,
external factors, and other considerations. 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 our
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) our 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. Premises and equipment 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.
(Continued)
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets: Assets acquired through or in lieu of foreclosure are initially recorded at their estimated fair value net of
estimated selling costs, establishing a new cost basis. If fair value subsequently declines, a valuation allowance is recorded
through noninterest expense, as are collection and operating costs after acquisition. Foreclosed assets, included in other
assets in the balance sheet, totaled $0.5 million and $0.8 million as of December 31, 2019 and 2018, respectively.
Bank Owned Life Insurance: Our 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. 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 2018 and 2019, 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: Our 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.
Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with
Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic
606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the
transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when
(or as) we satisfy a performance obligation. No revenue has been recognized in the current reporting period that results
from performance obligations satisfied in previous periods.
Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial
instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and
determined that further disaggregation of revenue from contracts with customers into more granular categories beyond
what is presented in the Consolidated Statements of Income was not necessary.
(Continued)
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction
prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because
performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment
involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from
contracts with customers.
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.
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.
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Accounting Standards Updates: In February 2016, the FASB issued ASU 2016-02, Leases. This ASU (as subsequently
amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20) 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. The adoption of this new standard as of January 1, 2019 resulted in the recording of a ROU asset and associated
lease liability of approximately $1.3 million.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as
subsequently amended by ASU 2018-19) 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.
We will adopt the guidance prospectively with a cumulative adjustment to retained earnings effective January 1, 2020. At
adoption, we currently expect to recognize a decrease in the allowance for loan losses of approximately $1.0 million. In
addition, we currently expect to record an increase of about $0.8 million in retained earnings associated with the anticipated
decreased estimated allowance for credit losses. The adoption of the ASU is not expected to cause us to no longer meet the
criteria for being considered well capitalized. As we are still finalizing the execution of our implementation controls and
processes, the ultimate impact of the adoption of the ASU could differ from our current expectation.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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.
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.
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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
2019
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
2018
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
$ 185,103,000 $ 2,449,000 $ (1,142,000 ) $ 186,410,000
(82,000 ) 42,470,000
554,000
41,998,000
(30,000 ) 101,079,000
98,245,000 2,864,000
4,196,000
63,000
500,000
0
$ 329,979,000 $ 5,930,000 $ (1,254,000 ) $ 334,655,000
4,133,000
500,000
0
0
$ 196,109,000 $ 310,000 $ (9,342,000 ) $ 187,077,000
187,000
44,263,000
(792,000 ) 43,658,000
427,000 (1,165,000 ) 102,497,000
103,235,000
3,634,000
(58,000 )
3,688,000
500,000
0
500,000
$ 347,795,000 $ 928,000 $ (11,357,000 ) $ 337,366,000
4,000
0
Securities with unrealized losses at year-end 2019 and 2018, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, are as follows:
Description of Securities
2019
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation
bonds
Municipal revenue bonds
Other investments
2018
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
$ 25,650,000 $ 349,000 $ 73,913,000 $ 793,000 $ 99,563,000 $ 1,142,000
82,000
2,838,000
54,000 13,261,000
28,000 10,423,000
3,755,000
0
0
30,000
994,000
0
0
0
0
$ 32,243,000 $ 395,000 $ 85,330,000 $ 859,000 $ 117,573,000 $ 1,254,000
4,749,000
0
0
12,000
0
0
18,000
0
0
$ 31,220,000 $ 1,136,000 $ 136,445,000 $ 8,206,000 $ 167,665,000 $ 9,342,000
792,000
11,460,000
656,000 35,222,000
136,000 23,762,000
28,923,000
1,188,000
0
866,000 72,884,000 1,165,000
299,000 43,961,000
58,000
2,560,000
1,372,000
0
0
0
$ 72,791,000 $ 1,582,000 $ 205,540,000 $ 9,775,000 $ 278,331,000 $ 11,357,000
47,000
0
11,000
0
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 3 – SECURITIES (Continued)
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, 2019, 107 debt securities with fair values totaling $118 million had unrealized losses aggregating $1.3
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.
The amortized cost and fair values of debt securities at December 31, 2019, 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
2.04%
2.36
2.66
3.09
2.76
5.88
2.76%
$
Amortized
Cost
14,118,000 $
52,865,000
Fair
Value
14,136,000
53,389,000
105,156,000 106,960,000
115,342,000 117,200,000
42,470,000
500,000
$ 329,979,000 $ 334,655,000
41,998,000
500,000
No mortgage-backed securities were sold in 2019 or 2018. Mortgage-backed securities totaling $5.0 million were sold in
2017, resulting in a nominal net gain. No municipal general obligation bonds were sold in 2019 or 2018. Municipal
general obligation bonds totaling $2.6 million were sold during 2017, 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 $96.5 million
and $98.2 million at December 31, 2019 and December 31, 2018, respectively, with estimated market values of $99.4
million and $97.4 million at the respective dates. Securities issued by all other states and their political subdivisions had a
combined amortized cost of $5.9 million and $8.7 million at December 31, 2019 and December 31, 2018, respectively, with
estimated market values of $5.9 million and $8.7 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 $103 million and $104 million at December 31, 2019 and 2018, respectively. Investments in
FHLBI stock are restricted and may only be resold to, or redeemed by, the issuer.
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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.
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-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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:
December 31, 2019
%
Balance
December 31, 2018
%
Balance
Percent
Increase
(Decrease)
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
$ 799,421,000
30.6 % $ 768,698,000
31.3 %
4.0 %
52,097,000
542,561,000
776,994,000
39,950,000
2.0
20.8
500,188,000
29.7 745,127,000
100,344,000
2,271,417,000
3.8
86.9
98,035,000
2,151,998,000
1.6
20.4
30.4
4.0
87.7
30.4
8.5
4.3
2.4
5.5
Retail:
Home equity and other
1-4 family mortgages
Total retail
61,060,000
282,248,000
343,308,000
2.3
65,023,000
10.8 235,425,000
13.1 300,448,000
2.7
9.6
12.3
(6.1 )
19.9
14.3
Total originated loans
$ 2,614,725,000
100.0 % $ 2,452,446,000
100.0 %
6.6 %
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired Loans
Commercial:
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
December 31, 2019
Balance
%
December 31, 2018
%
Balance
Percent
Increase
(Decrease)
$ 47,130,000
19.4 % $ 54,025,000
18.0 %
(12.8%)
4,022,000
36,442,000
58,352,000
1.7
4,935,000
15.1 48,431,000
24.1 71,155,000
residential rental
Total commercial
24,181,000
170,127,000
10.0 29,562,000
70.3 208,108,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
14,314,000
57,501,000
71,815,000
5.9 20,416,000
23.8 72,115,000
29.7 92,531,000
6.8
24.0
30.8
Total acquired loans
$ 241,942,000
100.0 % $ 300,639,000
100.0 %
(19.5%)
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
December 31, 2019
%
Balance
December 31, 2018
%
Balance
Percent
Increase
(Decrease)
$ 846,551,000
29.6 % $ 822,723,000
29.9 %
2.9 %
56,119,000
579,003,000
835,346,000
2.0
44,885,000
20.3 548,619,000
29.2 816,282,000
residential rental
Total commercial
124,525,000
2,441,544,000
4.4 127,597,000
85.5 2,360,106,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
75,374,000
339,749,000
415,123,000
2.6
85,439,000
11.9 307,540,000
14.5 392,979,000
3.1
11.2
14.3
Total loans
$ 2,856,667,000
100.0 % $ 2,753,085,000
100.0 %
3.8 %
(Continued)
F-54
1.6
16.1
23.7
9.8
69.2
1.6
19.9
29.7
4.6
85.7
(18.5)
(24.8)
(18.0)
(18.2)
(18.3)
(29.9)
(20.3)
(22.4)
25.0
5.5
2.3
(2.4 )
3.5
(11.8 )
10.5
5.6
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total contractually required payments and carrying value of acquired impaired loans were $5.7 million and $3.4
million, respectively, as of December 31, 2019. The total contractually required payments and carrying value of acquired
impaired loans were $8.0 million and $4.6 million, respectively, as of December 31, 2018. Changes in the accretable yield
for acquired impaired loans for the years ended December 31, 2019 and December 31, 2018 were as follows:
Balance at December 31, 2018
Additions
Accretion income
Net reclassification from nonaccretable to accretable
Reductions (1)
Balance at December 31, 2019
Balance at December 31, 2017
Additions
Accretion income
Net reclassification from nonaccretable to accretable
Reductions (1)
Balance at December 31, 2018
2019
1,274,000
9,000
(407,000 )
488,000
(88,000 )
1,276,000
2018
1,404,000
0
(490,000 )
437,000
(77,000 )
1,274,000
$
$
$
$
(1) Reductions primarily reflect the result of exit events, including loan payoffs and charge-offs.
Concentrations within the loan portfolio were as follows at year-end:
2019
2018
Percentage
of
Loan
Portfolio
Balance
Percentage
of
Loan
Portfolio
Balance
Commercial real estate loans to lessors of
non-residential buildings
$ 580,708,000
20.3 % $ 568,134,000
20.6 %
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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
2019
2018
$
$
0 $
677,000
677,000 $
0
803,000
803,000
2019
2018
$
$
0 $
1,607,000
1,607,000 $
0
3,338,000
3,338,000
December 31,
2019
December 31,
2018
$
0 $
0
134,000
0
2,000
136,000
17,000
0
950,000
0
141,000
1,108,000
255,000
1,893,000
2,148,000
454,000
2,579,000
3,033,000
Total nonperforming loans
$
2,284,000 $
4,141,000
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-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2019:
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 $ 799,421,000 $ 799,421,000 $
0
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
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
52,097,000
52,097,000
0 134,000 134,000 542,427,000 542,561,000
0
0
0 776,994,000 776,994,000
0
0 100,344,000 100,344,000
0 134,000 134,000 2,271,283,000 2,271,417,000
0
Retail:
Home equity and other 107,000
61,000
1- 4 family mortgages
168,000
Total retail
Total past due
50,000
61,060,000
0 130,000 191,000 282,057,000 282,248,000
50,000 130,000 348,000 342,960,000 343,308,000
0 157,000
60,903,000
loans
$ 168,000 $ 50,000 $ 264,000 $ 482,000 $ 2,614,243,000 $ 2,614,725,000 $
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
Acquired Loans
Commercial:
Commercial and
industrial
$
0 $
0 $
0 $
0 $
47,130,000 $
47,130,000 $
0
0
0
0
0
0
0
0
0
0
Vacant land, land
development, and
residential
construction
Real estate – owner
occupied
Real estate – non-owner
occupied
Real estate – multi-
191,000
0
0
family and residential
rental
Total commercial
Retail:
0
191,000
0
0
0
0
0
0 191,000
3,831,000
4,022,000
0
0
0
36,442,000
36,442,000
0
58,352,000
58,352,000
0
24,181,000
0 191,000 169,936,000 170,127,000
24,181,000
0
Home equity and other
1- 4 family mortgages
Total retail
64,000
684,000
748,000
15,000 20,000
99,000
29,000 399,000 1,112,000
44,000 419,000 1,211,000
14,215,000
56,389,000
70,604,000
14,314,000
57,501,000
71,815,000
Total past due loans $ 939,000 $ 44,000 $ 419,000 $ 1,402,000 $ 240,540,000 $ 241,942,000 $
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2018:
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
$ 186,000 $
0 $
0 $ 186,000 $ 768,512,000 $ 768,698,000 $
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
0
0
0
0
186,000
Retail:
Home equity and other
1- 4 family mortgages
Total retail
44,000
291,000
335,000
Total past due
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
39,950,000
39,950,000
500,188,000
500,188,000
745,127,000
745,127,000
0
186,000
98,035,000
2,151,812,000
98,035,000
2,151,998,000
0
137,000
137,000
44,000
428,000
472,000
64,979,000
234,997,000
299,976,000
65,023,000
235,425,000
300,448,000
0
0
0
0
0
0
0
0
0
0
loans
$ 521,000 $
0 $ 137,000 $ 658,000 $ 2,451,788,000 $ 2,452,446,000 $
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
Acquired Loans
Commercial:
Commercial and
industrial
$
8,000 $
0 $
0 $
8,000 $
54,017,000 $
54,025,000 $
0
0
0
0
0
0
0
0
0
0
Vacant land, land
development, and
residential
construction
Real estate – owner
19,000
0
0
19,000
4,916,000
4,935,000
occupied
108,000 950,000
0 1,058,000
47,373,000
48,431,000
Real estate – non-owner
occupied
Real estate – multi-
62,000
0
0
62,000
71,093,000
71,155,000
family and residential
rental
Total commercial
Retail:
0
0
197,000 950,000
0
29,562,000
0 1,147,000 206,961,000 208,108,000
29,562,000
0
Home equity and other
1- 4 family mortgages
Total retail
31,000
167,000
0 198,000
821,000 347,000 612,000 1,780,000
988,000 378,000 612,000 1,978,000
20,218,000
70,335,000
90,553,000
20,416,000
72,115,000
92,531,000
Total past due loans $ 1,185,000 $ 1,328,000 $ 612,000 $ 3,125,000 $ 297,514,000 $ 300,639,000 $
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with no related allowance recorded were as follows as of December 31, 2019:
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
$ 7,826,000 $ 7,826,000
$ 11,259,000
85,000
85,000
607,000
655,000
0
0
0
0
8,566,000 8,518,000
691,000
708,000
1,117,000
514,000
1,825,000 1,205,000
89,000
893,000
0
25,000
12,266,000
682,000
385,000
1,067,000
Total with no related allowance recorded
$ 10,391,000 $ 9,723,000
$ 13,333,000
(Continued)
F-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2019:
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
$
332,000 $
332,000 $ 172,000 $ 5,567,000
0
978,000
0
0
0
0
978,000 1,573,000
978,000
0
0
53,000
0
1,310,000 1,310,000 1,150,000 7,193,000
0
0
0
347,000
0
347,000
332,000
0
332,000
247,000
0
247,000
383,000
267,000
650,000
Total with an allowance recorded
$ 1,657,000 $ 1,642,000 $ 1,397,000 $ 7,843,000
Total impaired loans:
Commercial
Retail
Total impaired originated loans
$ 9,876,000 $ 9,828,000 $ 1,150,000 $ 19,459,000
2,172,000 1,537,000
247,000 1,717,000
$ 12,048,000 $ 11,365,000 $ 1,397,000 $ 21,176,000
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with no related allowance recorded were as follows as of December 31, 2019:
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
$
303,000 $
303,000
$ 351,000
0
60,000
178,000
29,000
570,000
0
60,000
178,000
9,000
550,000
571,000
518,000
2,155,000 1,454,000
2,726,000 1,972,000
0
627,000
131,000
19,000
1,128,000
521,000
1,693,000
2,214,000
Total with no related allowance recorded
$ 3,296,000 $ 2,522,000
$ 3,342,000
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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,
2019:
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
$
128,000 $ 126,000 $
30,000 $
142,000
0
100,000
0
0
228,000
0
100,000
0
0
226,000
0
4,000
0
0
34,000
0
99,000
80,000
1,000
322,000
155,000
358,000
513,000
153,000
356,000
509,000
109,000
83,000
192,000
275,000
393,000
668,000
Total with an allowance recorded
$
741,000 $ 735,000 $
226,000 $
990,000
Total impaired loans:
Commercial
Retail
Total impaired acquired loans
$
798,000 $ 776,000 $
3,239,000 2,481,000
$ 4,037,000 $ 3,257,000 $
34,000 $ 1,450,000
192,000 2,882,000
226,000 $ 4,332,000
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans with no related allowance recorded were as follows as of December 31, 2018:
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
$ 8,604,000 $ 8,604,000
$ 2,096,000
94,000
94,000
632,000
632,000
0
0
0
0
9,330,000 9,330,000
607,000
1,053,000
1,660,000
586,000
390,000
976,000
65,000
1,145,000
0
187,000
3,493,000
691,000
414,000
1,105,000
Total with no related allowance recorded
$ 10,990,000 $ 10,306,000
$ 4,598,000
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2018:
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
$ 5,011,000 $ 5,011,000 $
83,000 $ 3,455,000
0
0
2,658,000 2,658,000
0
0
135,000
140,000
7,809,000 7,804,000
0
0
363,000 2,072,000
0
112,000
451,000 5,639,000
0
5,000
442,000
409,000
851,000
431,000
341,000
772,000
193,000
44,000
237,000
600,000
299,000
899,000
Total with an allowance recorded
$ 8,660,000 $ 8,576,000 $ 688,000 $ 6,538,000
Total impaired loans:
Commercial
Retail
Total impaired originated loans
$ 17,139,000 $ 17,134,000 $ 451,000 $ 9,132,000
2,511,000 1,748,000
237,000 2,004,000
$ 19,650,000 $ 18,882,000 $ 688,000 $ 11,136,000
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans with no related allowance recorded were as follows as of December 31, 2018:
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
$
398,000 $
398,000
$ 690,000
0
0
1,193,000 1,193,000
0
0
26,000
45,000
1,636,000 1,617,000
388,000
361,000
2,494,000 1,849,000
2,882,000 2,210,000
0
749,000
182,000
73,000
1,694,000
615,000
2,031,000
2,646,000
Total with no related allowance recorded
$ 4,518,000 $ 3,827,000
$ 4,340,000
(Continued)
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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,
2018:
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
$
175,000 $ 166,000 $
43,000 $
33,000
0
147,000
210,000
3,000
535,000
0
147,000
210,000
3,000
526,000
0
0
0
0
43,000
0
349,000
42,000
1,000
425,000
462,000
418,000
880,000
440,000
371,000
811,000
178,000
89,000
267,000
95,000
74,000
169,000
Total with an allowance recorded
$ 1,415,000 $ 1,337,000 $
310,000 $
594,000
Total impaired loans:
Commercial
Retail
Total impaired acquired loans
$ 2,171,000 $ 2,143,000 $
3,762,000 3,021,000
$ 5,933,000 $ 5,164,000 $
43,000 $ 2,119,000
267,000 2,815,000
310,000 $ 4,934,000
Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby
the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt
restructurings totaled $1.3 million, $1.1 million and $0.4 million during 2019, 2018 and 2017, respectively. Interest
income recognized on nonaccrual loans totaled less than $0.1 million in 2019 and 2018, and $0.5 million during 2017,
reflecting the collection of interest at the time of principal pay-off. Lost interest income on nonaccrual loans totaled $0.1
million in 2019 and $0.3 million during 2018 and 2017.
(Continued)
F-68
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2019:
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 $
$
491,385,000 $
293,678,000
14,358,000
25,037,000 $
26,975,000
85,000
333,051,000 $
203,318,000
6,192,000
515,914,000 $
261,080,000
0
69,474,000
30,727,000
143,000
799,421,000 $
52,097,000 $
542,561,000 $
776,994,000 $
100,344,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
61,060,000 $
282,248,000
(Continued)
F-69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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 $
$
30,535,000 $
16,146,000
449,000
1,028,000 $
2,741,000
253,000
18,620,000 $
17,662,000
160,000
47,173,000 $
11,044,000
135,000
15,678,000
8,476,000
27,000
47,130,000 $
4,022,000 $
36,442,000 $
58,352,000 $
24,181,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
14,314,000 $
57,501,000
(Continued)
F-70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans by credit quality indicators were as follows as of December 31, 2018:
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 $
$
508,611,000 $
238,942,000
21,145,000
28,170,000 $
11,686,000
94,000
325,459,000 $
163,455,000
11,274,000
526,445,000 $
218,682,000
0
75,051,000
22,798,000
186,000
768,698,000 $
39,950,000 $
500,188,000 $
745,127,000 $
98,035,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
65,023,000 $
235,425,000
(Continued)
F-71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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 $
$
34,678,000 $
19,122,000
225,000
1,246,000 $
3,431,000
258,000
21,595,000 $
25,485,000
1,351,000
54,401,000 $
16,687,000
67,000
16,050,000
13,460,000
52,000
54,025,000 $
4,935,000 $
48,431,000 $
71,155,000 $
29,562,000
Retail credit exposure – credit risk profiled by collateral type:
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
Total retail
$
20,416,000 $
72,115,000
(Continued)
F-72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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-73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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,
2019 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
19,442,000 $ 2,068,000 $
320,000
1,521,000
(428,000 )
(455,000 )
302,000
326,000
20,834,000 $ 2,262,000 $
44,000 $
26,000
0
0
70,000 $
21,554,000
1,867,000
(883,000 )
628,000
23,166,000
Ending balance: individually evaluated for
impairment
$
1,150,000 $
247,000 $
0 $
1,397,000
Ending balance: collectively evaluated for
impairment
Total loans:
Ending balance
$
19,684,000 $ 2,015,000 $
70,000 $
21,769,000
$ 2,271,417,000 $ 343,308,000
$ 2,614,725,000
Ending balance: individually evaluated for
impairment
$
9,828,000 $ 1,537,000
$
11,365,000
Ending balance: collectively evaluated for impairment $ 2,261,589,000 $ 341,771,000
$ 2,603,360,000
The allowance for acquired loan losses for the year-ended December 31, 2019 is as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
177,000 $
57,000
0
2,000
236,000 $
649,000 $
(174,000 )
0
12,000
487,000 $
0 $
0
0
0
0 $
826,000
(117,000 )
0
14,000
723,000
(Continued)
F-74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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,
2018 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
16,456,000 $ 2,584,000 $
(377,000 )
(761,000 )
622,000
19,442,000 $ 2,068,000 $
826,000
(428,000 )
2,588,000
93,000 $
(49,000 )
0
0
44,000 $
19,133,000
400,000
(1,189,000 )
3,210,000
21,554,000
Ending balance: individually evaluated for
impairment
$
451,000 $
237,000 $
0 $
688,000
Ending balance: collectively evaluated for
impairment
Total loans:
Ending balance
$
18,991,000 $ 1,831,000 $
44,000 $
20,866,000
$ 2,151,998,000 $ 300,448,000
$ 2,452,446,000
Ending balance: individually evaluated for
impairment
$
17,134,000 $ 1,748,000
$
18,882,000
Ending balance: collectively evaluated for impairment $ 2,134,864,000 $ 298,700,000
$ 2,433,564,000
The allowance for acquired loan losses for the year-ended December 31, 2018 is as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
291,000 $
132,000
(246,000 )
0
177,000 $
77,000 $
568,000
(15,000 )
19,000
649,000 $
0 $
0
0
0
0 $
368,000
700,000
(261,000 )
19,000
826,000
(Continued)
F-75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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
Ending balance: individually evaluated for
impairment
Ending balance: collectively evaluated for
impairment
Total loans:
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
$
1,202,000 $
665,000 $
0 $
1,867,000
$
15,254,000 $ 1,919,000 $
93,000 $
17,266,000
$ 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, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the year-ended December 31, 2019 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
5 $
435,000 $
435,000
1
1
0
0
7
4
0
4
87,000
1,567,000
0
0
2,089,000
87,000
1,567,000
0
0
2,089,000
51,000
0
51,000
51,000
0
51,000
11 $
2,140,000 $
2,140,000
0 $
0
1
0
0
1
0 $
0
0
102,000
0
0
102,000
0
102,000
0
0
102,000
16
8
24
244,000
310,000
554,000
245,000
310,000
555,000
25 $
656,000 $
657,000
(Continued)
F-77
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the year-ended December 31, 2018 were as follows:
Pre-
Post-
Modification Modification
Recorded
Principal
Balance
Recorded
Principal
Balance
Number of
Contracts
Originated Loans
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Acquired Loans
Commercial:
Commercial and industrial
Vacant land, land development and residential
construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
9 $
12,297,000 $
12,263,000
0
1
0
0
10
2
0
2
0
2,284,000
0
0
14,581,000
0
2,284,000
0
0
14,547,000
63,000
0
63,000
63,000
0
63,000
12 $
14,644,000 $
14,610,000
0 $
0
1
0
0
1
0 $
0
0
150,000
0
0
150,000
0
150,000
0
0
150,000
16
4
20
414,000
91,000
505,000
416,000
90,000
506,000
21 $
655,000 $
656,000
(Continued)
F-78
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2019 (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, 2019 (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
1
2
3
0
0
0
0
0
0
20,000
106,000
126,000
3 $
126,000
(Continued)
F-79
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2018 (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, 2018 (amounts as of period end):
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
Home equity and other
1-4 family mortgages
Total retail
Total
Number of
Contracts
Recorded
Principal
Balance
0 $
0
0
0
0
0
0
0
0
0 $
0
0
0
0
0
0
0
0
0
0
(Continued)
F-80
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the year-ended December 31, 2019 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
$ 13,590,000 $
0
(20,244,000 )
0
14,812,000
$ 8,158,000 $
0 $ 2,682,000 $
0
0
(2,000 ) (2,947,000 )
0
87,000 1,250,000
985,000 $
85,000 $
0
0 $
0
0
0
0
0 $
0
0
0
0
0
0
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
$
$
938,000 $
0
(114,000 )
0
50,000
874,000 $
142,000
0
(110,000 )
0
0
32,000
(Continued)
F-81
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the year-ended December 31, 2019 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
$
$
548,000 $
0
(120,000 )
0
1,000
429,000 $
0 $
0
0
0
0
0 $
418,000 $
0
(873,000 )
(97,000 )
712,000
160,000 $
210,000 $
0
(32,000 )
0
0
178,000 $
24,000
0
(17,000 )
0
0
7,000
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
$
$
464,000 $
(18,000 )
(158,000 )
0
253,000
541,000 $
436,000
0
(52,000 )
0
308,000
692,000
(Continued)
F-82
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the year-ended December 31, 2018 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
$ 2,989,000 $
(230,000 )
(692,000 )
0
11,523,000
$ 13,590,000 $
0
383,000 $ 1,599,000 $
0
(383,000 ) (4,999,000 )
0
0
0 6,082,000
0 $ 2,682,000 $
0 $
0
0
0
0
0 $
0
0
0
0
0
0
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
$
$
1,127,000 $
0
(251,000 )
0
62,000
938,000 $
146,000
0
(4,000 )
0
0
142,000
(Continued)
F-83
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the year-ended December 31, 2018 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
$ 1,001,000 $
(275,000 )
(100,000 )
0
(78,000 )
548,000 $
$
427,000 $
0 $
0
0
0 (1,664,000 )
0
(93,000 )
0 1,748,000
418,000 $
0 $
237,000 $
0
(27,000 )
0
0
210,000 $
41,000
0
(17,000 )
0
0
24,000
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
$
$
219,000 $
(30,000 )
(72,000 )
(82,000 )
429,000
464,000 $
393,000
0
(37,000 )
0
80,000
436,000
(Continued)
F-84
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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-85
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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-86
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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,
2019
December 31,
2018
$
202,000 $
0
982,000
0
0
1,184,000
311,000
83,000
394,000
126,000
0
363,000
0
0
489,000
337,000
110,000
447,000
Total related allowance
$
1,578,000 $
936,000
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
2019
2018
$
17,039,000 $
52,847,000
22,712,000
92,598,000
35,271,000
18,198,000
45,362,000
18,139,000
81,699,000
33,378,000
Total premises and equipment
$
57,327,000 $
48,321,000
Future lease payments at December 31, 2019 totaled $3.8 million, comprised of $0.6 million in one year, $1.1 million in
one to three years, $0.9 million in three to five years and $1.2 million in over five years. Future lease payments at
December 31, 2018 totaled $3.0 million, comprised of $0.4 million in one year, $0.7 million in one to three years, $0.5
million in three to five years and $1.4 million in over five years. Depreciation expense totaled $3.9 million in 2019, $3.6
million in 2018, and $3.0 million in 2017.
(Continued)
F-87
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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
2019
2018
$
$
711,643,000 $
15,317,000
726,960,000 $
599,262,000
16,333,000
615,595,000
Custodial escrow balances, which are reported as deposits on the Consolidated Balance Sheets, maintained in connection
with serviced loans were $6.4 million and $4.1 million as of December 31, 2019 and December 31, 2018, respectively.
Activity for capitalized mortgage loan servicing rights during 2019 and 2018 was as follows:
Balance at beginning of year
Additions
Amortized to expense
Balance at end of year
2019
2018
$
4,436,000 $
1,962,000
(1,746,000 )
5,106,000
842,000
(1,512,000 )
$
4,652,000 $
4,436,000
We determined that no valuation allowance was necessary as of December 31, 2019 or December 31, 2018. The estimated
fair value of mortgage servicing rights was $7.4 million and $8.4 million as of December 31, 2019 and December 31, 2018,
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 2019, fair value was determined using a discount rate of 10.0%, a weighted average constant prepayment rate of
15.3%, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.32%. During
2018, fair value was determined using a discount rate of 10.0%, a weighted average constant prepayment rate of 9.3%,
depending on the stratification of the specific right, and a weighted average delinquency rate of 0.32%.
The weighted average amortization period was 5.3 years and 7.3 years as of December 31, 2019 and December 31, 2018,
respectively. Estimated amortization as of December 31, 2019 is as follows:
2020
2021
2022
2023
2024
Thereafter
$
1,099,000
925,000
759,000
604,000
467,000
798,000
(Continued)
F-88
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 7 – CORE DEPOSIT INTANGIBLE ASSET, NET
The gross carrying amount of core deposit intangible assets totaled $17.5 million as of December 31, 2019 and December
31, 2018. As of December 31, 2019, the accumulated amortization on core deposit intangible assets was $13.7 million,
providing for a net carry balance of $3.8 million. As of December 31, 2018, the accumulated amortization on core deposit
intangible assets was $11.9 million, providing for a net carry balance of $5.6 million.
The scheduled amortization expense on core deposit intangible assets in future periods is:
2020
2021
2022
2023
2024
$
1,403,000
1,086,000
768,000
450,000
133,000
NOTE 8 – DEPOSITS
Deposits at year-end are summarized as follows:
December 31, 2019
%
Balance
December 31, 2018
%
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
$ 924,916,000
332,373,000
509,368,000
269,318,000
198,123,000
322,827,000
2,556,925,000
34.4 % $ 889,784,000
12.3 339,089,000
18.9 434,333,000
10.0 317,014,000
7.4 160,092,000
12.0 210,164,000
95.0 2,350,476,000
Out-of-area time, under $100,000
Out-of-area time, $100,000 and over
Total out-of-area deposits
0
133,459,000
133,459,000
0.0
0
5.0 113,232,000
5.0 113,232,000
36.1 %
13.8
17.6
12.9
6.5
8.5
95.4
0.0
4.6
4.6
3.9 %
(2.0 )
17.3
(15.0 )
23.8
53.6
8.8
0.0
17.9
17.9
Total deposits
$ 2,690,384,000
100.0 % $ 2,463,708,000
100.0 %
9.2 %
Out-of-area time deposits consist of deposits obtained from depositors outside of our primary market areas exclusively
through deposit brokers.
(Continued)
F-89
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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
2019
2018
$
360,395,000 $
173,512,000
82,480,000
16,019,000
22,003,000
204,253,000
167,484,000
58,671,000
36,690,000
16,390,000
Total certificates of deposit
$
654,409,000 $
483,488,000
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
2019
2018
$
100,635,000 $
59,838,000
93,691,000
202,122,000
34,367,000
41,939,000
57,137,000
189,953,000
Total certificates of deposit
$
456,286,000 $
323,396,000
Total time deposits of more than $250,000 totaled $320 million and $232 million at year-end 2019 and 2018, 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
2019
2018
$
$
102,675,000 $
0.17 %
103,519,000
0.26 %
105,234,000 $
0.24 %
101,005,000
0.24 %
Maximum daily balance during the year
$
133,411,000 $
123,046,000
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-90
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $354 million at December 31, 2019, and were
expected to mature at varying dates from April 2020 through June 2025, with fixed rates of interest from 1.36% to 3.18%
and averaging 2.45%. FHLBI advances totaled $350 million at December 31, 2018, and were expected to mature at
varying dates ranging from January 2019 through June 2025, with fixed rates of interest from 1.20% to 3.18% and
averaging 2.30%.
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, 2019 totaled $813 million, with availability of $453 million.
Scheduled maturities as of December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
$
40,000,000
70,000,000
94,000,000
80,000,000
50,000,000
20,000,000
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 were 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 was recorded to income tax expense in the year the tax
law was 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 allowed 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. At the conclusion of our analysis of H.R.1, we determined that no adjustments to our
initial analysis were required.
The consolidated income tax expense is as follows:
Current expense
Deferred expense
Effect of federal tax law change
Tax expense
2019
2018
2017
$
$
10,978,000 $
26,000
0
11,004,000 $
10,170,000 $
(372,000 )
0
9,798,000 $
13,978,000
(505,000 )
1,336,000
14,809,000
(Continued)
F-91
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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
Increase (decrease) from
Tax-exempt interest
Bank owned life insurance
Effect of federal tax law change
Other
Tax expense
2019
2018
2017
$
12,697,000 $
10,883,000 $
16,129,000
(644,000 )
(804,000 )
0
(245,000 )
11,004,000 $
(620,000 )
(201,000 )
0
(264,000 )
9,798,000 $
(1,030,000 )
(948,000 )
1,336,000
(678,000 )
14,809,000
$
The statutory tax rate was 21% for 2019 and 2018 and 35% for 2017.
Significant components of deferred tax assets and liabilities as of December 31, 2019 and 2018 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
Unrealized loss on securities
Other
Deferred tax asset before valuation allowance
Valuation allowance
Deferred tax asset after valuation allowance
Deferred income tax liabilities
Depreciation
Prepaid expenses
Core deposit intangible
Mortgage loan servicing rights
Unrealized gain on securities
Business combination adjustments
Other
Deferred tax liability
Total net deferred tax asset
$
2019
2018
5,017,000 $
577,000
720,000
239,000
104,000
94,000
26,000
0
683,000
7,460,000
(94,000 )
7,366,000
1,743,000
269,000
787,000
977,000
982,000
2,058,000
485,000
7,301,000
4,700,000
630,000
660,000
297,000
185,000
94,000
15,000
2,190,000
340,000
9,111,000
(94,000 )
9,017,000
1,205,000
238,000
1,142,000
932,000
0
2,054,000
183,000
5,754,000
$
65,000 $
3,263,000
(Continued)
F-92
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2019 and 2018, we carried a valuation allowance of
$0.1 million against capital loss carryforwards generated by the disposal of certain capital investments acquired in our
merger with Firstbank. The $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 2019 or 2018 and do not anticipate any significant increase in
unrecognized tax benefits during 2020. 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 2019 or 2018. Our U.S. federal income tax returns are no longer subject to examination for all years before 2016.
NOTE 12 – STOCK-BASED COMPENSATION
Stock-based compensation plans are used to provide directors and employees with an increased incentive to contribute to
our long-term performance and growth, to align the interests of directors and employees with the interests of our
shareholders through the opportunity for increased stock ownership and to attract and retain directors and employees.
During 2014 and 2015, stock option and restricted stock grants were provided to certain employees from the Stock
Incentive Plan of 2006. During the years 2016 through 2019, restricted stock grants were provided to certain employees
from the Stock Incentive Plan of 2016. Stock option grants were also provided to certain employees during 2016 from the
Stock Incentive Plan of 2016, as well as stock grants to directors as retainer payments during the years 2016 through 2019.
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 the years 2014 through 2019 fully vest after three years and, in the case of performance-based
restricted stock issued to executive officers in 2018 and 2019, are subject to the attainment of pre-determined performance
goals. 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 2019, there were approximately 102,000 shares
authorized for future incentive awards.
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-93
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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:
2019
2018
2017
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
262,967 $
84,596
(81,772 )
(3,531 )
262,260 $
33.97
35.29
32.19
34.85
34.91
239,637 $
91,400
(55,792 )
(12,278 )
262,967 $
32.37
31.82
25.14
31.62
33.97
228,343 $
94,592
(74,979 )
(8,319 )
239,637 $
26.09
37.11
20.17
23.75
32.37
Of the restricted stock shares granted in 2019 and 2018, a total of 23,596 and 24,633 (at the target level), respectively, are
performance-based awards made to our Named Executive Officers and are subject to the attainment of pre-determined
performance goals.
A summary of stock option activity from grants issued under Mercantile plans during the past three years is as follows:
2019
2018
2017
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding at
beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of
year
Options exercisable at
year-end
13,700 $
0
(4,000 )
0
30.51
NA
24.91
NA
15,808 $
0
(2,108 )
0
29.62
NA
23.77
NA
16,808 $
0
(1,000 )
0
29.17
NA
22.15
NA
9,700 $
32.83
13,700 $
30.51
15,808 $
29.62
9,700 $
32.83
13,700 $
30.51
9,308 $
25.00
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. No stock option grants were made during the past three years.
(Continued)
F-94
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
Options issued under Mercantile plans outstanding at year-end 2019 were as follows:
Range of
Exercise
Prices
$22.00 - $23.00
$27.00 - $28.00
$36.00 - $37.00
Outstanding at year end
Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Exercisable
Weighted
Average
Exercise
Price
Number
Number
1,000
2,200
6,500
9,700
1.9
2.9
3.9
3.4
$
$
22.15
27.66
36.22
32.83
1,000
2,200
6,500
9,700
$
$
22.15
27.66
36.22
32.83
Information related to options issued under various Mercantile plans outstanding at year-end 2019, 2018 and 2017 is as
follows:
2019
2018
2017
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
22.15 $
36.22
3.4
22.15 $
36.22
4.1
22.15
36.22
5.0
Information related to stock option grants and exercises issued under various Mercantile plans during 2019, 2018 and 2017
is as follows:
2019
2018
2017
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
$
43,000 $
97,000
0
17,000 $
33,000
0
NA
NA
15,000
0
0
NA
The aggregate intrinsic value of in-the-money stock options issued under Mercantile plans outstanding and exercisable at
December 31, 2019 was less than $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-95
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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:
2019
2018
2017
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding at
beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of
year
Options exercisable at
year-end
5,200 $
0
(4,200 )
0
6.57
NA
6.90
NA
15,100 $
0
(9,900 )
0
7.20
NA
7.53
NA
44,275 $
0
(27,675 )
(1,500 )
9.86
NA
11.50
6.33
1,000 $
5.19
5,200 $
6.57
15,100 $
7.20
1,000 $
5.19
5,200 $
6.57
15,100 $
7.20
Options issued under Firstbank plans outstanding at year-end 2019 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
$ 5.00 - $ 6.00
Outstanding at year end
1,000
1,000
0.9
0.9
$
$
5.19
5.19
$
1,000
1,000 $
5.19
5.19
Information related to options issued under Firstbank plans outstanding at year-end 2019, 2018 and 2017 is as follows:
2019
2018
2017
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
5.19 $
5.19
0.9
5.19 $
8.60
1.5
5.19
8.60
1.7
(Continued)
F-96
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 12 – STOCK-BASED COMPENSATION (Continued)
Information related to stock option grants and exercises issued under Firstbank plans during 2018, 2017 and 2016 is as
follows:
2019
2018
2017
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
$
114,000 $
29,000
0
300,000 $
108,000
0
594,000
318,000
208,000
NA
NA
NA
The aggregate intrinsic value of all stock options issued under various Firstbank plans outstanding and exercisable at
December 31, 2019 was less than $0.1 million. Shares issued as a result of the exercise of stock option grants have been
authorized and previously unissued shares.
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 cost was expensed on a straightline basis over
the respective twelve month period. On May 24, 2018, we granted about 11,000 shares of common stock to our Corporate,
Bank and Regional Advisory Boards of Directors for retainer payments for the period of June 1, 2018 through May 31,
2019. The associated $0.4 million cost was expensed on a straightline basis over the respective twelve month period. On
October 25, 2018, we granted about 1,000 shares of common stock to newly appointed Bank Board members for retainer
payments for the period of October 1, 2018 through May 31, 2019. The associated less than $0.1 million cost was
expensed over the respective eight-month period. On May 23, 2019, 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, 2019
through May 31, 2020. The associated $0.4 million cost is being expensed on a straightline basis over the respective
twelve month period.
NOTE 13 – RELATED PARTIES
Certain directors and executive officers of our bank, including their immediate families and companies in which they are
principal owners, were loan customers of our bank. At year-end 2019 and 2018, our bank had $115 million and $41.3
million in loan commitments to directors and executive officers, of which $104 million and $92.0 million were outstanding
at year-end 2019 and 2018, respectively, as reflected in the following table.
Beginning balance
New loans
Repayments
Ending balance
2019
2018
$
92,033,000 $
16,662,000
(4,652,000 )
14,473,000
79,330,000
(1,770,000 )
$
104,043,000 $
92,033,000
Related party deposits and repurchase agreements totaled $15.0 million and $14.8 million at year-end 2019 and 2018,
respectively.
(Continued)
F-97
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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, 2019 and 2018.
At year-end 2019 and 2018, 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
2019
2018
$
776,493,000 $
60,858,000
58,199,000
18,135,000
101,961,000
22,798,000
784,895,000
57,378,000
47,432,000
20,231,000
101,517,000
25,322,000
$ 1,038,444,000 $ 1,036,775,000
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 6.00%. 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 4.50% to
6.00%. These credit facilities generally mature and fully amortize within three to seven years.
(Continued)
F-98
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 14 – COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
The following instruments are considered financial guarantees under current accounting guidance. These instruments are
carried at fair value.
2019
2018
Contract
Amount
Carrying
Value
Contract
Amount
Carrying
Value
Standby letters of credit
$ 22,798,000 $
160,000 $ 25,322,000 $
126,000
We were required to have $10.7 million and $9.1 million of cash on hand or on deposit with the Federal Reserve Bank of
Chicago to meet regulatory reserve and clearing requirements at December 31, 2019 and December 31, 2018, 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 had been 4.25% since
January 1, 2014; effective April 1, 2018, the matching contribution was increased to 5.00%. Matching contributions, if
made, are immediately vested. Our 2019, 2018 and 2017 matching 401(k) contributions charged to expense were $1.7
million, $1.6 million and $1.3 million, respectively.
We have a deferred compensation plan in which all persons serving on the Board of Directors may defer all or portions of
their annual retainer and meeting fees, with distributions to be paid upon termination of service as a director or specific
dates selected by the director. We also have a non-qualified deferred compensation program in which selected officers may
defer all or portions of salary and bonus payments. The deferred amounts, totaling $2.7 million and $3.0 million as of
December 31, 2019 and 2018, 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 $0.1 million during 2019 and 2018,
and less than $0.1 million during 2017.
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 1,507 and 1,579 in 2019
and 2018, respectively. As of December 31, 2019, there were approximately 241,000 shares available under our current
plan.
(Continued)
F-99
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 16 – 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):
Level in
Fair Value
Hierarchy
2019
2018
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets
Cash
Cash equivalents
Securities available for
sale
Level 1
Level 2
$
16,430
217,301
$
16,430
217,301
$
15,656
59,698
$
15,656
59,698
(1)
334,655
334,655
337,366
337,366
Federal Home Loan Bank
(2)
stock
Level 3
Loans, net
Loans held for sale
Level 2
Mortgage servicing rights Level 2
Accrued interest
18,002
2,827,800
4,978
4,652
18,002
2,887,168
4,978
7,375
16,022
2,729,583
1,122
4,436
16,022
2,711,687
1,122
8,444
receivable
Level 2
9,944
9,944
9,896
9,896
Financial liabilities
Deposits
Securities sold under
agreements to
repurchase
Level 2
2,690,384
2,600,452
2,463,708
2,471,617
Level 2
102,675
102,675
103,519
103,519
Federal Home Loan Bank
advances
Subordinated debentures
Accrued interest payable
Level 2
Level 2
Level 2
354,000
46,881
3,949
361,887
46,140
3,949
350,000
46,199
2,249
348,428
46,543
2,249
(1) See Note 17 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets
and liabilities.
(2) It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is
estimated at carrying amount.
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and
payable, noninterest-bearing checking accounts and securities sold under agreements to repurchase. 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. Fair value for loans is based on an exit price model as required by ASU 2016-01, taking into
account inputs such as discounted cash flows, probability of default and loss given default assumptions. Fair value for
deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market
rates applied to the estimated life. 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. The fair values of subordinated debentures and FHLBI advances are based on current rates for similar
financing. The fair value of off-balance sheet items is estimated to be nominal.
(Continued)
F-100
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 17 – 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, and municipal general obligation and revenue bonds. 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, 2019 or 2018. We
have no Level 1 securities available for sale.
(Continued)
F-101
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 17 – 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, 2019 and 2018, we determined that the
fair value of our mortgage loans held for sale approximated the recorded cost of $5.0 million and $1.1 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. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield
curves.
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, 2019 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
Total
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 186,410,000 $
42,470,000
101,079,000
4,196,000
500,000
$ 334,655,000 $
0
0 $ 186,410,000 $
0
0 42,470,000
2,050,000
0 99,029,000
0
4,196,000
0
0
0
500,000
0 $ 332,605,000 $ 2,050,000
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2019. The $1.7 million reduction in Level 3
municipal general obligation bonds during 2019 reflects the scheduled maturities of such bonds.
(Continued)
F-102
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 17 – FAIR VALUE MEASUREMENTS (Continued)
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 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
Total
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 187,077,000 $
43,658,000
102,497,000
3,634,000
500,000
$ 337,366,000 $
0
0 $ 187,077,000 $
0
0 43,658,000
3,729,000
0 98,768,000
0
3,634,000
0
0
0
500,000
0 $ 333,637,000 $ 3,729,000
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2018. The $1.5 million reduction in Level 3
municipal general obligation bonds during 2018 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, 2019 are as
follows:
Quoted
Prices
in Active
Markets for
Identical
Assets
Total
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Impaired loans
Foreclosed assets
Total
$ 1,107,000 $
452,000
$ 1,559,000 $
0 $
0
0 $
0 $ 1,107,000
0
452,000
0 $ 1,559,000
(Continued)
F-103
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 17 – FAIR VALUE MEASUREMENTS (Continued)
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2018 are as
follows:
Quoted
Prices
in Active
Markets for
Identical
Assets
Total
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Impaired loans
Foreclosed assets
Total
$ 8,181,000 $
811,000
$ 8,992,000 $
0 $
0
0 $
0 $ 8,181,000
811,000
0
0 $ 8,992,000
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 18 – EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
Basic
Net income attributable to common shares
$
49,456,000 $
42,024,000 $
31,274,000
2019
2018
2017
Weighted average common shares outstanding
16,405,159
16,600,612
16,478,968
Basic earnings per common share
Diluted
Net income attributable to common shares
$
$
3.01 $
2.53 $
1.90
49,456,000 $
42,024,000 $
31,274,000
Weighted average common shares outstanding for basic
earnings per common share
16,405,159
16,600,612
16,478,968
Add: Dilutive effects of share-based awards
3,976
5,804
10,102
Average shares and dilutive potential common shares
16,409,135
16,606,416
16,489,070
Diluted earnings per common share
$
3.01 $
2.53 $
1.90
Stock options for approximately 7,000 shares of common stock were antidilutive and were not included in determining
dilutive earnings per share in 2019, 2018 and 2017.
(Continued)
F-104
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 19 – 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 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.
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, 2019:
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 20 - 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-105
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 20 - 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 2019 and 2018, 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, 2019 that we believe have changed our bank’s
categorization.
Our actual capital levels (dollars in thousands) and minimum required levels were:
Actual
Amount
Ratio
Minimum Required
for Capital
Adequacy Purposes
Amount Ratio
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Amount Ratio
$ 429,038
424,917
13.1 % $ 262,141
262,088
13.0
8.0 % $
8.0
NA
327,610
NA
10.0 %
405,148
401,027
12.4
12.2
196,606
196,566
6.0
6.0
NA
262,088
360,342
401,027
11.0
12.2
147,454
147,425
4.5
4.5
NA
212,947
405,148
401,027
11.3
11.2
143,689
143,670
4.0
4.0
NA
179,588
NA
8.0
NA
6.5
NA
5.0
2019
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
(Continued)
F-106
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 20 - 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
$ 396,102
388,591
12.5 % $ 253,413
253,225
12.3
8.0 % $
8.0
NA
316,531
NA
10.0 %
373,721
366,211
11.8
11.6
190,060
189,919
6.0
6.0
NA
253,225
329,596
366,211
10.4
11.6
142,545
142,439
4.5
4.5
NA
205,745
373,721
366,211
11.4
11.2
131,014
130,913
4.0
4.0
NA
163,641
NA
8.0
NA
6.5
NA
5.0
2018
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
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 has been
phased in over three years beginning in 2016. The capital buffer requirement effectively raised 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, 2019, our bank met all capital adequacy
requirements under the Basel III capital rules.
Federal and state banking laws and regulations place certain restrictions on the amount of dividends our bank can transfer
to Mercantile and on the capital levels that must be maintained. At year-end 2019, under the most restrictive of these
regulations, our bank could distribute $75.2 million to Mercantile as dividends without prior regulatory approval. Our and
our bank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to
prudent and sound banking practices. On January 17, 2019, our Board of Directors declared a cash dividend on our
common stock in the amount of $0.26 per share that was paid on March 20, 2019 to shareholders of record as of March 8,
2019. On April 11, 2019, our Board of Directors declared a cash dividend on our common stock in the amount of $0.26 per
share that was paid on June 19, 2019 to shareholders of record as of June 7, 2019. On July 11, 2019, our Board of
Directors declared a cash dividend on our common stock in the amount of $0.27 per share that was paid on September 18,
2019 to shareholders of record as of September 6, 2019. On October 10, 2019, our Board of Directors declared a cash
dividend on our common stock in the amount of $0.27 per share that was paid on December 18, 2019 to shareholders of
record as of December 6, 2019.
(Continued)
F-107
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 20 - REGULATORY MATTERS (Continued)
On January 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per
share that will be paid on March 18, 2020 to shareholders of record as of March 6, 2020.
In May 2019, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our
common stock from time to time in open market transactions at prevailing market prices or by other means in accordance
with applicable regulations. This stock repurchase plan was instituted in conjunction with the completion of our existing
program that was introduced in January 2015 and later expanded in April 2016. During 2019, we repurchased a total of
233,300 shares at a total price of $7.2 million, at an average price per share of $30.79. During the period of January 2015
through December 2019, we repurchased a total of about 1.4 million shares at a total price of $32.6 million, at an average
price per share of $23.47. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional
repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded
from cash dividends paid to us from our bank.
Our consolidated capital levels as of December 31, 2019 and 2018 include $44.8 million and $44.1 million, respectively, of
trust preferred securities. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted
core capital element. The guidelines provide that the aggregate amount of restricted core capital elements that may be
included in Tier 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, 2019 and 2018, all $44.8 million and $44.1
million, respectively, of the trust preferred securities were included as Tier 1 capital of Mercantile.
NOTE 21 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2019, accumulated other comprehensive income, net of tax effects (as applicable), consisted of a net
unrealized gain on available for sale securities of $3.7 million. At December 31, 2018, accumulated other comprehensive
income, net of tax effects (as applicable), consisted of a net unrealized loss on available for sale securities of $8.2 million.
NOTE 22 - QUARTERLY FINANCIAL DATA (Unaudited)
2019
First quarter
Second quarter
Third quarter
Fourth quarter
2018
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Net
Income
Earnings per Share
Basic
Diluted
$ 38,637,000 $ 30,645,000 $ 11,824,000 $
39,820,000 31,116,000 11,715,000
40,316,000 31,605,000 12,600,000
39,564,000 31,168,000 13,317,000
$ 34,981,000 $ 30,199,000 $ 10,881,000 $
34,319,000 29,225,000 9,446,000
35,486,000 29,840,000 10,123,000
37,195,000 30,818,000 11,574,000
0.72 $
0.71
0.77
0.81
0.66 $
0.57
0.61
0.70
0.72
0.71
0.77
0.81
0.66
0.57
0.61
0.70
(Continued)
F-108
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 23 – 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
2019
2018
$
6,045,000 $
439,946,000
18,032,000
9,653,000
394,561,000
19,740,000
$
464,023,000 $
423,954,000
$
581,000 $
46,881,000
416,561,000
2,506,000
46,199,000
375,249,000
Total liabilities and shareholders’ equity
$
464,023,000 $
423,954,000
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
2019
2018
2017
$
22,246,000 $
22,246,000
33,832,000 $
33,832,000
16,203,000
16,203,000
3,153,000
4,804,000
7,957,000
2,999,000
4,424,000
7,423,000
2,496,000
3,651,000
6,147,000
14,289,000
26,409,000
10,056,000
(1,718,000 )
(1,610,000 )
(4,060,000 )
Equity in undistributed net income of subsidiary
33,449,000
14,005,000
17,158,000
Net income
$
49,456,000 $
42,024,000 $
31,274,000
Comprehensive income
$
61,390,000 $
38,646,000 $
32,821,000
(Continued)
F-109
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 23 – 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
$
activities:
Equity in undistributed net income of subsidiary
Stock-based compensation expense
Stock grants to directors for retainer fees
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
Net cash for financing activities
2019
2018
2017
49,456,000 $
42,024,000 $
31,274,000
(33,449,000 )
2,931,000
375,000
2,387,000
(1,924,000 )
19,776,000
(14,005,000 )
2,410,000
441,000
1,384,000
(187,000 )
32,067,000
(17,158,000 )
1,981,000
363,000
(230,000 )
(677,000 )
15,553,000
0
0
0
0
0
0
128,000
50,000
729,000
(7,183,000 )
(17,108,000 )
(23,384,000 )
108,000
52,000
1,165,000
(5,943,000 )
(27,500,000 )
(32,118,000 )
318,000
46,000
1,576,000
0
(12,046,000 )
(10,106,000 )
Net change in cash and cash equivalents
(3,608,000 )
(51,000 )
5,447,000
Cash and cash equivalents at beginning of period
9,653,000
9,704,000
4,257,000
Cash and cash equivalents at end of period
$
6,045,000 $
9,653,000 $
9,704,000
F-110
EXHIBIT NO.
EXHIBIT DESCRIPTION
EXHIBIT INDEX
2.1
2.2
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Agreement and Plan of Merger dated August 14, 2013, incorporated by reference to exhibit 2.1 to our
Current Report on Form 8-K filed August 15, 2013
First Amendment to Merger Agreement dated February 20, 2014, incorporated by reference to exhibit
10.1 to our Current Report on Form 8-K filed February 21, 2014
Our Articles of Incorporation are incorporated by reference to exhibit 3.1 of our Form 10-Q for the
quarter ended June 30, 2009
Our Amended and Restated By-laws dated as of February 26, 2014 are incorporated by reference to
exhibit 3.1 to our Current Report on Form 8-K filed February 26, 2015
Instruments defining the Rights of Security Holders – reference is made to Exhibits 3.1 and 3.2. In
accordance with Regulation S-K Item 601(b)(4), Mercantile Bank Corporation is not filing copies of
instruments defining the rights of holders of long-term debt because none of those instruments authorizes
debt in excess of 10% of the total assets of Mercantile Bank Corporation and its subsidiaries on a
consolidated basis. Mercantile Bank Corporation hereby agrees to furnish a copy of any such instrument
to the Securities and Exchange Commission upon request.
Form of Mercantile Bank of Michigan Split Dollar Agreement that has been entered into between our
bank and each of Michael H. Price, Robert B. Kaminski, Jr., Charles E. Christmas, and certain other
officers of our bank is incorporated by reference to exhibit 10.33 of our Form 10-K for the year ended
December 31, 2005*
Amendment and Restatement of Stock Incentive Plan of 2006 dated November 18, 2008 is incorporated
by reference to exhibit 10.39 of our Form 10-K for the year ended December 31, 2008*
Form of Notice of Grant of Incentive Stock Option and Stock Option Agreement for incentive stock
options granted after 2006 under our Stock Incentive Plan of 2006 is incorporated by reference to exhibit
10.41 of our Form 10-K for the year ended December 31, 2007*
Mercantile Bank Corporation Employee Stock Purchase Plan of 2014 is incorporated by reference to
exhibit 4(b) of our Registration Statement on Form S-8 that became effective on June 27, 2014
Amended and Restated Change in Control Agreement of Robert B. Kaminski, Jr. dated November 29,
2018, effective December 31, 2018, incorporated by reference to exhibit 10.6 of our Form 8-K filed
December 3, 2018*
Amended and Restated Change in Control Agreement of Charles E. Christmas dated November 29,
2018, effective December 31, 2018, incorporated by reference to exhibit 10.7 of our Form 8-K filed
December 3, 2018*
Form of Restricted Stock Award Agreement, incorporated by reference to exhibit 10.1 of our Form 8-K
filed November 18, 2016*
Form of Stock Option Agreement, incorporated by reference to exhibit 10.2 of our Form 8-K filed
November 18, 2016*
2017 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-
K filed May 26, 2017*
10.10
2018 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-
K filed May 25, 2018*
EXHIBIT NO.
EXHIBIT DESCRIPTION
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Amended and Restated Employment Agreement of Robert B. Kaminski, Jr. dated November 29, 2018,
effective December 31, 2018, incorporated by reference to exhibit 10.1 of our Form 8-K filed December
3, 2018*
Amended and Restated Employment Agreement of Charles E. Christmas dated November 29, 2018,
effective December 31, 2018, incorporated by reference to exhibit 10.2 of our Form 8-K filed December
3, 2018*
Amended and Restated Employment Agreement of Raymond E. Reitsma dated November 29, 2018,
effective December 31, 2018, incorporated by reference to exhibit 10.3 of our Form 8-K filed December
3, 2018*
Amended and Restated Employment Agreement of Robert T. Worthington dated November 29, 2018,
effective December 31, 2018, incorporated by reference to exhibit 10.4 of our Form 8-K filed December
3, 2018*
Amended and Restated Employment Agreement of Lonna L. Wiersma dated November 29, 2018,
effective December 31, 2018, incorporated by reference to exhibit 10.5 of our Form 8-K filed December
3, 2018*
Amended and Restated Change in Control Agreement of Robert B. Kaminski, Jr. dated November 29,
2018, effective December 31, 2018, incorporated by reference to exhibit 10.6 of our Form 8-K filed
December 3, 2018*
Amended and Restated Change in Control Agreement of Charles E. Christmas dated November 29,
2018, effective December 31, 2018, incorporated by reference to exhibit 10.7 of our Form 8-K filed
December 3, 2018*
Form of Performance Based Restricted Stock Award Agreement, incorporated by reference to exhibit
10.8 of our Form 8-K filed December 3, 2018*
2019 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-
K filed May 24, 2019*
10.20
Director Fee Summary*
21
23
31
Subsidiaries of the company
Consent of BDO USA, LLP
Rule 13a-14(a) Certifications
32.1
Section 1350 Chief Executive Officer Certification
32.2
Section 1350 Chief Financial Officer Certification
101
The following information from Mercantile’s Annual Report on Form 10-K for the year ended December
31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive
Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated
Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
* Management contract or compensatory plan.
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 2, 2020.
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 2, 2020.
/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, Chairman of the Board
/s/ Charles E. Christmas
Charles E. Christmas, Executive Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
CORPORATE INFORMATION
MERCANTILE BANK OF MICHIGAN
2020 STRATEGIC PLANNING TEAM
MERCANTILE BANK CORPORATION
SHAREHOLDER INFORMATION
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 Marketing Director
Douglas J. Ouellette
Senior Vice President
Chief Community Banking Officer
Raymond E. Reitsma
President
John R. Schulte
Senior Vice President
Chief Information Officer
Tara M. Randall
Senior Vice President
Retail Banking Director
Scott P. Setlock
Senior Vice President
Mortgage and Consumer Lending Department Head
Lonna L. Wiersma
Senior Vice President
Human Resource Director
Robert T. Worthington
Senior Vice President
Chief Operating Officer and General Counsel
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.
Annual Meeting
The Corporation’s Annual Meeting of Shareholders will
be held on Thursday, May 28, 2020, at the Mercantile
Bank Corporation Headquarters,
310 Leonard Street NW, Grand Rapids, MI 49504 at
9:00 am local time.
Corporation Headquarters
310 Leonard Street NW
Grand Rapids, MI 49504
616.406.3000 or 800.453.8700
Legal Counsel
Dickinson Wright, PLLC
500 Woodward Avenue, Suite 4000
Detroit, MI 48226
www.dickinson-wright.com
Independent Certified Public Accountants
BDO USA, LLP
200 Ottawa Avenue NW, Suite 300
Grand Rapids, MI 49503
Investor Relations
Lambert & Co.
47 Commerce Avenue SW
Grand Rapids, MI 49503
www.lambert.com
Common Stock Listing
NASDAQ Global Select Market
Symbol: MBWM
Stock Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
Shareholder Inquiries 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.
Please mail your request to:
Charles E. Christmas
Mercantile Bank Corporation
310 Leonard Street NW
Grand Rapids, MI 49504
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 services
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.
Mercantile Bank of Michigan and Michigan’s Community Bank
are registered trademarks of Mercantile Bank Corporation.
002CSNA7D1
Mercantile Bank Corporation, 310 Leonard Street NW, Grand Rapids, MI 49504, 800.453.8700
mercbank.com
2019 ANNUAL REPORT
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