Mercantile Bank of Michigan and Michigan’s Community Bank
are registered trademarks of Mercantile Bank Corporation.
002CSNB901
M
E
R
C
A
N
T
I
L
E
B
A
N
K
C
O
R
P
O
R
A
T
I
O
N
2
0
2
0
A
N
N
U
A
L
R
E
P
O
R
T
MERCBANK.COM
2020 ANNUAL REPORT
MISSION STATEMENT
The mission of Mercantile Bank Corporation is to provide financial value
in a highly professional and personalized manner.
We recognize that our most important partners are our CUSTOMERS.
We will satisfy our customers’ need for security
and achievement of their goals and dreams
by delivering top-quality service
that distinguishes us from our competitors.
Our EMPLOYEES are our most valuable asset.
Our exceptional team members are committed to cultivating
an environment of unique ideas, skills and backgrounds.
We also place a high value on
personal growth, development, equity and inclusion.
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.
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
Annual Meeting
will be held virtually.
The Corporation’s Annual Meeting of Shareholders
Thursday, May 27, 2021 at 9:00 am EDT
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
Mercantile and the financial services industry
filled an important role in helping businesses
and consumers in their efforts to survive the
economic challenges of 2020. Mercantile’s
strong preparedness plans provided a solid
framework for addressing the many issues
and concerns that emerged throughout the
year, and helped to keep our employees and
customers safe.
As reports of a contagious virus overseas
first started to surface in late January and
early February, Mercantile’s Pandemic
Response Team was activated and began
monitoring available
information and
developed specific plans and responses.
As the magnitude of the seriousness of the
virus became more known, and with the
eventual declaration of the situation as a
pandemic, the Mercantile team reacted
purposefully to position our organization as
a source of strength and assistance for the
communities we serve and to protect the
safety and soundness of all of our stakeholders.
In mid-March, we closed our lobbies for in-
person customer service in compliance with
local requirements and Centers For Disease
Control guidance. At the same time, our
Operations and Information Systems teams
implemented remote working for the bulk
of our staff. By the end of March, we had
at least 85% of our employees working from
home each day.
Mercantile’s prior investments and focus
on alternative banking channels, including
digital methods, allowed a smooth transition
to the new safety measures which restricted
in-person service.
Our Virtual Banking Team was able to meet
complex customer needs by utilizing our
Video Banking Machines (we call them “Live
ATM Bankers”), which had been introduced
in recent years at several of our locations.
Our customers adapted very quickly to
these new banking methods.
Mercantile was proactive in its outreach and
communication regarding COVID-19 related
relief with its customers, as recommended
by the federal and state governments and
our regulatory agencies. We provided initial
payment relief for customers currently in
good standing who were concerned about
the effects of the crisis on their cash flow.
During the early weeks of the pandemic and
associated mandatory business closures,
Mercantile provided payment relief on over
$700 million in outstanding business and
personal loans.
The Paycheck Protection Program (“PPP”),
as authorized under the CARES Act,
afforded a significant opportunity to quickly
deliver additional relief to our business
customers. The Mercantile team sped into
action, developing an effective process
to offer a path to assistance through PPP
for customers who wanted to apply. The
government rolled out the PPP quickly,
and as a result, guidance was very limited
and circumstances
forced the specific
rules governing the program to be rapidly
developed. Financial
institutions played
a critical role in providing information on
the nuances of the program to customers,
many of whom had never participated in
a government lending opportunity of any
kind.
Over the course of the next month we
funded loans to over 2,000 businesses
totaling over $550 million, providing them
with the funding needed to allow the
continued remittance of payroll to their
employees.
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 1
Additionally, the Mercantile team performed
in its characteristic customer-centric manner,
fulfilling the role of a trusted advisor for our
clients as they managed through the array of
challenges brought about by the pandemic.
Although our team devoted a significant
amount of time assisting both new and
existing customers in meeting pandemic-
related challenges, we still identified and
attracted new client relationships and
continued to meet the traditional needs of all
our customers. Additionally, numerous new
commercial relationships were developed
as a result of our team’s outstanding work
assisting some non-customers with PPP loan
requests where those clients experienced
slow responses from incumbent banks.
The Mercantile trusted advisor approach to
its client relationships is clearly effective
in any type of economic climate or market
condition.
As 2020 drew to a close, there was new
focus on PPP as we continued to work with
customers to facilitate the submission of their
forgiveness applications to the United States
Small Business Administration for first draw
loans funded earlier in the year. Additionally,
the approval of a new stimulus package by the
federal government introduced a new round
of PPP lending that would provide needed
relief to business customers continuing to
experience the impact of the pandemic as
the calendar turned to 2021.
As COVID-19 gained a foothold in the United
States in March, the Federal Open Market
Committee (“FOMC”) reduced interest rates
to historic lows to support the economy.
The low interest rates prompted a massive
rush of individuals seeking to refinance their
existing home mortgages or obtain new
loans for the purchase of homes.
Mercantile produced a record number of
mortgages in 2020.
Over the last five years, Mercantile had
rebuilt its mortgage banking operation with
the installment of new leadership, improved
processes and procedures, and a new
platform. Proven and experienced mortgage
lenders were also added to our teams
in most of our markets. These strategic
initiatives were developed and implemented
to create a significant retail revenue stream
to complement Mercantile’s traditionally
strong focus on the commercial segment.
In 2020, we opened mortgage production
offices in Midland, Michigan and in our first
venture outside of the state of Michigan
in Cincinnati, Ohio. The combination of all
these initiatives and the low interest rate
environment allowed us to generate a record
amount of real estate mortgage production
volume for our bank. For 2020, Mercantile had
mortgage production of 4,131 units totaling
$865 million for consumers throughout our
markets. Of that total, 2,851 units equaling
$567 million were for refinancing and 1,280
units equaling $298 million were for the
purpose of home purchase.
In addition to the great work done with
our mortgage production, development
continued in all areas of opportunity for
noninterest income.
The pandemic, however, dampened some
revenues during the peak period of the
mandated business closures in the late
winter and spring months. Revenue from
customer card usage dropped during March,
April and May from the same months in 2019,
but rebounded nicely from the summer
months through the end of the year to
demonstrate year over year growth in that
revenue category. Our MercForce Human
Capital Management Department also
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 2
experienced some challenges with revenues
in 2020, as payroll reductions by employers
and temporary business closures caused a
reduction in payroll processing activities.
But once again by the end of the year, those
revenues had rebounded as many employers
returned to full staffing.
While the federal government, through the
FOMC moved quickly to try to support a
suddenly struggling economy with dramatic
cuts in short term interest rates in March,
net interest margins of financial institutions
including Mercantile came under significant
pressure. As the asset sensitive composition
of our balance sheet caused a reduction in
revenue, the large amount of excess liquidity
we carried due to increasing customer
deposits, stemming from stimulus program
disbursements and
reduced customer
investing and spending, resulted in additional
net interest margin pressures. These factors
will also be present in 2021, and we will
continue to diligently work to lessen that
impact.
As economic uncertainty increased with
disruptions created by
the pandemic,
Mercantile embarked on a process to build
its Allowance for Loan and Lease Losses
(“ALLL”), and by the end of the year, the
reserve increased to 1.18% of total loans.
While the performance of Mercantile’s loan
portfolio remained remarkably strong, we
believed an increase in the loan loss reserve
was warranted in light of the challenging
economic conditions.
Over the course of 2020, we increased
the ALLL by over $14 million, with the vast
majority of the increase occurring as a result
of changes to certain environmental factors
within our incurred loss model. As permitted
under the CARES Act, Mercantile elected
to postpone the adoption of the Current
Expected Credit Loss (“CECL”) accounting
standard, which had an original effective date
of January 1, 2020 per Financial Accounting
Standards Board guidance. With
the
composition of Mercantile’s loan portfolio
weighted to shorter duration commercial
loans, we believed retention of the time
tested and proven incurred loan loss reserve
model would provide the best opportunity
for us to prudently build our reserve in view
of the possibility the economy would display
weakness for an extended period of time,
as the United States struggled to get the
pandemic under control. The Consolidated
Appropriations Act, 2021 which was signed
into law on December 27, 2020 extended the
deferment of CECL until January 1, 2022 for
financial institutions. While CECL adoption
continues to be deferred by our company,
the loan loss reserve calculation under that
framework is being run in tandem with the
incurred loan loss reserve model to ensure
that when adoption does occur, Mercantile
will be ready.
Throughout all of 2020, Mercantile’s asset
quality remained extremely strong. Past due
loans, nonperforming assets and loan losses
all remained at peer-leading levels during the
year, despite the challenging environment.
This is a demonstration of the disciplined
approach to credit underwriting and loan
administration by our lending teams, and
it also reflects the strength and resiliency
of our clients. By the end of the year, the
vast majority of loans that were granted
temporary relief through payment deferrals
had returned to contractual terms.
Our strategic initiatives in 2020 demonstrated
an ongoing focus on our people and
reinforced our commitment to the pursuit of
best practices in environmental, social and
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 3
governance matters with particular emphasis
on the social component. Our Board of
Directors, our management team, and all of
our employees remain committed to fulfilling
continually evolving roles as purposeful and
dedicated community leaders.
Our 2020 Board included introductions of
Directors (for our Company and the Bank)
with diverse business experience and
perspectives.
During the year, as we worked to manage
through all the economic effects of the
pandemic, events around
the country
regarding racial justice also impacted our
company. Many Mercantile employees were
deeply affected by these events, and desired
to increase their understanding of what was
happening and why. Mercantile’s Diversity,
Equity and Inclusion team worked to create
plans for conversations among groups
of employees to ask questions, express
opinions and share experiences with one
another about racial tensions in our country
and in our communities. These conversations
were fostered several times throughout our
company to ensure broad participation,
despite the remote work environment for
many employees. We also scheduled what
we refer to as “Lead & Learn” sessions,
where local and regional guest speakers
were introduced virtually to host talks with
groups of our team members about various
aspects of Diversity, Equity and Inclusion.
For 2021, we will be using the foundations
built during the past year as a platform
to continue our growth and the growth of
those in our communities in knowledge,
appreciation, respect and celebration of the
differences in each other.
As the needs of our customers and the
methods of engagement with them evolved
during the year, we continued to identify
opportunities
to optimize our branch
network. During 2020, Mercantile replaced
three locations with more effective facilities
in the same markets and opened two
locations in new markets. As the choices
of consumers and businesses increase with
the entrance of new players into the market,
we fully understand that we must add value
to our clients as they seek the fulfillment of
their financial needs. In order to best serve
our clients as trusted financial advisors,
we seek to transform our branch locations
into relationship centers. In these forums,
the evolving primary focus of our branch
teams will be to engage clients and potential
clients with the development of strategies to
identify and fulfill current and future financial
needs. We believe that digital channels will
continue to evolve into the most efficient
and convenient method of conducting
traditional banking transactions for many of
our customers.
Another challenge created by the pandemic
was the limitation on our team’s community
involvement. Volunteer hours by our staff
were reduced to 12,420, offered to 523 non-
profit organizations in 2020. Limits on in-
person meetings plus social distancing
requirements dampened the direct impact
that we could make. Mercantile bankers
were still able to make a difference in our
communities, however, as our team members
helped lead and volunteer with these non-
profits to navigate the pandemic’s obstacles.
Additionally, in late 2020 our team decided
that we needed to take some bold action to
help address the food and shelter crises in our
communities. As a result, we partnered with
local non-profit agencies to invest $100,000
as direct donations for the purchase of items
to help support these basic human needs
across our markets.
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 4
For all of 2020, Mercantile donated
over $800,000 in support of non-profit
organizations and other needs throughout
the communities we serve.
We challenge ourselves as an organization
and as individuals for continual improvement
and progress. We set a high bar as we engage
our diverse relationships in all facets of our
work. We are incredibly proud of our team’s
efforts in 2020 throughout all areas of our
operation, as we have built solid foundations
to sustain and continue the development of
these initiatives toward the collective future
success of all our constituents.
service to our company in 2020. Mr. Grant
was a long-time member of the Boards of
Mercantile Bank Corporation and Mercantile
Bank of Michigan. He joined the Board of
Firstbank Corporation in 1988 and served in
that capacity for 26 years until the merger
with Mercantile in 2014 where he continued
as a Director until his retirement. Ms. Jones
was a long-time Director of Mercantile Bank
of Michigan, joining the Board in 1998 and
serving until her retirement in 2020 as well.
We thank Ed and Susan for their many years
of dedicated support and guidance to our
organization, and we wish them all the best
in the years ahead.
Finally, we congratulate Mr. Ed Grant and Ms.
Susan Jones on their retirement from board
ROBERT B. KAMINSKI, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IN 2020
Mercantile and its staff were bestowed the following awards:
▪ 101 Best & Brightest Companies to Work For® (16 years in a row)
▪ Corp! Magazine Salute to Diversity Award — Diversity Focused Company
▪ Q2 Software Customer of the Year (Bank)
▪ Greater Ottawa County United Way — Community Builder Award
▪ Heart of West Michigan United Way — Gold Award (3 years in a row)
▪ Michigan Bankers Association Financial Literacy Award
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 5
BOARD OF DIRECTORS
David M.Cassard
Retired
Real Estate Executive
Edward J. Clark
Chairman and Chief
Executive Officer
American Seating
Company
Michael S. Davenport
Owner
Jireh Metal Products, Inc.
Michelle L. Eldridge
Co-Owner
Clear Ridge Wealth
Management
Jeff A. Gardner, CPM
Owner
Gardner Group
Robert B. Kaminski, Jr.
President and
Chief Executive
Officer
Michael H. Price
Chairman of the Board
Retired
Banking Executive
David B. Ramaker
Retired
Banking Executive
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 6
EXECUTIVE OFFICERS
Charles E. Christmas
Executive Vice President
Chief Financial Officer and Treasurer
Robert B. Kaminski, Jr.
President
and Chief Executive Officer
Raymond E. Reitsma
Executive Vice President
President of Mercantile Bank of Michigan
Lonna L. Wiersma
Senior Vice President
Human Resource Director
of Mercantile Bank of Michigan
Robert T. Worthington
Senior Vice President
Chief Operating Officer, General Counsel and Secretary
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 7
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.
MERCANTILE BANK CORPORATION 2020 ANNUAL REPORT | 8
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, 2020
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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 USC.7262(b)) by the registered public accounting
firm that prepared or issued its audit report. Yes X No
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 $356 million. As of February 26, 2021, there were issued and outstanding 16,258,947 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 27, 2021 are incorporated by reference into
Part III of this report. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal
year ended December 31, 2020.
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 44 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. We also have a banking office located in the metropolitan Detroit, Michigan area, and during 2020 we opened
residential mortgage loan production offices in Midland, Michigan and in the Cincinnati, Ohio metropolitan area. As part
of our bank’s branch rationalization efforts, we recently announced that our bank and Lake Trust Credit Union have entered
into an agreement for the sale of our banking office located in Hastings, Michigan, with the sale expected to be
consummated by March 31, 2021. Further, in late 2020 we closed banking offices located in the Lakeview, Alma and Ionia
downtown areas, consolidating the banking services with nearby banking office locations.
Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts
checking, savings and time deposits. Our bank owns 27 automated teller machines ("ATM") and 13 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. The facility was transferred to our bank and our real
estate company was dissolved on December 18, 2020. Our real estate company was 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 Bank Corporation. Each of the
trusts was formed to issue preferred securities that were sold in private sales, as well as selling common securities to
Mercantile Bank Corporation. The proceeds from the preferred and common securities sales were used by the trusts to
purchase floating rate notes issued by Mercantile Bank Corporation. The rates of interest, interest payment dates, call
features and maturity dates of each floating rate note are identical to its respective preferred securities. The net proceeds
from the issuance of the floating rate notes were used for a variety of purposes, including contributions to our bank as
capital to provide support for asset growth and the funding of stock repurchase programs and certain acquisitions. The only
significant assets of our trusts are the floating rate notes, and the only significant liabilities of our trusts are the preferred
securities. The floating rate notes are categorized on our Consolidated Balance Sheets as subordinated debentures, and the
interest expense is recorded on our Consolidated Statements of Income under interest expense on other borrowings.
Effect of Government Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United
States Government, its agencies, and the Federal Reserve Board. The Federal Reserve Board’s monetary policies have had,
and will likely continue to have, an important impact on the operating results of commercial banks through its power to
implement national monetary policy in order to, among other things, curb inflation, maintain or encourage employment,
and mitigate economic recessions. The policies of the Federal Reserve Board have a major effect upon the levels of bank
loans, investments and deposits through its open market operations in United States Government securities, and through its
regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against
member bank deposits. Our bank maintains reserves directly with the Federal Reserve Bank of Chicago to the extent
required by law. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Regulation and Supervision
Banks and bank holding companies, among other financial institutions, are regulated under federal and state law.
These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the 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.
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.
3
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 laws 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, 2020, we employed 577 full-time and 88 part-time persons. Our employees are our most
valuable asset. Our exceptional team members are committed to maintaining an environment of personal growth and
development. Employees of our bank subscribe to a common goal: To make this the best bank it can possibly be.
Diversity is an asset in the pursuit of this goal. Employees with dissimilar backgrounds, perspectives, opinions and
lifestyles help us understand the motivations and desires of our many different customers. Thus, we will strive to maintain
a workforce that reflects the increasing diversity of the communities we serve. We believe that each member of our
workforce should be accorded the utmost respect and should be given equal opportunity and encouragement to achieve
their full potential. Cooperation and teamwork are valued as much as individual growth and contribution.
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 $0.25 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 covered approximately 52% of total commercial loans outstanding during 2020. In addition, a random sampling
of retail loans is reviewed each quarter. Our watch list credits are reviewed monthly by our Board of Directors and our
Watch List Committee, the latter of which is comprised of senior level officers from the administration, lending and loan
review functions.
6
Loans are placed in a nonaccrual status when, in our opinion, uncertainty exists as to the ultimate collection of all
principal and interest. As of December 31, 2020, loans placed in nonaccrual status totaled $3.4 million, or 0.1% of total
loans, compared to $2.3 million, or 0.1% of total loans, at December 31, 2019. No loans were past due 90 days or more
and still accruing interest at year-end 2020 or 2019.
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 3 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.
We established a Covid-19 reserve allocation factor to address the Coronavirus Pandemic and its potential impact
on the collectability of the loan portfolio during the second quarter of 2020. The creation of this factor reflected our belief
that the traditional nine environmental factors did not sufficiently capture and address the unique circumstances, challenges
and uncertainties associated with the Coronavirus Pandemic, which include unprecedented federal government stimulus
and interventions, statewide mandatory closures of nonessential businesses and periodic changes to such and our ability to
provide payment deferral programs to commercial and retail borrowers without the interjection of troubled debt
restructuring accounting rules. We review a myriad of items when assessing this new environmental factor, including virus
infection rates, economic outlooks, employment data, business closures, foreclosures, payment deferments and
government-sponsored stimulus programs. The Covid-19 reserve factor resulted in a $5.3 million increase to the allowance
as of December 31, 2020.
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 2020 we placed most
weight on the period starting December 31, 2010 through December 31, 2020. 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.
7
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 creditors’ rights in order to preserve our collateral position.
Financial institutions were not required to comply with the Current Expected Credit Loss (“CECL”) methodology
requirements from the enactment date of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) until the
earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. The Consolidated
Appropriations Act, 2021, that was enacted in December 2020, provided for an extension of the required CECL adoption
date to January 1, 2022, which is the date we expect to adopt. An economic forecast is a key component of the CECL
methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the
economy has been significantly impacted by government-imposed activity limitations and similar reactions by businesses
and individuals, substantial government stimulus has been provided to businesses, individuals and state and local
governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts
are regularly revised with no economic forecast consensus. Given the high degree of uncertainty surrounding economic
forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model
as permitted.
Additional detail regarding the allowance 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.
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.
8
Additional detail and information relative to the securities portfolio is incorporated by reference to Management’s
Discussion and Analysis and Note 2 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
expansion into new markets.
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.
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.
9
Risks Related to Our Business
The Coronavirus Pandemic has impacted our business, financial condition and results of operations and will
continue to have an impact, the scope and duration of which is highly uncertain and dependent on factors that are
outside of our control.
The ongoing pandemic associated with the spread of Covid-19 has caused significant disruptions throughout the
State of Michigan and across the United States and global economies and financial markets. The Coronavirus Pandemic
has impacted our business, financial condition and results of operations and will continue to do so. For example, we derive
a large percentage of our net income from net interest income, which is derived from the yield on interest-earning assets
offset by our cost of funds. Our net interest income has been negatively impacted primarily due to reduced interest rates on
variable-rate commercial loans resulting from the Federal Open Market Committee (“FOMC”) significantly decreasing the
targeted federal funds rate by 225 basis points during the second half of 2019 and the first quarter of 2020. Due to the
Coronavirus Pandemic, the targeted federal funds rate is unlikely to be increased for the foreseeable future, resulting in
prolonged pressure on our net interest income, which could reduce our net income in future periods.
Our results may also be negatively impacted by a deterioration in the quality of our loan portfolio due to the impact
of the Coronavirus Pandemic on our loan customers. While we actively monitor the credit quality of our loan portfolio and
make adjustments to our allowance for loan losses accordingly, the Coronavirus Pandemic has created significant
disruptions in the United States economy, making it difficult to predict its impact with a high degree of certainty. While we
believe we have appropriately assessed and presented our loan portfolio and allowance for loan losses to date in accordance
with applicable accounting standards, we cannot be certain of that, nor can we be certain that we will adequately account
for the future negative impacts of the Coronavirus Pandemic. This could negatively impact our financial condition and
results of operations by increasing the amount of allowance for loan loss provisions reflected in our operating expenses,
decreasing our interest income as borrowers become unable to repay their loans and increasing our operating expenses due
to collection costs.
We are exposed to several additional risks associated with the Coronavirus Pandemic, including the risk that our
operating effectiveness will decrease as we adapt to new policies requiring that our employees work from home; that we
may temporarily lose the services of key members of our management team; that the economic downturn will negatively
impact demand for loans across our loan portfolio; that the collateral securing our loans will decline in value; that reduced
consumer spending will prolong the negative economic impacts of the Coronavirus Pandemic; that our portfolio of
securities available for sale will decrease in value; and that we may face litigation due to our handling of the challenges
associated with the Coronavirus Pandemic, including our participation in the Paycheck Protection Program.
While we believe that we have navigated the difficult environment associated with the Coronavirus Pandemic with
success thus far, we may not be able to continue to do so, and this could expose our business, financial condition and
results of operations to risks that could have a negative impact on 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.
10
Significant declines in the value of commercial real estate could adversely impact us.
Approximately 59% of our total commercial loans, or about 51% 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.
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.
11
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.
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.
12
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.
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 (“FCA”), 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 (“FRBNY”)
began publication of the SOFR in April 2018.
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. By the end of 2020, each of
FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”) had issued more than $125 billion in SOFR-
indexed debt instruments in the capital markets.
13
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, the ICE Benchmark Administration modified the methodology of
calculation of its index (which it is continuing to test). In May 2020, it announced that the index may be made available as
a credit-spread supplement to the SOFR. If the index was 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-based
SOFR.
During 2019 and 2020, 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 and private sector groups 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, on March 2, 2020 the FRBNY began publication of 30-, 90-, and 180-day SOFR
Averages, as well as a SOFR Index, on each business day. The FRBNY has stated that it will 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 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. During the fourth quarter of 2020, each of FNMA and FHLMC
began acquiring SOFR ARM loans and ceased purchasing Libor-based products.
In November 2020, the ICE Benchmark Administration announced a consultation regarding the cessation of the
publication of Libor. The consultation proposed a December 31, 2021 cessation for all tenors of various foreign currencies
and for the one week and two-month U.S. dollar Libor, and a June 30, 2023 cessation for the remaining overnight, one-
month, three-month, six-month and twelve-month U.S. dollar Libor tenors. This represented an 18-month extension of
Libor publication for the most frequently used tenors of U.S. dollar Libor from the cessation date originally proposed in
2017. The consultation period closed on January 25, 2021. ICE Benchmark Administration indicated that it would share
the results of the consultation with the FCA, and subsequently publish further guidance.
In coordinated announcements on November 30, 2020, the FCA and each of the U.S. federal banking agencies
recognized the proposed extension of Libor publication for the identified tenors of U.S. dollar Libor. The federal banking
agencies noted that this would allow most legacy U.S. dollar Libor contracts to mature before Libor experiences
disruptions. At the same time, the agencies stated that entry into new contracts using Libor as a reference rate after
December 31, 2021 by supervised banking organizations would create safety and soundness risks. Accordingly, the federal
banking agencies encouraged supervised banking organizations to cease using Libor as a reference rate in their agreements
as soon as possible, but in any event by December 31, 2021. They also stated that new contracts entered into before
December 31, 2021 should either utilize a reference rate other than Libor or have robust fallback language that includes a
clearly defined alternative reference rate after Libor’s discontinuation. Certain limited exceptions to that guidance were
included by the federal banking agencies, in the event that the ICE Benchmark Administration does continue to publish
Libor U.S. dollar tenors after December 31, 2021.
On January 19, 2021, Governor Mario Cuomo presented the 2022 Executive Budget for the State of New York.
The Executive Budget included a draft Libor-fallback statute proposed by the ARRC. The draft statute is intended to
minimize legal uncertainty in Libor contracts governed by New York law, which includes many derivative contracts.
There can be no assurance whether, or in what form, such draft legislation may be enacted in New York.
14
On January 25, 2021, the International Swaps and Derivatives Association’s IBOR (interbank offered rates)
Fallbacks Protocol (“Protocol”) and IBOR Fallbacks Supplement (“Supplement”) each took effect. Effectiveness of the
Protocol means that existing swaps and other derivative contracts will incorporate the new ISDA fallbacks if both
counterparties have accepted the Protocol. Effectiveness of the Supplement means that new derivatives contracts that
incorporate standard ISDA definitions and reference a relevant IBOR will also incorporate the new fallbacks. These
measures are intended to provide greater certainty with respect to derivative contracts.
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-47 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.
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.
15
Our business is subject to operational risks.
We, like most financial institutions, are exposed to many types of operational risks, including the risk of fraud by
employees or outsiders, unauthorized transactions by employees or operational errors. Operational errors may include
clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Given
our volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully
corrected. Our necessary dependence upon automated systems to record and process our transaction volume may further
increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses
that are difficult to detect.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially
beyond our control, including, for example, computer viruses or electrical or telecommunications outages, which may give
rise to losses in service to customers and to loss or liability to us. We are further exposed to the risk that our external
vendors may be unable to fulfill their contractual obligations to us, or will be subject to the same risk of fraud or
operational errors by their respective employees as are we, and to the risk that our or our vendors’ business continuity and
data security systems prove not to be adequate. We also face the risk that the design of our controls and procedures proves
inadequate or is circumvented, causing delays in detection or errors in information. Although we maintain a system of
controls designed to keep operational risks at appropriate levels, there can be no assurance that we will not suffer losses
from operational risks in the future that may be material in amount.
We face the risk of cyber-attack to our computer systems.
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. Remote working of employees during the Coronavirus Pandemic
introduces additional potential cybersecurity risks due to the use of home networks, video conferencing and other remote
work technologies over which we do not have as much control as our internal systems. Cyber 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.
16
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. In April 2020, the federal banking agencies issued a
statement highlighting the risks presented by banking organizations’ use of cloud computing services in their business. The
statement noted specific risks unique to the cloud computing environment, and the importance of ongoing controls of
virtual infrastructure, care in the use of containers for data, and the sensitivity of use of managed security services, among
other things. 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.
Regulatory Risks
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.
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 in Treasury securities and agency mortgage-backed securities, 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.
17
In light of the evolving risks to economic activity posed by the Coronavirus Pandemic, the FOMC took five
separate actions in March, 2020. Taken together, those actions reduced the federal funds target range to 0.00% to 0.25%,
directed expanded purchases of U.S. Treasury securities and agency mortgage-backed securities and large scale overnight
and term repurchase operations, committed the FOMC to use its full range of tools to support the U.S. economy, and
provided U.S. dollar swap lines and repurchase facilities to certain foreign central banks and international organizations.
On August 27, 2020, the FOMC announced revisions to its Statement on Longer-Run Goals and Monetary Policy
Strategy (“Statement”). Under the revised Statement, the FOMC emphasized that its statutory mandate of maximum
employment is a broad-based and inclusive goal, and that its policy decisions would be informed by its assessment of the
shortfall from maximum employment. Regarding price stability, the Statement provides that the FOMC seeks to achieve
inflation that averages 2% over time. Accordingly, when inflation has been persistently below 2%, the FOMC will likely
aim to achieve inflation moderately above 2% for some time. The revised Statement has been reflected in subsequent
actions by the FOMC.
At its meeting on January 27, 2021, the FOMC kept the target range for the federal funds rate at 0.00% to 0.25%,
and stated that it expects to maintain this target range until labor market conditions have reached levels consistent with the
FOMC’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for
some time. To foster smooth market functioning and accommodative monetary conditions, at the same time the FOMC
directed continued monthly increases in its holdings of U.S. Treasury securities of at least $80 billion, and of agency
mortgage-backed securities of at least $40 billion. There can be no assurance that the operations announced in January
2021 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 2008 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.
18
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).
In December 2019, the FDIC (which regulates our bank) and the Office of the Comptroller of the Currency (“OCC”)
jointly proposed 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. On May 20, 2020, the OCC
adopted a final revised rule, but the Chair of the FDIC announced that the FDIC was not prepared to do so at that time. The
Federal Reserve (which regulates our company) did not participate in the OCC/FDIC proposal. Rather, the Federal
Reserve published an advance notice of proposed rulemaking, requesting feedback on different approaches to modernizing
its Community Reinvestment Act regulation. The comment period has expired. There can be no assurance whether or
when any proposed changes in the existing regulations will be adopted by the FDIC or the Federal Reserve.
On January 20, 2021, President Biden signed a Memorandum on Modernizing Regulatory Review, and Executive
Order No. 13992, revoking a number of Executive Orders concerning federal regulation. Also, the President’s chief of staff
issued a Memorandum to all Executive Departments and Agencies directing, subject to certain exceptions, a temporary
freeze on proposal or issuance of new or pending regulations until a designee of President Biden reviews and approves the
rule.
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.
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.
19
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.
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.
On May 24, 2018, EGRRCPA was enacted, amending numerous provisions of the Dodd-Frank Act. Among other
things, the new law simplified capital requirements for certain organizations (such as us and our bank) by directing 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 based on the EGRRCPA provision establish a CBLR of 9%. A “Qualifying Community Banking
Organization” as defined in the final rules (a “QCBO”), may opt into the rules. 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, minus amounts deducted from Tier 1 capital.
20
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. We did not opt into the CBLR framework.
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 response to a mandate in the CARES Act, adopted in response to the Coronavirus Pandemic, the federal
banking agencies adopted interim rules temporarily reducing the required CBLR. As adopted in final form, effective
October 1, 2020, the required CBLR is 8% until December 31, 2020, 8.5% in 2021, and returns to 9% thereafter. The final
rule also provides a community banking organization that temporarily fails to meet the QCBO criteria will remain deemed
well-capitalized during a two-quarter grace period if its leverage capital ratio remains greater than the following levels
during the periods indicated: before December 31, 2020, 7%; during 2021, 7.5%; and any time thereafter, 8%.
To alleviate impacts of the Coronavirus Pandemic, on December 2, 2020, the federal banking agencies adopted an
interim final rule regarding regulatory thresholds based on asset size of banking organizations. Under the interim final rule,
banking organizations may use total assets as of December 31, 2019 in determining eligibility under various regulatory
regimes. Among the regulations covered by the interim final rule is the CBLR framework. Under the interim final rule,
otherwise applicable regulatory requirements regarding asset size determinations will once again apply as of January 1,
2022.
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.
Risks Related to Our Stock
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.
21
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.
Our Articles of Incorporation and By-laws and the laws of the State of Michigan contain provisions that may
discourage or prevent a takeover of our company and reduce any takeover premium.
Our Articles of Incorporation and By-laws, and the corporate laws of the State of Michigan, include provisions
which are designed to provide our Board of Directors with time to consider whether a hostile takeover offer is in our and
our shareholders’ best interest. These provisions, however, could discourage potential acquisition proposals and could
delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common
stock to participate in tender offers, including tender offers at a price above the then-current market price for our common
stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for
their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they
may deem to be in their best interest.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or
discourage various types of hostile takeover activities. In addition to these provisions and the provisions of our Articles of
Incorporation and By-laws, federal law requires the Federal Reserve Board’s approval prior to acquiring “control” of a
bank holding company. All of these provisions may delay or prevent a change in control without action by our
shareholders and could adversely affect the price of our common stock.
There is a limited trading market for our common stock.
The price of our common stock has been, and will likely continue to be, subject to fluctuations based on, among
other things, economic and market conditions for bank holding companies and the stock market in general, as well as
changes in investor perceptions of our company. The issuance of new shares of our common stock also may affect the
market for our common stock.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM.” The development
and maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence
of which is beyond our control. While we are a publicly-traded company, the volume of trading activity in our stock is still
relatively limited. Even if a more active market develops, there can be no assurance that such a market will continue, or
that our shareholders will be able to sell their shares at or above the price at which they acquired shares.
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.
22
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 2020 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 44
banking offices primarily concentrated throughout Western and Central Michigan, most of which are full-service facilities.
We also have a banking office in Troy, Michigan, and in late 2020 we opened a residential mortgage loan production office
in the Cincinnati, Ohio metropolitan area. We have larger banking facilities in Alma, 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
seven 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.
As part of our bank’s branch rationalization efforts, we recently announced that our bank and Lake Trust Credit
Union have entered into an agreement for the sale of our banking office located in Hastings, Michigan, with the sale
expected to be consummated by March 31, 2021. The agreement includes the 4,300 square-foot facility, all associated
assets and approximately $16 million in deposits.
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.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities.
Market Information and Holders
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM.” At March 1, 2021,
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.
23
Dividend Policy
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 cash dividends paid by us during those periods.
2020
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
37.16 $
26.08
24.29
28.06
35.82 $
34.69
34.24
37.32
18.90 $
18.64
17.09
17.85
27.86 $
30.58
29.78
31.60
0.28
0.28
0.28
0.28
0.26
0.26
0.27
0.27
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 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.28 per share that was paid on March 18, 2020 to shareholders of record as of March 6, 2020. On April 16, 2020, our
Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on June
17, 2020 to shareholders of record as of June 5, 2020. On July 16, 2020, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.28 per share that was paid on September 16, 2020 to shareholders of record as of
September 4, 2020. On October 15, 2020, our Board of Directors declared a cash dividend on our common stock in the
amount of $0.28 per share that was paid on December 16, 2020 to shareholders of record as of December 4, 2020.
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 14, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.29 per share that will be paid on March 17, 2021 to shareholders of record as of March 5, 2021.
24
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
our stock, general market and economic conditions, our capital position, financial performance and alternative uses of
capital, and applicable legal requirements. The program may be discontinued at any time.
During the first quarter of 2020, we repurchased a total of 222,385 shares for $6.3 million, or a weighted average
all-in cost per share of $28.25. After electing to temporarily cease stock repurchases in March 2020 to preserve capital for
lending and other purposes while we assessed the potential impacts of the Coronavirus Pandemic, we reinstated the
repurchase program during the fourth quarter of 2020; fourth quarter repurchases totaled 14,008 shares for $0.3 million, or
a weighted average all-in cost of per share of $22.05. During 2019, we repurchased a total of 233,300 shares for $7.2
million, or a weighted average all-in cost per share of $30.79. 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.
(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 $ 10,136,000
14,008 9,827,000
0 9,827,000
14,008 $ 9,827,000
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
Per Share
NA
22.05
NA
22.05
0 $
14,008
0
14,008 $
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, 2015 through December 31, 2020. The
following is based on an investment of $100 on December 31, 2015 in our common stock, the Nasdaq Composite Index and
the SNL Bank Nasdaq Index, with dividends reinvested where applicable.
25
Total Return Performance
Mercantile Bank Corporation
NASDAQ Composite Index
SNL Bank NASDAQ Index
300
250
200
150
100
l
e
u
a
V
x
e
d
n
I
50
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Index
Mercantile Bank Corporation
NASDAQ Composite Index
SNL Bank NASDAQ Index
12/31/15
100.00
100.00
100.00
12/31/16
159.74
108.87
138.65
12/31/17
153.35
141.13
145.97
12/31/18
129.25
137.12
123.04
12/31/19
172.30
187.44
154.47
12/31/20
134.39
271.64
132.56
Period Ending
Item 6.
Selected Financial Data.
The Selected Financial Data in this Annual Report is incorporated here by reference.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis included in this Annual Report is incorporated here by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information under the heading “Market Risk Analysis” included in this Annual Report is incorporated here by
reference.
Item 8.
Financial Statements and Supplementary Data.
The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Reports of
Independent Registered Public Accounting Firm included in this Annual Report are incorporated here by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
26
Item 9A. Controls and Procedures.
As of December 31, 2020, 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, 2020.
There have been no significant changes in our internal control over financial reporting during the quarter ended
December 31, 2020, 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, 2020. 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, 2020. Refer to page F-38 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 Bank Corporation for our May 27, 2021 Annual Meeting of Shareholders (the “Proxy Statement”),
a copy of which will be filed with the Securities and Exchange Commission before April 30, 2021, is incorporated here by
reference.
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.
27
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2020, 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
9,700 $
32.83
361,000 (1)
Equity compensation plans not approved by security holders
0
0
0
Total
9,700 $
32.83
361,000
(1) These securities are available under the Stock Incentive Plan of 2020. 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.
28
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
Consolidated Balance Sheets --- December 31, 2020 and 2019
Consolidated Statements of Income for each of the three years in the period ended December 31, 2020
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,
2020
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended
December 31, 2020
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2020
Notes to Consolidated Financial Statements
The Consolidated Financial Statements, the Notes to 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.
29
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2020 and 2019
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2020 and 2019
CONTENTS
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
F-4
F-35
F-38
F-39
F-40
F-41
F-42
F-45
F-47
F-2
SELECTED FINANCIAL DATA
Consolidated Results of Operations:
2020
2019
2018
(Dollars in thousands except per share data)
2017
2016
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
26,067
$ 148,313 $ 158,337 $ 141,981
21,899
122,246 124,534 120,082
1,100
19,010
86,170
51,822
9,798
42,024
14,050
45,172
98,520
54,848
10,710
44,138 $
1,750
26,956
89,280
60,460
11,004
49,456 $
$
$ 4,437,344 $ 3,632,915 $ 3,363,907
626,006 233,731
75,354
405,349 352,657 353,388
3,216,358 2,856,667 2,753,085
22,380
69,647
37,967
72,131
23,889
70,297
3,411,553 2,690,384 2,463,708
Deposits
Securities sold under agreements to repurchase 118,365 102,675 103,519
394,000 354,000 350,000
Federal Home Loan Bank advances
Subordinated debentures
46,199
441,554 416,561 375,249
Shareholders’ equity
47,563
46,881
$ 125,543 $ 118,457
12,590
109,748 105,867
15,795
2,950
19,001
79,716
46,083
14,809
31,274 $
2,900
21,038
77,118
46,887
14,974
31,913
$
$ 3,286,704 $ 3,082,571
200,101 183,596
346,780 336,086
2,558,552 2,378,620
17,961
67,198
19,501
68,689
2,522,365 2,374,985
118,748 131,710
220,000 175,000
44,835
365,870 340,811
45,517
Consolidated Financial Ratios:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
1.07 %
10.32 %
10.34 %
1.39 %
12.52 %
11.09 %
1.28 %
11.33 %
11.33 %
1.00 %
8.82 %
11.28 %
1.07 %
9.35 %
11.42 %
Nonperforming loans to total loans
Allowance for loan losses to total loans *
0.11 %
1.33 %
0.08 %
0.84 %
0.15 %
0.81 %
0.28 %
0.76 %
0.25 %
0.76 %
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
9.77 %
11.34 %
12.68 %
13.80 %
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 %
$
2.71 $
2.71
3.01 $
3.01
$
2.53
2.53
1.90 $
1.90
1.96
1.96
Book value per share at end of period
Dividends declared
Dividend payout ratio
27.04
1.12
40.62 %
25.36
1.06
34.59 %
22.70
1.68
65.44 %
22.05
0.74
38.52 %
20.76
1.16
58.70 %
(*) Excludes Paycheck Protection Program Loans
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,” “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, adverse changes in interest rates and interest rate relationships; significant declines in
the value of commercial real estate; market volatility; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation or actions by bank regulators; our participation in
the PayCheck Protection Program administered by the Small Business Administration; changes in the method of
determining Libor, or the replacement of Libor with an alternative reference rate; changes in tax laws; changes in prices,
levies, and assessments; the impact of technological advances; risks associated with cyber-attacks, information security
breaches and other criminal activities on our computer systems; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values;
damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, the failure to
meet client expectations and other facts; changes in the national and local economies, including the significant disruption to
financial market and other economic activity caused by the outbreak of Covid-19; 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. Loans made under the
Paycheck Protection Program are fully guaranteed by the Small Business Administration; therefore, such loans do not have
an associated allowance.
F-4
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 2020, we placed most weight
on the period starting December 31, 2010 through December 31, 2020. 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.
We established a Covid-19 reserve allocation factor to address the Coronavirus Pandemic and its potential impact on the
collectability of the loan portfolio during the second quarter of 2020. The creation of this factor reflected our belief that the
traditional nine environmental factors did not sufficiently capture and address the unique circumstances, challenges and
uncertainties associated with the Coronavirus Pandemic, which include unprecedented federal government stimulus and
interventions, statewide mandatory closures of nonessential businesses and periodic changes to such and our ability to
provide payment deferral programs to commercial and retail borrowers without the interjection of troubled debt
restructuring accounting rules. We review a myriad of items when assessing this new environmental factor, including virus
infection rates, economic outlooks, employment data, business closures, foreclosures, payment deferments and
government-sponsored stimulus programs. The Covid-19 reserve factor resulted in a $5.3 million increase to the allowance
as of December 31, 2020.
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 on an individual loan basis. 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.
Financial institutions were not required to comply with the Current Expected Credit Loss (“CECL”) methodology
requirements from the enactment date of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) until the
earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. The Consolidated
Appropriations Act, 2021, that was enacted in December 2020, provided for an extension of the required CECL adoption
date to January 1, 2022, which is the date we expect to adopt. An economic forecast is a key component of the CECL
methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the
economy has been significantly impacted by government-imposed activity limitations and similar reactions by businesses
and individuals, substantial government stimulus has been provided to businesses, individuals and state and local
governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts
are regularly revised with no economic forecast consensus. Given the high degree of uncertainty surrounding economic
forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve
model as permitted.
F-5
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.
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 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 loans and other factors to determine the cash flow that
we will receive from servicing each grouping of 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 loans. Impairment is evaluated quarterly based on the
fair value of the servicing rights, using groupings of the underlying 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 if conditions in the market place or changes in the company’s
organizational structure occur. Due to current stressed economic and market conditions, we assessed goodwill for
impairment as of March 31, 2020, June 30, 2020, September 30, 2020, and October 1, 2020. For March 31, 2020, we used
a discounted income approach and a market valuation model, which compared the inherent value of our company to
valuations of recent transactions in the market place to determine if our goodwill had been impaired. Using this
quantitative methodology, we determined goodwill was not impaired as of March 31, 2020. For June 30, 2020, September
30, 2020, and October 1, 2020, we used the Step 0 methodology for which we assessed the macro and microeconomic
conditions, industry and market conditions, financial performance, and our underlying stock performance. We concluded it
was more likely than not our fair value was greater than its carrying amount at the end of each period; therefore, no further
testing was required.
F-6
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.
CORONAVIRUS PANDEMIC
The U.S. economy deteriorated rapidly during the latter part of the first quarter and into the second quarter of 2020 due to
the ongoing pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus
2 (the “Coronavirus Pandemic”). While the economic fallout has stabilized somewhat, there remains a significant amount
of stress and uncertainty across national and global economies. This uncertainty is heightened as certain geographic areas
continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes in
circumstances.
The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may
have a material negative impact on our financial condition and results of operations. We continue to occupy an asset-
sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate
reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the
unprecedented economic impact of the Coronavirus Pandemic may produce declining asset quality, reflected by a higher
level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which may
necessitate additional provisions for our allowance and reduced net income.
The following section summarizes the primary measures that directly impact us and our customers.
• Paycheck Protection Program
The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business
Administration’s 100% guaranteed 7(a) loan program. The CARES Act authorized up to $350 billion in
loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business
concerns, self-employed and individual contractors. The PPP provides 100% guaranteed loans to cover
specific operating costs, with the maximum loan size capped at the lesser of 250% of the average monthly
payroll costs or $10.0 million. PPP loans are eligible to be forgiven based upon certain criteria. In general,
the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent
and utilities incurred or paid by the business during a prescribed period beginning on the loan origination
date. Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the
loan. The loan tenor is 24 months for loans originated prior to June 5, 2020 and 60 months for loans
originated on or after June 5, 2020. Loans originated prior to June 5, 2020 can be modified to a tenor of 60
months upon the mutual agreement of the lender and borrower. We have not modified the maturity date of
any loans made prior to June 5, 2020. The interest rate on the loan is fixed at 1.00%, with the financial
institution receiving a loan origination fee ranging from 1% to 5% of the loan amount paid by the Small
Business Administration. The loan origination fees, net of the direct origination costs, have totaled
approximately $15.0 million and are being accreted into interest income on loans using the level yield
methodology. The program was originally scheduled to end on June 30, 2020, but was subsequently
modified to end on August 8, 2020. Participation in the PPP has had a significant impact on the composition
of our loan and deposit portfolios and our net interest income starting during the second quarter of 2020,
which is expected to remain well into 2021. We originated approximately 2,200 loans aggregating $554
million under the PPP, with no customer payments but $189 million in forgiveness transactions on
approximately 900 PPP loans recorded through December 31, 2020.
Under the CARES Act, a PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the
federal banking agencies. On April 9, 2020, the federal banking agencies issued an interim final rule
allowing financial institutions to exclude PPP loans from the average asset calculation to the degree the PPP
loans are financed through the Paycheck Protection Program Lending Facility (“PPPLF”) for the Tier 1
Leverage Capital Ratio.
F-7
•
Individual Economic Impact Payments
The Internal Revenue Service began making Individual Economic Impact Payments in mid-April via direct
deposit or mailed checks. Individuals with adjusted gross income of $75,000 or less received payments of
$1,200, with a reduction formula for those individuals with adjusted gross income over $75,000 but less than
$99,000. Individuals with adjusted gross income of over $99,000 did not receive a payment. Married
couples filing jointly with adjusted gross income of $150,000 or less received payments of $2,400, with a
reduction formula for those married couples filing jointly with adjusted gross income over $150,000 but less
than $198,000. Married couples filing jointly with adjusted gross income of over $198,000 did not receive a
payment.
• Troubled Debt Restructuring Relief
From March 1, 2020 through 60 days after the end of the National Emergency (or December 31, 2020 if
earlier), a financial institution may elect to suspend GAAP principles and regulatory determinations with
respect to loan modifications related to Covid-19 that would otherwise be categorized as troubled debt
restructurings. Banking agencies must defer to the financial institution’s election. We elected to suspend
GAAP principles and regulatory determinations as permitted. The Consolidated Appropriations Act, 2021
extended the suspension date to January 1, 2022.
• Current Expected Credit Loss Methodology Delay
Financial institutions are not required to comply with the CECL methodology requirements from the
enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31,
2020. We elected to postpone CECL adoption as permitted. The Consolidated Appropriations Act, 2021
extended the adoption deferral date to January 1, 2022.
In early April 2020, in response to the early stages of the Coronavirus Pandemic and its pervasive impact across the
economy and financial markets, we developed internal programs of loan payment deferments for commercial and retail
borrowers. For commercial borrowers, we offered 90-day (three payments) interest only amendments as well as 90-day
(three payments) principal and interest payment deferments. Under the latter program, borrowers were extended a 12-
month single payment note at 0% interest in an amount equal to three payments, with loan proceeds used to make the
scheduled payments. The single payment notes receive a loan grade equal to the loan grade of each respective borrowing
relationship. Certain of our commercial loan borrowers subsequently requested and received an additional 90-day (three
payments) interest only amendment or 90-day (three payments) principal and interest payment deferment. Under the latter
program, the amount equal to the three payments was added to the original deferment note which has nine months
remaining to maturity; however, the original 0% interest rate is modified to equal the rate associated with each borrower’s
traditional lending relationship with us for the remainder of the term.
At the peak of activity in mid-July, nearly 750 borrowers with loan balances aggregating $719 million were participating in
the commercial loan deferment program. However, as of December 31, 2020, only 19 borrowers with loan balances
aggregating $8.0 million remained in the commercial loan deferment program. For retail borrowers, we offered 90-day
(three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan. As of
June 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million.
These payment deferral transactions largely applied to the borrowers’ April, May and June loan payments. As of
December 31, 2020, only 14 borrowers with loan balances aggregating $1.8 million remained in the retail loan payment
deferment program.
In April, 2020, the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to
small businesses under the PPP. Only PPP loans are eligible to serve as collateral for the PPPLF, with each dollar of PPP
loans providing one dollar of advance availability. The maturity date of an extension of credit under the PPPLF will equal
the maturity date of the pool of PPP loans pledged to secure the extension of credit. Any principal payments received by
the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration
or principal payments from the borrower after the initial six-month deferment period, must be used to pay down the PPPLF
advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance
relationship. The interest rate on PPPLF advances is fixed at 0.35%. No PPPLF advances could be obtained after
September 30, 2020. We obtained a PPPLF advance in the amount of $43.7 million in late April 2020 and paid it off in full
in early June 2020. As of December 31, 2020, we had no advances outstanding under the PPPLF.
F-8
SUBSEQUENT EVENTS
On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. This $900 billion Coronavirus
Pandemic relief package includes $284 billion in aid for small businesses through a second round of forgivable loans
through the PPP. In general, the framework of loans originated under the second round are similar to that of the initial
round. As of February 26, 2021, we had originated about 900 loans aggregating $181 million in second round PPP loans.
We originated approximately 2,200 loans aggregating $554 million under the initial round of the PPP. As of December 31,
2020, we had received no customer payments but had received $189 million in forgiveness payments from the Small
Business Administration on about 900 PPP loans. As of February 26, 2021, we had received no customer payments but
had received $266 million in forgiveness payments from the Small Business Administration on approximately 1,400 loans.
As part of our bank’s branch rationalization efforts, we recently announced that our bank and Lake Trust Credit Union have
entered into an agreement for the sale of our banking office located in Hastings, Michigan, with the sale expected to be
consummated by March 31, 2021. The agreement includes the 4,300 square-foot facility, all associated assets and
approximately $16 million in deposits.
FINANCIAL OVERVIEW
We recorded net income of $44.1 million, or $2.71 per basic and diluted share, for 2020, compared to net income of $49.5
million, or $3.01 per basic and diluted share, for 2019. The net impact of a gain on the sale of a former branch facility and
write-downs of former branch facilities decreased net income during 2020 by approximately $1.1 million, or $0.07 per
diluted share. Bank owned life insurance claims and the net impact of gains and losses on sales and write-downs of former
branch facilities increased net income during 2019 by approximately $2.7 million, or $0.16 per diluted share. Excluding
the impacts of these transactions, diluted earnings per share decreased $0.07, or 2.5%, during 2020 compared to 2019.
The lower level of net income during 2020 compared to 2019 resulted from higher provision expense and noninterest
expense and decreased net interest income, which more than offset increased noninterest income. The loan loss reserve
build during 2020, which primarily reflected increased allocations associated with changes in certain environmental factors
and an allocation related to a newly-created Covid-19 pandemic environmental factor, was viewed as a precautionary
measure to guard against any potential deterioration in the quality of the loan portfolio stemming from the pandemic and
associated weakened economic conditions. The higher level of noninterest expense mainly reflected increased
compensation, occupancy, furniture and equipment, and Federal Deposit Insurance Corporation (“FDIC”) insurance
premium costs, along with increased write-downs of former branch facilities. The decline in net interest income depicted a
lower yield on earning assets, which more than offset the positive impact of growth in earning assets. The improved
noninterest income primarily reflected increased mortgage banking income.
We believe the overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.11% of total
loans as of December 31, 2020. Gross loan charge-offs during 2020 totaled $0.8 million, while recoveries of prior period
loan charge-offs totaled $0.9 million, providing for net loan recoveries of $0.1 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.
Commercial loans increased $352 million during 2020, and at December 31, 2020 totaled $2.79 billion, or 86.9% of our
loan portfolio. As of December 31, 2019, the commercial loan portfolio comprised 85.5% of total loans. The increase in
commercial loans during 2020 primarily reflects activity under the PPP. Originations of PPP loans, primarily during the
second quarter and to a lesser degree the third quarter, totaled $554 million. We started to receive PPP loan forgiveness
payments from the Small Business Administration during the fourth quarter, totaling $189 million through year-end 2020
and providing for a net balance of $365 million at December 31, 2020. Excluding PPP loans, our commercial and
industrial loan segment declined $66.1 million during 2020, in large part reflecting a reduction in lines of credit during the
second quarter. Non-owner occupied commercial real estate (“CRE”) loans increased $82.1 million and multi-family and
residential rental loans grew $21.6 million, while owner-occupied CRE loans declined $49.1 million. We believe our loan
portfolio remains well diversified. As a percentage of total commercial loans, commercial and industrial loans and owner-
occupied CRE loans combined equaled 60.0% as of December 31, 2020, compared to 58.4% at December 31, 2019. The
current commercial loan pipeline remains strong, and at year-end 2020, we had almost $100 million in unfunded loan
commitments on commercial construction and development loans that are in the construction phase.
F-9
We experienced significant deposit growth during 2020, primarily reflecting federal government stimulus payments and
reduced business and consumer investing and spending, along with PPP loan proceeds being deposited into customers’
accounts at the time the loans were originated and remaining on deposit at year-end 2020. Local deposits increased $808
million during 2020, in large part comprised of a $508 million increase in noninterest-bearing checking accounts. In
addition, interest-bearing checking accounts were up $141 million, money market deposits grew $103 million and savings
deposits increased $68.8 million. Brokered deposits declined $86.5 million, comprising 1.4% of total deposits at December
31, 2020 compared to 5.0% at year-end 2019.
We recorded a loan loss provision expense of $14.1 million during 2020, a substantial increase over the $1.8 million
recorded during 2019. Approximately 80% of the provision expense recorded during 2020 is reflective of increased
allocations associated with qualitative factors, namely economic conditions, loan review and value of underlying collateral
dependent commercial loans, as well as the creation of a Coronavirus Pandemic environmental factor (“Covid-19 factor”).
The Covid-19 factor, developed during the second quarter, is designed to address the unique challenges and economic
uncertainty resulting from the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio.
The provision expense recorded during 2020 also reflects the downgrading of certain non-impaired commercial loan
relationships, most of which occurred during the third quarter.
Noninterest income during 2020 was $45.2 million, compared to $27.0 million in 2019. The significant growth primarily
reflects increased mortgage banking income stemming from a sizeable upturn in refinance activity spurred by a decrease in
residential mortgage loan interest rates, an increase in purchase activity, and the continuing success of strategic initiatives
that have been implemented over the past several years to gain market share and increase production. Mortgage banking
income totaled $29.3 million in 2020, compared to $8.5 million during 2019.
Noninterest expense totaled $98.5 million during 2020, compared to $89.3 million in 2019. The higher level of expense
primarily resulted from increased compensation costs, mainly reflecting higher residential mortgage lender commissions
and related incentives, as well as annual merit pay increases and a larger bonus accrual. Occupancy and equipment and
furniture costs were up $1.7 million on a combined basis in 2020 compared to 2019, mainly reflecting the late 2019
completion of our main office expansion.
FINANCIAL CONDITION
Our total assets increased $804 million during 2020, and totaled $4.44 billion as of December 31, 2020. Total loans
increased $360 million, interest-earning deposits were up $383 million and securities available for sale increased $52.7
million. Total deposits increased $721 million and FHLBI advances were up $40.0 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 94.1% of average total assets during 2020, compared to 93.4% during 2019. The loan
portfolio continued to comprise a majority of earning assets, followed by interest-earning deposits and securities. Average
total loans equaled 82.0% of average earning assets during 2020, compared to 85.8% in 2019, while average interest-
earning deposits and average securities comprised 9.2% and 8.8% of average earning assets during 2020 and 3.4% and
10.8% during 2019, respectively.
Our loan portfolio has historically been primarily comprised of commercial loans. Commercial loans increased $352
million during 2020, and at December 31, 2020 totaled $2.79 billion, or 86.9% of our loan portfolio. As of December 31,
2019, the commercial loan portfolio comprised 85.5% of total loans. The increase in commercial loans during 2020
primarily reflects activity under the PPP. Originations of PPP loans, primarily during the second quarter and to a lesser
degree during the third quarter, totaled $554 million. We started to receive PPP loan forgiveness payments from the Small
Business Administration during the fourth quarter, totaling $189 million through year-end 2020, and providing for a net
balance of $365 million as of December 31, 2020. Excluding PPP loans, our commercial and industrial loan segment
declined $66.1 million during 2020, in large part reflecting a reduction in lines of credit during the second quarter. Non-
owner occupied CRE loans increased $82.1 million and multi-family and residential rental loans grew $21.6 million, while
owner-occupied CRE loans declined $49.1 million. We believe our loan portfolio remains well diversified. As a
percentage of total commercial loans, commercial and industrial loans and owner-occupied CRE loans combined equaled
60.0% as of December 31, 2020, compared to 58.4% at December 31, 2019.
F-10
As of December 31, 2020, availability on commercial construction and development loans that are in the construction
phase totaled almost $100 million, with most of the funds expected to be drawn over the next 12 to 18 months. Our current
pipeline reports indicate strong commercial loan funding opportunities in future periods, including $228 million in new
lending commitments. Our commercial lenders also report 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. Usage of existing commercial lines of credit was relatively stable during the last six months of 2020, after having
declined by about $110 million during the second quarter largely reflecting the Coronavirus Pandemic and associated
weakened economic conditions.
Residential mortgage loans increased $21.0 million during 2020, totaling $361 million, or 11.2% of total loans, at
December 31, 2020. We originated $864 million in residential mortgage loans during 2020, compared to $369 million in
2019. The 135% increase is primarily attributable to a sizeable upturn in refinance activity spurred by a decrease in
residential mortgage loan interest rates, an increase in purchase activity, and the continuing success of strategic initiatives
that have been implemented over the past several years to gain market share and increase production. Almost 66% of the
residential mortgage loans originated during 2020 consisted of refinance transactions, compared to about 50% during 2019.
Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans,
totaled $672 million during 2020, or almost 78% of the total residential mortgage loans originated. Residential mortgage
loans originated not sold are generally comprised of adjustable rate residential mortgage loans. We are very pleased with
the results of our strategic initiatives associated with the growth of our residential mortgage banking operation over the past
few years, and remain optimistic that origination volumes will continue to be solid in future periods.
Other consumer-related loans declined $13.8 million during 2020, and at December 31, 2020 totaled $61.6 million, or 1.9%
of the loan portfolio. Other consumer-related loans equaled 2.6% of total loans as of December 31, 2019. 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
12/31/20
12/31/19
12/31/18
12/31/17
12/31/16
$ 1,145,423,000 $ 846,551,000 $ 822,723,000 $ 753,764,000 $ 713,903,000
55,055,000
56,119,000
44,885,000
29,873,000
34,828,000
529,953,000 579,003,000 548,619,000 526,328,000 450,464,000
Commercial Real Estate
917,436,000 835,346,000 816,282,000 791,685,000 748,269,000
Multi-Family & Residential Rental 146,095,000 124,525,000 127,597,000 101,918,000 117,883,000
2,793,962,000 2,441,544,000 2,360,106,000 2,203,568,000 2,065,347,000
Total Commercial
Retail:
1-4 Family Mortgages
Home Equity & Other Consumer
Loans
Total Retail
360,776,000 339,749,000 307,540,000 254,559,000 195,226,000
61,620,000
85,439,000 100,425,000 118,047,000
422,396,000 415,123,000 392,979,000 354,984,000 313,273,000
75,374,000
Total Loans
$ 3,216,358,000 $ 2,856,667,000 $ 2,753,085,000 $ 2,558,552,000 $ 2,378,620,000
(*) For December 31, 2020, includes $365 million in loans originated under the Paycheck Protection Program.
F-11
The following table presents total loans outstanding as of December 31, 2020, 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
4,327,000
$ 63,821,000 $
65,689,000 $ 100,839,000 $ 230,349,000
25,966,000 153,263,000 229,874,000 409,103,000
88,453,000
249,984,000 807,964,000 285,841,000 1,343,789,000
402,245,000 643,088,000 82,387,000 1,127,720,000
16,944,000
$ 748,411,000 $ 1,722,492,000 $ 745,455,000 $ 3,216,358,000
38,373,000 45,753,000
14,115,000
2,068,000
761,000
$ 365,124,000 $ 1,610,804,000 $ 611,366,000 $ 2,587,294,000
383,287,000 111,688,000 134,089,000 629,064,000
$ 748,411,000 $ 1,722,492,000 $ 745,455,000 $ 3,216,358,000
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 $4.1 million (0.1% of total assets) as of December 31, 2020, compared to $2.7 million (0.1% of total
assets) as of December 31, 2019. 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 relatively 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-12
The following tables provide a breakdown of nonperforming assets by property type:
NONPERFORMING LOANS
12/31/20 12/31/19 12/31/18 12/31/17 12/31/16
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
$
35,000 $
0
16,000
0
2,519,000 2,104,000 3,157,000 3,381,000 2,739,000
2,554,000 2,138,000 3,157,000 3,381,000 2,755,000
34,000 $
0
0 $
0
0 $
0
0
0
619,000
22,000
641,000
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
285,000
488,000
868,000
172,000
17,000
189,000
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
Total
$ 3,384,000 $ 2,284,000 $ 4,141,000 $ 7,143,000 $ 5,939,000
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
12/31/20 12/31/19 12/31/18 12/31/17 12/31/16
$
0 $
0
88,000
88,000
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
613,000
0
613,000
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
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
$ 701,000 $ 452,000 $ 811,000 $ 2,260,000 $
469,000
F-13
The following tables provide a reconciliation of nonperforming assets:
NONPERFORMING LOANS RECONCILIATION
2020
2019
2018
2017
2016
Beginning balance
Additions
Returns to performing status
Principal payments
Loan charge-offs
$ 2,284,000 $ 4,141,000 $ 7,143,000 $ 5,939,000 $ 5,444,000
698,000 2,909,000 7,604,000 5,655,000
3,361,000
(13,000 )
(126,000 )
(105,000 )
(1,701,000 ) (2,140,000 ) (5,028,000 ) (4,234,000 ) (4,166,000 )
(981,000 )
(708,000 ) (1,934,000 )
(175,000 )
(289,000 )
(232,000 )
(455,000 )
Total
$ 3,384,000 $ 2,284,000 $ 4,141,000 $ 7,143,000 $ 5,939,000
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION
2020
2019
2018
2017
2016
Beginning balance
Additions
Sale proceeds
Valuation write-downs
$ 452,000 $ 811,000 $ 2,260,000 $
758,000
(485,000 )
(24,000 )
462,000 1,114,000 4,401,000
(792,000 ) (2,380,000 )
(29,000 )
(183,000 ) (1,933,000 )
469,000 $ 1,293,000
725,000
(677,000 ) (1,428,000 )
(121,000 )
Total
$ 701,000 $ 452,000 $ 811,000 $ 2,260,000 $
469,000
Gross loan charge-offs during 2020 totaled $0.8 million, while recoveries of prior period loan charge-offs totaled $0.9
million, providing for net loan recoveries of $0.1 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-14
The following table summarizes changes in the allowance for the past five years. For the years 2019, 2018, 2017 and 2016,
presented loan and allowance data are reflective of only originated loans and the allowance for originated loans. We
terminated the application of purchase accounting associated with our merger with Firstbank effective January 1, 2020.
Loans outstanding at year-end
$ 3,216,358,000 $ 2,614,725,000 $ 2,452,446,000 $ 2,169,957,000 $ 1,884,548,000
2020
2019
2018
2017
2016
Daily average balance of loans
outstanding during the year
Balance of allowance for loans at
$ 3,190,742,000 $ 2,584,234,000 $ 2,295,251,000 $ 2,054,809,000 $ 1,784,978,000
beginning of year (*)
$
23,889,000 $
21,554,000 $
19,133,000 $
17,868,000 $
15,233,000
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 loans:
Commercial, financial and
agricultural
Construction and land
development
Residential real estate
Instalment loans to individuals
Total recoveries
Net loan (charge-offs)
recoveries
(614,000 )
(455,000 )
(367,000 )
(2,272,000 )
(980,000 )
0
(129,000 )
(96,000 )
(839,000 )
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 )
488,000
302,000
1,757,000
1,445,000
754,000
0
314,000
65,000
867,000
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
28,000
(255,000 )
2,021,000
(1,376,000 )
(463,000 )
Provision for loan losses
14,050,000
1,867,000
400,000
2,641,000
3,098,000
Balance of allowance for loans at
end of year
$
37,967,000 $
23,166,000 $
21,554,000 $
19,133,000 $
17,868,000
Ratio of net loan (charge-offs)
recoveries to average loans
outstanding during the year
Ratio of allowance to loans
outstanding at year-end
0.01%
(0.01% )
0.09%
(0.07% )
(0.03% )
1.18%
0.89%
0.88%
0.88%
0.95%
(*) For the December 31, 2020 column, the balance of allowance for loans at beginning of year includes the December 31,
2019 balance of the allowance for acquired loans.
F-15
The following table illustrates the breakdown of the allowance for loans balance by loan type (dollars in thousands) and of
the total loan portfolio (in percentages). For the years 2019, 2018, 2017 and 2016, presented loan and allowance data are
reflective of only originated loans and the allowance for originated loans. We terminated the application of purchase
accounting associated with our merger with Firstbank effective January 1, 2020.
12/31/2020
12/31/2019
12/31/2018
Loan
Loan
Loan
12/31/2017
Loan
12/31/2016
Loan
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Amount
Portfolio
Commercial,
financial
and
agricultural $ 33,235
79.6 % $ 20,599
76.0 % $ 19,228
86.7 % $ 15,616
77.8 % $ 15,035
85.8 %
Construction
and land
development
Residential
real estate
Instalment
loans to
individuals
Unallocated
Total
813
7.2
340
9.0
270
2.0 1,260
7.6
991
6.0
3,595
12.7 1,863
14.2 1,778
10.0 1,758
13.3 1,374
6.4
265
59
0.5
0.0
294
70
0.8
0.0
234
44
1.3
0.0
406
93
1.3
0.0
508
(40 )
1.8
0.0
$ 37,967 100.0 % $ 23,166 100.0 % $ 21,554 100.0 % $ 19,133 100.0 % $ 17,868 100.0 %
The following table depicts the ratio of our allowance to nonperforming loans:
Ratio of allowance to
nonperforming loans
12/31/20
12/31/19
12/31/18
12/31/17
12/31/16
1,122.0%
1,045.9%
540.4%
273.0%
302.4%
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.
Financial institutions were not required to comply with the CECL methodology requirements from the enactment date of
the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020.
The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for an extension of the required
CECL adoption date to January 1, 2022, which is the date we plan to adopt. An economic forecast is a key component of
the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion
of the economy has been significantly impacted by government-imposed activity limitations and similar reactions by
businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and
local governments and financial institutions have offered businesses and individuals payment relief options, economic
forecasts are regularly revised with no economic forecast consensus. Given the high degree of uncertainty surrounding
economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss
reserve model as permitted.
F-16
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.
We established a Covid-19 reserve allocation factor to address the Coronavirus Pandemic and its potential impact on the
collectability of the loan portfolio during the second quarter of 2020. The creation of this factor reflected our belief that the
traditional nine environmental factors did not sufficiently capture and address the unique circumstances, challenges and
uncertainties associated with the Coronavirus Pandemic, which include unprecedented federal government stimulus and
interventions, statewide mandatory closures of nonessential businesses and periodic changes to such and our ability to
provide payment deferral programs to commercial and retail borrowers without the interjection of troubled debt
restructuring accounting rules. We review a myriad of items when assessing this new environmental factor, including virus
infection rates, economic outlooks, employment data, business closures, foreclosures, payment deferments and
government-sponsored stimulus programs. The Covid-19 reserve factor resulted in a $5.3 million increase to the allowance
as of December 31, 2020.
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 2020 we placed most weight
on the period starting December 31, 2010 through December 31, 2020. 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. We continue to
actively monitor our loan portfolio and assess reserve allocation factors in light of the Coronavirus Pandemic and its impact
on the U.S. economic environment and our borrowers in particular.
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.
Approximately 80% of the provision expense recorded during 2020 is reflective of increased allocations associated with
qualitative factors, with the remainder primarily reflecting the downgrading of certain non-impaired commercial loan
relationships.
F-17
During the first quarter, we changed the trend rating on the economic and business conditions environmental factor from
slightly deteriorating to severely deteriorating due to the initial and expected stressed economic environment resulting from
the Coronavirus Pandemic. This modification impacted all loan portfolio segments, adding $4.0 million to the required
allowance during the quarter. Also during the first quarter, we improved the trend rating on the lending policies
environmental factor from slightly deteriorating to relatively stable to reflect the duration since the Firstbank merger in
2014 and recent loan policy enhancements. This modification impacted all loan portfolio segments, subtracting $3.0
million from the required allowance level. In addition, during the first quarter we improved the trend rating on the changes
in the experience, ability, and depth of lending management and staff environmental factor from slightly deteriorating to
relatively stable to reflect the duration since personnel changes were made as part of the Firstbank merger and personnel
changes necessitated by the retirement of our former CEO about two years ago. This modification impacted the
commercial loan portfolio segment, subtracting $2.0 million from the required allowance.
During the second quarter, we changed the impact rating of the economic and business conditions environmental factor
from moderate to high due to the ongoing and expected stressed economic environment resulting from the Coronavirus
Pandemic. This modification impacted all loan portfolio segments, adding $4.0 million to the required allowance level.
We also established the Covid-19 factor to address the Coronavirus Pandemic and its potential impact on the collectability
of the loan portfolio. The creation of this factor reflected our belief that the traditional nine environmental factors did not
sufficiently capture and address the unique circumstances, challenges and uncertainties associated with the Coronavirus
Pandemic, which include unprecedented federal government stimulus and interventions, statewide mandatory closures of
nonessential businesses and periodic changes to such and our ability to provide payment deferral programs to commercial
and retail borrowers without the interjection of troubled debt restructuring accounting rules. We review a myriad of items
when assessing this new environmental factor, including virus infection rates, economic outlooks, employment data,
business closures, foreclosures, payment deferments and government-sponsored stimulus programs. Impacting all loan
portfolio segments, the establishment of the Covid-19 factor added $3.9 million to the required allowance level.
During the third quarter, we completed a comprehensive review of risk ratings assigned to many commercial loan
relationships, especially those operating in lines of business that were hardest hit by the Coronavirus Pandemic. The
review resulted in loan rating downgrades of 159 of the reviewed relationships (eight of which were moved to the watch
list), and an increase to the required allowance of approximately $3.0 million.
During the fourth quarter, we made further changes to several environmental factors, including loan review, value of
underlying collateral dependent commercial loans and the Covid-19 factor. For the loan review environmental factor, we
lowered the trend from slightly deteriorating to moderately deteriorating to reflect a reduction in the level of commercial
loans being review by our loan review function, in large part reflecting personnel within that department spending a
significant amount of time administering our PPP activities. This change impacted the commercial loan portfolio segment,
and increased the required allowance by $0.7 million. We lowered the trend rating of the value of underlying collateral
dependent commercial loans from relatively stable to slightly deteriorating to reflect valuation softness we have noticed in
our larger markets. Impacting only the owner-occupied CRE and non-owner occupied CRE portfolio segments, this change
increased the required allowance by $1.7 million. Reflecting the ongoing uncertainty associated with the Coronavirus
Pandemic, including increased infections and the apparently slow roll-out of the vaccine, we lowered the impact rating on
the Covid-19 factor from moderate to moderate-to-high. This change impacted all loan portfolio segments, and added $1.4
million to the required allowance level.
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
creditors’ rights in order to preserve our collateral position.
The allowance for loans equaled $38.0 million as of December 31, 2020, or 1.2% of total loans outstanding. The allowance
for loans equaled 0.8% of total loans at year-end 2019. As of December 31, 2020, the allowance for loans was comprised
of $37.4 million in general reserves relating to non-impaired loans and $0.6 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.
F-18
Troubled debt restructurings totaled $23.6 million at December 31, 2020, consisting of $0.5 million that are on nonaccrual
status and $23.1 million that are on accrual status. The latter, while considered and accounted for as impaired loans in
accordance with accounting guidelines, is not included in our nonperforming loan totals. Impaired loans with an aggregate
carrying value of $1.3 million as of December 31, 2020 had been subject to previous partial charge-offs aggregating $1.2
million. Those partial charge-offs were recorded as follows: $0.2 million in 2020, less than $0.1 million in 2019, 2018,
2017, 2015, 2014, 2013, 2012 and 2010, $0.1 million in 2016 and $0.3 million in 2011. As of December 31, 2020, 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:
12/31/20
12/31/19
12/31/18
12/31/17
12/31/16
Performing
Nonperforming
$ 23,133,000 $ 11,788,000 $ 19,223,000 $
229,000
353,000
510,000
6,128,000 $ 12,480,000
1,132,000
2,434,000
Total
$ 23,643,000 $ 12,141,000 $ 19,452,000 $
8,562,000 $ 13,612,000
Securities available for sale increased $52.7 million during 2020, totaling $387 million as of December 31, 2020. The
securities portfolio equaled 8.4% of average earning assets during 2020, compared to 10.3% during 2019. During 2020,
purchases of U.S. Government agency bonds totaled $345 million, in part reflecting the reinvestment of funds from $289
million in called U.S. Government agency bonds and $17.7 million in principal paydowns on U.S. Government agency
issued or guaranteed mortgage-backed securities. Municipal bond purchases aggregated $24.8 million, with municipal
bond maturities and calls totaling $12.9 million. No bonds were sold during 2020. At December 31, 2020, the securities
portfolio was primarily comprised of U.S. Government agency bonds (63%), municipal bonds (31%) and U.S. Government
agency issued or guaranteed mortgage-backed securities (6%). 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,
2020 totaled $387 million, including a net unrealized gain of $6.9 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:
12/31/20
12/31/19
12/31/18
Carrying
Value
Percent
Carrying
Value
Percent
Carrying
Value
Percent
U.S. Government agency debt
obligations
$ 242,141,000
62.5 % $ 186,410,000
55.7 % $ 187,077,000
55.5 %
Mortgage-backed securities
24,890,000
6.4 42,470,000
12.7 43,658,000
12.9
Municipal general obligations
107,824,000
27.9 101,079,000
30.2 102,497,000
30.4
Municipal revenue bonds
11,992,000
3.1
4,196,000
1.3
3,634,000
Other investments
500,000
0.1
500,000
0.1
500,000
1.1
0.1
Totals
$ 387,347,000
100.0 % $ 334,655,000
100.0 % $ 337,366,000
100.0 %
FHLBI stock totaled $18.0 million as of December 31, 2020, unchanged from the balance at December 31, 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.
F-19
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.
The following table shows by class of maturities as of December 31, 2020, 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
$
0
64,597,000
118,002,000
59,542,000
242,141,000
5,939,000
29,877,000
62,539,000
21,461,000
119,816,000
24,890,000
500,000
NA
0.52 %
1.12
1.90
1.15
2.52
2.61
2.84
2.58
2.72
2.10
4.13
$
387,347,000
1.70 %
Interest-earning deposit balances, primarily consisting of excess funds deposited with the Federal Reserve Bank of Chicago
and a correspondent bank, are used to manage daily liquidity needs and interest rate sensitivity. The average balance of
these funds equaled $357 million, or 9.2% of average earning assets during 2020, compared to a more typical $115 million,
or 3.4%, during 2019. The higher level during 2020 reflects increased local deposit balances, primarily a product of federal
government stimulus programs as well as lower business and individual investing and spending. We anticipate the level of
interest-earning deposit balances to remain elevated throughout at least a majority of 2021 given the conditions associated
with the Coronavirus Pandemic.
Non-Earning Assets
Cash and due from bank balances averaged 1.4% of total assets during 2020, similar to the average level during 2019, and
no significant changes are expected in future periods. Net premises and equipment increased $1.6 million during 2020,
equaling $59.0 million as of December 31, 2020, or 1.3% of total assets. Net purchases during 2020 totaled $9.0 million, in
large part reflecting the construction and opening of a new regional banking center in Mt. Pleasant, Michigan and a new
banking facility in Clare, Michigan. Depreciation expense during 2020 totaled $5.2 million. Banking facility closures
resulted in a $2.2 million reduction in net premises and equipment during 2020.
Foreclosed and repossessed assets totaled $0.7 million at December 31, 2020, compared to $0.5 million at December 31,
2019. Almost the entire balance at year-end 2020 consisted of properties that were former banking office facilities that
were closed during 2020. 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.
F-20
Source of Funds
Total deposits increased $721 million during 2020, totaling $3.41 billion as of December 31, 2020. Local deposits
increased $808 million, while out-of-area deposits decreased $86.5 million during 2020. As a percent of total deposits, out-
of-area deposits declined from 5.0% at December 31, 2019 to 1.4% as of year-end 2020. FHLBI advances increased $40.0
million during 2020, totaling $394 million as of December 31, 2020.
Noninterest-bearing checking accounts increased $508 million during 2020, while interest-bearing checking accounts and
money market deposit accounts increased $141 million and $103 million, respectively. The increases in these transactional
deposit products largely reflect federal government stimulus, especially the PPP, as well as lower business investing and
spending. Savings deposits were up $68.8 million during 2020, primarily reflecting the impact of federal government
stimulus programs and lower consumer investing and spending. Local time deposits decreased $12.8 million, generally
reflecting the maturities of certain time deposits that were not renewed as we did not aggressively seek to renew these time
deposits that were opened as part of a special time deposit campaign we ran during the early part of 2019, which more than
offset new time deposits from several municipal deposit customers. The reduction in out-of-area deposits during 2020
reflects maturities not replaced as the funds were no longer needed.
Sweep accounts increased $15.7 million during 2020, totaling $118 million as of December 31, 2020. The average balance
of sweep accounts equaled $133 million during 2020. The aggregate balance of this funding type can be subject to
relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many
of the customers maintain. Our sweep account program entails transferring collected funds from certain business
noninterest-bearing checking accounts to overnight interest-bearing repurchase agreements. Such repurchase agreements
are not deposit accounts and are not afforded federal deposit insurance. All of our repurchase agreements are accounted for
as secured borrowings.
FHLBI advances increased $40.0 million during 2020, reflecting new advances obtained primarily to replace advance
maturities and manage interest rate risk. FHLBI advances totaled $394 million as of December 31, 2020. In June 2020, we
executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance portfolio as part of
our interest rate risk management program. We prepaid seven advances aggregating $70.0 million with maturities ranging
from August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the
proceeds from seven new advances aggregating $70.0 million with maturities ranging from June 2024 through June 2027
and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9 million were embedded
into the fixed rates on the newly obtained advances, equating to 0.22% of the 0.84% average rate of the new advances.
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 collateralized by residential mortgage loans, first mortgage liens on multi-
family residential property loans, first mortgage liens on certain commercial real estate property loans, and substantially all
other assets of our bank under a blanket lien arrangement. Our borrowing line of credit at year-end 2020 totaled $754
million, with remaining availability based on collateral of $354 million.
Shareholders’ equity increased $25.0 million during 2020, totaling $442 million as of December 31, 2020. Positively
impacting shareholders’ equity was net income of $44.1 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $17.9 million. Activity relating to the issuance and sale of common stock through
various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity
by a total of $3.6 million. Share repurchases reduced shareholders’ equity by $6.6 million during 2020. Positively
impacting shareholders’ equity during 2020 was a $1.8 million after-tax increase in the market value of available for sale
securities.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019
Summary
We recorded net income of $44.1 million, or $2.71 per basic and diluted share, for 2020, compared to net income of $49.5
million, or $3.01 per basic and diluted share, for 2019. The net impact of a gain on the sale of a former branch facility and
write-downs of former branch facilities decreased net income during 2020 by approximately $1.1 million, or $0.07 per
diluted share. Bank owned life insurance claims and the net impact of gains and losses on sales and write-downs of former
branch facilities increased net income during 2019 by approximately $2.7 million, or $0.16 per diluted share. Excluding
the impacts of these transactions, diluted earnings per share decreased $0.07, or 2.5%, during 2020 compared to 2019.
F-21
The lower level of net income during 2020 compared to 2019 resulted from higher provision expense and noninterest
expense and decreased net interest income, which more than offset increased noninterest income. The loan loss reserve
build during 2020, which primarily reflected increased allocations associated with changes in certain environmental factors
and an allocation related to a newly-created Covid-19 pandemic environmental factor, was viewed as a precautionary
measure to guard against any potential deterioration in the quality of the loan portfolio stemming from the pandemic and
associated weakened economic conditions. The higher level of noninterest expense mainly reflected increased
compensation, occupancy, furniture and equipment, and FDIC insurance premium costs, along with increased write-downs
of former branch facilities. The decline in net interest income depicted a lower yield on earning assets, which more than
offset the positive impact of growth in earning assets. The improved noninterest income primarily reflected increased
mortgage banking income.
The following table shows some of the key performance and equity ratios for the years ended December 31, 2020 and
2019:
Return on average assets
Return on average shareholders’ equity
Average shareholders’ equity to average assets
2020
2019
1.07 %
10.32 %
10.34 %
1.39 %
12.52 %
11.09 %
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
$149 million and $26.1 million during 2020, respectively, providing for net interest income of $122 million. During 2019,
interest income and interest expense equaled $159 million and $33.8 million, respectively, providing for net interest income
of $125 million. In comparing 2020 with 2019, interest income decreased 6.3%, interest expense was down 22.9%, and net
interest income declined 1.8%. The level of net interest income is primarily a function of asset size, as the weighted
average interest rate received on earning assets is greater than the weighted average interest cost of funding sources;
however, factors such as types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset
quality, liquidity, and customer behavior also impact net interest income as well as the net interest margin.
The $2.3 million decrease in net interest income in 2020 compared to 2019 resulted from a lower net interest margin, which
more than offset an increased level of average earning assets. During 2020, the net interest margin equaled 3.15%, down
from 3.75% during 2019 due to a lower yield on average earning assets, which more than offset a reduction in the cost of
funds. The lower yield on average earning assets mainly resulted from a decreased yield on commercial loans, primarily
reflecting reduced interest rates on variable-rate loans stemming from the Federal Open Market Committee (“FOMC”)
significantly lowering the targeted federal funds rate by a total of 225 basis points during the last six months of 2019 and
the first three months of 2020. The decreased cost of funds mainly reflected lower interest rates paid on local deposit
accounts and borrowings, reflecting the declining interest rate environment. A change in funding mix, consisting of an
increase in lower-cost non-time deposits as a percentage of total funding sources, also contributed to the decreased cost of
funds. During 2020, earning assets averaged $3.89 billion, representing an increase of $563 million, or 16.9%, from the
$3.33 billion average during 2019. Average loans increased $338 million, and average interest-earning deposits were up
$242 million, while average securities decreased $16.5 million. The increase in average loans primarily depicted PPP loan
originations of approximately $554 million during 2020; PPP loans averaged approximately $370 million during the year.
The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities
and shareholders’ equity during 2020, 2019 and 2018. 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. Tax-exempt securities interest income and yield for 2020, 2019 and
2018 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%. Securities interest income was
increased by $0.2 million in both 2020 and 2019, and $0.3 million in 2018, for this non-GAAP, but industry standard,
adjustment. These adjustments equated to one basis point increases in our net interest margin during all three years.
F-22
Taxable securities
Tax-exempt
securities
(Dollars in
thousands)
2 0 2 0
Years ended December 31,
2 0 1 9
2 0 1 8
Average
Balance Interest
$ 236,097 $ 7,740
Average
Rate
Average
Balance Interest
3.28 % $ 259,221 $ 7,919
Average
Rate
Average
Balance Interest
3.05 % $ 233,372 $ 6,736
Average
Rate
2.89 %
2,538
Total securities 343,032 10,278
106,935
100,291
2.37
2,471
3.00 359,512 10,390
2.46 110,514
2.89 343,886
2,509
9,245
2.27
2.69
Savings deposits
Money market
accounts
Time deposits
Loans
Interest-earning
deposits
Total earning
3,190,742 137,399
4.31 2,853,021 145,816
5.11 2,628,906 131,763
5.01
356,501
876
0.25 114,527
2,371
2.07
69,559
1,243
1.79
assets
3,890,275 148,553
3.82 3,327,060 158,577
4.77 3,042,351 142,251
4.68
Allowance for loan
losses
Cash and due from
banks
Other non-earning
(30,164 )
58,345
(23,914 )
53,151
(21,173 )
48,207
assets
215,112
205,348
203,252
Total assets
$ 4,133,568
$ 3,561,645
$ 3,272,637
Interest-bearing
checking accounts $ 392,053 $ 1,263
185
297,825
0.32 % $ 315,735 $
0.06 276,852
529
319
0.17 % $ 359,371 $
0.12 320,387
552
381
0.15 %
0.12
542,967
1,968
590,421 11,568
0.36 485,044
5,664
1.96 644,904 14,752
1.17 474,651
2.29 478,741
5,322
7,614
1.12
1.59
Total interest-
bearing deposits 1,823,266 14,984
0.82 1,722,535 21,264
1.23 1,633,150 13,869
0.85
Short-term
borrowings
137,658
173
0.13 106,630
295
0.28 102,076
273
0.27
Federal Home Loan
Bank advances
Other borrowings
Total interest-
bearing
liabilities
386,896
49,792
8,571
2,339
2.22 369,688
49,427
4.70
8,977
3,267
2.43 239,068
49,048
6.61
4,647
3,110
1.94
6.34
2,397,612 26,067
1.09 2,248,280 33,803
1.50 2,023,342 21,899
1.08
Checking accounts
Other liabilities
1,291,542
16,909
Total liabilities 3,706,063
427,505
Average equity
902,180
16,272
3,166,732
394,913
863,384
15,115
2,901,841
370,796
Total liabilities
and equity
Net interest income
Rate spread
Net interest margin
$ 4,133,568
$ 3,561,645
$ 3,272,637
$ 122,486
$ 124,774
$ 120,352
2.73 %
3.15 %
3.27 %
3.75 %
3.60 %
3.96 %
F-23
Years ended December 31,
Total
2020 over 2019
Volume
Rate
Total
2019 over 2018
Volume
Rate
$
(179,000 ) $ (735,000 ) $
160,000
711,000 $ 472,000
151,000
(189,000 )
(8,417,000 ) 16,094,000 (24,511,000 ) 14,053,000 11,413,000 2,640,000
556,000 $ 1,183,000 $
(38,000 )
(93,000 )
67,000
(1,495,000 ) 1,894,000 (3,389,000 ) 1,128,000
906,000
222,000
Increase (decrease) in interest
income
Taxable securities
Tax exempt securities
Loans
Interest-earning deposit
balances
Net change in tax-
equivalent interest income (10,024,000 ) 17,413,000 (27,437,000 ) 16,326,000 12,841,000 3,485,000
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
152,000
23,000
48,000
734,000
(12,000 )
(134,000 )
(3,696,000 )
224,000
(3,184,000 ) (1,180,000 ) (2,004,000 ) 7,138,000 3,155,000 3,983,000
10,000
582,000
(157,000 )
607,000 (4,303,000 )
(23,000 )
(62,000 )
342,000
(71,000 )
(50,000 )
118,000
(122,000 )
(192,000 )
22,000
70,000
12,000
(406,000 )
(928,000 )
405,000
24,000
(811,000 ) 4,330,000 2,974,000 1,356,000
133,000
(952,000 )
157,000
24,000
(7,736,000 )
101,000 (7,837,000 ) 11,904,000 6,162,000 5,742,000
$ (2,288,000 ) $ 17,312,000 $ (19,600,000 ) $ 4,422,000 $ 6,679,000 $ (2,257,000 )
Interest income is primarily generated from the loan portfolio, and to a significantly lesser degree, from securities and other
interest-earning assets. Interest income decreased $10.0 million during 2020 from that earned in 2019, totaling $149
million in 2020 compared to $159 million in the previous year. The decrease in interest income is attributable to a lower
yield on average earning assets, which more than offset the positive impact of an increased level of average earning assets.
During 2020 and 2019, earning assets had an average yield (tax equivalent-adjusted basis) of 3.82% and 4.77%,
respectively. The lower yield on average earning assets mainly resulted from a decreased yield on commercial loans,
primarily reflecting reduced interest rates on variable-rate loans stemming from the previously-mentioned FOMC rate cuts.
A change in earning asset mix and a decreased yield on interest-earning deposits also contributed to the lower yield on
average earning assets. On average, lower-yielding interest-earning deposits represented 9.2% of earning assets during
2020, up from 3.4% during 2019, while higher-yielding loans represented 82.0% of earning assets during 2020, down from
85.8% during 2019. The significant increase in interest-earning deposits during 2020 primarily reflected increased local
deposits stemming from federal government stimulus programs as well as lower business and consumer investing and
spending. The yield on interest-earning deposits was 0.25% during 2020, down from 2.07% during 2019, mainly reflecting
the decreased interest rate environment. Accelerated discount accretion on called U.S. Government agency bonds totaling
$3.0 million was recorded as interest income during 2020. The accelerated discount accretion positively impacted the yield
on average earning assets during 2020 by eight basis points.
Interest income generated from the loan portfolio decreased $8.4 million in 2020 compared to the level earned in 2019; a
decrease in loan yield from 5.11% in 2019 to 4.31% in 2020 resulted in a $24.5 million decline in interest income, while
growth in the loan portfolio during 2020 resulted in a $16.1 million increase in interest income. The lower yield on loans
mainly resulted from a decreased yield on commercial loans, which equaled 4.35% during 2020, down from 5.21% during
2019 primarily due to the aforementioned FOMC rate cuts during the last six months of 2019 and first three months of
2020.
F-24
Interest income generated from the securities portfolio decreased $0.1 million in 2020 compared to the level earned in
2019; a decrease in the average balance of the securities portfolio during 2020 resulted in a reduction in interest income of
$0.6 million, while an increase in the yield on securities from 2.89% during 2019 to 3.00% during 2020 resulted in a $0.5
million increase in interest income. The increased yield on securities mainly reflected $3.0 million in accelerated discount
accretion on called U.S. Government agency bonds being recorded as interest income during 2020; accelerated discount
accretion totaled $0.3 million during 2019. Interest income on interest-earning deposits decreased $1.5 million in 2020
compared to the level earned in 2019; a decline in the yield on interest-earning deposits, reflecting the decreased interest
rate environment, resulted in a $3.4 million reduction in interest income, while growth in these balances resulted in a $1.9
million increase in interest income. The increase in average interest-earning deposits during 2020 primarily stemmed from
growth in local deposits.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree, from borrowed funds. Interest
expense decreased $7.7 million during 2020 from that expensed in 2019, totaling $26.1 million in 2020 compared to $33.8
million in the previous year. The decrease in interest expense resulted from a lower cost of funds, which more than offset
an increase in the average balance of interest-bearing liabilities. During 2020 and 2019, interest-bearing liabilities had a
weighted average rate of 1.09% and 1.50%, respectively; a decrease in interest expense of $7.8 million was recorded during
2020 due to the lower cost of funds. Average interest-bearing liabilities were $2.40 billion during 2020, up $149 million,
or 6.6%, from the $2.25 billion average during 2019; the growth in average interest-bearing liabilities resulted in an
increase in interest expense of $0.1 million. The lower average cost of interest-bearing liabilities resulted from decreased
costs of local deposits and borrowings and a change in funding mix. The cost of interest-bearing non-time deposit accounts
decreased from 0.60% during 2019 to 0.28% during 2020, primarily reflecting lower interest rates paid on money market
accounts; the reduced interest rates mainly reflected the decreased interest rate environment. The cost of time deposits
declined from 2.29% during 2019 to 1.96% during 2020 due to lower rates paid on local time deposits, depicting the
decreased interest rate environment, and a change in composition, mainly reflecting a decline in higher-cost brokered
funds. The cost of borrowed funds decreased from 2.39% during 2019 to 1.93% during 2020, mainly reflecting lower costs
of subordinated debentures and FHLBI advances, along with a change in borrowing mix. The cost of subordinated
debentures was 4.80% during 2020, down from 6.77% during 2019 due to decreases in the 90-Day Libor Rate. The cost of
FHLBI advances was 2.22% during 2020, down from 2.43% during 2019, primarily reflecting the declining interest rate
environment and the impact of a blend and extend transaction that was executed in June 2020. The blend and extend
transaction with the FHLBI, which extended the duration of our FHLBI advance portfolio as part of our interest rate risk
management program, consisted of us prepaying seven advances aggregating $70.0 million with maturities ranging from
August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the proceeds
from seven new advances aggregating $70.0 million with maturities ranging from June 2024 through June 2027 and fixed
interest rates from 0.55% to 1.18% and averaging 0.84%. Average lower-cost sweep accounts represented 23.1% and
20.0% of average total borrowings during 2020 and 2019, respectively, while average higher-cost FHLBI advances
represented 67.4% and 70.3% of average total borrowings during the respective time periods. A change in funding mix,
consisting of an increase in average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost
time deposits as a percentage of average total interest-bearing liabilities, also contributed to the lower weighted average
cost of interest-bearing liabilities during 2020 compared to 2019.
A lower average rate paid on interest-bearing non-time deposits during 2020 resulted in a $3.9 million decrease in interest
expense, while a $155 million increase in the average balance of these deposits equated to a $0.8 million increase in interest
expense. A lower average rate paid on time deposits during 2020 resulted in a $2.0 million decrease in interest expense,
while a $54.5 million decrease in the average balance of time deposits equated to a $1.2 million reduction in interest
expense. A decreased average rate paid on short-term borrowings, which are comprised almost entirely of sweep accounts,
during 2020 resulted in a $0.2 million decline in interest expense, while a $31.0 million increase in the average balance of
these borrowings resulted in a $0.1 million increase in interest expense. A lower average rate paid on average FHLBI
advances during 2020 resulted in a $0.8 million reduction in interest expense, while a $17.2 million increase in the average
balance of advances resulted in a $0.4 million increase in interest expense. A slight increase in average other borrowings
during 2020 resulted in a nominal increase in interest expense, while a decreased average rate paid on the borrowings
resulted in a $1.0 million decline in interest expense.
F-25
Provision for Loan Losses
A loan loss provision expense of $14.1 million was recorded in 2020, compared to a provision expense of $1.8 million
recorded in 2019. Approximately 80% of the provision expense recorded during 2020 consisted of increased allocations
associated with existing environmental factors, including economic and business conditions, loan review, and value of
underlying collateral dependent loans, and an allocation stemming from the creation of a Covid-19 pandemic
environmental factor. The Covid-19 pandemic environmental factor, developed during the second quarter of 2020, is
designed to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact
on the collectability of the loan portfolio. The provision expense recorded during 2020 also reflected the downgrading of
certain non-impaired commercial loan relationships, most of which occurred during the third quarter. The provision
expense recorded during 2019 primarily reflected ongoing net loan growth, as well as an increased allocation related to a
change in the nature and volume of the consumer mortgage loan portfolio environmental factor.
During 2020, recoveries of prior-period loan charge-offs totaling $0.9 million slightly exceeded loan charge-offs, providing
for a nominal level of net loan recoveries. During 2019, loan charge-offs totaled $0.9 million, while recoveries of prior-
period loan charge-offs equaled $0.7 million, providing for net loan charge-offs of $0.2 million, or an annualized 0.01% of
average total loans. The allowance for loans, as a percentage of total loans, was 1.2% as of December 31, 2020, and 0.8%
as of December 31, 2019. Excluding PPP loans, the allowance for loans represented 1.3% of total loans as of December
31, 2020.
Noninterest Income
Noninterest income during 2020 was $45.2 million, compared to $27.0 million during 2019. 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. Excluding these transactions, noninterest income increased $21.7 million, or 92.1%, during 2020
compared to 2019. The improved level of noninterest income primarily resulted from increased mortgage banking income
stemming from a sizeable upturn in refinance activity spurred by a decrease in residential mortgage loan interest rates, a
higher level of purchase activity, the continuing success of strategic initiatives that were implemented to gain market share,
and an increase in the percentage of originated loans being sold. Mortgage banking income totaled $29.3 million during
2020, representing an increase of $20.9 million, or nearly 246%, from the $8.5 million earned during 2019. We originated
$864 million in residential mortgage loans during 2020, which was approximately 135% higher than originations during
2019. Almost 66% of the residential mortgage loans originated during 2020 consisted of refinance transactions, compared
to approximately 50% during 2019. Residential mortgage loans originated for sale, generally consisting of longer-term
fixed rate residential mortgage loans, totaled $672 million, or approximately 78% of total mortgage loans originated, during
2020. During 2019, residential mortgage loans originated for sale totaled $257 million, or nearly 70% of total mortgage
loans originated. Fee income generated from an interest rate swap program that was implemented during the fourth quarter
of 2020 and growth in payroll processing fees also contributed to the improved noninterest income during 2020. The
interest rate swap program provides certain commercial borrowers with a longer-term fixed-rate option and assists us in
managing associated longer-term interest rate risk. Service charges on accounts and credit and debit card income during
2020, which were negatively impacted by Covid-19 pandemic-related events, including business shutdowns and stay-at-
home orders, approximated 2019 levels.
Noninterest Expense
Noninterest expense totaled $98.5 million during 2020, compared to $89.3 million during 2019. Overhead costs during
2020 included write-downs of former branch facilities totaling $1.4 million, while overhead costs during 2019 included a
loss on the sale of a former branch facility of $0.5 million and a write-down of a former branch facility of $0.1 million.
Excluding these transactions, noninterest expense increased $8.5 million, or 9.6%, during 2020 compared to 2019. The
higher level of expense primarily resulted from increased salary and benefit costs, which were up a combined $6.0 million
in 2020 compared to 2019. The increased salary expense mainly reflected higher residential mortgage lender commissions
and related incentives, as well as annual employee merit pay increases and a larger bonus accrual, while the increased
benefit expense primarily reflected higher insurance costs. The higher level of commissions and associated incentives
primarily depicted the significant increase in residential mortgage loan originations during 2020. Occupancy and
equipment and furniture costs were up $1.7 million on a combined basis during 2020 compared to 2019, mainly reflecting
increased depreciation expense associated with an expansion of our main office that was completed during the latter part of
2019. Data processing costs increased $1.2 million during 2020 compared to 2019, primarily depicting growth in
transaction volume, new product offerings, and stay-at-home efforts and activities, including providing employees with
access to work computers while working remotely. FDIC insurance premiums increased $0.9 million in 2020 compared to
2019, mainly reflecting deposit insurance assessment credits being applied against regular assessments during 2019.
F-26
As part of a branch network efficiency plan, we closed three branches during the fourth quarter of 2020. As a result of
these branch network efficiency actions, we recorded pre-tax charges of $0.3 million for severance-related payments and
$1.4 million for valuation adjustments during 2020. Annual pre-tax savings of approximately $0.7 million are anticipated
as a result of these actions.
Federal Income Tax Expense
During 2020, we recorded income before federal income tax of $54.8 million and a federal income tax expense of $10.7
million, compared to income before federal income tax of $60.5 million and a federal income tax expense of $11.0 million
during 2019. The decrease in federal income tax expense in 2020 compared to 2019 resulted from the lower level of
income before federal income tax. Our effective tax rate was 19.5% during 2020, compared to 18.2% during 2019. The
aforementioned nontaxable bank owned life insurance claims positively impacted the effective tax rate in 2019.
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. 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.
F-27
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
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.
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.
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.
F-28
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 a 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.
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.
F-29
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. FDIC 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.
CAPITAL RESOURCES
Shareholders’ equity increased $25.0 million during 2020, totaling $442 million as of December 31, 2020. Positively
impacting shareholders’ equity was net income of $44.1 million, while negatively affecting shareholders’ equity were cash
dividends on our common stock totaling $17.9 million. Activity relating to the issuance and sale of common stock through
various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity
by a total of $3.6 million. Share repurchases reduced shareholders’ equity by $6.6 million during 2020. Positively
impacting shareholders’ equity during 2020 was a $1.8 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, 2020, our bank’s total risk-based capital ratio was 13.5%, compared to 13.0% at
December 31, 2019. Our bank’s total regulatory capital increased $32.3 million during 2020, primarily reflecting the net
impact of net income totaling $49.6 million, an increase in the allowance of $14.1 million and cash dividends paid to
Mercantile Bank Corporation aggregating $32.5 million. Our bank’s total risk-based capital ratio was also impacted by a
$114 million increase in total risk-weighted assets. As of December 31, 2020, our bank’s total regulatory capital equaled
$457 million, or $118 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 $441
million, or 11.2% of combined deposits and borrowed funds as of December 31, 2020, compared to $487 million, or 15.5%
of combined deposits and borrowed funds, as of December 31, 2019.
F-30
Sweep accounts increased $15.7 million during 2020, totaling $118 million as of December 31, 2020. The average balance
of sweep accounts equaled $133 million during 2020. The aggregate balance of this funding type can be subject to
relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many
of the customers maintain. 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, 2020 and during 2020 is as follows:
Outstanding balance at December 31, 2020
Weighted average interest rate at December 31, 2020
Maximum daily balance twelve months ended December 31, 2020
Average daily balance for twelve months ended December 31, 2020
Weighted average interest rate for twelve months ended December 31, 2020
$
$
$
118,365,000
0.12 %
173,186,000
132,880,000
0.12 %
FHLBI advances increased $40.0 million during 2020, reflecting new advances obtained primarily to replace advance
maturities and manage interest rate risk. FHLBI advances totaled $394 million as of December 31, 2020. In June 2020, we
executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance portfolio as part of
our interest rate risk management program. We prepaid seven advances aggregating $70.0 million with maturities ranging
from August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the
proceeds from seven new advances aggregating $70.0 million with maturities ranging from June 2024 through June 2027
and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9 million were embedded
into the fixed rates on the newly obtained advances, equating to 0.22% of the 0.84% average rate of the new advances.
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 collateralized by residential mortgage loans, first mortgage liens on multi-
family residential property loans, first mortgage liens on certain commercial real estate property loans, and substantially all
other assets of our bank under a blanket lien arrangement. Our borrowing line of credit at year-end 2020 totaled $754
million, with remaining availability based on collateral of $354 million.
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. These lines of credit were not accessed during 2020. In contrast, our
interest-earning deposit accounts at the Federal Reserve Bank of Chicago and a correspondent bank averaged $352 million
during 2020. 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 $35.7 million at December 31, 2020. We did not
utilize this line of credit during the past ten years, and do not plan to access this line of credit in future periods.
The following table reflects, as of December 31, 2020, 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 $
$ 2,856,438,000 $
0 $
327,246,000 179,602,000 48,267,000
0
118,365,000
0 $ 2,856,438,000
0 555,115,000
0 118,365,000
20,000,000 174,000,000 130,000,000 70,000,000 394,000,000
47,563,000
2,433,000
3,430,000
0 47,563,000
0 2,433,000
503,000 1,195,000
0
0
1,159,000
0
0
573,000
0
F-31
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, 2020, we had a total of $1.41 billion in unfunded loan
commitments and $20.5 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $1.18
billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $228
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:
12/31/20
12/31/19
12/31/18
Commercial unused lines of credit
Unused lines of credit secured by 1-4 family residential
$ 1,019,496,000 $
776,493,000 $
784,895,000
properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
59,396,000
72,495,000
30,707,000
227,558,000
20,543,000
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
Total
$ 1,430,195,000 $ 1,038,444,000 $ 1,036,775,000
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events,
economic or market conditions, reductions in earnings performance, declining capital levels or situations beyond our
control could cause liquidity challenges. While we believe it is unlikely that a funding crisis of any significant degree is
likely to materialize, we have developed a comprehensive contingency funding plan that provides a framework for meeting
liquidity disruptions.
MARKET RISK ANALYSIS
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan
assets and therefore have no significant exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates is assumed to be insignificant. Interest rate risk is the
exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the
excess of interest collected on interest-earning assets over the interest paid on interest-bearing liabilities. The rates of
interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since
market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes.
Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of
interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management
that maintains interest rate risk at prudent levels is essential to our safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control
interest rate risk and the quantitative level of exposure. Our interest rate risk management process seeks to ensure that
appropriate policies, procedures, management information systems and internal controls are in place to maintain interest
rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we
assess the existing and potential future effects of changes in interest rates on our financial condition, including capital
adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures
the difference between the dollar amounts of interest-sensitive assets and liabilities that will be refinanced or repriced
during a given time period. A significant repricing gap could result in a negative impact to the net interest margin during
periods of changing market interest rates.
F-32
The following table depicts our GAP position as of December 31, 2020:
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
958,000
$ 444,790,000 $ 275,587,000 $ 1,555,114,000 $ 514,820,000 $ 2,790,311,000
7,479,000 18,487,000 153,263,000 229,874,000 409,103,000
1,110,000
16,944,000
14,115,000
6,487,000 117,750,000 261,545,000 405,349,000
19,567,000
0 563,174,000
560,424,000
(37,967,000 )
0
0
0 290,430,000
0
1,033,370,000 302,269,000 1,842,242,000 1,007,000,000 $ 4,437,344,000
2,000,000
0
0
750,000
0
0
761,000
473,053,000
338,070,000
611,912,000
0
0
0
0
0
0
74,538,000
35,330,000 55,680,000
79,500,000 156,736,000 153,331,000
0
118,365,000
0
49,996,000
0
0
0 20,000,000 304,000,000
0
0
0
0
0
0
1,706,226,000 232,416,000 531,869,000
0
0
0
0 473,053,000
0 338,070,000
0 611,912,000
0 165,548,000
0 389,567,000
0 118,365,000
70,000,000 394,000,000
0
49,996,000
0 1,433,403,000
21,876,000
0
70,000,000 3,995,790,000
0 441,554,000
Total liabilities & shareholders'
equity
Net asset (liability) GAP
1,706,226,000 232,416,000 531,869,000
$ (672,856,000 ) $ 69,853,000 $ 1,310,373,000 $ 937,000,000
70,000,000 $ 4,437,344,000
Cumulative GAP
$ (672,856,000 ) $ (603,003,000 ) $ 707,370,000 $ 1,644,370,000
Percent of cumulative GAP to total
assets
(15.2% )
(13.6% )
15.9%
37.1%
(1) Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using
maturity date and not repricing frequency.
(2) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31,
2020.
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-33
We conducted multiple simulations as of December 31, 2020, in which it was assumed that changes in market interest rates
occurred ranging from up 400 basis points to down 100 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 $115 million in net interest income projected using our balance sheet amounts and anticipated
replacement rates as of December 31, 2020. The resulting estimates are generally within our policy parameters established
to manage and monitor interest rate risk.
Interest Rate Scenario
Interest rates down 100 basis points
Interest rates up 100 basis points
Interest rates up 200 basis points
Interest rates up 300 basis points
Interest rates up 400 basis points
Dollar Change
Percent Change
In Net
Interest Income
In Net
Interest Income
$
(750,000 )
5,880,000
10,860,000
15,640,000
20,320,000
(0.7%)
5.1
9.4
13.6
17.7
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-34
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) and our report dated March 5, 2021 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 Public Company Accounting Oversight Board (“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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relate(s) to accounts
or disclosures that are material to the consolidated financial statements, and (2) involved especially challenging, subjective
or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – General Reserve
As described in Notes 1 and 3 to the Company’s consolidated financial statements, the Company has a gross loan balance
of $3,216,358,000 and related allowance for loan losses (“allowance”) balance of $37,967,000 at December 31, 2020. The
allowance consists of loans individually and collectively evaluated for impairment. Loans collectively evaluated for
impairment are grouped using similar risk characteristics using historical loss experience that is adjusted for certain
qualitative environmental factors.
F-35
We identified the estimation of the qualitative environmental factors as a critical audit matter. Management’s assumptions
related to the qualitative environmental factors, such as economic trends, credit quality trends, valuation trends, and
external factors, such as Covid-19, which are used to adjust the quantitative historical losses, are highly subjective and have
a significant impact on the allowance. Auditing these assumptions involves especially challenging and subjective auditor
judgment due to the extent of specialized knowledge about the industry and local economy needed to assess these
assumptions.
The primary procedures we performed to address this critical audit matter included:
• Testing the design and operating effectiveness of internal controls over:
o The completeness and accuracy of the data used by management to assess the qualitative environmental
factors
o Management’s monitoring review of the conclusions related to the qualitative environmental factors and
the resulting adjustment to the allowance.
• Evaluating the relevance and reliability of the data used by management to support their assessment of the
qualitative environmental factors by comparing to source data.
• Performing an independent assessment of the reasonableness of qualitative environmental factors by evaluating
trends in internal and external data, including using alternative source data, evaluating the impact of Covid-19, and
comparing to the conclusions reached by management.
/s/ BDO USA, LLP
BDO USA, LLP
We have served as the Company’s auditor since 2006.
Grand Rapids, Michigan
March 5, 2021
F-36
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, 2020, 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, 2020,
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, 2020 and 2019, 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, 2020, and the related notes, and our report dated March 5, 2021 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report by
Mercantile Bank Corporation’s Management on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
BDO USA, LLP
Grand Rapids, Michigan
March 5, 2021
F-37
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, 2020. 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, 2020, 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-37.
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-38
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
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 13)
2020
2019
62,832,000 $
$
53,262,000
563,174,000 180,469,000
626,006,000 233,731,000
387,347,000 334,655,000
18,002,000
18,002,000
3,216,358,000 2,856,667,000
(23,889,000 )
3,178,391,000 2,832,778,000
(37,967,000 )
58,959,000
72,131,000
49,473,000
2,436,000
44,599,000
57,327,000
70,297,000
49,473,000
3,840,000
32,812,000
$ 4,437,344,000 $ 3,632,915,000
$ 1,433,403,000 $ 924,916,000
1,978,150,000 1,765,468,000
3,411,553,000 2,690,384,000
118,365,000 102,675,000
394,000,000 354,000,000
46,881,000
22,414,000
3,995,790,000 3,216,354,000
47,563,000
24,309,000
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized; 0 shares
outstanding at December 31, 2020 and December 31, 2019
Common stock, no par value; 40,000,000 shares authorized;
16,330,476 shares outstanding at December 31, 2020 and
16,425,136 shares outstanding at December 31, 2019
Retained earnings
Accumulated other comprehensive gain/(loss)
Total shareholders’ equity
0
0
302,029,000 305,035,000
134,039,000 107,831,000
3,695,000
441,554,000 416,561,000
5,486,000
Total liabilities and shareholders’ equity
$ 4,437,344,000 $ 3,632,915,000
See accompanying notes to consolidated financial statements.
F-39
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2020, 2019 and 2018
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
2020
2019
2018
$
137,399,000 $
7,740,000
2,298,000
876,000
148,313,000
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
14,984,000
173,000
8,571,000
2,339,000
26,067,000
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
122,246,000
124,534,000
120,082,000
14,050,000
1,750,000
1,100,000
Net interest income after provision for loan losses
108,196,000
122,784,000
118,982,000
Noninterest income
Service charges on deposit and sweep accounts
Mortgage banking activities
Credit and debit card fees
Payroll processing
Earnings on bank owned life insurance
Interest rate swap program fees
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
Other expense
Total noninterest expenses
4,578,000
29,346,000
5,973,000
1,745,000
1,214,000
932,000
268,000
1,116,000
45,172,000
59,799,000
7,950,000
3,350,000
10,440,000
1,292,000
1,138,000
14,551,000
98,520,000
4,584,000
8,485,000
5,925,000
1,626,000
3,886,000
0
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
14,897,000
89,280,000
4,358,000
4,109,000
5,354,000
1,462,000
1,287,000
0
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
14,944,000
86,170,000
Income before federal income tax expense
54,848,000
60,460,000
51,822,000
Federal income tax expense
10,710,000
11,004,000
9,798,000
Net income
$
44,138,000 $
49,456,000 $
42,024,000
Earnings per common share:
Basic
Diluted
$
$
2.71 $
2.71 $
3.01 $
3.01 $
2.53
2.53
See accompanying notes to consolidated financial statements.
F-40
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2020, 2019 and 2018
2020
2019
2018
Net income
$
44,138,000 $
49,456,000 $
42,024,000
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale
Fair value of interest rate swap
Total other comprehensive income (loss)
Tax effect of unrealized holding gains (losses) on securities
available for sale
Tax effect of fair value of interest rate swap
Total tax effect of other comprehensive income (loss)
Other comprehensive income (loss), net of tax effect
2,268,000
0
2,268,000
15,106,000
0
15,106,000
(4,225,000 )
2,000
(4,223,000 )
(477,000 )
0
(477,000 )
1,791,000
(3,172,000 )
0
(3,172,000 )
11,934,000
846,000
(1,000 )
845,000
(3,378,000 )
Comprehensive income
$
45,929,000 $
61,390,000 $
38,646,000
See accompanying notes to consolidated financial statements.
F-41
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2020, 2019 and 2018
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-42
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2020, 2019 and 2018
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-43
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2020, 2019 and 2018
Accumulated
Other
Total
($ in thousands except per share amounts)
Preferred Common Retained Comprehensive Shareholders’
Stock
Earnings Income/(Loss)
Stock
Equity
Balances, January 1, 2020
$
0 $ 305,035 $ 107,831 $
3,695 $
416,561
Employee stock purchase plan (2,264 shares)
Dividend reinvestment plan (35,479 shares)
Stock option exercises, net (753 shares)
Stock grants to directors for retainer fees
(17,716 shares)
Stock-based compensation expense
Share repurchase program (236,393 shares)
Cash dividends ($1.12 per common share)
Net income for 2020
Change in net unrealized gain/(loss) on
securities available for sale, net of tax effect
49
814
3
394
2,325
(6,591 )
(17,930 )
44,138
49
814
3
394
2,325
(6,591 )
(17,930 )
44,138
1,791
1,791
Balances, December 31, 2020
$
0 $ 302,029 $ 134,039 $
5,486 $
441,554
See accompanying notes to consolidated financial statements.
F-44
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2020, 2019 and 2018
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 from sale and write-downs on former bank premises
Net loss from sales and disposals of premises and equipment
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
2020
2019
2018
44,138,000 $
49,456,000 $
42,024,000
9,425,000
(449,000 )
14,050,000
(4,141,000 )
2,325,000
394,000
677,634,000
(665,992,000 )
(29,541,000 )
(325,000 )
(27,000 )
1,514,000
(1,214,000 )
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
(3,886,000 )
(917,000 )
(10,892,000 )
1,895,000
37,877,000
(48,000 )
(7,636,000 )
(2,818,000 )
44,767,000
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
(1,287,000 )
(1,126,000 )
(2,193,000 )
11,029,000
61,737,000
Purchases of securities available for sale
Proceeds from maturities, calls and repayments 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
(369,682,000 )
321,164,000
0
(341,461,000 )
(700,000 )
0
(8,989,000 )
162,000
700,000
(398,806,000 )
(62,084,000 )
79,478,000
(1,980,000 )
(99,620,000 )
(4,500,000 )
7,708,000
(13,484,000 )
854,000
790,000
(92,838,000 )
(48,664,000 )
40,308,000
(4,986,000 )
(193,556,000 )
0
0
(6,318,000 )
1,964,000
772,000
(210,480,000 )
Cash flows from financing activities
Net (decrease) increase in time deposits
Net (decrease) increase in all other deposits
Net (decrease) increase 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
(99,294,000 )
820,463,000
170,921,000
55,755,000
(30,091,000 )
(28,566,000 )
15,690,000
60,000,000
(20,000,000 )
3,000
49,000
814,000
(6,591,000 )
(17,930,000 )
753,204,000
(844,000 )
44,000,000
(40,000,000 )
128,000
50,000
729,000
(7,183,000 )
(17,108,000 )
206,448,000
(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
See accompanying notes to consolidated financial statements.
F-45
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2020, 2019 and 2018
2020
2019
2018
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
392,275,000
233,731,000
626,006,000 $
158,377,000
75,354,000
233,731,000 $
(124,747,000 )
200,101,000
75,354,000
$
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
$
27,703,000 $
10,950,000
32,103,000 $
11,975,000
21,569,000
10,075,000
146,000
613,000
337,000
258,000
744,000
296,000
See accompanying notes to consolidated financial statements.
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
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. The facility was transferred to our bank, and our real estate company was dissolved on
December 18, 2020.
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.
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Events: The U.S. economy deteriorated rapidly during the latter part of the first quarter and into the second quarter
of 2020 due to the ongoing Coronavirus Pandemic. While the economic fallout has stabilized somewhat, there remains a
significant amount of stress and uncertainty across national and global economies. This uncertainty is heightened as certain
geographic areas continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes
in circumstances.
The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may
have a material negative impact on our financial condition and results of operations. We continue to occupy an asset-
sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate
reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the
unprecedented economic impact of the Coronavirus Pandemic may produce declining asset quality, reflected by a higher
level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which may
necessitate additional provisions for our allowance and reduced net income.
The following section summarizes the primary measures that directly impact us and our customers.
• Paycheck Protection Program
The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business
Administration’s 100% guaranteed 7(a) loan program. The CARES Act authorized up to $350 billion in
loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business
concerns, self-employed and individual contractors. The PPP provides 100% guaranteed loans to cover
specific operating costs, with the maximum loan size capped at the lesser of 250% of the average monthly
payroll costs or $10.0 million. PPP loans are eligible to be forgiven based upon certain criteria. In general,
the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent
and utilities incurred or paid by the business during a prescribed period beginning on the loan origination
date. Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the
loan. The loan tenor is 24 months for loans originated prior to June 5, 2020 and 60 months for loans
originated on or after June 5, 2020. Loans originated prior to June 5, 2020 can be modified to a tenor of 60
months upon the mutual agreement of the lender and borrower. We have not modified the maturity date of
any loans made prior to June 5, 2020. The interest rate on the loan is fixed at 1.00%, with the financial
institution receiving a loan origination fee ranging from 1% to 5% of the loan amount paid by the Small
Business Administration. The loan origination fees, net of the direct origination costs, have totaled
approximately $15.0 million and are being accreted into interest income on loans using the level yield
methodology. The program was originally scheduled to end on June 30, 2020, but was subsequently
modified to end on August 8, 2020. Participation in the PPP has had a significant impact on the composition
of our loan and deposit portfolios and our net interest income starting during the second quarter of 2020,
which is expected to remain well into 2021. We originated approximately 2,200 loans aggregating $554
million under the PPP, with no customer payments but $189 million in forgiveness payments from the Small
Business Administration on approximately 900 PPP loans recorded through December 31, 2020.
Under the CARES Act, a PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the
federal banking agencies. On April 9, 2020, the federal banking agencies issued an interim final rule
allowing financial institutions to exclude PPP loans from the average asset calculation to the degree the PPP
loans are financed through the Paycheck Protection Program Lending Facility (“PPPLF”) for the Tier 1
Leverage Capital Ratio.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
•
Individual Economic Impact Payments
The Internal Revenue Service began making Individual Economic Impact Payments in mid-April via direct
deposit or mailed checks. Individuals with adjusted gross income of $75,000 or less received payments of
$1,200, with a reduction formula for those individuals with adjusted gross income over $75,000 but less than
$99,000. Individuals with adjusted gross income of over $99,000 did not receive a payment. Married
couples filing jointly with adjusted gross income of $150,000 or less received payments of $2,400, with a
reduction formula for those married couples filing jointly with adjusted gross income over $150,000 but less
than $198,000. Married couples filing jointly with adjusted gross income of over $198,000 did not receive a
payment.
• Troubled Debt Restructuring Relief
From March 1, 2020 through 60 days after the end of the National Emergency (or December 31, 2020 if
earlier), a financial institution may elect to suspend GAAP principles and regulatory determinations with
respect to loan modifications related to Covid-19 that would otherwise be categorized as troubled debt
restructurings. Banking agencies must defer to the financial institution’s election. We elected to suspend
GAAP principles and regulatory determinations as permitted. The Consolidated Appropriations Act, 2021
extended the suspension date to January 1, 2022.
• Current Expected Credit Loss Methodology Delay
Financial institutions are not required to comply with the CECL methodology requirements from the
enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31,
2020. We elected to postpone CECL adoption as permitted. The Consolidated Appropriations Act, 2021
extended the adoption deferral date to January 1, 2022.
In early April 2020, in response to the early stages of the Coronavirus Pandemic and its pervasive impact across the
economy and financial markets, we developed internal programs of loan payment deferments for commercial and retail
borrowers. For commercial borrowers, we offered 90-day (three payments) interest only amendments as well as 90-day
(three payments) principal and interest payment deferments. Under the latter program, borrowers were extended a 12-
month single payment note at 0% interest in an amount equal to three payments, with loan proceeds used to make the
scheduled payments. The single payment notes receive a loan grade equal to the loan grade of each respective borrowing
relationship. Certain of our commercial loan borrowers subsequently requested and received an additional 90-day (three
payments) interest only amendment or 90-day (three payments) principal and interest payment deferment. Under the latter
program, the amount equal to the three payments was added to the original deferment note which has nine months
remaining to maturity; however, the original 0% interest rate is modified to equal the rate associated with each borrower’s
traditional lending relationship with us for the remainder of the term. Peak of activity in the commercial loan deferment
program was in mid-July, 2020; however, as of December 31, 2020, only 19 borrowers with loan balances aggregating $8.0
million remained in the commercial loan deferment program. For retail borrowers, we offered 90-day (three payments)
principal and interest payment deferments, with deferred amounts added to the end of the loan. Peak of activity was in
early third quarter of 2020; however, as of December 31, 2020, only 14 borrowers with loan balances aggregating $1.8
million remained in the retail loan payment deferment program.
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In April, 2020, the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to
small businesses under the PPP. Only PPP loans are eligible to serve as collateral for the PPPLF, with each dollar of PPP
loans providing one dollar of advance availability. The maturity date of an extension of credit under the PPPLF will equal
the maturity date of the pool of PPP loans pledged to secure the extension of credit. Any principal payments received by
the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration
or principal payments from the borrower after the initial six-month deferment period, must be used to pay down the PPPLF
advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance
relationship. The interest rate on PPPLF advances is fixed at 0.35%. No PPPLF advances could be obtained after
September 30, 2020. We obtained a PPPLF advance in the amount of $43.7 million in late April 2020 and paid it off in full
in early June 2020. As of December 31, 2020, we had no advances outstanding under the PPPLF.
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.
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 $4.4 million and $0.5 million, respectively, at December 31, 2020 and 2019.
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.
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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
2020
22,888,000 $
0
22,888,000 $
2019
4,978,000
0
4,978,000
$
$
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, 2020 and 2019.
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 consolidated 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.
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In accordance with current accounting guidance, 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 and included in the allowance under a general allowance methodology (i.e.,
pooling). In these circumstances, the allowance may be impacted to the extent there is a difference in the results obtained
by the initial measurement methodology and the methodology applied to reflect a troubled debt restructuring. Loans
modified as troubled debt restructurings that subsequently default are factored into the determination of the allowance in
the same manner as other defaulted loans.
The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, which was subsequently revised on
April 7, 2020. This guidance encourages financial institutions to work prudently with borrowers that are or may be unable
to meet their contractual obligations because of the effects of the Coronavirus Pandemic. Pursuant to the guidance, the
federal banking agencies concluded, in consultation with FASB staff, that short-term modifications (e.g. six months) made
on a good faith basis to borrowers who were current prior to any relief are not troubled debt restructurings. This guidance
complements Section 4013 of the CARES Act, which specified that Coronavirus-related modifications made on loans that
were current as of December 31, 2019 and that occur between March 1, 2020 and the earlier of 60 days after the date of
termination of the National Emergency declared by President Trump on March 13, 2020 (the “National Emergency”) or
December 31, 2020, as applicable, are not troubled debt restructurings. As part of the Consolidated Appropriations Act that
was enacted in late 2020, this guidance was extended to January 1, 2022.
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, Coronavirus Pandemic environment, 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.
(Continued)
F-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Financial institutions were not required to comply with the CECL methodology requirements from the enactment date of
the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020.
The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the
required CECL adoption date to January 1, 2022. An economic forecast is a key component of the CECL methodology.
As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been
significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals,
substantial government stimulus has been provided to businesses, individuals and state and local governments and financial
institutions have offered businesses and individuals payment relief options, economic forecasts are regularly revised with
no economic forecast consensus. Given the high degree of uncertainty surrounding economic forecasting, we have elected
to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.
Loans made under PPP are fully guaranteed by the Small Business Administration; therefore, such loans do not have an
associated allowance.
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.
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 $0.7 million and $0.5 million as of December 31, 2020 and 2019, respectively.
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2019, we elected to perform a qualitative assessment for our annual impairment
test and concluded it was more likely than not our fair value was greater than its carrying amount; therefore, no further
testing was required.
Due to current stressed economic and market conditions, we assessed goodwill for impairment as of March 31, 2020, June
30, 2020, September 30, 2020 and October 1, 2020. For March 31, 2020, we performed a quantitative analysis, which used
a discounted income approach and a market valuation model, which compared the inherent value of our company to
valuations of recent transactions in the market place to determine if our goodwill had been impaired. Using this
quantitative methodology, we determined goodwill was not impaired as of March 31, 2020. For June 30, 2020, September
30, 2020, and October 1, 2020, we used the Step 0 qualitative methodology for which we assessed the macro and
microeconomic conditions, industry and market conditions, financial performance, and our underlying stock performance.
We concluded it was 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.
(Continued)
F-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
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.
Subsequent Events: On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. This $900
billion Coronavirus Pandemic relief package includes $284 billion in aid for small businesses through a second round of
forgivable loans through the PPP. In general, the framework of loans originated under the second round is similar to that of
the initial round. As of February 26, 2021, we had originated about 900 loans aggregating $181 million in second round
PPP loans.
We originated approximately 2,200 loans aggregating $554 million under the initial round of the PPP. As of December 31,
2020, we had received no customer payments but had received $189 million in forgiveness payments from the Small
Business Administration on about 900 PPP loans. As of February 26, 2021, we had received no customer payments but
had received $266 million in forgiveness payments from the Small Business Administration on approximately 1,400 loans.
As part of our bank’s branch rationalization efforts, we recently announced that our bank and Lake Trust Credit Union have
entered into an agreement for the sale of our banking office located in Hastings, Michigan, with the sale expected to be
consummated by March 31, 2021. The agreement includes the 4,300 square-foot facility, all associated assets and
approximately $16 million in deposits.
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 was 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.
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (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.
Financial institutions were not required to comply with the CECL methodology requirements from the enactment date of
the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020.
The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the
required CECL adoption date to January 1, 2022. An economic forecast is a key component of the CECL methodology.
As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been
significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals,
substantial government stimulus has been provided to businesses, individuals and state and local governments and financial
institutions have offered businesses and individuals payment relief options, economic forecasts are regularly updated and
there is no economic forecast consensus. Given the high degree of uncertainty surrounding economic forecasting, we have
elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 2 – 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:
2020
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
2019
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 242,522,000 $ 516,000 $
23,869,000 1,021,000
101,991,000 5,833,000
473,000
11,521,000
0
500,000
$ 380,403,000 $ 7,843,000 $
(897,000 ) $ 242,141,000
0 24,890,000
0 107,824,000
(2,000 ) 11,992,000
500,000
(899,000 ) $ 387,347,000
0
$ 185,103,000 $ 2,449,000 $ (1,142,000 ) $ 186,410,000
(82,000 ) 42,470,000
41,998,000
554,000
(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
Securities with unrealized losses at year-end 2020 and 2019, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, are as follows:
Description of Securities
2020
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation
bonds
Municipal revenue bonds
Other investments
2019
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
$ 118,650,000 $ 897,000 $
0
0
0
0
2,000
423,000
0
0
$ 119,073,000 $ 899,000 $
0 $
0
0
0
0
0 $
0 $ 118,650,000 $
0
0
897,000
0
0
0
423,000
0
0
0
0 $ 119,073,000 $
0
2,000
0
899,000
$ 25,650,000 $ 349,000 $ 73,913,000 $ 793,000 $ 99,563,000 $ 1,142,000
82,000
54,000 13,261,000
28,000 10,423,000
2,838,000
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
18,000
0
0
12,000
0
0
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 2 – 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, 2020, 64 debt securities with fair values totaling $119 million had unrealized losses aggregating $0.9
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, 2020, 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
2.52%
1.16
1.67
2.07
2.10
4.13
1.67%
$
Amortized
Cost
5,906,000 $
93,320,000
Fair
Value
5,939,000
94,474,000
176,848,000 180,541,000
81,003,000
24,890,000
500,000
$ 380,403,000 $ 387,347,000
79,960,000
23,869,000
500,000
No securities were sold during the last three years.
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $109 million
and $96.5 million at December 31, 2020 and December 31, 2019, respectively, with estimated market values of $116
million and $99.4 million at the respective dates. Securities issued by all other states and their political subdivisions had a
combined amortized cost of $4.1 million and $5.9 million at December 31, 2020 and December 31, 2019, respectively, with
estimated market values of $4.2 million and $5.9 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 $118 million and $103 million at December 31, 2020 and 2019, respectively. Investments in
FHLBI stock are restricted and may only be resold to, or redeemed by, the issuer.
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – 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.
Year-end loans disaggregated by class of loan within the loan portfolio segments were as follows:
December 31, 2020
%
Balance
December 31, 2019
%
Balance
Percent
Increase
(Decrease)
$ 1,145,423,000
35.6 % $ 846,551,000
29.6 %
35.3 %
55,055,000
529,953,000
917,436,000
1.7
56,119,000
16.5 579,003,000
28.5 835,346,000
Commercial:
Commercial and industrial (1)
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
146,095,000
2,793,962,000
4.6 124,525,000
86.9 2,441,544,000
Retail:
Home equity and other
1-4 family mortgages
Total retail
61,620,000
360,776,000
422,396,000
1.9
75,374,000
11.2 339,749,000
13.1 415,123,000
2.6
11.9
14.5
2.0
20.3
29.2
4.4
85.5
(1.9 )
(8.5 )
9.8
17.3
14.4
(18.2 )
6.2
1.8
Total loans
$ 3,216,358,000
100.0 % $ 2,856,667,000
100.0 %
12.6 %
(1) For December 31, 2020, includes $365 million in loans originated under the Paycheck Protection Program.
Concentrations within the loan portfolio were as follows at year-end:
2020
2019
Percentage
of
Loan
Portfolio
Balance
Percentage
of
Loan
Portfolio
Balance
Commercial real estate loans to lessors of
non-residential buildings
$ 649,162,000
20.2 % $ 580,708,000
20.3 %
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Year-end nonperforming loans were as follows:
Loans past due 90 days or more still accruing interest
Nonaccrual loans
Total nonperforming loans
The recorded principal balance of 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
2020
2019
$
$
0 $
3,384,000
3,384,000 $
0
2,284,000
2,284,000
December 31,
2020
December 31,
2019
$
172,000 $
0
619,000
22,000
0
813,000
0
0
134,000
0
2,000
136,000
242,000
2,329,000
2,571,000
255,000
1,893,000
2,148,000
Total nonperforming loans
$
3,384,000 $
2,284,000
(Continued)
F-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2020:
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
$ 261,000 $ 172,000 $
0 $ 433,000 $ 1,144,990,000 $ 1,145,423,000 $
0
Commercial:
Commercial and
industrial
Vacant land, land
development, and
residential
construction
Real estate – owner
occupied
Real estate – non-
owner occupied
Real estate – multi-
0
0
0
0
0
0
0
0
0
0
0
0
0
55,055,000
55,055,000
0 197,000 421,000 618,000 529,335,000 529,953,000
0
0
23,000
23,000 917,413,000 917,436,000
family and
residential rental
0 146,095,000 146,095,000
Total commercial 261,000 369,000 444,000 1,074,000 2,792,888,000 2,793,962,000
0
0
0
Retail:
61,620,000
Home equity and other 112,000
1- 4 family mortgages 1,147,000 247,000 342,000 1,736,000 359,040,000 360,776,000
1,259,000 312,000 396,000 1,967,000 420,429,000 422,396,000
54,000 231,000
61,389,000
Total retail
65,000
Total past due
loans
$ 1,520,000 $ 681,000 $ 840,000 $ 3,041,000 $ 3,213,317,000 $ 3,216,358,000 $
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – 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 $ 846,551,000 $ 846,551,000 $
0
Commercial:
Commercial and
industrial
Vacant land, land
development, and
residential
construction
Real estate – owner
occupied
Real estate – non-
owner occupied
Real estate – multi-
0
0
0
0
0
0
0
0
0
191,000
0
0 191,000
55,928,000
56,119,000
0
0
0 134,000 134,000 578,869,000 579,003,000
0
0
0 835,346,000 835,346,000
family and
residential rental
0
Total commercial 191,000
Retail:
Home equity and other 171,000
1- 4 family mortgages 745,000
916,000
Total retail
Total past due
0 124,525,000 124,525,000
0
0 134,000 325,000 2,441,219,000 2,441,544,000
0
20,000 256,000
75,374,000
65,000
29,000 529,000 1,303,000 338,446,000 339,749,000
94,000 549,000 1,559,000 413,564,000 415,123,000
75,118,000
loans
$ 1,107,000 $ 94,000 $ 683,000 $ 1,884,000 $ 2,854,783,000 $ 2,856,667,000 $
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans with no related allowance recorded were as follows as of December 31, 2020:
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
$ 6,242,000 $ 6,242,000
$ 7,874,000
0
0
14,782,000 14,593,000
341,000
341,000
0
0
21,365,000 21,176,000
1,072,000
987,000
4,455,000 2,575,000
5,527,000 3,562,000
187,000
5,361,000
227,000
3,000
13,652,000
1,216,000
2,447,000
3,663,000
Total with no related allowance recorded
$ 26,892,000 $ 24,738,000
$ 17,315,000
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans with an allowance recorded and total impaired loans were as follows as of December 31, 2020:
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
$
343,000 $
343,000 $
53,000 $
971,000
0
0
734,000
763,000
162,000
162,000
0
0
1,268,000 1,239,000
0
77,000
8,000
0
77,000
578,000
100,000
0
138,000 1,726,000
300,000
698,000
998,000
283,000
698,000
981,000
421,000
241,000
172,000
595,000
413,000 1,016,000
Total with an allowance recorded
$ 2,266,000 $ 2,220,000 $ 551,000 $ 2,742,000
Total impaired loans:
Commercial
Retail
Total impaired loans
$ 22,633,000 $ 22,415,000 $ 138,000 $ 15,378,000
6,525,000 4,543,000
413,000 4,679,000
$ 29,158,000 $ 26,958,000 $ 551,000 $ 20,057,000
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired 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
$ 8,129,000 $ 8,129,000
$ 11,610,000
85,000
715,000
178,000
29,000
85,000
667,000
178,000
9,000
9,136,000 9,068,000
1,279,000 1,209,000
3,272,000 1,968,000
4,551,000 3,177,000
89,000
1,520,000
131,000
44,000
13,394,000
1,203,000
2,078,000
3,281,000
Total with no related allowance recorded
$ 13,687,000 $ 12,245,000
$ 16,675,000
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans with an allowance recorded and total impaired 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
$
460,000 $
458,000 $ 202,000 $ 5,709,000
0
0
0
982,000 1,672,000
1,078,000 1,078,000
80,000
0
0
54,000
0
0
1,538,000 1,536,000 1,184,000 7,515,000
0
0
0
502,000
358,000
860,000
485,000
356,000
841,000
356,000
83,000
658,000
660,000
439,000 1,318,000
Total with an allowance recorded
$ 2,398,000 $ 2,377,000 $ 1,623,000 $ 8,833,000
Total impaired loans:
Commercial
Retail
Total impaired loans
$ 10,674,000 $ 10,604,000 $ 1,184,000 $ 20,909,000
5,411,000 4,018,000
439,000 4,599,000
$ 16,085,000 $ 14,622,000 $ 1,623,000 $ 25,508,000
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 fair value. Interest income recognized on accruing troubled debt
restructurings totaled $1.3 million in 2020 and 2019, and $1.1 million during 2018. Interest income recognized on
nonaccrual loans totaled less than $0.1 million in 2020, 2019 and 2018, reflecting the collection of interest at the time of
principal pay-off. Lost interest income on nonaccrual loans totaled $0.2 million in 2020, $0.1 million in 2019, and $0.3
million in 2018.
(Continued)
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – 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, 2020:
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 (1) $
Grades 5 – 7
Grades 8 – 9
Total
commercial $ 1,145,423,000 $
828,706,000 $
306,614,000
10,103,000
22,547,000 $
32,398,000
110,000
315,134,000 $
185,541,000
29,278,000
396,700,000 $
520,395,000
341,000
91,711,000
54,111,000
273,000
55,055,000 $
529,953,000 $
917,436,000 $
146,095,000
Retail credit exposure – credit risk profiled by collateral type:
Performing
Nonperforming
Total retail
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
61,378,000
242,000
358,447,000
2,329,000
61,620,000 $ 360,776,000
$
(1) Included in Commercial and Industrial Loans Grades 1 – 4 are $365 million of loans originated under the
Paycheck Protection Program.
(Continued)
F-68
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans by credit quality indicators were as follows as of December 31, 2019:
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 $
$
521,920,000 $
309,824,000
14,807,000
26,065,000 $
29,716,000
338,000
351,671,000 $
220,980,000
6,352,000
563,087,000 $
272,124,000
135,000
85,152,000
39,203,000
170,000
846,551,000 $
56,119,000 $
579,003,000 $
835,346,000 $
124,525,000
Retail credit exposure – credit risk profiled by collateral type:
Performing
Nonperforming
Total retail
Retail
Home Equity
and Other
Retail
1-4 Family
Mortgages
75,119,000
255,000
337,856,000
1,893,000
75,374,000 $ 339,749,000
$
(Continued)
F-69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
All commercial loans are graded using the following criteria:
Grade 1. “Exceptional” Loans with this rating contain very little, if any, risk.
Grade 2. “Outstanding” Loans with this rating have excellent and stable sources of repayment and conform to bank
policy and regulatory requirements.
Grade 3. “Very Good” Loans with this rating have strong sources of repayment and conform to bank policy and
regulatory requirements. These are loans for which repayment risks are acceptable.
Grade 4. “Good” Loans with this rating have solid sources of repayment and conform to bank policy and regulatory
requirements. These are loans for which repayment risks are modest.
Grade 5. “Acceptable” Loans with this rating exhibit acceptable sources of repayment and conform with most bank
policies and all regulatory requirements. These are loans for which repayment risks are satisfactory.
Grade 6. “Monitor” Loans with this rating are considered to have emerging weaknesses which may include negative
current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these
credits will be downgraded to the criticized asset report.
Grade 7. “Special Mention” Loans with this rating have potential weaknesses that deserve management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan at some future date.
Grade 8. “Substandard” Loans with this rating are inadequately protected by current sound net worth, paying
capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more
well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct
possibility of loss if the deficiencies are not corrected.
Grade 9. “Doubtful” Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and
where collection or liquidation in full is highly questionable and improbable.
Grade 10. “Loss” Loans with this rating are considered uncollectable, and of such little value that continuance as an
active 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
creditors’ rights in order to preserve our collateral position.
(Continued)
F-70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for loan losses and recorded investments in loans for the year-ended December 31, 2020 are as follows:
Allowance for loan losses:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
21,070,000 $ 2,749,000 $
1,226,000
12,835,000
(225,000 )
(613,000 )
379,000
487,000
33,779,000 $ 4,129,000 $
70,000 $
(11,000 )
0
0
59,000 $
23,889,000
14,050,000
(838,000 )
866,000
37,967,000
Ending balance: individually evaluated for
impairment
$
138,000 $
413,000 $
0 $
551,000
Ending balance: collectively evaluated for
impairment
Total loans (*):
Ending balance
$
33,641,000 $ 3,716,000 $
59,000 $
37,416,000
$ 2,428,703,000 $ 422,396,000
$ 2,851,099,000
Ending balance: individually evaluated for
impairment
$
22,415,000 $ 4,543,000
$
26,958,000
Ending balance: collectively evaluated for impairment $ 2,406,288,000 $ 417,853,000
$ 2,824,141,000
(*) Excludes $365 million in loans originated under the Paycheck Protection Program.
(Continued)
F-71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for loan losses and recorded investments in 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
$
$
19,619,000 $ 2,717,000 $
146,000
1,578,000
(428,000 )
(455,000 )
314,000
328,000
21,070,000 $ 2,749,000 $
44,000 $
26,000
0
0
70,000 $
22,380,000
1,750,000
(883,000 )
642,000
23,889,000
Ending balance: individually evaluated for
impairment
$
1,230,000 $
459,000 $
0 $
1,689,000
Ending balance: collectively evaluated for
impairment
Total loans:
Ending balance
$
19,840,000 $ 2,290,000 $
70,000 $
22,200,000
$ 2,441,544,000 $ 415,123,000
$ 2,856,667,000
Ending balance: individually evaluated for
impairment
$
10,604,000 $ 4,018,000
$
14,622,000
Ending balance: collectively evaluated for impairment $ 2,430,940,000 $ 411,105,000
$ 2,842,045,000
(Continued)
F-72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for loan losses and recorded investments in 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
Ending balance: individually evaluated for
impairment
Ending balance: collectively evaluated for
impairment
Total loans:
Ending balance
Commercial
Loans
Retail
Loans
Unallocated
Total
$
$
16,747,000 $ 2,661,000 $
191,000
(776,000 )
641,000
19,619,000 $ 2,717,000 $
958,000
(674,000 )
2,588,000
93,000 $
(49,000 )
0
0
44,000 $
19,501,000
1,100,000
(1,450,000 )
3,229,000
22,380,000
$
550,000 $
539,000 $
0 $
1,089,000
$
19,069,000 $ 2,178,000 $
44,000 $
21,291,000
$ 2,360,106,000 $ 392,979,000
$ 2,753,085,000
Ending balance: individually evaluated for
impairment
$
19,291,000 $ 4,617,000
$
23,908,000
Ending balance: collectively evaluated for impairment $ 2,340,815,000 $ 388,362,000
$ 2,729,177,000
(Continued)
F-73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the year-ended December 31, 2020 were 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
Total
Pre-
Post-
Modification Modification
Recorded
Principal
Balance
Recorded
Principal
Balance
Number of
Contracts
13 $
6,914,000 $
7,717,000
0
8
2
0
23
16
6
22
0
14,663,000
319,000
0
21,896,000
0
14,663,000
318,000
0
22,698,000
451,000
151,000
602,000
452,000
148,000
600,000
45 $
22,498,000 $
23,298,000
Loans modified as troubled debt restructurings during the year-ended December 31, 2019 were 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
Pre-
Post-
Modification Modification
Recorded
Principal
Balance
Recorded
Principal
Balance
Number of
Contracts
5 $
435,000 $
435,000
1
2
0
0
8
20
8
28
87,000
1,669,000
0
0
2,191,000
87,000
1,669,000
0
0
2,191,000
295,000
310,000
605,000
296,000
310,000
606,000
Total
36 $
2,796,000 $
2,797,000
(Continued)
F-74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past
due during the year-ended December 31, 2020 (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 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-75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for loans categorized as troubled debt restructurings during the year-ended December 31, 2020 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
$ 8,587,000 $
0
(11,260,000 )
0
9,087,000
$ 6,414,000 $
0
85,000 $ 1,145,000 $
0
(85,000 ) (3,765,000 )
0
0
0 17,417,000
0 $ 14,797,000 $
178,000 $
0
(585,000 )
0
887,000
480,000 $
7,000
0
(7,000 )
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
$
$
1,415,000 $
0
(881,000 )
0
612,000
1,146,000 $
724,000
0
(68,000 )
0
150,000
806,000
(Continued)
F-76
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for 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
$ 14,138,000 $
0
(20,364,000 )
0
14,813,000
$ 8,587,000 $
0 $ 3,100,000 $
0
0
(2,000 ) (3,820,000 )
(97,000 )
87,000 1,962,000
85,000 $ 1,145,000 $
0
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
$
$
1,402,000 $
(18,000 )
(272,000 )
0
303,000
1,415,000 $
578,000
0
(162,000 )
0
308,000
724,000
(Continued)
F-77
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for 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
$ 3,990,000 $
(505,000 )
(792,000 )
0
11,445,000
$ 14,138,000 $
0
383,000 $ 2,026,000 $
0
(383,000 ) (6,663,000 )
0
(93,000 )
0 7,830,000
0 $ 3,100,000 $
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
$
$
1,346,000 $
(30,000 )
(323,000 )
(82,000 )
491,000
1,402,000 $
539,000
0
(41,000 )
0
80,000
578,000
(Continued)
F-78
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 3 – 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,
2020
December 31,
2019
$
53,000 $
0
59,000
8,000
0
120,000
202,000
0
982,000
0
0
1,184,000
202,000
145,000
347,000
311,000
83,000
394,000
Total related allowance
$
467,000 $
1,578,000
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 4 - PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
Land and improvements
Buildings
Furniture and equipment
Less: accumulated depreciation
2020
2019
$
16,533,000 $
56,114,000
21,522,000
94,169,000
35,210,000
17,039,000
52,847,000
22,712,000
92,598,000
35,271,000
Total premises and equipment
$
58,959,000 $
57,327,000
Future lease payments at December 31, 2020 totaled $3.4 million, comprised of $0.6 million in one year, $1.2 million in
one to three years, $0.5 million in three to five years and $1.1 million in over five years. 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. Depreciation expense totaled $5.2 million in 2020, $3.9
million in 2019, and $3.6 million in 2018.
(Continued)
F-79
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 5 – 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
2020
2019
$ 1,030,211,000 $
8,717,000
$ 1,038,928,000 $
711,643,000
15,317,000
726,960,000
Custodial escrow balances, which are reported as deposits on the Consolidated Balance Sheets, maintained in connection
with serviced loans were $11.8 million and $6.4 million as of December 31, 2020 and December 31, 2019, respectively.
Activity for capitalized mortgage loan servicing rights during 2020 and 2019 was as follows:
Balance at beginning of year
Additions
Amortized to expense
Balance at end of year
2020
2019
$
4,652,000 $
6,467,000
(2,930,000 )
4,436,000
1,962,000
(1,746,000 )
$
8,189,000 $
4,652,000
We determined that no valuation allowance was necessary as of December 31, 2020 or December 31, 2019. The estimated
fair value of mortgage servicing rights was $10.0 million and $7.4 million as of December 31, 2020 and December 31,
2019, 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 2020, fair value was determined using a discount rate of 7.75%, a weighted average constant prepayment rate of
14.0%, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.40%. 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%.
The weighted average amortization period was 6.1 years and 5.3 years as of December 31, 2020 and December 31, 2019,
respectively. Forecasted amortization as of December 31, 2020 is as follows:
2021
2022
2023
2024
2025
Thereafter
$
1,724,000
1,476,000
1,241,000
1,026,000
834,000
1,888,000
(Continued)
F-80
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 6 – CORE DEPOSIT INTANGIBLE ASSET, NET
The gross carrying amount of core deposit intangible assets totaled $17.5 million as of December 31, 2020 and December
31, 2019. As of December 31, 2020, the accumulated amortization on core deposit intangible assets was $15.1 million,
providing for a net carry balance of $2.4 million. 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.
The scheduled amortization expense on core deposit intangible assets in future periods is:
2021
2022
2023
2024
NOTE 7 – DEPOSITS
Deposits at year-end are summarized as follows:
December 31, 2020
%
Balance
December 31, 2019
%
Balance
Noninterest-bearing checking
Interest-bearing checking
Money market
Savings
Time, under $100,000
Time, $100,000 and over
Total local deposits
$ 1,433,403,000
473,053,000
611,912,000
338,070,000
165,548,000
342,633,000
3,364,619,000
42.0 % $ 924,916,000
13.9 332,373,000
17.9 509,368,000
9.9 269,318,000
4.9 198,123,000
10.0 322,827,000
98.6 2,556,925,000
$
1,086,000
768,000
450,000
132,000
Percent
Increase
(Decrease)
34.4 %
12.3
18.9
10.0
7.4
12.0
95.0
55.0 %
42.3
20.1
25.5
(16.4 )
6.1
31.6
Out-of-area time, $100,000 and over
46,934,000
1.4 133,459,000
5.0
(64.8 )
Total deposits
$ 3,411,553,000
100.0 % $ 2,690,384,000
100.0 %
26.8 %
Out-of-area time deposits consist of deposits obtained from depositors outside of our primary market areas exclusively
through deposit brokers.
The following table depicts the maturity distribution for time deposits at year-end:
In one year or less
In one to two years
In two to three years
In three to four years
In four to five years
2020
2019
$
327,246,000 $
139,801,000
39,801,000
25,577,000
22,690,000
360,395,000
173,512,000
82,480,000
16,019,000
22,003,000
Total certificates of deposit
$
555,115,000 $
654,409,000
(Continued)
F-81
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 7 – DEPOSITS (Continued)
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
2020
2019
$
79,500,000 $
79,373,000
77,363,000
153,331,000
100,635,000
59,838,000
93,691,000
202,122,000
Total certificates of deposit
$
389,567,000 $
456,286,000
Total time deposits of more than $250,000 totaled $272 million and $320 million at year-end 2020 and 2019, respectively.
NOTE 8 – 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
2020
2019
$
$
118,365,000 $
0.12 %
102,675,000
0.17 %
132,880,000 $
0.12 %
105,234,000
0.24 %
Maximum daily balance during the year
$
173,186,000 $
133,411,000
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-82
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $394 million at December 31, 2020, and were
expected to mature at varying dates from November 2021 through June 2027, with fixed rates of interest from 0.55% to
3.18% and averaging 2.06%. 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%.
In June 2020, we executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance
portfolio as part of our interest rate risk management program. We prepaid seven advances aggregating $70.0 million with
maturities ranging from August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging
1.97%, using the proceeds from seven new advances aggregating $70.0 million with maturities ranging from June 2024
through June 2027 and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9
million were embedded into the fixed rates on the newly obtained advances, equating to 0.22% of the 0.84% average rate of
the new advances.
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 collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans,
first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank under a blanket
lien arrangement. Our borrowing line of credit as of December 31, 2020 totaled $754 million, with remaining availability
based on collateral of $354 million.
Scheduled maturities as of December 31, 2020:
2021
2022
2023
2024
2025
Thereafter
NOTE 10 - FEDERAL INCOME TAXES
The consolidated income tax expense is as follows:
Current expense
Deferred expense
Change in valuation allowance
Tax expense
$
20,000,000
94,000,000
80,000,000
80,000,000
50,000,000
70,000,000
2020
2019
2018
$
$
14,945,000 $
(4,141,000 )
(94,000 )
10,710,000 $
10,978,000 $
26,000
0
11,004,000 $
10,170,000
(372,000 )
0
9,798,000
(Continued)
F-83
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 10 - 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
Change in valuation allowance
Other
Tax expense
2020
2019
2018
$
11,518,000 $
12,697,000 $
10,883,000
(681,000 )
(238,000 )
(94,000 )
205,000
10,710,000 $
(644,000 )
(804,000 )
0
(245,000 )
11,004,000 $
(620,000 )
(201,000 )
0
(264,000 )
9,798,000
$
The statutory tax rate was 21% for 2020, 2019 and 2018.
Significant components of deferred tax assets and liabilities as of December 31, 2020 and 2019 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
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
$
2020
2019
7,973,000 $
511,000
541,000
211,000
924,000
0
537,000
938,000
11,635,000
0
11,635,000
1,175,000
297,000
498,000
1,720,000
1,458,000
2,142,000
521,000
7,811,000
5,017,000
577,000
720,000
239,000
104,000
94,000
26,000
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
$
3,824,000 $
65,000
(Continued)
F-84
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 10 - 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, 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 expired at December 31, 2020 and we no longer carry this
asset or the valuation allowance against it.
We had no unrecognized tax benefits at any time during 2020 or 2019 and do not anticipate any significant increase in
unrecognized tax benefits during 2021. 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 2020 or 2019. Our U.S. federal income tax returns are no longer subject to examination for all years before 2017.
NOTE 11 – 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. During 2020, restricted stock grants were provided to certain employees from the
Stock Incentive Plan of 2020. Stock option grants were provided to certain employees during 2016 from the Stock
Incentive Plan of 2016. Stock grants to directors as retainer payments during the years 2016 through 2019 were from the
Stock Incentive Plan of 2016, while stock grants to directors as retainer payments during 2020 were from the Stock
Incentive Plan of 2020. 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. The Stock Incentive Plan of 2016 was
effectively replaced with the Stock Incentive Plan of 2020 that was approved by shareholders in May, 2020.
Under the Stock Incentive Plan of 2006, the Stock Incentive Plan of 2016 and the Stock Incentive Plan of 2020, 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 2020 fully vest after three years and, in
the case of performance-based restricted stock issued to executive officers in 2018, 2019 and 2020, 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 2020,
there were approximately 361,000 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-85
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 11 – STOCK-BASED COMPENSATION (Continued)
A summary of restricted stock activity from grants issued during the past three years is as follows:
2020
2019
2018
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
262,260 $
121,518
(85,445 )
(35,997 )
262,336 $
34.91
24.65
37.08
33.71
29.42
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
Of the restricted stock shares granted in 2020, 2019 and 2018, a total of 31,295 shares, 23,596 shares and 24,633 shares,
respectively, are performance-based awards made to our Named Executive Officers at the target level and are subject to the
attainment of pre-determined performance goals. Of the forfeited shares during 2020, a total of 13,709 shares and 14,681
shares reflect reductions in performance-based grants to our Named Executive Officers that were awarded in 2019 and
2018, respectively. These forfeitures were based on an analysis of the pre-determined performance goals, taking into
account actual performance since the grant date and forecasts for the remainder of the three-year performance period.
A summary of stock option activity during the past three years is as follows:
2020
2019
2018
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
10,700 $
0
(1,000 )
0
30.25
NA
5.19
NA
18,900 $
0
(8,200 )
0
23.92
NA
15.69
NA
30,908 $
0
(12,008 )
0
18.67
NA
10.38
NA
9,700 $
32.83
10,700 $
30.25
18,900 $
23.92
9,700 $
32.83
10,700 $
30.25
18,900 $
23.92
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-86
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 11 – STOCK-BASED COMPENSATION (Continued)
Options at year-end 2020 were as follows:
Outstanding
Weighted
Average
Range of
Exercise
Prices
$22.00 - $23.00
$27.00 - $28.00
$36.00 - $37.00
Outstanding at year end
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
Number
1,000
2,200
6,500
9,700
0.9
1.9
2.9
2.4
$
$
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 outstanding at year-end 2020, 2019 and 2018 is as follows:
Minimum exercise price
Maximum exercise price
Average remaining option term (years)
$
22.15 $
36.22
2.4
5.19 $
36.22
3.2
5.19
36.22
3.4
2020
2019
2018
Information related to stock option grants and exercises during 2020, 2019 and 2018 is as follows:
2020
2019
2018
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
$
17,000 $
3,000
0
157,000 $
126,000
0
317,000
141,000
0
NA
NA
NA
The aggregate intrinsic value of in-the-money stock options issued under Mercantile plans outstanding and exercisable at
December 31, 2020 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-87
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 11– STOCK-BASED COMPENSATION (Continued)
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 was expensed on a
straightline basis over the respective twelve month period. On June 1, 2020, we granted about 16,000 shares of common
stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of June 1,
2020 through May 31, 2021. The associated $0.3 million cost is being expensed on a straightline basis over the respective
twelve month period. On August 27, 2020, we granted about 2,000 shares of common stock to newly appointed Corporate
and Bank Board members for retainer payments for the period of September 1, 2020 through May 31, 2021. The
associated less than $0.1 million cost is being expensed over the respective nine-month period.
NOTE 12 – 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 2020 and 2019, our bank had $122 million and $115
million in loan commitments to directors and executive officers, of which $108 million and $104 million were outstanding
at year-end 2020 and 2019, respectively, as reflected in the following table.
Beginning balance
New loans
Repayments
Ending balance
2020
2019
$
104,043,000 $
13,823,000
(9,824,000 )
92,033,000
16,662,000
(4,652,000 )
$
108,042,000 $
104,043,000
Paycheck Protection Program loans to related companies of our directors totaled $0.3 million as of December 31, 2020.
Related party deposits and repurchase agreements totaled $19.4 million and $15.0 million at year-end 2020 and 2019,
respectively.
(Continued)
F-88
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 13 – 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, 2020 and 2019.
At year-end 2020 and 2019, 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
2020
2019
$ 1,019,496,000 $
59,396,000
72,495,000
30,707,000
227,558,000
20,543,000
776,493,000
60,858,000
58,199,000
18,135,000
101,961,000
22,798,000
$ 1,430,195,000 $ 1,038,444,000
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 3.00% to 5.00%. 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 3.50% to
5.00%. These credit facilities generally mature and fully amortize within three to seven years.
(Continued)
F-89
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 13 – 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.
2020
2019
Contract
Amount
Carrying
Value
Contract
Amount
Carrying
Value
Standby letters of credit
$ 20,543,000 $
138,000 $ 22,798,000 $
160,000
The Federal Reserve Board reduced reserve requirements for all depository institutions to zero percent effective March 26,
2020; as a result, we did not have a reserve requirement as of December 31, 2020. We were required to have $10.7 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.
NOTE 14 – 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 2020, 2019 and 2018 matching 401(k) contributions charged to expense were $1.9
million, $1.7 million and $1.6 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 $2.4 million and $2.7 million as of
December 31, 2020 and 2019, 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 2020, 2019 and
2018.
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 2,264 and 1,507 in 2020
and 2019, respectively. As of December 31, 2020, there were approximately 239,000 shares available under our current
plan.
(Continued)
F-90
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 15 – DERIVATIVES AND HEDGING ACTIVITIES
We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the
exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate,
liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities.
Derivative financial instruments may also be used to assist in managing economic risks.
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan
borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while
simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps
with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk
exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the
strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps
and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings.
The fair value of derivative instruments as of December 31, 2020 are reflected in the following table. No interest rate
swaps were outstanding as of December 31, 2019.
Derivative Assets
Interest rate swaps
Derivative Liabilities
Interest rate swaps
Notional Amount
Balance Sheet
Location
Fair Value
$
33,731,000 Other Assets
$
1,003,000
33,731,000 Other Liabilities
1,027,000
The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of less than
$0.1 million during the year-ended December 31, 2020. There were no such instruments outstanding during 2019.
The fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment
for nonperformance risk related to these agreements, was $1.0 million as of December 31, 2020. Cash collateral totaling
$1.1 million was provided to the counterparty correspondent bank as of December 31, 2020.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $33.7 million as of
December 31, 2020. Associated credit exposure is generally mitigated by securing the interest rates swaps with the
underlying collateral of the loan instrument that has been hedged.
(Continued)
F-91
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
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
2020
2019
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets
Cash
Cash equivalents
Securities available for
sale
Level 1
Level 2
$
16,953
609,053
$
16,953
609,053
$
16,430
217,301
$
16,430
217,301
(1)
387,347
387,347
334,655
334,655
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
3,155,503
22,888
8,189
18,002
3,294,522
24,029
10,006
18,002
2,827,800
4,978
4,652
18,002
2,887,168
4,978
7,375
receivable
Level 2
10,861
10,861
9,944
9,944
Financial liabilities
Deposits
Securities sold under
agreements to
repurchase
Level 2
3,411,553
3,397,768
2,690,384
2,600,452
Level 2
118,365
118,365
102,675
102,675
Federal Home Loan Bank
advances
Subordinated debentures
Accrued interest payable
Level 2
Level 2
Level 2
394,000
47,563
2,313
410,881
47,574
2,313
354,000
46,881
3,949
361,887
46,140
3,949
(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-92
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
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 that
becomes known to us necessitates an impairment. There was no such impairment as of December 31, 2020 or 2019. We
have no Level 1 securities available for sale.
(Continued)
F-93
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 17 – FAIR VALUE MEASUREMENTS (Continued)
Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or market, as determined by outstanding commitments from investors, 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, 2020 and 2019, we determined the fair value of our
mortgage loans held for sale to be $24.0 million and $5.0 million, respectively.
Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair
value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the
observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table
below at initial recognition of impairment and on an ongoing basis until recovery or charge-off. The fair values of
impaired loans are determined using either the sales comparison approach or income approach; respective unobservable
inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate
capitalization rates.
Foreclosed assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less
costs to sell upon transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently
adjust estimated fair value on foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value
estimates. The fair values of parcels of other real estate owned are determined using either the sales comparison approach
or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between
comparable sales and the utilization of appropriate capitalization rates.
Derivatives. 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, 2020 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)
$ 242,141,000 $
24,890,000
107,824,000
11,992,000
500,000
$ 387,347,000 $
0 $ 242,141,000 $
0 24,890,000
0 107,058,000
0 11,992,000
0
500,000
0 $ 386,581,000 $
0
0
766,000
0
0
766,000
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2020. The $1.3 million reduction in Level 3
municipal general obligation bonds during 2020 reflects the scheduled maturities of such bonds.
(Continued)
F-94
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 17 – FAIR VALUE MEASUREMENTS (Continued)
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.
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, 2020 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
$ 2,880,000 $
701,000
$ 3,581,000 $
0 $
0
0 $
0 $ 2,880,000
701,000
0
0 $ 3,581,000
(Continued)
F-95
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 17 – FAIR VALUE MEASUREMENTS (Continued)
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
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.
(Continued)
F-96
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 18 – EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
Basic
Net income attributable to common shares
$
44,138,000 $
49,456,000 $
42,024,000
2020
2019
2018
Weighted average common shares outstanding
16,268,689
16,405,159
16,600,612
Basic earnings per common share
$
2.71 $
3.01 $
2.53
Diluted
Net income attributable to common shares
$
44,138,000 $
49,456,000 $
42,024,000
Weighted average common shares outstanding for basic
earnings per common share
16,268,689
16,405,159
16,600,612
Add: Dilutive effects of share-based awards
630
3,976
5,804
Average shares and dilutive potential common shares
16,269,319
16,409,135
16,606,416
Diluted earnings per common share
$
2.71 $
3.01 $
2.53
Stock options for approximately 9,000, 7,000 and 7,000 shares of common stock were antidilutive and were not included in
determining dilutive earnings per share in 2020, 2019 and 2018, respectively.
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.
(Continued)
F-97
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 19 – SUBORDINATED DEBENTURES (Continued)
The following table depicts our five business trusts as of December 31, 2020:
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.
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 2020 and 2019, 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, 2020 that we believe have changed our bank’s
categorization.
(Continued)
F-98
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 20 - REGULATORY MATTERS (Continued)
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
$ 468,113
457,203
13.8 % $ 271,325
271,196
13.5
8.0 % $
8.0
NA
338,995
NA
10.0 %
430,146
419,236
12.7
12.4
203,494
203,397
6.0
6.0
NA
271,196
384,658
419,236
11.3
12.4
152,621
152,548
4.5
4.5
NA
220,347
430,146
419,236
9.8
9.5
176,053
175,999
4.0
4.0
NA
219,999
NA
8.0
NA
6.5
NA
5.0
$ 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
2020
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
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-99
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 20 - REGULATORY MATTERS (Continued)
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 was phased in over three years beginning in 2016. The capital buffer requirement 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, 2020, our bank meets all capital adequacy
requirements under the BASEL III capital rules on a fully phased-in basis.
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 2020, under the most restrictive of these
regulations, our bank could distribute $85.7 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 16, 2020, our Board of Directors declared a cash dividend on our
common stock in the amount of $0.28 per share that was paid on March 18, 2020 to shareholders of record as of March 6,
2020. On April 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per
share that was paid on June 17, 2020 to shareholders of record as of June 5, 2020. On July 16, 2020, our Board of
Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on September 16,
2020 to shareholders of record as of September 4, 2020. On October 15, 2020, our Board of Directors declared a cash
dividend on our common stock in the amount of $0.28 per share that was paid on December 16, 2020 to shareholders of
record as of December 4, 2020.
On January 14, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $0.29 per
share that will be paid on March 17, 2021 to shareholders of record as of March 5, 2021.
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. During the first quarter of 2020, we repurchased approximately of 222,000 for $6.3 million, at
an average price per share of $28.25. After electing to temporarily cease stock repurchases in March 2020 to preserve
capital for lending and other purposes while we assessed the potential impacts of the Coronavirus Pandemic, we reinstated
the buyback program during the fourth quarter of 2020. Fourth quarter repurchases totaled approximately 14,000 shares for
$0.3 million, at an average weighted price per share of $22.05. Availability under our current repurchase plan totals about
$10.0 million. 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, 2020 and 2019 include $45.5 million and $44.8 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, 2020 and 2019, all $45.5 million and $44.8
million, respectively, of the trust preferred securities were included as Tier 1 capital of Mercantile.
(Continued)
F-100
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 21 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2020, accumulated other comprehensive income, net of tax effects (as applicable), consisted of a net
unrealized gain on available for sale securities of $5.5 million. 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.
NOTE 22 - QUARTERLY FINANCIAL DATA (Unaudited)
2020
First quarter
Second quarter
Third quarter
Fourth quarter
2019
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Net
Income
Earnings per Share
Basic
Diluted
$ 37,935,000 $ 30,317,000 $ 10,673,000 $
37,164,000 30,571,000 8,697,000
35,594,000 29,509,000 10,686,000
37,620,000 31,849,000 14,082,000
$ 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
0.65 $
0.54
0.66
0.86
0.72 $
0.71
0.77
0.81
0.65
0.54
0.66
0.86
0.72
0.71
0.77
0.81
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
2020
2019
$
12,746,000 $
458,830,000
18,934,000
6,045,000
439,946,000
18,032,000
$
490,510,000 $
464,023,000
$
1,393,000 $
47,563,000
441,554,000
581,000
46,881,000
416,561,000
Total liabilities and shareholders’ equity
$
490,510,000 $
464,023,000
(Continued)
F-101
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 23 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Income
Interest and dividends from subsidiaries
Total income
Expenses
Interest expense
Other operating expenses
Total expenses
Income before income tax benefit and equity in undistributed
net income of subsidiary
Federal income tax benefit
2020
2019
2018
$
32,588,000 $
32,588,000
22,246,000 $
22,246,000
33,832,000
33,832,000
2,268,000
4,441,000
6,709,000
3,153,000
4,804,000
7,957,000
2,999,000
4,424,000
7,423,000
25,879,000
14,289,000
26,409,000
(1,173,000 )
(1,718,000 )
(1,610,000 )
Equity in undistributed net income of subsidiary
17,086,000
33,449,000
14,005,000
Net income
$
44,138,000 $
49,456,000 $
42,024,000
Comprehensive income
$
45,929,000 $
61,390,000 $
38,646,000
(Continued)
F-102
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
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
2020
2019
2018
44,138,000 $
49,456,000 $
42,024,000
(17,086,000 )
2,325,000
394,000
(227,000 )
812,000
30,356,000
(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
0
0
0
0
0
0
3,000
49,000
814,000
(6,591,000 )
(17,930,000 )
(23,655,000 )
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 )
Net change in cash and cash equivalents
6,701,000
(3,608,000 )
(51,000 )
Cash and cash equivalents at beginning of period
6,045,000
9,653,000
9,704,000
Cash and cash equivalents at end of period
$
12,746,000 $
6,045,000 $
9,653,000
F-103
EXHIBIT NO.
EXHIBIT DESCRIPTION
EXHIBIT INDEX
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
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, 2015 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*
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
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*
2018 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-
K filed May 25, 2018*
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*
EXHIBIT NO.
EXHIBIT DESCRIPTION
10.12
10.13
10.14
10.15
10.16
10.17
10.18
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*
Mercantile Bank Corporation Stock Incentive Plan of 2020, incorporated by reference to Appendix A to
Mercantile’s Definitive Proxy Statement on Schedule 14A filed April 9, 2020*
Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile
Bank Corporation Stock Incentive Plan of 2020*
2020 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-
K filed November 19, 2020*
10.19
Director Fee Summary*
21
23
31
32.1
32.2
101
Subsidiaries of the company
Consent of BDO USA, LLP
Rule 13a-14(a) Certifications
Section 1350 Chief Executive Officer Certification
Section 1350 Chief Financial Officer Certification
The following information from Mercantile’s Annual Report on Form 10-K for the year ended December
31, 2020, formatted in Inline 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
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* 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 5, 2021.
MERCANTILE BANK CORPORATION
/s/ Robert B. Kaminski, Jr.
Robert B. Kaminski, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on March 5, 2021.
/s/ David M. Cassard
David M. Cassard, Director
/s/ Michael S. Davenport
Michael S. Davenport, Director
/s/ Michelle L. Eldridge
Michelle L. Eldridge, Director
/s/ Jeff A. Gardner
Jeff A. Gardner, 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/ David B. Ramaker
David B. Ramaker, Director
/s/ Charles E. Christmas
Charles E. Christmas, Executive Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
MISSION STATEMENT
The mission of Mercantile Bank Corporation is to provide financial value
in a highly professional and personalized manner.
We recognize that our most important partners are our CUSTOMERS.
We will satisfy our customers’ need for security
and achievement of their goals and dreams
by delivering top-quality service
that distinguishes us from our competitors.
Our EMPLOYEES are our most valuable asset.
Our exceptional team members are committed to cultivating
an environment of unique ideas, skills and backgrounds.
We also place a high value on
personal growth, development, equity and inclusion.
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.
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
Annual Meeting
The Corporation’s Annual Meeting of Shareholders
will be held virtually.
Thursday, May 27, 2021 at 9:00 am EDT
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
Mercantile Bank of Michigan and Michigan’s Community Bank
are registered trademarks of Mercantile Bank Corporation.
002CSNB901
MERCBANK.COM
2020 ANNUAL REPORT
M
E
R
C
A
N
T
I
L
E
B
A
N
K
C
O
R
P
O
R
A
T
I
O
N
2
0
2
0
A
N
N
U
A
L
R
E
P
O
R
T