UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
| o | 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 | 38-3360865 | |
| (State or other jurisdiction of
incorporation or organization) 310 Leonard Street NW, Grand Rapids, Michigan |
(I.R.S. Employer Identification
No.) 49504 |
|
| (Address of principal executive offices) | (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 | Name of each exchange on which registered | |
| Common Stock | 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 o No þ
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 o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the
Exchange Act).
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
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 $26.3 million.
As of February 1, 2010, there were issued and outstanding 8,592,395 shares of the registrant’s
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2010 annual meeting of shareholders (Portions of Part III).
PART I
Item 1. Business.
The Company
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.
Mercantile Bank Mortgage Company initiated business in October 2000 as a subsidiary of our
bank, and was reorganized as Mercantile Bank Mortgage Company, LLC (“our mortgage company”), on
January 1, 2004. 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. Mercantile Bank Capital Trust I
(“our trust”), a business trust subsidiary, was formed in September 2004 to issue trust preferred
securities.
To date we have raised capital from our initial public offering of common stock in October
1997, a public offering of common stock in July 1998, three private placements of common stock
during 2001, a public offering of common stock in August 2001 and a public offering of common stock
in September 2003. In addition, we raised capital through a public offering of $16.0 million of
trust preferred securities in 1999, which was refinanced as part of a $32.0 million private
placement of trust preferred securities in 2004. In May 2009, we raised $21.0 million from the
sale of preferred stock and a warrant for common stock to the United States Treasury Department
under the Capital Purchase Program. Our expenses have generally been paid using the proceeds of
the capital sales and dividends from our bank. Our principal source of future operating funds is
expected to be dividends from our bank.
We filed an election to become a financial holding company, which election became effective
March 23, 2000. Effective June 1, 2009, we withdrew our election to be a financial holding
company.
Our Bank
Our bank is a state banking company that operates under the laws of the State of Michigan,
pursuant to a charter issued by the Michigan Office of Financial and Insurance Regulation. Our
bank’s deposits are insured to the maximum extent permitted by law by the Federal Deposit Insurance
Corporation (“FDIC”). Our bank’s primary service area is the Kent and Ottawa County areas of West
Michigan, which includes the City of Grand Rapids, the second largest city in the State of
Michigan. In addition, our bank opened new offices in the cities of East Lansing and Ann Arbor,
Michigan, during 2005, and in Novi, Michigan, during 2007. The Ann Arbor and Novi offices were
closed in mid-2009.
Our bank, through its seven offices, provides commercial banking services primarily to small-
to medium-sized businesses and retail banking services in and around the Grand Rapids, Holland and
Lansing areas. These offices consist of a main office located at 310 Leonard Street NW, Grand
Rapids, Michigan, a combination branch and retail loan center located at 4613 Alpine Avenue NW,
Comstock Park, Michigan, a combination branch and operations center located at 5610 Byron Center
Avenue SW, Wyoming, Michigan, and branches located at 4860 Broadmoor Avenue SE, Kentwood, Michigan,
3156 Knapp Street NE, Grand Rapids, Michigan, 880 East 16th Street, Holland, Michigan,
and 3737 Coolidge Road, East Lansing, Michigan.
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Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans,
and accepts checking, savings and time deposits. Our bank owns seven automated teller machines
(“ATM”), located at each of our office locations, that participate in the MAC, NYCE 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 telephone and personal computer.
Courier service is provided to certain commercial customers, and safe deposit facilities are
available at each of our office locations. Our bank does not have trust powers. In December 2001,
our bank entered into a joint brokerage services and marketing agreement with Raymond James
Financial Services, Inc. to make available to its customers financial planning, retail brokerage,
equity research, insurance and annuities, retirement planning, trust services and estate planning.
The joint brokerage services and marketing agreement was terminated during the first quarter 2009.
Our Mortgage Company
Our mortgage company’s predecessor, Mercantile Bank Mortgage Company, commenced operations on
October 24, 2000, when our bank contributed most of its residential mortgage loan portfolio and
participation interests in certain commercial mortgage loans to Mercantile Bank Mortgage Company.
On the same date, our bank also transferred its residential mortgage origination function to
Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was
reorganized as Mercantile Bank Mortgage Company, LLC, a limited liability company, which is 99%
owned by our bank and 1% owned by our insurance company. The reorganization had no impact on the
company’s financial position or results of operations. Mortgage loans originated and held by our
mortgage company are serviced by our bank pursuant to a servicing agreement.
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.
Our Real Estate Company
Our real estate company was organized on July 21, 2003, principally to develop, construct and
own our facility in downtown Grand Rapids that serves as our bank’s main office and Mercantile Bank
Corporation’s headquarters. This facility was placed into service during the second quarter of
2005. Our real estate company is 99% owned by our bank and 1% owned by our insurance company.
Our Trust
In 2004, we formed our trust, a Delaware business trust. Our trust’s business and affairs are
conducted by its property trustee, a Delaware trust company, and three individual administrative
trustees who are employees and officers of the company. Our trust was established for the purpose
of issuing and selling its Series A and Series B trust preferred securities and common securities,
and used the proceeds from the sales of those securities to acquire Series A and Series B Floating
Rate Notes issued by the company. Substantially all of the net proceeds received by the company
from the Series A transaction were used to redeem the trust preferred securities that had been
issued by MBWM Capital Trust I in September 1999. We established MBWM Capital Trust I in 1999 to
issue the trust preferred securities that were redeemed. Substantially all of the net proceeds
received by the company from the Series B transaction were contributed to our bank as capital. The
Series A and Series B Floating Rate Notes are categorized on our consolidated financial statements
as subordinated debentures. Additional information regarding our trust is incorporated by
reference to “Note 17 – Subordinated Debentures” and “Note 18 – Regulatory Matters” of the Notes to
Consolidated Financial Statements included in this Annual Report.
3
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 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
As a bank holding company under the Bank Holding Company Act, we are required to file an
annual report with the Federal Reserve Board and such additional information as the Federal Reserve
Board may require. We are also subject to examination by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding companies that are not
qualified as financial holding companies to banking and the management of banking organizations,
and to certain non-banking activities. These non-banking activities include those 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 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. With the exception of the activities of our mortgage company
discussed above, neither we nor any of our subsidiaries engages in any of the non-banking
activities listed above.
Our bank is subject to restrictions imposed by federal law and regulation. Among other
things, these restrictions apply to any extension of credit to us or to 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. 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.
Employees
As of December 31, 2009, we and our bank employed 232 full-time and 62 part-time persons.
Management believes that relations with employees are good.
4
Lending Policy
As a routine part of our business, we make loans and leases 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 and leases 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 and leases 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 and leases, including
the ability to pay; the character of the customer; evidence of financial responsibility; purpose of
the loan or lease; 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 or leased 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 and lease to value limits
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 and lease identification, maintenance of an
allowance for loan and lease losses, loan and lease 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, makes us responsive to our customers. The
loan policy currently specifies lending authority for certain officers up to $5.0 million, and
$10.0 million for our bank’s Chairman of the Board and Chief Executive Officer; however, the $10.0
million lending authority is generally used only in rare circumstances where timing is of the
essence. Generally, loan requests exceeding $2.5 million require approval by the Officers Loan
Committee, and loan requests exceeding $4.0 million, up to the legal lending limit of approximately
$38.4 million, require approval by the Board of Directors. In most circumstances, we apply an
in-house lending limit that is significantly less than our bank’s legal lending limit.
Lending Activity
Commercial Loans. Our commercial lending group originates commercial loans and leases
primarily in our market areas. Our commercial lenders have extensive commercial lending
experience, with most having at least ten years’ experience. Loans and leases 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 an interest rate tied to the
Mercantile Bank Prime Rate. Loans and leases 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 15 to 20 year period. Commercial
loans and leases typically have an interest rate that is fixed to maturity or is tied to the
Mercantile Bank Prime Rate.
5
We evaluate many aspects of a commercial loan or lease 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. This analysis includes a review of the borrower’s
historical and projected financial results. Appraisals are generally required 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 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. Our mortgage company originates single-family
residential real estate loans in our market areas, usually according to secondary market
underwriting standards. Loans not conforming to those standards are made in limited circumstances.
Single-family residential real estate loans provide borrowers with a fixed or adjustable interest
rate with terms up to 30 years.
Our bank has a home equity line of credit program. Home equity credit is generally secured by
either a first or second mortgage on the borrower’s primary residence. The program provides
revolving credit at a rate tied to the Wall Street Journal Prime Rate.
Consumer Loans. We originate consumer loans for a variety of personal financial needs,
including new and used automobiles, boat loans, credit cards and overdraft protection for our
checking account customers. Consumer loans generally have shorter terms and higher interest rates
and usually involve more credit risk than single-family residential real estate loans because of
the type and nature of the collateral.
We believe our consumer loans are underwritten carefully, with a strong emphasis on the amount
of the down payment, credit quality, employment stability and monthly income of the borrower.
These loans are generally repaid on a monthly repayment schedule with the source of repayment tied
to the borrower’s periodic income. In addition, consumer lending collections are dependent on the
borrower’s continuing financial stability, and are thus likely to be adversely affected by job
loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral.
We believe that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans, and that consumer loans are important to our
efforts to serve the credit needs of the communities and customers that we serve.
Loan and Lease Portfolio Quality
We utilize a comprehensive grading system for our commercial loans and leases as well as
residential mortgage and consumer loans. All commercial loans and leases are graded on a ten grade
rating system. The rating system utilizes standardized grade paradigms that analyze several
critical factors such as cash flow, management and collateral coverage. All commercial loans and
leases are graded at inception and reviewed at various intervals thereafter. Residential mortgage
and consumer loans are graded on a random sampling basis after the loan has been made using a
separate standardized grade paradigm that analyzes several critical factors such as debt-to-income
and credit and employment histories.
6
Our independent loan and lease review program is primarily responsible for the administration
of the grading system and ensuring adherence to established lending policies and procedures. The
loan and lease review program is an integral part of maintaining our strong asset quality culture.
The loan and lease review function works closely with senior management, although it functionally
reports to the Board of Directors. All commercial loan and lease relationships equal to or
exceeding $1.8 million are formally reviewed every twelve months, with a random sampling performed
on credits under $1.8 million. Our watch list credits are reviewed monthly by our Watch List
Committee, which is comprised of personnel from the administration, lending and loan and lease
review functions.
Loans and leases are placed in a nonaccrual status when, in our opinion, uncertainty exists as
to the ultimate collection of principal and interest. As of December 31, 2009, loans and leases
placed in nonaccrual status totaled $81.8 million, or 5.3% of total loans and leases. As of the
same date, loans and leases past due 90 days or more and still accruing interest totaled $0.2
million, or 0.02% of total loans and leases.
Additional detail and information relative to the loan and lease portfolio is incorporated by
reference to Management’s Discussion and Analysis of Financial Condition and Results of Operation
(“Management’s Discussion and Analysis”) and Note 3 of the Notes to Consolidated Financial
Statements in this Annual Report.
Allowance for Loan and Lease Losses
In each accounting period, we adjust the allowance to the amount we believe is necessary to
maintain the allowance at adequate levels. Through the loan and lease review and credit
departments, we attempt to establish specific portions of the allowance based on specifically
identifiable problem loans and leases. The evaluation of the allowance is further based on, but
not limited to, consideration of the internally prepared Reserve Analysis, loan and lease loss
migration analysis, composition of the loan and lease portfolio, third party analysis of the loan
and lease administration processes and portfolio and general economic conditions.
The Reserve Analysis, used since our inception and completed monthly, applies reserve
allocation factors to outstanding loan and lease balances to calculate an overall allowance dollar
amount. For commercial loans and leases, which continue to comprise a vast majority of our total
loans and leases, reserve allocation factors are based upon the loan ratings as determined by our
standardized grade paradigms. For retail loans, reserve allocation factors are based upon the type
of credit. Adjustments for specific lending relationships, including impaired loans and leases,
are made on a case-by-case basis. The reserve allocation factors are primarily based on the recent
levels and historical trends of net loan and lease charge-offs and non-performing assets, the
comparison of the recent levels and historical trends of net loan and lease charge-offs and
non-performing assets with a customized peer group consisting of ten similarly-sized publicly
traded banking organizations conducting business in the states of Michigan, Illinois, Indiana or
Ohio, the review and consideration of our loan and lease migration analysis and the experience of
senior management making similar loans and leases for an extensive period of time. We regularly
review the Reserve Analysis and make adjustments periodically based upon identifiable trends and
experience. Net increases to commercial loan and lease reserve allocation factors during 2009
resulted in a $5.3 million increase to the allowance.
As specified in our Loan Administration Policy, we complete a migration analysis quarterly to
assist us in determining appropriate reserve allocation factors for commercial loans and leases.
Our migration analysis takes into account four different time periods, including four, eight,
twelve and twenty-quarter time periods, and while we generally place most weight on the
eight-quarter timeframe as that period is close to the average duration of our loan and lease
portfolio, consideration is given to the other time periods as part of our assessment. Although
the migration analysis provides an accurate historical accounting of our loan and lease losses, it
is not able to fully account for environmental factors that will also very likely impact the
collectability of our commercial loans and leases as of any quarter-end date.
7
Environmental factors include both internal and external items. We believe the most
significant internal environmental factor is our credit culture and our relative aggressiveness in
assigning and revising commercial loan and lease ratings. Although we have been conservative in
our approach to commercial loan and lease ratings, ongoing stressed economic conditions have
resulted in an even higher sense of aggressiveness with regards to the downgrading of lending
relationships. In addition, we made revisions to our grading paradigms in early 2009 that
mathematically resulted in commercial loan and lease relationships being more quickly downgraded
when signs of stress are noted, such as slower sales activity for construction and land development
commercial real estate (“CRE”) relationships and reduced operating performance/cash flow coverage
for commercial and industrial (“C&I”) relationships. These changes, coupled with the troubled
economic environment, resulted in significant downgrades during 2009 and the need for substantial
provisions to the allowance. To more effectively manage our commercial loan and lease portfolio,
we created two specific groups tasked with managing our higher exposure lending relationships. One
team manages the most distressed credits, while the other team manages our larger “monitor-rated”
credit relationships.
The most significant external environmental factor is the assessment of the current economic
environment and the resulting implications on our commercial loans and leases. Currently, we
believe
conditions remained stressed for CRE; however, recent data and performance reflect a level of
stability in the C&I segment of our loan and lease portfolio.
The primary risks associated with commercial loans and leases are the financial condition of
the borrower, the sufficiency of collateral, and lack of timely payment. We have a policy of
requesting and reviewing periodic financial statements from our commercial loan and lease
customers, and periodically reviewing existence of collateral and its value. The primary risk
element that we consider for consumer and residential real estate loans is lack of timely payment.
We have a reporting system that monitors past due loans and have adopted policies to pursue our
creditor’s rights in order to preserve our bank’s collateral position.
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.
Although we believe the allowance is adequate to absorb probable incurred losses as they
arise, there can be no assurance that we will not sustain losses in any given period which could be
substantial in relation to, or greater than, the size of the allowance.
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 Mercantile trust.
Other funds of our bank holding company may be invested from time to time in various debt
instruments.
As a bank holding company, 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.
8
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, our mortgage
company, or our real estate company. Under another such exception, in certain circumstances and
with prior notice to or approval of the FDIC, our bank could invest up to 10% of its total assets
in the equity securities of a subsidiary corporation engaged in the acquisition and development of
real property for sale, or the improvement of real property by construction or rehabilitation of
residential or commercial units for sale or lease. Our bank has no present plans to make such an
investment. Real estate acquired by our bank in satisfaction of or foreclosure upon loans may be
held by our bank for specified periods. Our bank is also permitted to invest in such real estate
as is necessary for the convenient transaction of its business. Our bank’s Board of Directors may
alter the bank’s investment policy without shareholder approval at any time.
Additional detail and information relative to the securities portfolio is incorporated by
reference to Management’s Discussion and Analysis and Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.
Competition
Our primary markets for loans and core deposits are the Grand Rapids, Holland and Lansing
metropolitan areas. 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 out-of-state 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 the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies may acquire banks
and other financial institutions. The Gramm-Leach-Bliley Act 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.
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.
9
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.
Difficult market conditions have adversely affected our industry.
Dramatic declines in the housing market over the past several years, with falling home prices
and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of real estate related loans and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-backed securities but spreading to
other securities and loans, have caused many financial institutions to seek additional capital, to
reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases,
to fail. Reflecting concern about the stability of the financial markets generally and the
strength of counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This market turmoil and
tightening of credit have led to an increased level of commercial and consumer delinquencies, lack
of consumer confidence, increased market volatility and widespread reduction of business activity
generally. The
resulting economic pressure on consumers and lack of confidence in the financial markets have
adversely affected our business, financial condition and results of operations. Market
developments may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which may impact our charge-offs
and provision for credit losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the financial institutions
industry.
Significant declines in the value of commercial real estate adversely impact us.
Many of our loans relate to commercial real estate. Stressed economic conditions have
significantly reduced the value of commercial real estate and have strained the financial condition
of our commercial real estate borrowers, especially in the land development and non-owner occupied
CRE segments of our loan and lease portfolio. Those difficulties have adversely affected us and
could produce additional losses and other adverse effects on our business.
Market volatility may adversely affect us.
The capital and credit markets have been experiencing 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. The
current levels of market disruption and volatility have an adverse effect, which may be material,
on our ability to access capital and on our business, financial condition and results of
operations.
10
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, have been 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, as well as provisions to the allowance for loan and lease
losses. Substantially all of our loans are to businesses and individuals in western, south
central, or southeastern Michigan, and the decline in the economy of these areas has adversely
affected us. Continued stress on our financial condition is likely until economic conditions
improve within our markets. 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.
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.
11
The effect of the U.S. Government’s response to the financial crisis remains uncertain.
In response to the turmoil in the financial services sector and the severe recession in the
broader economy, the U.S. Government has taken legislative and other action intended to restore
financial stability and economic growth. On October 3, 2008, then President Bush signed into law
the Emergency Economic Stabilization Act of 2008 (the “EESA”). Among other things, the EESA
established the Troubled Asset Relief Program, or TARP. Under TARP, the U.S. Treasury Department
was given the authority, among other things, to purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial instruments from financial institutions and
others for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On
October 14, 2008, the Treasury Department announced a program under EESA pursuant to which it would
make senior preferred stock investments in qualifying financial institutions (the “TARP Capital
Purchase Program”). On February 17, 2009, President Obama signed into law the American Recovery
and Reinvestment Act of 2009 (the “ARRA”). The ARRA contained, among other things, a further
package of economic stimulus measures and amendments to EESA’s restrictions on compensation of
executives of financial institutions and others participating in the TARP. In addition to
legislation, the Federal Reserve Board eased short-term interest rates and implemented a series of
emergency programs to furnish liquidity to the financial markets and credit to various participants
in those markets. The FDIC created a program to guarantee, on specified conditions, certain
indebtedness and noninterest-bearing transaction accounts of participating insured depository
institutions for limited periods. The Treasury Department also implemented further measures to
address the crisis in the financial services sector. Recently, some of the emergency programs
established by the Federal Reserve Board have been modified or allowed to expire. There can be no
assurance as to the actual impact of the EESA, the ARRA, and their respective implementing
regulations, the programs of the government agencies, or any further legislation or regulations, on
the financial markets or the broader economy. Likewise, it is impossible to predict the effects of
the winding-up of the emergency governmental programs on financial markets, general interest rate
levels, and the broader economy. A failure to stabilize the financial markets, and a continuation
or worsening of the current financial market conditions, could materially and adversely affect our
business, financial condition, results of operations, access to credit or the trading price of our
common stock.
The U.S. Government’s legislative and regulatory response to the financial crisis and our
participation in its programs may have adverse effects on us.
The programs established or to be established under the EESA, TARP, the ARRA or other
legislation or regulations may have adverse effects upon us. We may face increased regulation in
our industry. Compliance with such regulations may increase our costs and limit our ability to
pursue business opportunities. Also, our participation in specific programs may subject us to
additional restrictions. For example, we participated in the TARP Capital Purchase Program by
selling preferred stock and a warrant for common stock to the Treasury Department for $21.0 million
in May of 2009. That participation limits our ability, without the consent of the Treasury
Department, to increase the cash dividend on, or to repurchase, our common stock. It also subjects
us to restrictions on the compensation we may pay to our executives. The restrictions may
adversely affect the trading price of our common stock or our ability to recruit and retain
executives.
Our credit losses could increase and our allowance for loan and lease losses 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 for loan and lease losses 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 and lease losses cannot be determined at this time and may exceed the amounts
of past provisions. Additions to our allowance for loan and lease losses decrease our net income.
12
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
Michael H. Price, Chairman of the Board, President and Chief Executive Officer, and our other
senior managers. The loss of Mr. Price, or any of our other senior managers, could have an adverse
effect on our growth and performance. We have entered into employment contracts with Mr. Price and
two other executive officers. The contracts provide for a three year employment period that is
extended for an additional year each year unless a notice is given indicating that the contract
will not be extended.
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 and lease 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 and lease portfolio and performance, and our ability to generate new loans and leases. 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.
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.
Decline in the availability of out-of-area deposits could cause liquidity or interest rate margin
concerns, or limit our growth.
We have utilized and expect to continue to utilize out-of-area or wholesale deposits to
support our assets. These deposits are generally a lower cost source of funds when compared to the
interest rates that we would have to offer in our local markets to generate a commensurate level of
funds. In addition, the overhead costs associated with wholesale deposits are considerably less
than the overhead costs we would incur to obtain and administer a similar level of local deposits.
A decline in the availability of these wholesale deposits would
require us to fund our growth with more costly funding sources, which could reduce our net
interest margin, limit our growth, reduce our asset size, or increase our overhead costs.
Wholesale deposits include deposits obtained through brokers. If a bank is not well capitalized,
regulatory approval is required to accept brokered deposits.
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 Stock Incentive Plan of 2006. 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.
13
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 out-of-state banks, thrifts, credit unions and other financial
institutions as well as other entities that provide financial services, including securities firms
and mutual funds. Some of the financial institutions and financial service organizations with
which we compete are not subject to the same degree of regulation as we are. Most of our
competitors have been in business for many years, have established customer bases, are larger, have
substantially higher lending limits than we do and offer 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 the Gramm-Leach-Bliley Act of 1999,
effective March 11, 2000, securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
affects the competitive environment in which we conduct 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.
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, 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, 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.
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. There can be no assurance
that we will be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
14
Our Articles of Incorporation and By-laws and the laws of 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 interests.
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 Bylaws, 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 offering price.
We have paid a quarterly cash dividend each quarter beginning with the first quarter of 2003.
Our ability to pay cash and stock dividends is subject to limitations under various laws and
regulations, to prudent and sound banking practices, and to contractual provisions relating to our
subordinated debentures and participation in the Capital Purchase Program.
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.
15
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 sufficiently adequate. We
also face the risk that the design of our controls and procedures prove inadequate or are
circumvented, causing delays in detection or errors in information. Although we maintain a system
of controls designed to keep operational risk 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.
| 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
2009 fiscal year and that remain unresolved.
Item 2. Properties.
During 2005, our bank placed into service a new four-story facility located approximately two
miles north from the center of downtown Grand Rapids. This facility serves as our headquarters and
our bank’s main office, and houses the administration function, our bank’s commercial lending and
review function, our bank’s loan operations function, a full service branch, and portions of our
bank’s retail lending and business development function. The facility consists of approximately
55,000 square feet of usable space and contains multiple drive-through lanes with ample parking.
The land and building are owned by our real estate company. The address of this facility is 310
Leonard Street NW, Grand Rapids, Michigan.
Our bank designed and constructed a full service branch and retail loan facility which opened
in July of 1999 in Alpine Township, a northwest suburb of Grand Rapids. The facility is one story
and has approximately 8,000 square feet of usable space. The land and building are owned by our
bank. The facility has multiple drive-through lanes and ample parking space. The address of this
facility is 4613 Alpine Avenue NW, Comstock Park, Michigan.
During 2001, our bank designed and constructed two facilities on a 4-acre parcel of land
located in the City of Wyoming, a southwest suburb of Grand Rapids. The land had been purchased by
our bank in 2000. The larger of the two buildings is a full service branch and deposit operations
facility which opened in September of 2001. The facility is two-stories and has approximately
25,000 square feet of usable space. The facility has multiple drive-through lanes and ample
parking space. The address of this facility is 5610 Byron Center Avenue SW, Wyoming, Michigan.
The other building is a single-story facility with approximately 11,000 square feet of usable
space. Our bank’s accounting, audit, loss prevention and wire transfer functions are housed in
this building, which underwent a renovation in 2005 that almost doubled its size. The address of
this facility is 5650 Byron Center Avenue SW, Wyoming, Michigan.
During 2002, our bank designed and constructed a full service branch which opened in December
of 2002 in the City of Kentwood, a southeast suburb of Grand Rapids. The land had been purchased
by our bank in 2001. The facility is one story and has approximately 10,000 square feet of usable
space. The facility has multiple drive-through lanes and ample parking space. The address of this
facility is 4860 Broadmoor Avenue SW, Kentwood, Michigan.
During 2003, our bank designed and constructed a full service branch in the northeast
quadrant of the City of Grand Rapids. The land had been purchased by our bank in 2002. The
facility is one story and has approximately 3,500 square feet of usable space. The
facility has multiple drive-through lanes and ample parking space. The address of this facility is
3156 Knapp Street NE, Grand Rapids, Michigan.
16
During 2003, our bank designed and started construction of a new two-story facility
located in Holland, Michigan. This facility, which was completed during the fourth quarter of
2004, serves as a full service banking center for the Holland area, including commercial lending,
retail lending and a full service branch. The facility, which is owned by our bank, consists of
approximately 30,000 square feet of usable space and contains multiple drive-through lanes with
ample parking. The address of this facility is 880 East 16th Street, Holland, Michigan.
During 2006, our bank purchased approximately 3 acres of vacant land and designed and
initiated construction of a new three-story facility in East Lansing, Michigan. This facility was
completed during the second quarter of 2007, and serves as a full service banking center for the
greater Lansing area, including commercial lending, retail lending, and a full service branch. The
facility consists of approximately 27,000 square feet of usable space and contains multiple
drive-through lanes with ample parking. The address of this facility is 3737 Coolidge Road, East
Lansing, Michigan.
| 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. | Reserved |
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM”. At
February 1, 2010, there were 388 record holders of our common stock. In addition, we estimate that
there were approximately 4,000 beneficial owners of our common stock who own their shares through
brokers or banks.
The following table shows the high and low sales prices for our common stock as reported by
the Nasdaq Global Select Market for the periods indicated and the quarterly cash dividends paid by
us during those periods.
| High | Low | Dividend | ||||||||||
2009 |
||||||||||||
First Quarter |
$ | 6.48 | $ | 3.01 | $ | 0.04 | ||||||
Second Quarter |
6.00 | 2.84 | 0.01 | |||||||||
Third Quarter |
4.79 | 3.02 | 0.01 | |||||||||
Fourth Quarter |
4.33 | 3.00 | 0.01 | |||||||||
2008 |
||||||||||||
First Quarter |
$ | 16.19 | $ | 10.19 | $ | 0.15 | ||||||
Second Quarter |
11.40 | 7.10 | 0.08 | |||||||||
Third Quarter |
10.09 | 4.82 | 0.04 | |||||||||
Fourth Quarter |
9.69 | 4.00 | 0.04 | |||||||||
17
Holders of our common stock are entitled to receive dividends that the Board of Directors may
declare from time to time. We may only pay dividends out of funds that are legally available for
that purpose. We are
a holding company and substantially all of our assets are held by our 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. Also, in
connection with our participation in the Treasury Department’s Capital Purchase Program, we agreed
that we would not, without the Treasury Department’s consent, increase our cash dividend rate on
our common stock, or with certain exceptions, repurchase any shares of our common stock. These
restrictions relating to the Capital Purchase Program remain in effect until the earlier of (i) May
15, 2012, or (ii) when all of the preferred stock that we sold to the Treasury Department has been
redeemed by us or transferred by the Treasury Department to third parties.
On January 14, 2010, we declared a $0.01 per share cash dividend on our common stock, payable
on March 10, 2010 to record holders as of February 10, 2010.
Issuer Purchases of Equity Securities
We did not purchase any shares of our common stock during the fourth quarter of 2009.
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 Nasdaq Bank Index
from December 31, 2004 through December 31, 2009. The following is based on an investment of $100
on December 31, 2004 in our common stock, the Nasdaq Composite Index and the SNL Bank Nasdaq Index,
with dividends reinvested where applicable.
18
| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | ||||||||||||||||||
Mercantile Bank Corporation |
100.00 | 103.39 | 107.70 | 47.63 | 13.59 | 9.90 | ||||||||||||||||||
NASDAQ Composite |
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||||||||
SNL Bank NASDAQ |
100.00 | 96.95 | 108.85 | 85.45 | 62.06 | 50.34 | ||||||||||||||||||
| Item 6. | Selected Financial Data. |
The Selected Financial Data on page F-3 in this Annual Report is incorporated here by
reference.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation. |
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, Notes to Consolidated Financial Statements and the
Reports of Independent Registered Public Accounting Firm included in this Annual Report are
incorporated here by reference.
19
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None
| Item 9A. | Controls and Procedures. |
As of December 31, 2009, 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,
2009.
There have been no significant changes in our internal controls over financial reporting
during the quarter ended December 31, 2009, 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, 2009. This evaluation was based
on criteria for effective internal control over financial reporting described in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control — Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2009. Refer to page F-34 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
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information presented under the captions “Election of Directors,” “Executive Officers,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance — Code of
Ethics” in the definitive Proxy Statement of Mercantile for our April 29, 2010 Annual Meeting of
Shareholders (the “Proxy Statement”), a copy of which will be filed with the Securities and
Exchange Commission before the meeting date, is incorporated here by reference.
We have a separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee
consist of Betty S. Burton, David M. Cassard, Calvin D. Murdock, Merle J. Prins and Timothy O.
Schad. The Board of Directors has determined that Messrs. Cassard, Murdock and Schad, members of
the Audit Committee, are qualified as audit committee financial experts, as that term is defined in
the rules of the Securities and Exchange Commission. Messrs. Cassard, Murdock and Schad are
independent, as independence for audit committee members is defined in the Nasdaq listing standards
and the rules of the Securities and Exchange Commission.
20
| Item 11. | Executive Compensation. |
The information presented under the captions “Executive Compensation,” “Corporate Governance
— Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”
in the Proxy Statement is incorporated here by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information presented under the caption “Stock Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated here by reference.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2009, relating to compensation
plans under which equity securities are authorized for issuance.
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| future issuance under | ||||||||||||
| Number of securities to | Weighted-average | equity compensation | ||||||||||
| be issued upon exercise | exercise price of | plans (excluding | ||||||||||
| of outstanding options, | outstanding options, | securities reflected in | ||||||||||
| Plan Category | warrants and rights | warrants and rights | column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
Equity compensation
plans approved by
security holders
(1) |
296,215 | $ | 20.34 | 410,000 | (2) | |||||||
Equity compensation
plans not approved
by security holders |
0 | 0 | 0 | |||||||||
Total |
296,215 | $ | 20.34 | 410,000 | ||||||||
| (1) | These plans are Mercantile’s 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan, 2004 Employee Stock Option Plan, Independent Director Stock Option Plan and the Stock Incentive Plan of 2006. | |
| (2) | These securities are available under the Stock Incentive Plan of 2006. 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.
21
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a) (1) Financial Statements. The following financial statements and reports of independent
registered public accounting firms of Mercantile Bank Corporation and its subsidiaries are filed as
part of this report:
Report of Independent Registered Public Accounting Firm dated March 15, 2010 — BDO
Seidman, LLP
Consolidated Balance Sheets — December 31, 2009 and 2008
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2009
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in
the period ended December 31, 2009
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2009
Notes to Consolidated Financial Statements
The consolidated financial statements, the notes to the consolidated financial statements,
and the reports of independent registered public accounting firm listed above are
incorporated by reference in Item 8 of this report.
(2) Financial Statement Schedules
Not applicable
(b) Exhibits:
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
| 3.1 | Our Articles of Incorporation are incorporated by reference to
exhibit 3.1 of our Form 10-Q for the quarter ended June 30,
2009 |
|||
| 3.2 | Our Amended and Restated Bylaws dated as of January 16, 2003
are incorporated by reference to exhibit 3.2 of our
Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 2003 |
|||
| 10.1 | Our 1997 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Registration Statement on
Form SB-2 (Commission File No. 333-33081) that became
effective on October 23, 1997 * |
|||
| 10.2 | Our 2000 Employee Stock Option Plan is incorporated by
reference to exhibit 10.14 of our Form 10-K for the year ended
December 31, 2000 * |
|||
| 10.3 | Our 2004 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 10-Q for the quarter
ended September 30, 2004 * |
|||
| 10.4 | Form of Stock Option Agreement for options under the 2004
Employee Stock Option Plan is incorporated by reference to
exhibit 10.2 of our Form 10-Q for the quarter ended September
30, 2004 * |
|||
22
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
| 10.5 | Our Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.26 of our Form 10-K for the year ended
December 31, 2002 * |
|||
| 10.6 | Form of Stock Option Agreement for options under the
Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 8-K filed October 22,
2004 * |
|||
| 10.7 | Mercantile Bank of Michigan Amended and Restated Deferred
Compensation Plan for Members of the Board of Directors dated
June 29, 2006 is incorporated by reference to exhibit 10.9 of
our Form 10-K for the year ended December 31, 2007 |
|||
| 10.8 | First Amendment dated October 25, 2007 to the Mercantile Bank
of Michigan Amended and Restated Deferred Compensation Plan
for Members of the Board of Directors dated June 29, 2006 is
incorporated by reference to exhibit 10.10 of our Form 10-K
for the year ended December 31, 2007 |
|||
| 10.9 | Second Amendment dated October 23, 2008 to the Mercantile Bank
of Michigan Amended and Restated Deferred Compensation Plan
for Members of the Board of Directors dated June 29, 2007 is
incorporated by reference to exhibit 10.9 of our Form 10-K for
the year ended December 31, 2008 |
|||
| 10.10 | Agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23, 1997 |
|||
| 10.11 | Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated May 12, 2000 extending the
agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.15 of our Form 10-K for the year ended December 31, 2000 |
|||
| 10.12 | Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated November 21, 2002 extending
the agreement between Fiserv Solutions, Inc. and our bank
dated September 10, 1997, is incorporated by reference to
exhibit 10.5 of our Form 10-K for the year ended December 31,
2002 |
|||
| 10.13 | Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated December 20, 2006 extending
the agreements between Fiserv Solutions, Inc. and our bank
dated September 10, 1997 and November 21, 2002 is incorporated
by reference to exhibit 10.14 of our Form 10-K for the year
ended December 31, 2007 |
|||
| 10.14 | Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2001 * |
|||
| 10.15 | Employment Agreement dated as of October 18, 2001, among the
company, our bank and Robert B. Kaminski, Jr., is incorporated
by reference to exhibit 10.23 of our Form 10-K for the year
ended December 31, 2001 * |
|||
| 10.16 | Employment Agreement dated as of October 18, 2001, among the
company, our bank and Charles E. Christmas, is incorporated by
reference to exhibit 10.23 of our Form 10-K for the year ended
December 31, 2001 * |
|||
23
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
| 10.17 | Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2002 * |
|||
| 10.18 | Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.23 of our Form 10-K
for the year ended December 31, 2002 * |
|||
| 10.19 | Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Charles E. Christmas, is
incorporated by reference to exhibit 10.24 of our Form 10-K
for the year ended December 31, 2002 * |
|||
| 10.20 | Amendment to Employment Agreement dated as of October 28,
2004, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.21 of our Form 10-K
for the year ended December 31, 2004 * |
|||
| 10.21 | Junior Subordinated Indenture between us and Wilmington Trust
Company dated September 16, 2004 providing for the issuance of
the Series A and Series B Floating Rate Junior Subordinated
Notes due 2034 is incorporated by reference to exhibit 10.1 of
our Form 8-K filed December 15, 2004 |
|||
| 10.22 | Amended and Restated Trust Agreement dated September 16, 2004
for Mercantile Bank Capital Trust I is incorporated by
reference to exhibit 10.2 of our Form 8-K filed December 15,
2004 |
|||
| 10.23 | Placement Agreement between us, Mercantile Bank Capital Trust
I, and SunTrust Capital Markets, Inc. dated September 16, 2004
is incorporated by reference to exhibit 10.3 of our Form 8-K
filed December 15, 2004 |
|||
| 10.24 | Guarantee Agreement dated September 16, 2004 between
Mercantile as Guarantor and Wilmington Trust Company as
Guarantee Trustee is incorporated by reference to exhibit 10.4
of our Form 8-K filed December 15, 2004 |
|||
| 10.25 | Form of Agreement Amending Stock Option Agreement, dated
November 17, 2005 issued under our 2004 Employee Stock Option
Plan, is incorporated by reference to exhibit 10.1 of our Form
8-K filed December 14, 2005 * |
|||
| 10.26 | Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Michael H. Price is
incorporated by reference to exhibit 10.29 of our Form 10-K
for the year ended December 31, 2005 * |
|||
| 10.27 | Third Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Robert B. Kaminski,
Jr. is incorporated by reference to exhibit 10.30 of our Form
10-K for the year ended December 31, 2005 * |
|||
| 10.28 | Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Charles E. Christmas
is incorporated by reference to exhibit 10.31 of our Form 10-K
for the year ended December 31, 2005 * |
|||
24
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
| 10.29 | Form of Mercantile Bank of Michigan Amended and Restated
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski,
Jr., Charles E. Christmas, and certain other officers of our
bank is incorporated by reference to exhibit 10.34 of our Form
10-K for the year ended December 31, 2007 * |
|||
| 10.30 | Form of First Amendment to the Mercantile Bank of Michigan
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski,
Jr., Charles E. Christmas, and certain other officers of our
bank, dated October 25, 2007 is incorporated by reference to
exhibit 10.35 of our Form 10-K for the year ended December 31,
2007 * |
|||
| 10.31 | Form of Second Amendment to the Mercantile Bank of Michigan
Executive Deferred Compensation Agreement date November 18,
2006, that has been entered into between our bank and each of
Michael H. Price, Robert B. Kaminski, Charles E. Christmas,
and certain other officers of our bank, dated October 23, 2008
is incorporated by reference to exhibit 10.34 of our Form 10-K
for the year ended December 31, 2008 * |
|||
| 10.32 | Form of Mercantile Bank of Michigan Split Dollar Agreement
that has been entered into between our bank and each of Gerald
R. Johnson, Jr., 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 * |
|||
| 10.33 | Director Fee Summary * |
|||
| 10.34 | Lease Agreement between our bank and The Conlin Company dated
July 12, 2005 for our Ann Arbor, Michigan office is
incorporated by reference to exhibit 10.36 of our Form 10-K
for the year ended December 31, 2005 |
|||
| 10.35 | Stock Incentive Plan of 2006 is incorporated by reference to
Appendix A of our proxy statement for our April 27, 2006
annual meeting of shareholders that was filed with the
Securities and Exchange Commission * |
|||
| 10.36 | Amendment and Restatement of Stock Incentive Plan of 2006
dated November 18, 2008 is incorporated by reference to
exhibit 10.39 of our Form 10-K for the year ended December 31,
2008 * |
|||
| 10.37 | Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted in 2006
under our Stock Incentive Plan of 2006 is incorporated by
reference to exhibit 10.1 of our Form 8-K filed November 22,
2006 * |
|||
| 10.38 | 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 * |
|||
25
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
| 10.39 | Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock granted
in 2006 under our Stock Incentive Plan of 2006 is incorporated
by reference to exhibit 10.2 of our Form 8-K filed November
22, 2006 * |
|||
| 10.40 | Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock granted
after 2006 under our Stock Incentive Plan of 2006 is
incorporated by reference to exhibit 10.43 of our Form 10-K
for the year ended December 31, 2007 * |
|||
| 10.41 | Mercantile Bank Corporation Employee Stock Purchase Plan of
2002 is incorporated by reference to exhibit 10.47 of our Form
10-K for the year ended December 31, 2008 |
|||
| 10.42 | First Amendment to Mercantile Bank Corporation Employee Stock
Purchase Plan of 2002 is incorporated by reference to exhibit
4(c) of our Registration Statement on Form S-8 (Commission
File No. 333-158280) that became effective on March 30, 2009 |
|||
| 10.43 | Second Amendment to Mercantile Bank Corporation Employee Stock
Purchase Plan of 2002 is incorporated by reference to exhibit
4(d) of our Registration Statement on Form S-8 (Commission
File No. 333-158280) that became effective on March 30, 2009 |
|||
| 10.44 | Lease Agreement between our bank and CD Partners LLC dated
October 2, 2007 for our Oakland County, Michigan office is
incorporated by reference to exhibit 10.47 of our Form 10-K
for the year ended December 31, 2007 |
|||
| 10.45 | Letter Agreement, dated as of May 15, 2009, between Mercantile
Bank Corporation and the United States Department of the
Treasury, including the Securities Purchase Agreement —
Standard Terms and Schedules is incorporated by reference to
exhibit 10.1 of our Form 8-K filed May 15, 2009 |
|||
| 10.46 | Side Letter Agreement, dated as of May 15, 2009, between
Mercantile Bank Corporation and the United States Department
of the Treasury regarding the American Recovery and
Reinvestment Act of 2009 is incorporated by reference to
exhibit 10.2 of our Form 8-K filed May 15, 2009 |
|||
| 10.47 | Amendment to Employment Agreements, dated May 15, 2009, by and
among Mercantile Bank Corporation, Mercantile Bank of
Michigan, Michael H. Price, Robert B. Kaminski, Jr. and
Charles E. Christmas is incorporated by reference to exhibit
10.3 of our Form 8-K filed May 15, 2009 * |
|||
| 10.48 | Form of Waiver executed by each of Michael H. Price, Robert B.
Kaminski, Jr. and Charles E. Christmas is incorporated by
reference to exhibit 10.4 of our Form 8-K filed May 15, 2009 |
|||
| 10.49 | Amendment to Commercial Lease between our bank and Jerry
Helmer and Ruthann Helmer dated August 14, 2007 for our Ann
Arbor, Michigan office is incorporated by reference to exhibit
10.5 of our Form 10-Q for the quarter ended June 30, 2009 |
|||
26
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
| 10.50 | Termination of Lease Agreement between our bank and CD
Partners LLC dated May 21, 2009 for our Oakland County,
Michigan office is incorporated by reference to exhibit 10.6
of our Form 10-Q for the quarter ended June 30, 2009 |
|||
| 10.51 | Termination of Lease Agreement between our bank and Jerry
Helmer and Ruthann Helmer dated July 22, 2009 for our Ann
Arbor, Michigan office is incorporated by reference to exhibit
10.7 of our Form 10-Q for the quarter ended June 30, 2009 |
|||
| 10.52 | Warrant to Purchase Common Stock of Mercantile Bank
Corporation, dated May 15, 2009 is incorporated by reference
to exhibit 4.2 of our Form 8-K filed May 15, 2009 |
|||
| 21 | Subsidiaries of the company is incorporated by reference to
exhibit 21 of our Form 10-K for the year ended December 31,
2008 |
|||
| 23 | Consent of BDO Seidman, LLP |
|||
| 31 | Rule 13a-14(a) Certifications |
|||
| 32.1 | Section 1350 Chief Executive Officer Certification |
|||
| 32.2 | Section 1350 Chief Financial Officer Certification |
|||
| 99.1 | First fiscal year certification of our principal executive
officer and principal financial officer required because of
our participation in the Capital Purchase Program of the
Troubled Asset Relief Program |
|||
| * | Management contract or compensatory plan | |
| (c) | Financial Statements Not Included In Annual Report | |
| Not applicable |
27
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2009 and 2008
December 31, 2009 and 2008
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2009 and 2008
December 31, 2009 and 2008
CONTENTS
| F-3 | ||||
| F-4 | ||||
| F-32 | ||||
| F-34 | ||||
CONSOLIDATED FINANCIAL STATEMENTS |
||||
| F-35 | ||||
| F-36 | ||||
| F-37 | ||||
| F-40 | ||||
| F-42 |
F-2
SELECTED FINANCIAL DATA
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in thousands except per share data) | ||||||||||||||||||||
Consolidated Results of Operations: |
||||||||||||||||||||
Interest income |
$ | 104,909 | $ | 121,072 | $ | 144,181 | $ | 137,260 | $ | 102,130 | ||||||||||
Interest expense |
53,576 | 74,863 | 88,624 | 75,673 | 46,838 | |||||||||||||||
Net interest income |
51,333 | 46,209 | 55,557 | 61,587 | 55,292 | |||||||||||||||
Provision for loan and lease losses |
59,000 | 21,200 | 11,070 | 5,775 | 3,790 | |||||||||||||||
Noninterest income |
7,558 | 7,282 | 5,870 | 5,261 | 5,661 | |||||||||||||||
Noninterest expense |
46,488 | 42,126 | 38,356 | 32,262 | 31,117 | |||||||||||||||
Income (loss) before income tax expense (benefit) |
(46,597 | ) | (9,835 | ) | 12,001 | 28,811 | 26,046 | |||||||||||||
Income tax expense (benefit) |
5,490 | (4,876 | ) | 3,035 | 8,964 | 8,145 | ||||||||||||||
Net income (loss) |
(52,087 | ) | (4,959 | ) | 8,966 | 19,847 | 17,901 | |||||||||||||
Preferred stock dividends and accretion |
802 | 0 | 0 | 0 | 0 | |||||||||||||||
Net income (loss) attributable to common shares |
$ | (52,889 | ) | $ | (4,959 | ) | $ | 8,966 | $ | 19,847 | $ | 17,901 | ||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Total assets |
$ | 1,906,208 | $ | 2,208,010 | $ | 2,121,403 | $ | 2,067,268 | $ | 1,838,210 | ||||||||||
Cash and cash equivalents |
21,735 | 25,804 | 29,430 | 51,380 | 36,753 | |||||||||||||||
Securities |
257,384 | 242,787 | 211,736 | 202,419 | 181,614 | |||||||||||||||
Loans and leases |
1,539,818 | 1,856,915 | 1,799,880 | 1,745,478 | 1,561,812 | |||||||||||||||
Allowance for loan and lease losses |
47,878 | 27,108 | 25,814 | 21,411 | 20,527 | |||||||||||||||
Bank owned life insurance |
45,024 | 42,462 | 39,118 | 30,858 | 28,071 | |||||||||||||||
Deposits |
1,401,627 | 1,599,575 | 1,591,181 | 1,646,903 | 1,419,352 | |||||||||||||||
Securities sold under agreements to repurchase |
99,755 | 94,413 | 97,465 | 85,472 | 72,201 | |||||||||||||||
Federal Home Loan Bank advances |
205,000 | 270,000 | 180,000 | 95,000 | 130,000 | |||||||||||||||
Subordinated debentures |
32,990 | 32,990 | 32,990 | 32,990 | 32,990 | |||||||||||||||
Shareholders’ equity |
140,104 | 174,372 | 178,155 | 171,915 | 155,125 | |||||||||||||||
Consolidated Financial Ratios: |
||||||||||||||||||||
Return on average assets |
(2.51 | %) | (0.23 | %) | 0.43 | % | 1.01 | % | 1.05 | % | ||||||||||
Return on average shareholders’ equity |
(29.91 | %) | (2.87 | %) | 5.10 | % | 12.19 | % | 12.05 | % | ||||||||||
Average shareholders’ equity to average assets |
8.40 | % | 8.01 | % | 8.44 | % | 8.31 | % | 8.73 | % | ||||||||||
Nonperforming loans and leases to total loans and leases |
5.52 | % | 2.66 | % | 1.66 | % | 0.49 | % | 0.26 | % | ||||||||||
Allowance for loan and lease losses to total loans and leases |
3.11 | % | 1.46 | % | 1.43 | % | 1.23 | % | 1.31 | % | ||||||||||
Tier 1 leverage capital |
8.64 | % | 9.17 | % | 9.97 | % | 10.04 | % | 10.45 | % | ||||||||||
Tier 1 leverage risk-based capital |
9.92 | % | 9.68 | % | 10.14 | % | 10.37 | % | 10.82 | % | ||||||||||
Total risk-based capital |
11.18 | % | 10.93 | % | 11.39 | % | 11.45 | % | 12.00 | % | ||||||||||
Per Share Data: |
||||||||||||||||||||
Net income (loss): |
||||||||||||||||||||
Basic |
$ | (6.23 | ) | $ | (0.59 | ) | $ | 1.06 | $ | 2.36 | $ | 2.14 | ||||||||
Diluted |
(6.23 | ) | (0.59 | ) | 1.05 | 2.33 | 2.10 | |||||||||||||
Book value at end of period |
13.86 | 20.29 | 20.89 | 21.43 | 19.46 | |||||||||||||||
Dividends declared |
0.07 | 0.31 | 0.55 | 0.48 | 0.39 | |||||||||||||||
Dividend payout ratio |
NA | NA | 52.16 | % | 20.34 | % | 17.79 | % | ||||||||||||
F-3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion and other portions of this Annual Report contain forward-looking
statements that are based on management’s beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about our company. Words such
as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,”
“projects,” and variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in such forward-looking
statements. We undertake no obligation to update, amend, or clarify forward-looking statements,
whether as a result of new information, future events (whether anticipated or unanticipated), or
otherwise.
Future Factors include changes in interest rates and interest rate relationships; demand for
products and services; the degree of competition by traditional and non-traditional competitors;
changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the
impact of technological advances; 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; changes in the national and local economies; and other risk factors
described in Item 1A of this Annual Report. These are representative of the Future Factors that
could cause a difference between an ultimate actual outcome and a preceding forward-looking
statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 and lease losses and income tax accounting, and actual results could differ from
those estimates. Management has reviewed the analyses with the Audit Committee of our Board of
Directors.
Allowance For Loan and Lease Losses: The allowance for loan and lease losses (“allowance”)
is maintained at a level we believe is adequate to absorb probable incurred losses identified and
inherent in the loan and lease 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 and lease 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 and lease portfolio. Allocations of the allowance may be made for specific loans or
leases, but the entire allowance is available for any loan or lease that, in management’s judgment,
should be charged-off. Loan and lease losses are charged against the allowance when management
believes the uncollectability of a loan or lease is likely. The balance of the allowance
represents management’s best estimate, but significant downturns in circumstances relating to loan
and lease quality or economic conditions could result in a requirement for an increased allowance
in the future. Likewise, an upturn in loan and lease 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 operating earnings.
F-4
The allowance is increased through a provision charged to operating expense. Uncollectable loans
and leases are charged-off through the allowance. Recoveries of loans and leases previously
charged-off are added to the allowance. A loan or lease is considered impaired when it is probable that contractual interest
and principal payments will not be collected either for the amounts or by the dates as scheduled in
the loan or lease agreement. Impairment is evaluated in aggregate for smaller-balance loans of
similar nature such as residential mortgage, consumer and credit card loans, and on an individual
loan or lease basis for other loans. If a loan or lease is impaired, a portion of the allowance is
allocated so that the loan or lease is reported, net, at the present value of estimated future cash
flows using the loan’s or lease’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. 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 and leases are evaluated for impairment when payments are
delayed, typically 30 days or more, or when serious deficiencies are identified within the credit
relationship. Our policy for recognizing income on impaired loans is to accrue interest unless a
loan is placed on nonaccrual status. We put loans into nonaccrual status when the full collection
of principal and interest is not expected.
Income Tax Accounting: Current income tax liabilities or assets 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 liabilities and assets 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 liability or asset 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 that companies assess whether a valuation allowance should be
established against their 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 which
may impact future operating results. Significant weight is given to evidence that can be
objectively verified. Despite improvements achieved throughout 2009 in key areas such as an
expanded net interest margin, increased regulatory capital levels, a continued shift to local
funding sources and reduced controllable overhead costs, the increased loan and lease loss
provision expense and problem asset administration costs have been sizable. The continuing recent
losses resulting from the distressed operating environment have significantly restricted our
ability to rely on projections of future taxable income to support the recovery of our deferred tax
assets. Consequently, we determined it necessary to establish a valuation allowance against our
entire net deferred tax asset. We will continue to monitor our deferred tax assets quarterly for
changes affecting their realizability.
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
Mortgage Company, LLC (“our mortgage company”), Mercantile Bank Real Estate Co., L.L.C. (“our real
estate company”) and Mercantile Insurance Center, Inc. (“our insurance company”), which are
subsidiaries of our bank. Unless the text clearly suggests otherwise, references to “us,” “we,”
“our,” or “the company” include Mercantile Bank Corporation and its wholly-owned subsidiaries
referred to above.
F-5
We were incorporated on July 15, 1997 as a bank holding company to establish and own our bank. Our
bank, after receiving all necessary regulatory approvals, began operations on December 15, 1997.
Our bank has a strong commitment to community banking and offers a wide range of financial products
and services, primarily to small- to medium-sized businesses, as well as individuals. Our bank’s
lending strategy focuses on commercial lending, and, to a lesser extent, residential mortgage and consumer lending. Our bank also offers a broad array of
deposit products, including checking, savings, money market, and certificates of deposit, as well
as security repurchase agreements. Our primary markets are the Grand Rapids, Holland and Lansing
areas. Our bank utilizes deposits from customers located outside of our primary market areas to
assist in funding assets.
We formed a business trust, Mercantile Bank Capital Trust I (“our trust”), in 2004 to issue trust
preferred securities. We issued subordinated debentures to our trust in return for the proceeds
raised from the issuance of the trust preferred securities. In accordance with accounting
guidelines, our trust is not consolidated, but instead we report the subordinated debentures issued
to our trust as a liability.
Our mortgage company’s predecessor, Mercantile Bank Mortgage Company, was formed to increase the
profitability and efficiency of our mortgage loan operations. Mercantile Bank Mortgage Company
initiated business on October 24, 2000 from our bank’s contribution of most of its residential
mortgage loan portfolio and participation interests in certain commercial mortgage loans. On the
same date, our bank had also transferred its residential mortgage origination function to
Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was
reorganized as Mercantile Bank Mortgage Company, LLC, a limited liability company. Mortgage loans
originated and held by our mortgage company are serviced by our bank pursuant to a servicing
agreement.
Our insurance company acquired, at nominal cost, 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.
Our real estate company 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. Construction was completed during the second quarter of 2005.
FINANCIAL OVERVIEW
Our earnings performance has been negatively impacted by substantial provisions to the allowance.
Ongoing state, regional and national economic struggles have negatively impacted some of our
borrowers’ cash flows and underlying collateral values, leading to increased nonperforming assets,
higher loan and lease charge-offs and increased overall credit risk within our loan portfolio. We
continue to work with our borrowers to develop constructive dialogue to strengthen our
relationships and enhance our ability to resolve complex issues; however, with the environment for
the banking industry likely to remain stressed until economic conditions improve, credit quality
will continue to be our major concern. We will remain vigilant in the identification and
administration of problem assets, but provisions to the allowance will likely remain above
historical levels, dampening future earnings performance.
F-6
Our earnings performance also reflects positive steps we have taken to not only partially mitigate
the impact of deteriorating asset quality in the near term, but to benefit us on a longer-term
basis as well. First, our net interest margin expanded throughout 2009 as we replaced maturing
high-rate deposits with lower-cost funds, while at the same time our commercial loan pricing
initiatives offset the negative impact of an increase in nonaccrual loans. Despite a substantial
reduction in total loans and leases, our net interest income increased due to the higher net
interest margin, and we expect our net interest margin to improve further over the next few
quarters. Next, our regulatory risk-based capital ratios also increased, as the sale of preferred stock under the
Treasury’s Capital Purchase Program and the reduction of loans outstanding have more than offset
the impact of recording a net loss. In addition, we saw strong increases in local deposits,
reflecting the successful implementation of various initiatives, campaigns and product
enhancements. The local deposit growth, combined with the reduction of loans outstanding, provided
for a substantial reduction of, and reliance on, wholesale funds. Lastly, we are starting to see
the positive effect of our branch consolidation and other overhead cost reduction initiatives, as
we continue to make strides to reduce controllable noninterest expense.
FINANCIAL CONDITION
Primarily reflecting our financial condition and weakened and relatively poor economic environments
within our markets, we shrunk our balance sheet during 2009. Total assets declined from $2.21
billion on December 31, 2008 to $1.91 billion on December 31, 2009, representing a decrease in
total assets of $301.8 million, or 13.7%. The decline in total assets during 2009 was primarily
comprised of a $317.1 million decrease in total loans and leases. Our total deposits decreased
$197.9 million and Federal Home Loan Bank (“FHLB”) advances declined $65.0 million.
Earning Assets
Average earning assets equaled 95.1% of average total assets during 2009, a level very similar to
the 95.4% during 2008. The loan and lease portfolio continued to comprise a majority of earning
assets, followed by securities, federal funds sold and interest-bearing deposits; however, during
2009, securities, federal funds sold and interest-bearing deposits comprised a larger percentage of
earning assets primarily reflecting our decision to operate with a larger volume of on balance
sheet liquidity given market conditions. Average total loans and leases equaled 80.9% of average
total assets during 2009, a decline from 84.8% in 2008. Meanwhile, average securities, federal
funds sold and interest-bearing deposits equaled a combined 14.2% of average total assets during
2009, an increase from 10.6% during 2008.
Our loan and lease portfolio is primarily comprised of commercial loans and leases. Commercial
loans and leases declined by $301.3 million during 2009, and at December 31, 2009, totaled $1.41
billion, or 91.5% of the total loan and lease portfolio. The decline in outstanding balances
reflects the slowdown in business activity in our markets and the impact of a concerted effort on
our part to reduce exposure to certain non-owner occupied commercial real estate (“CRE”) and
automotive-related businesses. The largest decline occurred in the commercial and industrial
(“C&I”) loan portfolio, where usage of commercial lines of credit was reduced by about $138.0
million, in large part reflecting the slowdown in business activity and a corresponding reduction
in accounts receivable and inventory financings. We would expect to see an increase in commercial
line of credit usage when economic conditions improve. Total CRE balances declined $66.2 million
during 2009. Our systematic approach to reducing our exposure to certain CRE lending will be
prolonged, given the nature of CRE lending and the current depressed economic conditions; however,
we believe that such a reduction is in our best interest when taking into account the increased
inherent credit risk, relatively low loan rates and nominal deposit balances associated with
targeted borrowing relationships. Also during 2009, commercial loans collateralized by
owner-occupied real estate declined by $53.6 million and commercial loans related to residential
development and construction decreased by $31.6 million.
F-7
The commercial loan and lease portfolio represents loans to businesses generally located within our
market areas. Approximately 74% of the commercial loan and lease portfolio is primarily secured by
real estate properties, with the remaining generally secured by other business assets such as
accounts receivable, inventory, and equipment. The continued concentration of the loan and lease
portfolio in commercial loans and leases is consistent with our stated strategy of focusing a
substantial amount of our efforts on “wholesale” banking. Corporate and business lending continues
to be an area of expertise for our senior management team, and our commercial lenders have
extensive commercial lending experience, with most having at least ten years’ experience. Of each
of the loan categories that we originate, commercial loans and leases are most efficiently
originated and managed, thus limiting overhead costs by necessitating the attention of fewer employees. Our commercial lending business generates the
largest portion of local deposits and is our primary source of demand deposits.
The following table summarizes our loans secured by real estate, excluding residential mortgage
loans representing permanent financing of owner occupied dwellings and home equity lines of credit:
| 12/31/09 | 9/30/09 | 6/30/09 | 3/31/09 | 12/31/08 | ||||||||||||||||
Residential-Related: |
||||||||||||||||||||
Vacant Land |
$ | 19,465,000 | $ | 20,630,000 | $ | 21,400,000 | $ | 22,244,000 | $ | 21,374,000 | ||||||||||
Land Development |
34,027,000 | 33,862,000 | 42,053,000 | 50,402,000 | 54,055,000 | |||||||||||||||
Construction |
7,199,000 | 9,446,000 | 11,157,000 | 14,646,000 | 16,839,000 | |||||||||||||||
| 60,691,000 | 63,938,000 | 74,610,000 | 87,292,000 | 92,268,000 | ||||||||||||||||
Comm’l Non-Owner Occupied: |
||||||||||||||||||||
Vacant Land |
25,549,000 | 25,564,000 | 29,005,000 | 28,775,000 | 29,269,000 | |||||||||||||||
Land Development |
19,402,000 | 22,412,000 | 23,469,000 | 24,636,000 | 24,629,000 | |||||||||||||||
Construction |
65,697,000 | 79,339,000 | 94,225,000 | 93,322,000 | 102,464,000 | |||||||||||||||
Commercial Buildings |
537,891,000 | 528,727,000 | 545,501,000 | 556,280,000 | 558,360,000 | |||||||||||||||
| 648,539,000 | 656,042,000 | 692,200,000 | 703,013,000 | 714,722,000 | ||||||||||||||||
Comm’l Owner Occupied: |
||||||||||||||||||||
Construction |
1,404,000 | 5,456,000 | 7,407,000 | 9,290,000 | 9,344,000 | |||||||||||||||
Commercial Buildings |
324,451,000 | 349,335,000 | 359,610,000 | 365,250,000 | 370,099,000 | |||||||||||||||
| 325,855,000 | 354,791,000 | 367,017,000 | 374,540,000 | 379,443,000 | ||||||||||||||||
Total |
$ | 1,035,085,000 | $ | 1,074,771,000 | $ | 1,133,827,000 | $ | 1,164,845,000 | $ | 1,186,433,000 | ||||||||||
Residential mortgage and consumer loans declined in aggregate $15.8 million during 2009, and
at December 31, 2009, totaled $130.8 million, or 8.5% of the total loan and lease portfolio.
Although residential mortgage loan and consumer loan portfolios may increase in future periods, we
expect the commercial sector of the lending efforts and resultant assets to remain the dominant
loan portfolio category given our wholesale banking strategy.
F-8
The following table presents total loans outstanding as of December 31, 2009, 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 Through | More Than | ||||||||||||||
| One Year | Five Years | Five Years | Total | |||||||||||||
Construction and land development |
$ | 135,144,000 | $ | 40,014,000 | $ | 920,000 | $ | 176,078,000 | ||||||||
Real estate — residential properties |
63,086,000 | 48,387,000 | 13,332,000 | 124,805,000 | ||||||||||||
Real estate — multi-family properties |
18,001,000 | 29,435,000 | 243,000 | 47,679,000 | ||||||||||||
Real estate — commercial properties |
355,983,000 | 433,593,000 | 24,482,000 | 814,058,000 | ||||||||||||
Commercial and industrial |
245,596,000 | 107,480,000 | 17,070,000 | 370,146,000 | ||||||||||||
Leases |
59,000 | 996,000 | 0 | 1,055,000 | ||||||||||||
Consumer |
3,062,000 | 2,752,000 | 183,000 | 5,997,000 | ||||||||||||
Total |
$ | 820,931,000 | $ | 662,657,000 | $ | 56,230,000 | $ | 1,539,818,000 | ||||||||
Fixed rate loans and leases |
$ | 439,405,000 | $ | 662,657,000 | $ | 42,750,000 | $ | 1,144,812,000 | ||||||||
Floating rate loans and leases |
381,526,000 | 0 | 13,480,000 | 395,006,000 | ||||||||||||
Total |
$ | 820,931,000 | $ | 662,657,000 | $ | 56,230,000 | $ | 1,539,818,000 | ||||||||
Our credit policies establish guidelines to manage credit risk and asset quality. These
guidelines include loan review and early identification of problem loans and leases to provide
effective loan and lease 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 leases and the
possibility that changes in these could occur quickly because of changing economic conditions.
Identified problem loans and leases, which exhibit characteristics (financial or otherwise) that
could cause the loans and leases to become nonperforming or require restructuring in the future,
are included on the internal “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
current distressed market conditions.
The levels of net loan and lease charge-offs and nonperforming assets have increased since early
2007. Although we were never directly involved in the underwriting of or the investing in subprime
residential real estate loans, the apparent substantial and rapid collapse of this line of business
during 2007 and 2008 throughout the United States had a significant negative impact on the
residential real estate development lending portion of our business. The resulting decline in real
estate prices and slowdown in sales has stretched the cash flow of our local developers and eroded
the value of our underlying collateral, which caused elevated levels of nonperforming assets and
net loan and lease charge-offs. Since that time, we have witnessed deteriorating economic
conditions in Michigan and throughout the country. The resulting decline in business revenue has
negatively impacted the cash flows of many of our borrowers, some to the point where loan payments
have become past due or will likely become delinquent in future periods. In addition, real estate
prices have fallen significantly, thereby exposing us to larger-than-typical losses in those
instances where the sale of collateral is the primary source of repayment. Also during this time,
we have seen deterioration in guarantors’ financial capacities to fund deficient cash flows and
reduce or eliminate collateral deficiencies. It is likely that net loan and lease charge-offs and
nonperforming assets will remain elevated in comparison to our historical levels until economic
conditions improve.
F-9
As of December 31, 2007, nonperforming assets totaled $35.7 million, or 1.68% of total assets, an
increase from the $9.6 million, or 0.46% of total assets, as of December 31, 2006. Nonperforming
loans and leases totaled $29.8 million and foreclosed properties/repossessed assets equaled $5.9
million at year-end 2007, compared to $8.6 million and $1.0 million, respectively, at year-end
2006. As of December 31, 2007, nonperforming loans secured by real estate, combined with all
foreclosed properties, totaled $28.6 million, or about 80% of total nonperforming assets.
Nonperforming loans and foreclosed properties associated with the development of residential real
estate totaled $11.1 million, with another $3.2 million in nonperforming loans secured by, and
foreclosed properties consisting of, residential properties. Net loan and lease charge-offs during
2007 totaled $6.7 million, or 0.38% of average total loans and leases. During 2006, net loan and
lease charge-offs totaled $4.9 million, or 0.29% of average total loans and leases.
Throughout most of 2008, we experienced a sudden and rapid deterioration in a number of commercial
loan relationships which previously had been performing satisfactorily. Analyses of certain
commercial borrowers revealed a reduced capability on the part of these borrowers to make required
payments as indicated by factors such as delinquent loan payments, diminished cash flow,
deteriorating financial performance, or past due property taxes, and in the case of commercial and
residential development projects slow absorption or sales trends. In addition, commercial real
estate is the primary source of collateral for many of these borrowing relationships and updated
evaluations and appraisals in many cases reflected significant declines from the original estimated
values.
During the latter part of 2008 and throughout 2009, we saw a continuation of the stresses caused by
the deteriorating economic conditions, especially in the CRE markets and automotive-related
borrowing relationships in our C&I portfolio. High vacancy rates or slow absorption has resulted
in inadequate cash flow generated from some real estate projects we have financed and has required
guarantors to provide personal funds to make full contractual loan payments and pay other operating
costs. In some cases, the guarantors’ cash and other liquid reserves have become seriously diminished. In other cases, sale of the collateral, either by the borrower or us, is our
primary source of repayment.
As of December 31, 2008, nonperforming assets totaled $57.4 million, or 2.60% of total assets.
Nonperforming loans and leases totaled $49.3 million and foreclosed properties/repossessed assets
equaled $8.1 million at year-end 2008, compared to $29.8 million and $5.9 million, respectively, at
year-end 2007. As of December 31, 2008, nonperforming loans secured by real estate, combined with
all foreclosed properties, totaled $52.3 million, or about 91% of total nonperforming assets.
Nonperforming loans and foreclosed properties associated with the development of residential real
estate totaled $25.3 million, with another $4.2 million in nonperforming loans secured by, and
foreclosed properties consisting of, residential properties. Net loan and lease charge-offs during
2008 totaled $19.9 million, or 1.09% of average total loans and leases. The increase in net loan
and lease charge-offs during 2008 over prior periods primarily reflects a combination of a higher
level of nonperforming assets and the significant decline in property values.
As of December 31, 2009, nonperforming assets totaled $111.7 million, or 5.86% of total assets.
Nonperforming loans and leases totaled $85.1 million and foreclosed properties/repossessed assets
equaled $26.6 million at year-end 2009. As of December 31, 2009, nonperforming loans secured by
CRE, combined with all foreclosed properties, totaled $62.6 million. Nonperforming loans and
foreclosed properties associated with the development of residential-related real estate totaled
$31.8 million, with another $7.5 million in nonperforming loans secured by, and foreclosed
properties consisting of, residential properties. Nonperforming C&I loans and repossessed assets
totaled $9.8 million. Net loan and lease charge-offs during 2009 totaled $38.2 million, or 2.24%
of average total loans and leases. The increase in net loan and lease charge-offs during 2009 over
prior periods primarily reflects a combination of a higher level of nonperforming assets and the
continued significant decline in property values.
F-10
The following table provides a breakdown of nonperforming assets by property type:
| 12/31/09 | 9/30/09 | 6/30/09 | 3/31/09 | 12/31/08 | ||||||||||||||||
Residential Real Estate: |
||||||||||||||||||||
Land Development |
$ | 19,722,000 | $ | 13,645,000 | $ | 10,422,000 | $ | 12,646,000 | $ | 14,273,000 | ||||||||||
Construction |
12,103,000 | 13,021,000 | 12,882,000 | 13,538,000 | 11,040,000 | |||||||||||||||
Owner Occupied / Rental |
7,493,000 | 6,830,000 | 4,910,000 | 4,877,000 | 4,160,000 | |||||||||||||||
| 39,318,000 | 33,496,000 | 28,214,000 | 31,061,000 | 29,473,000 | ||||||||||||||||
Commercial Real Estate: |
||||||||||||||||||||
Land Development |
2,971,000 | 4,621,000 | 2,292,000 | 2,383,000 | 2,234,000 | |||||||||||||||
Construction |
1,268,000 | 228,000 | 0 | 0 | 0 | |||||||||||||||
Owner Occupied |
19,918,000 | 21,429,000 | 17,378,000 | 8,753,000 | 6,495,000 | |||||||||||||||
Non-Owner Occupied |
38,417,000 | 36,473,000 | 28,110,000 | 28,364,000 | 14,055,000 | |||||||||||||||
| 62,574,000 | 62,751,000 | 47,780,000 | 39,500,000 | 22,784,000 | ||||||||||||||||
Non-Real Estate: |
||||||||||||||||||||
Commercial Assets |
9,758,000 | 14,510,000 | 10,629,000 | 13,155,000 | 5,134,000 | |||||||||||||||
Consumer Assets |
8,000 | 8,000 | 8,000 | 31,000 | 30,000 | |||||||||||||||
| 9,766,000 | 14,518,000 | 10,637,000 | 13,186,000 | 5,164,000 | ||||||||||||||||
Total |
$ | 111,658,000 | $ | 110,765,000 | $ | 86,631,000 | $ | 83,747,000 | $ | 57,421,000 | ||||||||||
The following table provides a breakdown of net loan and lease charge-offs by collateral type:
| 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | Whole Year | ||||||||||||||||
| 2009 | 2009 | 2009 | 2009 | 2009 | ||||||||||||||||
Residential Real Estate: |
||||||||||||||||||||
Land Development |
$ | 2,204,000 | $ | 467,000 | $ | 1,060,000 | $ | 624,000 | $ | 4,355,000 | ||||||||||
Construction |
733,000 | 3,208,000 | 1,023,000 | 86,000 | 5,050,000 | |||||||||||||||
Owner Occupied / Rental |
946,000 | 530,000 | 729,000 | 1,442,000 | 3,647,000 | |||||||||||||||
| 3,883,000 | 4,205,000 | 2,812,000 | 2,152,000 | 13,052,000 | ||||||||||||||||
Commercial Real Estate: |
||||||||||||||||||||
Land Development |
45,000 | 0 | 74,000 | 0 | 119,000 | |||||||||||||||
Construction |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Owner Occupied |
1,140,000 | 1,254,000 | 593,000 | 75,000 | 3,062,000 | |||||||||||||||
Non-Owner Occupied |
3,009,000 | 3,265,000 | 2,347,000 | 786,000 | 9,407,000 | |||||||||||||||
| 4,194,000 | 4,519,000 | 3,014,000 | 861,000 | 12,588,000 | ||||||||||||||||
Non-Real Estate: |
||||||||||||||||||||
Commercial Assets |
2,788,000 | 2,232,000 | 4,918,000 | 2,475,000 | 12,413,000 | |||||||||||||||
Consumer Assets |
(1,000 | ) | 7,000 | 35,000 | 136,000 | 177,000 | ||||||||||||||
| 2,787,000 | 2,239,000 | 4,953,000 | 2,611,000 | 12,590,000 | ||||||||||||||||
Total |
$ | 10,864,000 | $ | 10,963,000 | $ | 10,779,000 | $ | 5,624,000 | $ | 38,230,000 | ||||||||||
F-11
The following table summarizes nonperforming loans and leases and troubled debt
restructurings:
| 12/31/09 | 12/31/08 | 12/31/07 | 12/31/06 | 12/31/05 | ||||||||||||||||
Past due 90 days or more and
accruing interest |
$ | 243,000 | $ | 1,358,000 | $ | 977,000 | $ | 819,000 | $ | 394,000 | ||||||||||
Nonaccrual |
81,818,000 | 47,945,000 | 28,832,000 | 7,752,000 | 3,601,000 | |||||||||||||||
Troubled debt restructurings |
2,989,000 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
$ | 85,050,000 | $ | 49,303,000 | $ | 29,809,000 | $ | 8,571,000 | $ | 3,995,000 | ||||||||||
The following table summarizes changes in the allowance for loan and lease losses for the past
five years:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Loans and leases outstanding at year-end |
$ | 1,539,818,000 | $ | 1,856,915,000 | $ | 1,799,880,000 | $ | 1,745,478,000 | $ | 1,561,812,000 | ||||||||||
Daily average balance of loans and leases
outstanding during the year |
$ | 1,704,335,000 | $ | 1,829,686,000 | $ | 1,765,465,000 | $ | 1,660,284,000 | $ | 1,432,609,000 | ||||||||||
Balance of allowance at beginning of year |
$ | 27,108,000 | $ | 25,814,000 | $ | 21,411,000 | $ | 20,527,000 | $ | 17,819,000 | ||||||||||
Loans and leases charged-off: |
||||||||||||||||||||
Commercial, financial and agricultural |
(25,858,000 | ) | (12,566,000 | ) | (4,232,000 | ) | (5,208,000 | ) | (718,000 | ) | ||||||||||
Construction and land development |
(9,606,000 | ) | (4,835,000 | ) | (1,353,000 | ) | 0 | (521,000 | ) | |||||||||||
Leases |
(120,000 | ) | (174,000 | ) | (18,000 | ) | 0 | 0 | ||||||||||||
Residential real estate |
(3,797,000 | ) | (2,900,000 | ) | (1,618,000 | ) | (50,000 | ) | (131,000 | ) | ||||||||||
Instalment loans to individuals |
(240,000 | ) | (119,000 | ) | (53,000 | ) | (131,000 | ) | (22,000 | ) | ||||||||||
Total charge-offs |
(39,621,000 | ) | (20,594,000 | ) | (7,274,000 | ) | (5,389,000 | ) | (1,392,000 | ) | ||||||||||
Recoveries of previously charged-off
loans and leases: |
||||||||||||||||||||
Commercial, financial and agricultural |
1,141,000 | 597,000 | 586,000 | 487,000 | 298,000 | |||||||||||||||
Construction and land development |
81,000 | 8,000 | 11,000 | 0 | 2,000 | |||||||||||||||
Leases |
4,000 | 6,000 | 0 | 0 | 0 | |||||||||||||||
Residential real estate |
150,000 | 51,000 | 3,000 | 2,000 | 6,000 | |||||||||||||||
Instalment loans to individuals |
15,000 | 26,000 | 7,000 | 9,000 | 4,000 | |||||||||||||||
Total recoveries |
1,391,000 | 688,000 | 607,000 | 498,000 | 310,000 | |||||||||||||||
Net loan and lease charge-offs |
(38,230,000 | ) | (19,906,000 | ) | (6,667,000 | ) | (4,891,000 | ) | (1,082,000 | ) | ||||||||||
Provision for loan and lease losses |
59,000,000 | 21,200,000 | 11,070,000 | 5,775,000 | 3,790,000 | |||||||||||||||
Balance of allowance at year-end |
$ | 47,878,000 | $ | 27,108,000 | $ | 25,814,000 | $ | 21,411,000 | $ | 20,527,000 | ||||||||||
Ratio of net loan and lease charge-offs
during the year to average loans and leases
outstanding during the year |
(2.24 | %) | (1.09 | %) | (0.38 | %) | (0.29 | %) | (0.08 | %) | ||||||||||
Ratio of allowance to loans and leases
outstanding at year-end |
3.11 | % | 1.46 | % | 1.43 | % | 1.23 | % | 1.31 | % | ||||||||||
F-12
In each accounting period, we adjust the allowance to the amount we believe is necessary to
maintain the allowance at adequate levels. Through the loan and lease review and credit
departments, we attempt to establish specific portions of the allowance based on specifically
identifiable problem loans and leases. The evaluation of the allowance is further based on, but
not limited to, consideration of the internally prepared Reserve Analysis, loan and lease loss
migration analysis, composition of the loan and lease portfolio, third party analysis of the loan
and lease administration processes and portfolio and general economic conditions.
The Reserve Analysis, used since our inception and completed monthly, applies reserve allocation
factors to outstanding loan and lease balances to calculate an overall allowance dollar amount.
For commercial loans and leases, which continue to comprise a vast majority of our total loans and
leases, reserve allocation factors are based upon the loan ratings as determined by our
standardized grade paradigms. For retail loans, reserve allocation factors are based upon the type
of credit. Adjustments for specific lending relationships, including impaired loans and leases,
are made on a case-by-case basis. The reserve allocation factors are primarily based on the recent
levels and historical trends of net loan and lease charge-offs and non-performing assets, the
comparison of the recent levels and historical trends of net loan and lease charge-offs and
non-performing assets with a customized peer group consisting of ten similarly-sized publicly
traded banking organizations conducting business in the states of Michigan, Illinois, Indiana or
Ohio, the review and consideration of our loan and lease migration analysis and the experience of
senior management making similar loans and leases for an extensive period of time. We regularly
review the Reserve Analysis and make adjustments periodically based upon identifiable trends and
experience. Net increases to commercial loan and lease reserve allocation factors during 2009
resulted in a $5.3 million increase to the allowance.
As specified in our Loan Administration Policy, we complete a migration analysis quarterly to
assist us in determining appropriate reserve allocation factors for commercial loans and leases.
Our migration takes into account four different time periods, including four, eight, twelve and
twenty-quarter time periods, and while we generally place most weight on the eight-quarter
timeframe as that period is close to the average duration of our loan and lease portfolio,
consideration is given to the other time periods as part of our assessment. Although the migration
analysis provides an accurate historical accounting of our loan and lease losses, it is not able to
fully account for environmental factors that will also very likely impact the collectability of our
commercial loans and leases as of any quarter-end date.
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 and lease risk ratings. Although we have been consistent in our
approach to commercial loan and lease ratings, ongoing stressed economic conditions have resulted
in an even higher sense of aggressiveness with regards to the downgrading of lending relationships.
In addition, we made revisions to our grading paradigms in early 2009 that mathematically resulted
in commercial loan and lease relationships being more quickly downgraded when signs of stress are
noted, such as slower sales activity for construction and land development CRE relationships and
reduced operating performance/cash flow coverage for C&I relationships. These changes, coupled
with the troubled economic environment, resulted in significant downgrades during 2009 and the need
for substantial provisions to the allowance. To more effectively manage our commercial loan and
lease portfolio, we created two specific groups tasked with managing our higher exposure lending
relationships. One team manages the most distressed credits, while the other team manages our
larger “monitor-rated” credit relationships.
The most significant external environmental factor is the assessment of the current economic
environment and the resulting implications on our commercial loans and leases. Currently, we
believe conditions remain stressed for CRE; however, recent data and performance reflect a level of
stability in the C&I segment of our loan and lease portfolio.
F-13
The following table illustrates the breakdown of the allowance balance by loan type (dollars in
thousands) and of the total loan and lease portfolio (in percentages):
| 12/31/2009 | 12/31/2008 | 12/31/2007 | 12/31/2006 | 12/31/2005 | ||||||||||||||||||||||||||||||||||||
| Loan | Loan | Loan | Loan | Loan | ||||||||||||||||||||||||||||||||||||
| Amount | Portfolio | Amount | Portfolio | Amount | Portfolio | Amount | Portfolio | Amount | Portfolio | |||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 37,590 | 80.0 | % | $ | 20,170 | 77.9 | % | $ | 18,947 | 77.4 | % | $ | 15,706 | 74.7 | % | $ | 16,507 | 76.9 | % | ||||||||||||||||||||
Construction and land development |
6,566 | 11.4 | 5,137 | 14.1 | 4,907 | 14.7 | 3,975 | 17.1 | 2,868 | 14.5 | ||||||||||||||||||||||||||||||
Leases |
49 | 0.1 | 41 | 0.1 | 29 | 0.1 | 15 | 0.1 | 30 | 0.1 | ||||||||||||||||||||||||||||||
Residential real estate |
3,517 | 8.1 | 1,656 | 7.6 | 1,829 | 7.5 | 1,591 | 7.6 | 1,020 | 8.2 | ||||||||||||||||||||||||||||||
Instalment loans to individuals |
156 | 0.4 | 104 | 0.3 | 102 | 0.3 | 124 | 0.5 | 102 | 0.3 | ||||||||||||||||||||||||||||||
Unallocated |
0 | 0.0 | 0 | 0.0 | 0 | 0.0 | 0 | 0.0 | 0 | 0.0 | ||||||||||||||||||||||||||||||
Total |
$ | 47,878 | 100.0 | % | $ | 27,108 | 100.0 | % | $ | 25,814 | 100.0 | % | $ | 21,411 | 100.0 | % | $ | 20,527 | 100.0 | % | ||||||||||||||||||||
The primary risk elements with respect to commercial loans and leases are the financial
condition of the borrower, the sufficiency of collateral, and lack of timely payment. We have a
policy of requesting and reviewing periodic financial statements from commercial loan and lease
customers, and we periodically review the existence of collateral and its value. The primary risk
element with respect to each instalment and residential real estate loan is lack of timely payment.
We have a reporting system that monitors past due loans and have adopted policies to pursue
creditor’s rights in order to preserve our bank’s collateral position.
Although we believe that the allowance is adequate to sustain losses as they arise, there can be no
assurance that our bank will not sustain losses in any given period that could be substantial in
relation to, or greater than, the size of the allowance.
Securities increased $14.6 million during 2009, from $242.8 million on December 31, 2008 to $257.4
million at December 31, 2009. During 2009, the securities portfolio equaled 11.9% of average
earning assets. The increase in the securities portfolio reflects increased collateral
requirements for our repurchase agreements and certain correspondent bank activities, as well as
enhanced on-balance sheet liquidity. Proceeds from called U.S. Government agency bonds totaled
$34.1 during 2009, with another $16.5 million received from principal paydowns on mortgage-backed
securities. In addition, $6.3 million was received from matured and called tax-exempt municipal
securities. The proceeds were generally invested back into the securities portfolio, with $68.8
million invested in U.S. Government agency bonds, $3.9 million invested in mortgage-backed
securities and $1.0 million invested in tax-exempt municipal securities. We also purchased $0.1
million in bonds issued through the Michigan Strategic Fund during 2009, although we received $1.7
million from scheduled maturities. These bonds are purchased and sold at par value and are
sellable back to the re-marketing brokerage firm weekly. We maintain the securities portfolio at
levels to provide adequate pledging for the repurchase agreement program and secondary liquidity
for our daily operations. In addition, the portfolio serves a primary interest rate risk
management function. At December 31, 2009, the portfolio was comprised of high credit quality U.S.
Government agency issued bonds (37%), U.S. Government agency issued and guaranteed mortgage-backed
securities (25%), tax-exempt municipal general obligation and revenue bonds (23%), Michigan
Strategic Fund bonds (8%), Federal Home Loan Bank stock (6%) and mutual funds (1%).
F-14
The following table reflects the composition of the securities portfolio, excluding Federal Home
Loan Bank stock:
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||||||||||||||
| Carrying | Carrying | Carrying | ||||||||||||||||||||||
| Value | Percent | Value | Percent | Value | Percent | |||||||||||||||||||
U.S. Government agency
debt obligations |
$ | 95,544,000 | 39.6 | % | $ | 62,382,000 | 27.5 | % | $ | 80,945,000 | 40.1 | % | ||||||||||||
Mortgage-backed
securities |
64,982,000 | 26.9 | 77,026,000 | 33.9 | 54,619,000 | 27.0 | ||||||||||||||||||
Municipal general
obligations |
49,892,000 | 20.6 | 54,066,000 | 23.8 | 57,668,000 | 28.5 | ||||||||||||||||||
Municipal revenue bonds |
9,319,000 | 3.9 | 10,371,000 | 4.6 | 7,662,000 | 3.8 | ||||||||||||||||||
Michigan Strategic
Fund bonds |
20,550,000 | 8.5 | 22,105,000 | 9.7 | 0 | 0.0 | ||||||||||||||||||
Mutual funds |
1,416,000 | 0.5 | 1,156,000 | 0.5 | 1,109,000 | 0.6 | ||||||||||||||||||
Totals |
$ | 241,703,000 | 100.0 | % | $ | 227,106,000 | 100.0 | % | $ | 202,003,000 | 100.0 | % | ||||||||||||
All securities, with the exception of tax-exempt municipal bonds, have been designated as
“available for sale”. Securities designated as available for sale are stated at fair value, with
the unrealized gains and losses, net of income tax (as applicable), reported as a separate
component of shareholders’ equity in accumulated other comprehensive income. The fair value of
securities designated as available for sale at December 31, 2009 and 2008 was $182.5 million and
$162.7 million, respectively. The net unrealized gain recorded at year-end 2009 was $1.9 million,
compared to a net unrealized gain of $3.2 million at year-end 2008. All tax-exempt municipal bonds
have been designated as “held to maturity” and are stated at amortized cost. As of December 31,
2009 and 2008, held to maturity securities had an amortized cost of $59.2 million and $64.4 million
and a fair value of $60.3 million and $65.4 million, respectively.
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed
by U.S. Government agencies and tax-exempt municipal securities 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 other securities is estimated at carrying value as those financial instruments are
generally bought and sold at par 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 15 of the Notes to Consolidated Financial
Statements for additional information.
F-15
The following table shows by class of maturities as of December 31, 2009, the amounts and weighted
average yields of investment securities (1):
| Carrying | Average | |||||||
| Value | Yield | |||||||
U.S. Treasury securities and obligations of U.S. |
||||||||
Government agencies and corporations: |
||||||||
One year or less |
$ | 3,068,000 | 4.76 | % | ||||
Over one through five years |
3,292,000 | 4.96 | ||||||
Over five through ten years |
13,962,000 | 4.52 | ||||||
Over ten years |
75,222,000 | 5.00 | ||||||
| 95,544,000 | 4.92 | |||||||
Obligations of states and political subdivisions: |
||||||||
One year or less |
4,156,000 | 7.32 | ||||||
Over one through five years |
8,016,000 | 6.31 | ||||||
Over five through ten years |
13,526,000 | 6.39 | ||||||
Over ten years |
33,513,000 | 6.35 | ||||||
| 59,211,000 | 6.42 | |||||||
Mortgage-backed securities |
64,982,000 | 5.15 | ||||||
Michigan Strategic Fund bonds |
20,550,000 | 3.06 | ||||||
Mutual funds |
1,416,000 | 3.06 | ||||||
Totals |
$ | 241,703,000 | 5.16 | % | ||||
| (1) | Yields on tax-exempt securities are computed on a fully taxable-equivalent basis. |
Federal funds sold, consisting of excess funds sold overnight to a correspondent bank, along with
investments in interest-bearing deposits at correspondent banks, are used to manage daily liquidity
needs and interest rate sensitivity. During 2009, the average balance of these funds equaled 3.0%
of average earning assets, up from 0.6% during 2008. Given stressed market and economic
conditions, we made the decision to operate with a higher than normal balance of federal funds sold
throughout 2009. We expect to maintain the higher balance of federal funds sold, likely to average
1.0% to 2.0% of average earning assets, until market conditions return to more normalized levels.
Non-Earning Assets
Cash and due from bank balances totaled $18.9 million at December 31, 2009, compared to $16.8
million on December 31, 2008. Cash and due from bank balances averaged $16.3 million during 2009.
Net premises and equipment decreased from $32.3 million at December 31, 2008, to $29.7 million on
December 31, 2009, primarily reflecting depreciation expense. Purchases of premises and equipment
during 2009 were nominal. On December 30, 2009, all FDIC-insured financial institutions were
required to pre-pay estimated FDIC deposit insurance assessments for the years 2010, 2011 and 2012.
The amount we paid equaled $16.3 million, which will be expensed over the future quarterly
assessment periods.
Foreclosed and repossessed assets totaled $26.6 million at December 31, 2009, compared to $8.1
million on December 31, 2008. We expected an increase in foreclosed and repossessed assets during
2009, as we moved through the difficult economic environment and in certain situations elected to
foreclose or repossess collateral. The State of Michigan has a relatively protracted foreclosure
process that generally takes six to twelve months before a deed is obtained. While we expect
further transfers from loans and leases to foreclosed and repossessed assets in 2010 reflecting our
collection efforts on impaired lending relationships, we are hopeful that the increased sales
activity we witnessed in the latter part of 2009 will continue into 2010 and limit the overall
increase in this nonperforming asset category.
F-16
Source of Funds
Our major sources of funds are from deposits, repurchase agreements and FHLB advances. Total
deposits declined from $1.60 billion at December 31, 2008, to $1.40 billion on December 31, 2009, a
decrease of $197.9 million. Local deposits increased from $470.4 million at year-end 2008, to
$676.8 million at year-end 2009, an increase of $206.4 million. Meanwhile, out-of-area deposits
decreased from $1.13 billion at December 31, 2008, to $724.9 million on December 31, 2009, a
decline of $404.3 million. FHLB advances decreased from $270.0 million at year-end 2008 to $205.0
million at year-end 2009, a decline of $65.0 million. At December 31, 2009, local deposits and
repurchase agreements equaled 45.4% of total funding liabilities, compared to 28.0% on December 31,
2008.
The increase in local deposits reflects various programs and initiatives we implemented during
2009. During the first quarter, we ran a local one-year certificate of deposit campaign to attract
new deposits and cross-sell other bank products. We opened over 1,500 certificates of deposit
totaling over $60.0 million, with many new customers coming to the bank and a majority of the funds
coming from other financial institutions. Our sales force has been working diligently to
cross-sell these new customers, and we are currently in the midst of a direct mailing program
designed specifically to appeal to them, which will assist us in retaining the deposits at maturity
and provide us with additional cross-sell opportunities. We have also created several initiatives
within our commercial lending function, such as: inclusion of local deposit growth goals as part of
our commercial lenders’ job performance standards; an emphasis to all sales employees on garnering
personal deposits of the business owners, officers and employees; mandating minimum corporate
deposit balances on existing commercial loan relationships at time of renewal as well as on new
commercial loan customers as part of the loan commitment; and the requirement of property tax
escrow accounts on certain commercial loan relationships. Additionally, we have had strong success
with our executive banking product, which provides for a relatively high-rate interest-bearing
checking account and an increase in certificate of deposit rate offerings if the customer maintains
their primary checking account with us. We also remain committed to providing our customers with
the latest in technological advances that provide improved information, convenience and timeliness,
and to that end launched several new offerings during 2009 and have additional new products
scheduled to be offered starting in 2010.
Noninterest-bearing checking deposit accounts increased $10.4 million during 2009, and on an
average basis increased $4.2 million. Interest-bearing checking accounts, in large part reflecting
the strong success of our executive banking product, increased $36.1 million. Savings deposits
declined $11.3 million, although most of the decrease reflects transfers to other deposit products,
namely the higher earning executive banking product as well as certificate of deposit products.
Money market deposit accounts increased $7.1 million during 2009, primarily reflecting an increased
deposit relationship with one municipal depositor. Certificates of deposit purchased by customers
located within our market areas increased $164.1 million, lead by our first quarter one-year
certificate of deposit campaign and an increase of about $28.0 million from municipal units.
Certificates of deposit obtained from customers located outside of our market areas declined by
$404.3 million during 2009, and as of December 31, 2009, totaled $724.9 million. Out-of-area
deposits consist primarily of certificates of deposit placed by deposit brokers for a fee, but also
include certificates of deposit obtained from the deposit owners directly. The owners of the
out-of-area deposits include individuals, businesses and governmental units located throughout the
United States. The decline in out-of-area deposits during 2009 primarily reflects the influx of
cash resulting from the reduction in total loans and leases and from the increase in local
deposits.
Repurchase agreements increased $5.3 million during 2009, and as of December 31, 2009 totaled $99.8
million. As part of our sweep account program, collected funds from certain business
noninterest-bearing checking accounts are invested in overnight interest-bearing repurchase
agreements. Such repurchase agreements are not deposit accounts and are not afforded federal
deposit insurance.
FHLB advances declined $65.0 million during 2009, and as of December 31, 2009 totaled $205.0
million. FHLB 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 at December 31, 2009 totaled about $278.0 million, with availability
approximating $64.0 million.
F-17
Shareholders’ equity declined $34.3 million during 2009. The decrease was primarily attributable
to the net loss attributable to common shares of $52.9 million, of which $23.2 million was related
to the creation of a valuation allowance on our net deferred tax assets. Positively impacting
shareholders’ equity during 2009 was the sale of preferred stock and a warrant for common stock to
the United States Treasury Department for $21.0 million under the Capital Purchase Program. Cash
dividends on our common stock and preferred stock reduced shareholders’ equity by $1.3 million
during 2009.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 and 2008
FOR THE YEARS ENDED DECEMBER 31, 2009 and 2008
Summary
We recorded a net loss attributable to common shares of $52.9 million, or $6.23 per basic and
diluted share, for 2009, compared to a net loss of $5.0 million, or $0.59 per basic and diluted
share, for 2008. The net loss attributable to common shares for 2009 includes a one-time non-cash
charge of $23.2 million to federal income tax expense to establish a valuation allowance against
our net deferred tax assets. In addition, 2009 operating results also include $1.3 million in
expenses associated with the consolidation of the mid- and eastern-Michigan regions of our banking
activities and a $0.9 million charge for the bank industry-wide FDIC special assessment.
The decline in earnings performance during 2009 from that of 2008 is primarily the result of a
substantially higher provision for loan and lease losses, which more than offset increased net
interest income. The elevated provision for loan and lease losses reflects continuing
deterioration in the quality of the loan portfolio, most notably in the CRE and C&I segments. The
increase in net interest income is the result of an improved net interest margin, which has been
positively impacted by a substantial reduction in our cost of funds.
The following table shows some of the key performance and equity ratios for the years ended
December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
Return on average assets |
(2.51 | )% | (0.23 | )% | ||||
Return on average shareholders’ equity |
(29.91 | ) | (2.87 | ) | ||||
Average shareholders’ equity to average assets |
8.40 | 8.01 | ||||||
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 $106.2 million and $53.6 million during 2009,
respectively, providing for net interest income of $52.6 million. During 2008, interest income and
interest expense equaled $122.3 million and $74.9 million, respectively, providing for net interest
income of $47.4 million. In comparing 2009 with 2008, interest income decreased 13.2%, interest
expense was down 28.4%, and net interest income increased 10.9%. The level of net interest income
is primarily a function of asset size, as the weighted average interest rate received on earning
assets is greater than the weighted average interest cost of funding sources; however, factors such
as types and levels of assets and liabilities, 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 $5.2 million increase in net interest income in 2009 compared to 2008 resulted from an improved
net interest margin, which more than offset a decreased level of average earning assets. Although
our yield on earning assets declined in 2009 compared to 2008 primarily due to an increased level
of nonperforming assets and a declining interest rate environment, our cost of funds declined at a
far greater rate, resulting in the improved net interest margin. The cost of funds primarily
decreased as a result of higher-costing matured wholesale funds, consisting of certificates of
deposit and FHLB advances, being replaced by lower-costing funds.
F-18
Given the multitude of factors that impact the net interest margin, it is difficult to predict
future net interest margins. However, in light of the current interest rate environment, our net
interest margin during 2010 should benefit from a continued reduction in our cost of funds and the
loan pricing initiatives instituted in 2008 and 2009. With respect to our cost of funds, we have
about $345 million in wholesale funds at an average rate of 2.20% scheduled to mature during the
first six months of 2010 and about $215 million at an average rate of 2.25% scheduled to mature
during the last six months of 2010. Current rates on wholesale instruments generally range from
0.40% to 3.00%, depending on the type of product and term. During the fourth quarter of 2009, our
average rate on new wholesale funds was about 1.15%; the planned implementation of a
matched-funding program involving new and existing fixed-rate loans will likely place upward
pressure on the average rate of wholesale funds acquired in future periods as the duration of the
wholesale funding portfolio is increased . While a continued reduction in our cost of funds will
positively impact our net interest margin, the impact of asset quality on the net interest margin
is difficult to predict.
The following table depicts the average balance, interest earned and paid, and weighted average
rate of our assets, liabilities and shareholders’ equity during 2009, 2008 and 2007. The
subsequent table also depicts the dollar amount of change in interest income and interest expense
of interest-earning assets and interest-bearing liabilities, segregated between change due to
volume and change due to rate. For tax-exempt investment securities, interest income and yield
have been computed on a tax equivalent basis using a marginal tax rate of 35%. As a result,
securities interest income was increased by $1.3 million in 2009 and $1.2 million in each of 2008
and 2007.
F-19
| Years ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||
Taxable securities |
$ | 154,273 | $ | 7,498 | 4.86 | % | $ | 147,668 | $ | 7,888 | 5.34 | % | $ | 141,289 | $ | 7,243 | 5.13 | % | ||||||||||||||||||
Tax-exempt
securities |
83,816 | 4,623 | 5.52 | 69,857 | 4,180 | 5.98 | 64,122 | 4,013 | 6.26 | |||||||||||||||||||||||||||
Total securities |
238,089 | 12,121 | 5.09 | 217,525 | 12,068 | 5.55 | 205,411 | 11,256 | 5.48 | |||||||||||||||||||||||||||
Loans and leases |
1,704,335 | 93,903 | 5.51 | 1,829,686 | 110,013 | 6.01 | 1,765,465 | 133,685 | 7.57 | |||||||||||||||||||||||||||
Short-term
investments |
6,730 | 21 | 0.31 | 392 | 7 | 1.79 | 510 | 20 | 3.92 | |||||||||||||||||||||||||||
Federal funds sold |
53,825 | 136 | 0.25 | 11,353 | 204 | 1.80 | 8,239 | 420 | 5.10 | |||||||||||||||||||||||||||
Total earning
assets |
2,002,979 | 106,181 | 5.30 | 2,058,956 | 122,292 | 5.94 | 1,979,625 | 145,381 | 7.34 | |||||||||||||||||||||||||||
Allowance for loan
and lease losses |
(34,155 | ) | (30,184 | ) | (23,157 | ) | ||||||||||||||||||||||||||||||
Cash and due
from banks |
16,341 | 21,004 | 33,099 | |||||||||||||||||||||||||||||||||
Other non-earning
assets |
120,508 | 107,546 | 94,279 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 2,105,673 | $ | 2,157,322 | $ | 2,083,846 | ||||||||||||||||||||||||||||||
Interest-bearing
demand deposits |
$ | 60,155 | $ | 867 | 1.44 | % | $ | 42,734 | $ | 492 | 1.15 | % | $ | 37,143 | $ | 1,047 | 2.82 | % | ||||||||||||||||||
Savings deposits |
48,182 | 521 | 1.08 | 65,091 | 922 | 1.42 | 86,009 | 2,977 | 3.46 | |||||||||||||||||||||||||||
Money market
accounts |
25,759 | 361 | 1.40 | 13,948 | 192 | 1.38 | 11,706 | 359 | 3.07 | |||||||||||||||||||||||||||
Time deposits |
1,279,188 | 39,520 | 3.09 | 1,332,071 | 58,206 | 4.37 | 1,385,260 | 71,838 | 5.19 | |||||||||||||||||||||||||||
Total interest-
bearing deposits |
1,413,284 | 41,269 | 2.92 | 1,453,844 | 59,812 | 4.11 | 1,520,118 | 76,221 | 5.01 | |||||||||||||||||||||||||||
Short-term
borrowings |
98,513 | 1,845 | 1.87 | 97,313 | 2,021 | 2.08 | 93,307 | 3,493 | 3.74 | |||||||||||||||||||||||||||
Federal Home Loan
Bank advances |
239,699 | 8,808 | 3.67 | 258,939 | 10,554 | 4.08 | 118,904 | 6,100 | 5.13 | |||||||||||||||||||||||||||
Other borrowings |
50,278 | 1,654 | 3.29 | 46,579 | 2,476 | 5.32 | 36,610 | 2,810 | 7.68 | |||||||||||||||||||||||||||
Total interest-
bearing liabilities |
1,801,774 | 53,576 | 2.97 | 1,856,675 | 74,863 | 4.03 | 1,768,939 | 88,624 | 5.01 | |||||||||||||||||||||||||||
Demand deposits |
112,821 | 108,584 | 115,172 | |||||||||||||||||||||||||||||||||
Other liabilities |
14,258 | 19,286 | 23,838 | |||||||||||||||||||||||||||||||||
Total liabilities |
1,928,853 | 1,984,545 | 1,907,949 | |||||||||||||||||||||||||||||||||
Average equity |
176,820 | 172,777 | 175,897 | |||||||||||||||||||||||||||||||||
Total liabilities
and equity |
$ | 2,105,673 | $ | 2,157,322 | $ | 2,083,846 | ||||||||||||||||||||||||||||||
Net interest
income |
$ | 52,605 | $ | 47,429 | $ | 56,757 | ||||||||||||||||||||||||||||||
Rate spread |
2.33 | % | 1.91 | % | 2.33 | % | ||||||||||||||||||||||||||||||
Net interest
margin |
2.63 | % | 2.30 | % | 2.87 | % | ||||||||||||||||||||||||||||||
F-20
| Years ended December 31, | ||||||||||||||||||||||||
| 2009 over 2008 | 2008 over 2007 | |||||||||||||||||||||||
| Total | Volume | Rate | Total | Volume | Rate | |||||||||||||||||||
Increase (decrease) in interest income
Taxable securities |
$ | (390,000 | ) | $ | 342,000 | $ | (732,000 | ) | $ | 645,000 | $ | 334,000 | $ | 311,000 | ||||||||||
Tax exempt securities |
443,000 | 788,000 | (345,000 | ) | 167,000 | 348,000 | (181,000 | ) | ||||||||||||||||
Loans |
(16,110,000 | ) | (7,253,000 | ) | (8,857,000 | ) | (23,672,000 | ) | 4,713,000 | (28,385,000 | ) | |||||||||||||
Short-term investments |
14,000 | 24,000 | (10,000 | ) | (13,000 | ) | (4,000 | ) | (9,000 | ) | ||||||||||||||
Federal funds sold |
(68,000 | ) | 230,000 | (298,000 | ) | (216,000 | ) | 121,000 | (337,000 | ) | ||||||||||||||
Net change in tax-equivalent
interest income |
(16,111,000 | ) | (5,869,000 | ) | (10,242,000 | ) | (23,089,000 | ) | 5,512,000 | (28,601,000 | ) | |||||||||||||
Increase (decrease) in interest expense
Interest-bearing demand deposits |
375,000 | 232,000 | 143,000 | (555,000 | ) | 139,000 | (694,000 | ) | ||||||||||||||||
Savings deposits |
(401,000 | ) | (210,000 | ) | (191,000 | ) | (2,055,000 | ) | (599,000 | ) | (1,456,000 | ) | ||||||||||||
Money market accounts |
169,000 | 165,000 | 4,000 | (167,000 | ) | 59,000 | (226,000 | ) | ||||||||||||||||
Time deposits |
(18,686,000 | ) | (2,230,000 | ) | (16,456,000 | ) | (13,632,000 | ) | (2,673,000 | ) | (10,959,000 | ) | ||||||||||||
Short-term borrowings |
(176,000 | ) | 25,000 | (201,000 | ) | (1,472,000 | ) | 144,000 | (1,616,000 | ) | ||||||||||||||
Federal Home Loan Bank
advances |
(1,746,000 | ) | (751,000 | ) | (995,000 | ) | 4,454,000 | 5,927,000 | (1,473,000 | ) | ||||||||||||||
Other borrowings |
(822,000 | ) | 184,000 | (1,006,000 | ) | (334,000 | ) | 655,000 | (989,000 | ) | ||||||||||||||
Net change in interest
expense |
(21,287,000 | ) | (2,585,000 | ) | (18,702,000 | ) | (13,761,000 | ) | 3,651,000 | (17,412,000 | ) | |||||||||||||
Net change in tax-equivalent
net interest income |
$ | 5,176,000 | $ | (3,284,000 | ) | $ | 8,460,000 | $ | (9,328,000 | ) | $ | 1,861,000 | $ | (11,189,000 | ) | |||||||||
Interest income is primarily generated from the loan and lease portfolio, and to a lesser
degree, from securities, federal funds sold, and short-term investments. Interest income decreased
$16.1 million during 2009 from that earned in 2008, totaling $106.2 million in 2009 compared to
$122.3 million in the previous year. The reduction in interest income is attributable to a
decreased level of average earning assets and a declining yield on earning assets, primarily
resulting from a decreased interest rate environment, an increased level of nonperforming assets,
and an increased percentage of low-yielding federal funds sold to total earning assets.
During 2009, earning assets averaged $2.00 billion, or $56.0 million lower than average earning
assets of $2.06 billion during 2008. A reduction in average total loans and leases totaling $125
million resulted in the lower level of average earning assets during 2009. Interest income
generated from the loan and lease portfolio decreased $16.1 million in 2009 compared to the level
earned in 2008; a decline in loan yield from 6.01% in 2008 to 5.51% in 2009 resulted in an $8.9
million decrease in interest income while a reduction in the loan and lease portfolio during 2009
resulted in a $7.2 million decrease in interest income. The decrease in the loan and lease
portfolio yield is primarily due to a lower interest rate environment and an increase in
nonperforming loans.
Interest income generated from the securities portfolio increased slightly in 2009 compared to the
level earned in 2008 as a result of growth in the portfolio. Average securities equaled $238.1
million during 2009 compared to $217.5 million during 2008, an increase of $20.6 million. The
growth equated to an increase in interest income of $1.13 million, while the declined yield, which
equaled 5.09% in 2009 compared to 5.55% in 2008, resulted in a $1.08 million decrease in interest
income. Interest income earned on federal funds sold decreased by $0.1 million due to a decline in
the average rate, which more than offset an increase in the average balance.
F-21
During 2009 and 2008, earning assets had an average yield (tax equivalent-adjusted basis) of 5.30%
and 5.94%, respectively. With approximately 60% of our total loans and leases tied to Prime or
LIBOR rates, our earning asset yield has been substantially impacted by the steep reduction in
market interest rates since late third quarter of 2007. Between mid-September 2007 and
early-October 2008, the Federal Market Committee (“FOMC”) lowered the
targeted federal funds rate by a total of 375 basis points. The resulting similar decline in the
Prime and LIBOR rates, combined with an increased level of nonperforming assets, has significantly
lowered our yield on earning assets and level of interest income. Although the FOMC lowered the
targeted federal funds rate by another 50 basis points in late October 2008 and an additional 75
basis points in mid-December 2008, we kept the Mercantile Bank Prime Rate unchanged at 4.50% in an
effort to shield interest income from further erosion. Virtually all of our prime-based commercial
floating rate loans are tied to the Mercantile Bank Prime Rate. A higher level of nonperforming
assets has also negatively impacted the yield on earning assets in 2009 compared to 2008,
increasing from 2.60% of total assets at December 31, 2008, to 5.86% at December 31, 2009. A
significant increase in average federal funds sold during 2009 also had an adverse effect on
earning asset yield. During 2009, the yield on average earning assets was relatively stable, as
the loan pricing initiatives instituted within the commercial loan function in 2008 and 2009
mitigated the negative impact of an increase in nonaccrual loans.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree,
from repurchase agreements, FHLB advances, and subordinated debentures. Interest expense decreased
$21.3 million during 2009 from that expensed in 2008, totaling $53.6 million in 2009 compared to
$74.9 million in the previous year. The decline in interest expense is attributable to a decreased
cost of funds and a decreased level of average interest-bearing liabilities. The decreased cost of
funds in 2009 compared to 2008 mainly resulted from fixed rate certificates of deposit and
borrowings being renewed or replaced at lower interest rates, reflecting the decreasing interest
rate environment during the period of September 2007 through December 2009.
Interest-bearing liabilities averaged $1.80 billion during 2009, or $54.9 million lower than
average interest-bearing liabilities of $1.86 billion during 2008. This reduction resulted in
decreased interest expense of $2.6 million. A decline in interest expense of $18.7 million was
recorded during 2009 due to a decreased cost of funds, which resulted primarily from lower average
rates paid on fixed rate certificates of deposit and borrowings. The cost of average
interest-bearing liabilities decreased from 4.03% in 2008 to 2.97% in 2009.
Average certificates of deposit declined $52.9 million during 2009, which equated to a decrease in
interest expense of $2.2 million. An additional $16.5 million reduction in interest expense
resulted from a decrease in the average rate paid as higher-rate certificates of deposit matured
and were either renewed or replaced with lower-costing certificates of deposit throughout 2009.
Growth in other average interest-bearing deposit accounts, totaling $12.3 million, equated to an
increase in interest expense of $0.2 million, while a decrease in the average rate paid on these
deposit accounts resulted in a $0.1 million reduction in interest expense.
Average short-term borrowings, primarily comprised of repurchase agreements and federal funds
purchased, increased $1.2 million during 2009, resulting in increased interest expense of less than
$0.1 million, while a decrease in the average rate paid during 2009 resulted in a reduction in
interest expense of $0.2 million. Average FHLB advances decreased $19.2 million, equating to a
$0.7 million reduction in interest expense, while a decreased average rate paid on the advances
resulted in a $1.0 million reduction in interest expense. Growth in average other borrowings,
which is comprised of subordinated debentures, structured repurchase agreements, and deferred
director and officer compensation programs, equated to an increase in interest expense of $0.2
million during 2009, with a decreased average rate reducing interest expense by $1.0 million.
F-22
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $59.0 million in 2009, compared to the $21.2
million expensed in 2008. The increase primarily reflects a higher volume of nonperforming loans
and leases, increased net loan and lease charge-offs, other downgrades within our commercial loan
and lease portfolio, and increased reserve allocation factors, necessitating a higher allowance
balance. Nonperforming loans and leases totaled $85.1 million, or 5.52% of total loans and leases,
as of December 31, 2009, compared to $49.3 million, or 2.66% of total loans and leases, as
of December 31, 2008. Net loan and lease charge-offs during 2009 totaled $38.2 million, or 2.24%
of average total loans and leases. Net loan and lease charge-offs during 2008 totaled $19.9
million, or 1.09% of average total loans and leases. The allowance as a percentage of total loans
and leases outstanding as of December 31, 2009 was 3.11%, compared to 1.46% at year-end 2008.
Although we believe the allowance is adequate to cover 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.
Noninterest Income
Noninterest income totaled $7.6 million in 2009, an increase of $0.3 million, or 3.8%, from the
$7.3 million earned in 2008. Income from mortgage banking activities increased $0.5 million in
2009, reflecting a higher volume of refinancing activity due to the lower interest rate
environment, while rental income on foreclosed properties, included in other income, increased $0.4
million.
Noninterest Expense
Noninterest expense during 2009 totaled $46.5 million, an increase of $4.4 million over the $42.1
million expensed in 2008. Overhead costs during 2009 include a $1.3 million charge for the branch
consolidation and a $0.9 million charge for the bank industry-wide FDIC special assessment. The
one-time charges related to the branch consolidation were fully expensed during the second and
third quarters of 2009; beginning in the fourth quarter of 2009, overhead cost savings of $200,000
per month were achieved as a result of the branch consolidation. Excluding these one-time charges,
noninterest expense in 2009 totaled $44.3 million, or $2.1 million higher than in 2008.
Controllable operating expenses, including salaries and benefits (excluding a $0.5 million one-time
charge for severance payments included in the branch consolidation costs), occupancy, furniture and
equipment costs, and various other expenses declined $3.9 million in 2009 compared to 2008. Salary
and benefit costs were down $2.2 million, exclusive of the $0.5 million one-time charge taken in
the second quarter, in 2009 compared to 2008, primarily resulting from a reduction in full-time
equivalent employees from 303 at year-end 2008 to 257 at year-end 2009. Costs associated with the
administration and resolution of problem assets, including legal costs, property tax payments,
appraisal fees and write-downs on foreclosed properties, totaled $7.3 million in 2009 compared to
$3.3 million in 2008. Excluding the $0.9 million one-time special assessment, FDIC deposit
insurance assessments totaled $3.9 million in 2009, up $2.0 million from the previous year. While
it is difficult to predict future FDIC deposit insurance assessments given the enormous stress on
the Deposit Insurance Fund from the significant losses incurred from bank failures, it is very
likely that the expense will remain at elevated levels until economic conditions improve and the
rate of bank failures declines substantially.
Federal Income Tax Expense
During 2009, we recorded a loss before federal income tax of $46.6 million and federal income tax
expense of $5.5 million, compared to a loss before federal income tax of $9.8 million and a federal
income tax benefit of $4.9 million during 2008. In spite of the loss before federal income tax
recorded during 2009, a federal income tax expense was recognized due to the establishment of a
valuation allowance against our net deferred tax assets.
Accounting guidance requires that companies assess whether a valuation allowance should be
established against their deferred tax assets based on the consideration of all available evidence
using a “more likely than not” standard. We reviewed our deferred tax assets and determined that a
valuation allowance was necessary at year-end 2009 in light of our recent operating losses. As a
result of establishing the valuation allowance against the entire balance of net deferred tax
assets at year-end 2009, a one-time non-cash charge of $23.2 million to federal income tax expense
was recognized. The utilization of net deferred tax assets for future tax deductions will be
analyzed quarterly, and the valuation allowance will be adjusted in accordance with accounting
rules.
F-23
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Summary
A net loss of $5.0 million, or $0.59 per basic and diluted share, was recorded in 2008, compared to
net income of $9.0 million, or $1.06 per basic share and $1.05 per diluted share, generated in
2007. The decline in earnings performance during 2008 from that of 2007 is primarily the result of
lower net interest income and a higher provision for loan and lease losses. Net income during 2007
includes a one-time $1.2 million ($0.8 million after-tax) expense
associated with the retirement package for former Chairman and Chief Executive Officer, Gerald R.
Johnson Jr., which was recorded in conjunction with Mr. Johnson’s retirement effective June 30,
2007. Excluding this one-time expense, net income for 2007 was $9.8 million, or $1.16 per basic
share and $1.15 per diluted share.
The following table shows some of the key performance and equity ratios for the years ended
December 31, 2008 and 2007:
| 2008 | 2007 | |||||||
Return on average assets |
(0.23 | )% | 0.43 | % | ||||
Return on average shareholders’ equity |
(2.87 | ) | 5.10 | |||||
Dividend payout ratio |
NA | 52.16 | ||||||
Average shareholders’ equity to average assets |
8.01 | 8.44 | ||||||
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 $122.3 million and $74.9 million during 2008,
respectively, providing for net interest income of $47.4 million. During 2007, interest income and
interest expense were $145.4 million and $88.6 million, respectively, providing for net interest
income of $56.8 million. In comparing 2008 with 2007, interest income decreased 15.9%, interest
expense was down 15.5%, and net interest income decreased 16.4%. 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, 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 net interest margin declined from 2.87% in 2007 to 2.30% in 2008, a decrease of 19.9%. With
approximately 60% of our total loans and leases tied to Prime or LIBOR rates, our earning asset
yield in 2008 has been substantially impacted by the steep reduction in market interest rates that
began late in the third quarter of 2007. Between mid-September 2007 and late April 2008, the
Federal Open Market Committee (“FOMC’) lowered the targeted federal funds rate by a total of 325
basis points. The resulting similar decline in the Prime and LIBOR rates, combined with an
increased level of nonperforming assets, a very competitive loan and deposit environment, and a
flat to inverted yield curve over an extended period of time, have significantly negatively
impacted our yield on earning assets and level of interest income. Our cost of funds also
decreased in 2008 compared to 2007 as we paid lower interest rates on our deposits and borrowings;
however, due to a significant portion of our interest-bearing liabilities being comprised of fixed
rate certificates of deposit and borrowings, our cost of funds declined at a much slower rate than
our earning asset yield, resulting in the compressed net interest margin.
The decision by the FOMC to lower the targeted federal funds rate by 50 basis points in early
October 2008 placed additional pressure on our yield on earning assets and level of interest income
in light of our Prime-based loans repricing downward. Although the FOMC lowered the targeted
federal funds rate by another 50 basis points in late October 2008 and an additional 75 basis
points in mid-December 2008, we decided to keep the Mercantile Bank Prime Rate unchanged at 4.50%.
Virtually all of our prime-based commercial floating rate loans are tied to the Mercantile Bank
Prime Rate. Despite the 100 basis point reduction in the targeted federal funds rate in October
2008, deposit rates remained substantially unchanged. The steady deposit rates, combined with an
already very low Prime Rate, placed significant pressure on our net interest income and net
interest margin, and we believed it was prudent to not lower the Mercantile Bank Prime Rate in
association with the FOMC’s 50 basis point reduction in the targeted federal funds rate in late
October and the 75 basis point reduction in mid-December of 2008.
F-24
Our net interest margin, which equaled 2.15% in the second quarter of 2008, has improved over the
last six months of 2008, equaling 2.30% and 2.40% in the third and fourth quarters of 2008,
respectively. Our implementation of several loan pricing initiatives, including the decision to
not lower the Mercantile Bank Prime Rate in association with the two most recent FOMC rate
reductions, stabilized our yield on loans and leases in the latter part of 2008. The stabilization
of our earning asset yield, which is most influenced by our yield on loans and leases, combined
with a reduction in our cost of funds resulting from maturing fixed rate certificates of deposit
and borrowings repricing downward in light of decreased market interest rates, resulted in the
improved net interest margin.
During the first six months of 2008, we entered into interest rate swaps to convert the variable
rate cash flows on certain of our Prime-based commercial loans to a fixed rate of interest. On
October 30, 2008, we terminated all of
our interest rate swaps. The termination coincided with our decision to not lower the Mercantile
Bank Prime Rate in association with the FOMC’s reduction of the targeted federal funds rate by 50
basis points announced on October 29, 2008. During 2008, the net cash flow received from the
interest rate swap arrangements contributed $1.0 million to interest income.
Interest income is primarily generated from the loan and lease portfolio, and to a lesser degree,
from securities, federal funds sold, and short term investments. Interest income decreased $23.1
million during 2008 from that earned in 2007, totaling $122.3 million in 2008 compared to $145.4
million in the previous year. The decrease is primarily due to the lower interest rate environment
and increased level of nonperforming assets during 2008 when compared to 2007, which more than
offset the growth in average earning assets year over year. The yield on average earning assets
declined from 7.34% in 2007 to 5.94% in 2008.
During 2008, average earning assets increased $79.4 million, from $1,979.6 million in 2007 to
$2,059.0 million in 2008. Growth in average total loans and leases, totaling $64.2 million,
comprised 80.9% of the increase in average earning assets during 2008. Interest income generated
from the loan and lease portfolio decreased $23.7 million in 2008 compared to the level earned in
2007; a decline in loan yield from 7.57% in 2007 to 6.01% in 2008 resulted in a $28.4 million
reduction in interest income while growth in the loan and lease portfolio during 2008 resulted in a
$4.7 million increase in interest income. The decrease in the loan and lease portfolio yield is
primarily due to a lower interest rate environment during 2008 than in 2007 and an increase in
nonperforming loans.
Interest income generated from the securities portfolio increased in 2008 compared to the level
earned in 2007 as a result of growth in the portfolio and an increased yield. Average securities
increased by $12.1 million in 2008, increasing from $205.4 million in 2007 to $217.5 million in
2008. The growth equated to an increase in interest income of $0.7 million. The improved yield,
which equaled 5.55% in 2008 compared to 5.48% in 2007, resulted in a $0.1 million increase in
interest income. Interest income earned on federal funds sold decreased by $0.2 million due to a
decline in the average rate, which more than offset an increase in the average balance.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree,
from repurchase agreements, FHLB advances, and subordinated debentures. Interest expense decreased
$13.7 million during 2008 from that expensed in 2007, totaling $74.9 million in 2008 compared to
$88.6 million in the previous year. The decline in interest expense is primarily attributable to a
decreased cost of funds, which mainly resulted from maturing fixed rate certificates of deposit and
borrowings being renewed or replaced at lower interest rates, reflecting the decreased interest
rate environment in 2008. Interest-bearing liabilities averaged $1,856.7 million during 2008, or
$87.8 million higher than the average interest-bearing liabilities of $1,768.9 million during 2007.
This growth resulted in increased interest expense of $3.7 million. A decline in interest expense
of $17.4 million was recorded during 2008 due to a decreased cost of funds primarily attributable
to lower average rates paid on fixed rate certificates of deposit and borrowings. The cost of
average interest-bearing liabilities decreased from the 5.01% recorded in 2007 to 4.03% in 2008.
Average certificates of deposit declined $53.2 million during 2008, which equated to a decrease in
interest expense of $2.7 million. An additional $10.9 million reduction in interest expense
resulted from a decrease in the average rate paid as higher-rate certificates of deposit matured
and were either renewed or replaced with lower-costing certificates of deposit throughout 2008. A
decline in other average interest-bearing deposit accounts, totaling $13.1 million, equated to a
decrease in interest expense of $0.4 million, with an additional interest expense reduction of $2.4
million recorded due to a decrease in the average rate paid during 2008.
F-25
Average short-term borrowings, primarily comprised of repurchase agreements and federal funds
purchased, increased $4.0 million during 2008, resulting in increased interest expense of $0.1
million, while a decrease in the average rate paid during 2008 resulted in a reduction in interest
expense of $1.6 million. Average FHLB advances increased $140.0 million, equating to an increase
in interest expense of $5.9 million, while a decreased average rate paid on the advances resulted
in a $1.5 million reduction in interest expense. Growth in average long-term borrowings, which is
comprised of subordinated debentures, structured repurchase agreements, and deferred director and
officer compensation programs, equated to an increase in interest expense of $0.7 million during
2008, with a decreased average rate reducing interest expense by $1.0 million.
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $21.2 million in 2008, compared to the $11.1
million expensed in 2007. The increase primarily reflected a higher volume of nonperforming loans
and leases, increased net loan
charge-offs, and other downgrades within our commercial loan and lease portfolio, necessitating a
higher allowance balance. Nonperforming loans and leases totaled $49.3 million, or 2.66% of total
loans and leases, as of December 31, 2008, compared to $29.8 million, or 1.66% of total loans and
leases, as of December 31, 2007. Net loan and lease charge-offs during 2008 totaled $19.9 million,
or 1.09% of average total loans and leases. Net loan and lease charge-offs during 2007 totaled
$6.7 million, or 0.38% of average total loans and leases. Loan and lease growth during 2008
equaled $57.0 million, compared to loan and lease growth of $54.4 million during 2007. The
allowance as a percentage of total loans outstanding as of December 31, 2008 was 1.46%, compared to
1.43% at year-end 2007.
Noninterest Income
Noninterest income totaled $7.3 million in 2008, an increase of $1.4 million from the $5.9 million
earned in 2007. Service charge income on deposits and repurchase agreements increased $0.4 million
during 2008 when compared to 2007, primarily reflecting a decrease in the earnings credit rate and
improved collection of overdraft service charges. Earnings from the increased cash surrender value
of bank owned life insurance, primarily reflecting additional investments during the year and
improved yields, increased $0.5 million in 2008. Residential mortgage banking fees increased $0.2
million in 2008 due to a higher volume of activity. We recorded increases in virtually all other
fee income-producing activities in 2008 when compared to 2007 primarily due to increased volumes.
Noninterest Expense
Noninterest expense during 2008 totaled $42.1 million, an increase of $3.7 million over the $38.4
million expensed in 2007. Salary expense and benefit costs decreased $0.4 million in 2008 when
compared to 2007. Included in 2007 salary and benefit costs is a one-time $1.2 million expense
associated with the retirement package for former Chairman and Chief Executive Officer, Gerald R.
Johnson, Jr., in conjunction with Mr. Johnson’s retirement effective June 30, 2007. Salary expense
and benefit costs increased $0.8 million in 2008 if this one-time expense is excluded from 2007
salary and benefit costs; the resulting increase primarily reflects annual pay increases and the
hiring of additional staff related to our expansion into Oakland County in late 2007. Occupancy,
furniture and equipment costs increased $0.4 million in 2008. Costs associated with the
administration and resolution of problem assets, including legal costs, property tax payments,
appraisal fees and write-downs on foreclosed properties, totaled $3.3 million in 2008 compared to
$1.1 million in 2007. FDIC deposit insurance assessments totaled $1.9 million in 2008 compared to
$0.7 million in 2007. Other non-interest expenses, in aggregate, increased $0.3 million in 2008
when compared to 2007, reflecting additional expenditures required to administer an increased asset
base.
Federal Income Tax Expense
During 2008, we recorded a loss before federal income tax of $9.8 million and a federal income tax
benefit of $5.0 million, compared to net income before federal income tax of $12.0 million and
federal income tax expense of $3.0 million during 2007. Our effective tax rate for 2008 was
(49.6%), compared to 25.3% for 2007. The difference in the effective tax rate primarily reflects
the significant difference in income before federal income tax expense (benefit), and the
relationship of tax-exempt income to income (loss) before federal income tax expense (benefit).
F-26
CAPITAL RESOURCES
Shareholders’ equity is a noninterest-bearing source of funds that generally provides support for
our asset growth. Shareholders’ equity declined $34.3 million during 2009. The decrease was
primarily due to the net loss attributable to common shares of $52.9 million, of which $23.2
million was related to the creation of a valuation allowance on our net deferred tax asset.
Positively impacting shareholders’ equity during 2009 was the sale of preferred stock and a warrant
to purchase common stock to the United States Treasury Department for $21.0 million under the
Capital Purchase Program. Cash dividends on our common stock and preferred stock reduced
shareholders’ equity by $1.3 million during 2009.
Despite the reduction in shareholders’ equity during 2009, our and our bank’s regulatory risk-based
capital ratios increased, and our bank remains “well capitalized.” As of December 31, 2009, our
bank’s total risk-based capital ratio was 11.1%, compared to 10.8% at December 31, 2008. Our
bank’s total regulatory capital, consisting of our shareholders’ equity plus a portion of the
allowance, declined by $34.9 million during 2009, primarily reflecting a
net loss of $46.8 million and a reduction of $4.3 million in eligible allowance due to a decline in
total risk-weighted assets, which was partially offset by a $19.0 million capital injection from
Mercantile Bank Corporation from the proceeds of the preferred stock and warrant sale. Despite the
reduction in total regulatory capital, our bank’s total risk-based capital ratio increased due to a
decline of $367.9 million in total risk-weighted assets, primarily resulting from a reduction in
commercial loans. As of December 31, 2009, our bank’s total regulatory capital equaled $191.1
million, or $18.6 million in excess of the 10.0% minimum which is among the requirements to be
categorized as “well capitalized.” Our and our bank’s capital ratios as of December 31, 2009 and
2008 are disclosed in Note 18 of the Notes to Consolidated Financial Statements.
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. Our ability to pay cash and
stock dividends is subject to limitations under various laws and regulations, to prudent and sound
banking practices, and to contractual provisions relating to our subordinated debentures and
participation in the Capital Purchase Program. During 2009, we paid a cash dividend on our common
stock each calendar quarter. However, reflecting our financial results and the poor and weakening
economy, we lowered the dollar amount of the cash dividends paid during the year. During the first
quarter of 2009, our cash dividend was $0.04 per share, but that was lowered to $0.01 per share for
the second, third and fourth quarters. The reduction of the cash dividends during 2009 had a
positive impact on our capital ratios. On January 14, 2010, we declared a $0.01 per common share
cash dividend that will be paid on March 10, 2010 to shareholders of record on February 10, 2010.
LIQUIDITY
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or
cash flow from the repayment of loans and investment securities. These funds are used to fund
loans, meet deposit withdrawals, maintain reserve requirements and operate our company. Liquidity
is primarily achieved through the growth of local and out-of-area deposits and liquid assets such
as securities available for sale, matured securities and federal funds sold. 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.
Our liquidity strategy is to fund loan growth with deposits, repurchase agreements and FHLB
advances, and to maintain an adequate level of short- and medium-term investments to meet typical
daily loan and deposit activity. To assist in providing needed funds, we have regularly obtained
monies from wholesale funding sources. Wholesale funds, primarily comprised of certificates of
deposit from customers outside of our market areas and advances from the FHLB, totaled $944.9
million, or 54.8% of combined deposits and borrowed funds as of December 31, 2009, compared to
$1.41 billion, or 71.5% of combined deposits and borrowed funds as of December 31, 2008.
F-27
Although local deposits have historically generally increased as new business, municipal
governmental unit and individual deposit relationships are established and as existing customers
increase the balances in their accounts, and we witnessed significant local deposit growth in 2009,
the relatively high reliance on wholesale funds will likely remain. As part of our interest rate
risk management strategy, a majority of our wholesale funds have a fixed rate and mature within one
year, reflecting the fact that a majority of our loans and leases have a floating interest rate
tied to either the Mercantile Bank Prime Rate or LIBOR rates. While this strategy increases
inherent liquidity risk, we believe the increased liquidity risk is sufficiently mitigated by the
benefits derived from an interest rate risk management standpoint. In addition, we have developed
a comprehensive contingency funding plan which we believe further mitigates the increased liquidity
risk.
Wholesale funds are generally a lower all-in cost source of funds when compared to the interest
rates that would have to be offered in the local markets to generate a commensurate level of funds.
Interest rates paid on new out-of-area deposits and FHLB advances have historically been similar
to interest rates paid on new certificates of deposit issued to local customers. In addition, the
overhead costs associated with wholesale funds are considerably less than the overhead costs that
would be incurred to attract and administer a similar level of local deposits, especially if the
estimated costs of a needed expanded branching network were taken into account. We believe the
relatively low
overhead costs reflecting our limited branch network mitigate our high reliance on wholesale funds
and resulting relatively low net interest margin.
As a member of the Federal Home Loan Bank of Indianapolis, our bank has access to the FHLB advance
borrowing programs. Advances totaled $205.0 million as of December 31, 2009, compared to $270.0
million outstanding as of December 31, 2008. Based on available collateral as of December 31,
2009, we could borrow an additional $64.0 million. Our bank also has the ability to borrow up to
$30.0 million on a daily basis through a correspondent bank using an established unsecured federal
funds purchased line of credit. During 2009, our federal funds purchased position averaged only
$0.1 million, compared to an average federal funds sold position of $53.8 million and another $6.7
million invested in interest-bearing deposits at correspondent banks. Given the volatile market
and stressed economic conditions, we made the decision to operate with a higher than normal balance
of federal funds sold and other short-term investments. It is expected that we will maintain the
higher balance of liquid funds, likely to average 1.0% to 2.0% of average earning assets, until
market conditions return to more normalized levels. As a result, we expect the use of our federal
funds purchased line of credit, in at least the near future, will be rare, if at all.
Our bank has a line of credit through the Discount Window of the Federal Reserve Bank of Chicago.
Using a substantial majority of our tax-exempt municipal securities as collateral, at year-end 2009
we could have borrowed up to about $53.0 million for terms of 1 to 28 days. We did not utilize
this line of credit during 2009, and do not plan to access this line of credit in future periods.
The following table reflects, as of December 31, 2009, significant fixed and determinable
contractual obligations to third parties by payment date, excluding accrued interest:
| One Year | One to | Three to | Over | |||||||||||||||||
| or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||
Deposits without a stated maturity |
$ | 278,110,000 | $ | 0 | $ | 0 | $ | 0 | $ | 278,110,000 | ||||||||||
Certificates of deposit |
850,801,000 | 254,345,000 | 18,371,000 | 0 | 1,123,517,000 | |||||||||||||||
Short-term borrowings |
102,355,000 | 0 | 0 | 0 | 102,355,000 | |||||||||||||||
Federal Home Loan Bank |
||||||||||||||||||||
advances |
65,000,000 | 125,000,000 | 15,000,000 | 0 | 205,000,000 | |||||||||||||||
Subordinated debentures |
0 | 0 | 0 | 32,990,000 | 32,990,000 | |||||||||||||||
Other borrowed money |
5,000,000 | 10,000,000 | 0 | 1,890,000 | 16,890,000 | |||||||||||||||
F-28
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, 2009,
we had a total of $250.7 million in unfunded loan commitments and $36.5 million in unfunded standby
letters of credit. Of the total unfunded loan commitments, $243.0 million were commitments
available as lines of credit to be drawn at any time as customers’ cash needs vary, and $7.7
million were for loan commitments scheduled to close and become funded within the next twelve
months. The level of commitments to make loans has declined significantly when compared to
historical levels, primarily reflecting relatively poor economic conditions. We 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:
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
Commercial unused lines of credit |
$ | 205,018,000 | $ | 323,785,000 | $ | 377,493,000 | ||||||
Unused lines of credit secured by 1-4 family |
||||||||||||
residential properties |
24,916,000 | 30,658,000 | 33,083,000 | |||||||||
Credit card unused lines of credit |
8,565,000 | 9,413,000 | 9,035,000 | |||||||||
Other consumer unused lines of credit |
4,526,000 | 4,881,000 | 6,910,000 | |||||||||
Commitments to make loans |
7,701,000 | 10,959,000 | 66,196,000 | |||||||||
Standby letters of credit |
36,512,000 | 51,439,000 | 81,292,000 | |||||||||
Total |
$ | 287,238,000 | $ | 431,135,000 | $ | 574,009,000 | ||||||
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize
that unexpected events, economic or market conditions, reduction 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.
F-29
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.
The following table depicts our GAP position as of December 31, 2009:
| Within | Three to | One to | After | |||||||||||||||||
| Three | Twelve | Five | Five | |||||||||||||||||
| Months | Months | Years | Years | Total | ||||||||||||||||
Assets: |
||||||||||||||||||||
Commercial loans (1) |
$ | 481,173,000 | $ | 273,551,000 | $ | 610,522,000 | $ | 42,715,000 | $ | 1,407,961,000 | ||||||||||
Leases |
5,000 | 54,000 | 996,000 | 0 | 1,055,000 | |||||||||||||||
Residential real estate loans |
48,504,000 | 14,582,000 | 48,387,000 | 13,332,000 | 124,805,000 | |||||||||||||||
Consumer loans |
2,583,000 | 479,000 | 2,752,000 | 183,000 | 5,997,000 | |||||||||||||||
Securities (2) |
38,657,000 | 6,214,000 | 52,786,000 | 159,727,000 | 257,384,000 | |||||||||||||||
Federal funds sold |
1,368,000 | 0 | 0 | 0 | 1,368,000 | |||||||||||||||
Short-term investments |
1,471,000 | 0 | 0 | 0 | 1,471,000 | |||||||||||||||
Allowance for loan and
lease losses |
0 | 0 | 0 | 0 | (47,878,000 | ) | ||||||||||||||
Other assets |
0 | 0 | 0 | 0 | 154,045,000 | |||||||||||||||
Total assets |
573,761,000 | 294,880,000 | 715,443,000 | 215,957,000 | $ | 1,906,208,000 | ||||||||||||||
Liabilities: |
||||||||||||||||||||
Interest-bearing checking |
86,320,000 | 0 | 0 | 0 | 86,320,000 | |||||||||||||||
Savings deposits |
38,625,000 | 0 | 0 | 0 | 38,625,000 | |||||||||||||||
Money market accounts |
32,008,000 | 0 | 0 | 0 | 32,008,000 | |||||||||||||||
Time deposits under $100,000 |
70,980,000 | 65,278,000 | 31,697,000 | 0 | 167,955,000 | |||||||||||||||
Time deposits $100,000 & over |
314,358,000 | 400,185,000 | 241,019,000 | 0 | 955,562,000 | |||||||||||||||
Short-term borrowings |
102,355,000 | 0 | 0 | 0 | 102,355,000 | |||||||||||||||
Federal Home Loan Bank advances |
15,000,000 | 50,000,000 | 140,000,000 | 0 | 205,000,000 | |||||||||||||||
Other borrowed money |
34,880,000 | 5,000,000 | 10,000,000 | 0 | 49,880,000 | |||||||||||||||
Noninterest-bearing checking |
0 | 0 | 0 | 0 | 121,157,000 | |||||||||||||||
Other liabilities |
0 | 0 | 0 | 0 | 7,242,000 | |||||||||||||||
Total liabilities |
694,526,000 | 520,463,000 | 422,716,000 | 0 | 1,766,104,000 | |||||||||||||||
Shareholders’ equity |
0 | 0 | 0 | 0 | 140,104,000 | |||||||||||||||
Total liabilities & shareholders’
equity |
694,526,000 | 520,463,000 | 422,716,000 | 0 | $ | 1,906,208,000 | ||||||||||||||
Net asset (liability) GAP |
$ | (120,765,000 | ) | $ | (225,583,000 | ) | $ | 292,727,000 | $ | 215,957,000 | ||||||||||
Cumulative GAP |
$ | (120,765,000 | ) | $ | (346,348,000 | ) | $ | (53,621,000 | ) | $ | 162,336,000 | |||||||||
Percent of cumulative GAP to
total assets |
(6.3 | %) | (18.2 | %) | (2.8 | %) | 8.5 | % | ||||||||||||
| (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, 2009. |
F-30
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.
We conducted multiple simulations as of December 31, 2009, in which it was assumed that changes in
market interest rates occurred ranging from up 300 basis points to down 300 basis points in equal
quarterly instalments over the next twelve months. The following table reflects the suggested
impact on net interest income over the next twelve months in comparison to estimated net interest
income based on our balance sheet structure, including the balances and interest rates associated
with our specific loans, securities, deposits and borrowed funds, as of December 31, 2009. The
resulting estimates are well within our policy parameters established to manage and monitor
interest rate risk.
| Dollar Change | Percent Change | |||||
| In Net | In Net | |||||
| Interest Rate Scenario | Interest Income | Interest Income | ||||
Interest rates down 300 basis points |
$ | 265,000 | 0.5% | |||
Interest rates down 200 basis points |
925,000 | 1.8 | ||||
Interest rates down 100 basis points |
1,570,000 | 3.1 | ||||
No change in interest rates |
2,250,000 | 4.4 | ||||
Interest rates up 100 basis points |
570,000 | 1.1 | ||||
Interest rates up 200 basis points |
805,000 | 1.6 | ||||
Interest rates up 300 basis points |
2,610,000 | 5.1 | ||||
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 brokered certificates of deposit, which comprise a substantial portion of
our balance sheet. As of December 31, 2009, the Mercantile Bank Prime Rate is 4.50% as compared to
the Wall Street Journal Prime Rate of 3.25%. Historically, the two indices have been equal;
however, we elected not to reduce the Mercantile Bank Prime Rate in late October and mid-December
of 2008 when the Wall Street Journal Prime Rate declined by 50 and 75 basis points, respectively.
In conducting our simulations at year-end 2009, we have made the assumption that the Mercantile
Bank Prime Rate will remain unchanged until the Wall Street Journal Prime Rate exceeds the
Mercantile Bank Prime Rate, at which time the two indices will remain equal in the increasing
interest rate scenarios. Also, brokered certificate of deposit rates have substantially decreased
since December of 2008, with part of the decline attributable to a significant imbalance whereby
the supply of available funds far outweighs the demand from banks looking to raise funds. As a
result, we have substantially limited further reductions in brokered certificate of deposit rates
in the declining interest rate scenarios.
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-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation as of
December 31, 2009 and 2008, and the related consolidated statements of income, changes in
shareholders’ equity and cash flows for each of the three years in the period ended December 31,
2009. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mercantile Bank Corporation as of December 31, 2009
and 2008, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2009, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Mercantile Bank Corporation’s internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 15, 2010 expressed an unqualified opinion thereon.
| /s/ BDO Seidman, LLP | ||||
| BDO Seidman, LLP | ||||
Grand Rapids, Michigan
March 15, 2010
March 15, 2010
F-32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited Mercantile Bank Corporation’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Mercantile Bank Corporation’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report by Mercantile Bank Corporation’s
Management on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Mercantile Bank Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Mercantile Bank Corporation as of
December 31, 2009 and 2008, and the related consolidated statements of income, changes in
shareholders’ equity and cash flows for each of the three years in the period ended December 31,
2009, and our report dated March 15, 2010 expressed an unqualified opinion thereon.
| /s/ BDO Seidman, LLP | ||||
| BDO Seidman, LLP | ||||
Grand Rapids, Michigan
March 15, 2010
March 15, 2010
F-33
March 15, 2010
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control
over financial reporting 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 in conformity with generally accepted accounting
principles as of December 31, 2009. This assessment was based on criteria for effective internal
control over financial reporting described in Internal Control
— Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 2009, Mercantile Bank Corporation maintained effective
control over financial reporting 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.
Mercantile Bank Corporation
| /s/ Michael H. Price | ||||
| Michael H. Price | ||||
| Chairman of the Board, President and Chief Executive Officer | ||||
| /s/ Charles E. Christmas | ||||
| Charles E. Christmas | ||||
| Senior Vice President — Chief Financial Officer and Treasurer | ||||
F-34
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 18,896,000 | $ | 16,754,000 | ||||
Short-term investments |
1,471,000 | 100,000 | ||||||
Federal funds sold |
1,368,000 | 8,950,000 | ||||||
Total cash and cash equivalents |
21,735,000 | 25,804,000 | ||||||
Securities available for sale |
182,492,000 | 162,669,000 | ||||||
Securities held to maturity (fair value of $60,271,000 at
December 31, 2009 and $65,381,000 at December 31, 2008) |
59,211,000 | 64,437,000 | ||||||
Federal Home Loan Bank stock |
15,681,000 | 15,681,000 | ||||||
Loans and leases |
1,539,818,000 | 1,856,915,000 | ||||||
Allowance for loan and lease losses |
(47,878,000 | ) | (27,108,000 | ) | ||||
Loans and leases, net |
1,491,940,000 | 1,829,807,000 | ||||||
Premises and equipment, net |
29,684,000 | 32,334,000 | ||||||
Bank owned life insurance |
45,024,000 | 42,462,000 | ||||||
Accrued interest receivable |
7,088,000 | 8,513,000 | ||||||
Other real estate owned and repossessed assets |
26,608,000 | 8,118,000 | ||||||
Other assets |
26,745,000 | 18,185,000 | ||||||
Total assets |
$ | 1,906,208,000 | $ | 2,208,010,000 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 121,157,000 | $ | 110,712,000 | ||||
Interest-bearing |
1,280,470,000 | 1,488,863,000 | ||||||
Total |
1,401,627,000 | 1,599,575,000 | ||||||
Securities sold under agreements to repurchase |
99,755,000 | 94,413,000 | ||||||
Federal funds purchased |
2,600,000 | 0 | ||||||
Federal Home Loan Bank advances |
205,000,000 | 270,000,000 | ||||||
Subordinated debentures |
32,990,000 | 32,990,000 | ||||||
Other borrowed money |
16,890,000 | 19,528,000 | ||||||
Accrued interest and other liabilities |
7,242,000 | 17,132,000 | ||||||
Total liabilities |
1,766,104,000 | 2,033,638,000 | ||||||
Shareholders’ equity |
||||||||
Preferred stock, no par value; 1,000,000 shares authorized;
21,000 shares outstanding at December 31, 2009 |
19,839,000 | 0 | ||||||
Common stock, no par value; 20,000,000 shares
authorized; 8,592,514 shares outstanding at December 31, 2009
and 8,593,304 shares outstanding at December 31, 2008 |
172,438,000 | 172,353,000 | ||||||
Common stock warrant |
1,138,000 | 0 | ||||||
Retained earnings (deficit) |
(54,170,000 | ) | (1,281,000 | ) | ||||
Accumulated other comprehensive income |
859,000 | 3,300,000 | ||||||
Total shareholders’ equity |
140,104,000 | 174,372,000 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,906,208,000 | $ | 2,208,010,000 | ||||
See accompanying notes to consolidated financial statements.
F-35
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
Interest income |
||||||||||||
Loans and leases, including fees |
$ | 93,903,000 | $ | 110,013,000 | $ | 133,685,000 | ||||||
Securities, taxable |
7,498,000 | 7,888,000 | 7,243,000 | |||||||||
Securities, tax-exempt |
3,351,000 | 2,960,000 | 2,813,000 | |||||||||
Federal funds sold |
136,000 | 204,000 | 420,000 | |||||||||
Short-term investments |
21,000 | 7,000 | 20,000 | |||||||||
Total interest income |
104,909,000 | 121,072,000 | 144,181,000 | |||||||||
Interest expense |
||||||||||||
Deposits |
41,269,000 | 59,812,000 | 76,221,000 | |||||||||
Short-term borrowings |
1,845,000 | 2,021,000 | 3,493,000 | |||||||||
Federal Home Loan Bank advances |
8,808,000 | 10,554,000 | 6,100,000 | |||||||||
Other borrowings |
1,654,000 | 2,476,000 | 2,810,000 | |||||||||
Total interest expense |
53,576,000 | 74,863,000 | 88,624,000 | |||||||||
Net interest income |
51,333,000 | 46,209,000 | 55,557,000 | |||||||||
Provision for loan and lease losses |
59,000,000 | 21,200,000 | 11,070,000 | |||||||||
Net interest income (deficiency) after provision
for loan and lease losses |
(7,667,000 | ) | 25,009,000 | 44,487,000 | ||||||||
Noninterest income |
||||||||||||
Service charges on accounts |
2,023,000 | 1,994,000 | 1,610,000 | |||||||||
Earnings on bank owned life insurance |
1,444,000 | 1,727,000 | 1,252,000 | |||||||||
Mortgage banking activities |
1,202,000 | 662,000 | 464,000 | |||||||||
Credit and debit card fees |
670,000 | 745,000 | 668,000 | |||||||||
Letter of credit fees |
541,000 | 687,000 | 613,000 | |||||||||
Rental income from other real estate owned |
438,000 | 27,000 | 0 | |||||||||
Other income |
1,240,000 | 1,440,000 | 1,263,000 | |||||||||
Total noninterest income |
7,558,000 | 7,282,000 | 5,870,000 | |||||||||
Noninterest expense |
||||||||||||
Salaries and benefits |
20,331,000 | 22,493,000 | 22,876,000 | |||||||||
Occupancy |
3,377,000 | 3,826,000 | 3,300,000 | |||||||||
Furniture and equipment rent, depreciation and maintenance |
1,871,000 | 1,980,000 | 2,063,000 | |||||||||
Nonperforming asset costs |
7,294,000 | 3,266,000 | 1,099,000 | |||||||||
FDIC insurance |
4,852,000 | 1,890,000 | 654,000 | |||||||||
Data processing |
2,526,000 | 2,394,000 | 2,017,000 | |||||||||
Branch consolidation costs |
1,308,000 | 0 | 0 | |||||||||
Advertising |
650,000 | 559,000 | 585,000 | |||||||||
Other expense |
4,279,000 | 5,718,000 | 5,762,000 | |||||||||
Total noninterest expenses |
46,488,000 | 42,126,000 | 38,356,000 | |||||||||
Income (loss) before federal income tax expense (benefit) |
(46,597,000 | ) | (9,835,000 | ) | 12,001,000 | |||||||
Federal income tax expense (benefit) |
5,490,000 | (4,876,000 | ) | 3,035,000 | ||||||||
Net income (loss) |
(52,087,000 | ) | (4,959,000 | ) | 8,966,000 | |||||||
Preferred stock dividends and accretion |
802,000 | 0 | 0 | |||||||||
Net income (loss) attributable to common shares |
$ | (52,889,000 | ) | $ | (4,959,000 | ) | $ | 8,966,000 | ||||
Earnings (loss) per share: |
||||||||||||
Basic |
$ | (6.23 | ) | $ | (0.59 | ) | $ | 1.06 | ||||
Diluted |
$ | (6.23 | ) | $ | (0.59 | ) | $ | 1.06 | ||||
See accompanying notes to consolidated financial statements.
F-36
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2009, 2008 and 2007
| Accumulated | ||||||||||||||||||||||||
| Common | Retained | Other | Total | |||||||||||||||||||||
| Preferred | Common | Stock | Earnings | Comprehensive | Shareholders’ | |||||||||||||||||||
| Stock | Stock | Warrant | (Deficit) | Income (Loss) | Equity | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||
Balances, January 1, 2007 |
$ | 0 | $ | 161,223 | $ | 0 | $ | 11,794 | $ | (1,102 | ) | $ | 171,915 | |||||||||||
Payment of 5% stock dividend |
11,131 | (11,135 | ) | (4 | ) | |||||||||||||||||||
Employee stock purchase plan
(3,966 shares) |
91 | 91 | ||||||||||||||||||||||
Dividend reinvestment plan
(3,137 shares) |
76 | 76 | ||||||||||||||||||||||
Stock option exercises
(52,117 shares) |
643 | 643 | ||||||||||||||||||||||
Stock tendered for stock option exercises
(18,291 shares) |
(587 | ) | (587 | ) | ||||||||||||||||||||
Stock-based compensation expense |
361 | 361 | ||||||||||||||||||||||
Cash dividends
($0.55 per common share) |
(4,677 | ) | (4,677 | ) | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
8,966 | 8,966 | ||||||||||||||||||||||
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications and tax effect |
1,371 | 1,371 | ||||||||||||||||||||||
Total comprehensive income |
10,337 | |||||||||||||||||||||||
Balances, December 31, 2007 |
$ | 0 | $ | 172,938 | $ | 0 | $ | 4,948 | $ | 269 | $ | 178,155 | ||||||||||||
See accompanying notes to consolidated financial statements.
F-37
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2009, 2008 and 2007
| Accumulated | ||||||||||||||||||||||||
| Common | Retained | Other | Total | |||||||||||||||||||||
| Preferred | Common | Stock | Earnings | Comprehensive | Shareholders’ | |||||||||||||||||||
| ($ in thousands) | Stock | Stock | Warrant | (Deficit) | Income (Loss) | Equity | ||||||||||||||||||
Balances, January 1, 2008 |
$ | 0 | $ | 172,938 | $ | 0 | $ | 4,948 | $ | 269 | $ | 178,155 | ||||||||||||
Employee stock purchase plan
(10,904 shares) |
76 | 76 | ||||||||||||||||||||||
Dividend reinvestment plan
(4,340 shares) |
40 | 40 | ||||||||||||||||||||||
Stock option exercises
(2,000 shares) |
16 | 16 | ||||||||||||||||||||||
Stock tendered for stock option exercises
(1,123 shares) |
(16 | ) | (16 | ) | ||||||||||||||||||||
Stock-based compensation expense |
654 | 654 | ||||||||||||||||||||||
Cash dividends
($0.31 per common share) |
(1,355 | ) | (1,270 | ) | (2,625 | ) | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net loss |
(4,959 | ) | (4,959 | ) | ||||||||||||||||||||
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications and tax effect |
1,795 | 1,795 | ||||||||||||||||||||||
Change in net fair value of interest rate
swaps, net of reclassifications and
tax effect |
1,236 | 1,236 | ||||||||||||||||||||||
Total comprehensive loss |
(1,928 | ) | ||||||||||||||||||||||
Balances, December 31, 2008 |
$ | 0 | $ | 172,353 | $ | 0 | $ | (1,281 | ) | $ | 3,300 | $ | 174,372 | |||||||||||
See accompanying notes to consolidated financial statements.
F-38
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2009, 2008 and 2007
| Accumulated | ||||||||||||||||||||||||
| Common | Retained | Other | Total | |||||||||||||||||||||
| Preferred | Common | Stock | Earnings | Comprehensive | Shareholders’ | |||||||||||||||||||
| ($ in thousands) | Stock | Stock | Warrant | (Deficit) | Income (Loss) | Equity | ||||||||||||||||||
Balances, January 1, 2009 |
$ | 0 | $ | 172,353 | $ | 0 | $ | (1,281 | ) | $ | 3,300 | $ | 174,372 | |||||||||||
Preferred stock issued, net |
19,696 | 19,696 | ||||||||||||||||||||||
Accretion of preferred stock |
143 | (143 | ) | 0 | ||||||||||||||||||||
Common stock warrant issued |
1,138 | 1,138 | ||||||||||||||||||||||
Employee stock purchase plan
(14,694 shares) |
57 | 57 | ||||||||||||||||||||||
Dividend reinvestment plan
(2,875 shares) |
11 | 11 | ||||||||||||||||||||||
Stock-based compensation expense |
611 | 611 | ||||||||||||||||||||||
Cash dividends
($0.07 per common share) |
(594 | ) | (594 | ) | ||||||||||||||||||||
Preferred stock dividends |
(659 | ) | (659 | ) | ||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
(52,087 | ) | (52,087 | ) | ||||||||||||||||||||
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications |
(1,269 | ) | (1,269 | ) | ||||||||||||||||||||
Reclassification of unrealized gain
on interest rate swaps |
(1,172 | ) | (1,172 | ) | ||||||||||||||||||||
Total comprehensive loss |
(54,528 | ) | ||||||||||||||||||||||
Balances, December 31, 2009 |
$ | 19,839 | $ | 172,438 | $ | 1,138 | $ | (54,170 | ) | $ | 859 | $ | 140,104 | |||||||||||
See accompanying notes to consolidated financial statements.
F-39
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income (loss) |
$ | (52,087,000 | ) | $ | (4,959,000 | ) | $ | 8,966,000 | ||||
Adjustments to reconcile net income (loss)
to net cash from (for) operating activities: |
||||||||||||
Depreciation and amortization |
2,577,000 | 2,773,000 | 3,067,000 | |||||||||
Provision for loan and lease losses |
59,000,000 | 21,200,000 | 11,070,000 | |||||||||
Deferred income tax expense (benefit) |
9,973,000 | (1,558,000 | ) | (2,103,000 | ) | |||||||
Stock-based compensation expense |
611,000 | 654,000 | 361,000 | |||||||||
Proceeds from sales of mortgage loans held for sale |
80,782,000 | 44,095,000 | 32,911,000 | |||||||||
Origination of mortgage loans held for sale |
(82,251,000 | ) | (42,810,000 | ) | (33,408,000 | ) | ||||||
Net gain on sales of mortgage loans held for sale |
(905,000 | ) | (506,000 | ) | (432,000 | ) | ||||||
Net (gain) loss on sale and write-down of premises and equipment |
227,000 | (11,000 | ) | 13,000 | ||||||||
Net loss on sale and valuation write-downs of foreclosed assets |
3,551,000 | 1,768,000 | 157,000 | |||||||||
Recognition of unrealized gain on interest rate swaps |
(1,803,000 | ) | (974,000 | ) | 0 | |||||||
Earnings on bank owned life insurance |
(1,444,000 | ) | (1,727,000 | ) | (1,252,000 | ) | ||||||
Net change in: |
||||||||||||
Accrued interest receivable |
1,425,000 | 1,444,000 | 330,000 | |||||||||
Other assets |
(18,407,000 | ) | 913,000 | (2,243,000 | ) | |||||||
Accrued interest and other liabilities |
(10,024,000 | ) | (6,667,000 | ) | 1,927,000 | |||||||
Net cash from (for) operating activities |
(8,775,000 | ) | 13,635,000 | 19,364,000 | ||||||||
Cash flows from investing activities |
||||||||||||
Purchases of: |
||||||||||||
Securities available for sale |
(73,059,000 | ) | (96,292,000 | ) | (15,406,000 | ) | ||||||
Securities held to maturity |
(1,025,000 | ) | (978,000 | ) | (4,658,000 | ) | ||||||
Federal Home Loan Bank stock |
0 | (5,948,000 | ) | (2,224,000 | ) | |||||||
Proceeds from: |
||||||||||||
Maturities, calls and repayments of
securities available for sale |
52,343,000 | 73,571,000 | 11,969,000 | |||||||||
Maturities, calls and repayments of
securities held to maturity |
6,270,000 | 1,840,000 | 3,221,000 | |||||||||
Loan and lease originations and payments, net |
240,291,000 | (86,489,000 | ) | (66,681,000 | ) | |||||||
Proceeds from sales of commercial loans |
11,633,000 | 0 | 0 | |||||||||
Purchases of premises and equipment, net |
(44,000 | ) | (673,000 | ) | (3,513,000 | ) | ||||||
Proceeds from sales of foreclosed assets |
7,276,000 | 4,777,000 | 1,476,000 | |||||||||
Purchases of bank owned life insurance |
(1,118,000 | ) | (1,617,000 | ) | (7,008,000 | ) | ||||||
Net cash from (for) investing activities |
242,567,000 | (111,809,000 | ) | (82,824,000 | ) | |||||||
Cash flows from financing activities |
||||||||||||
Net increase (decrease) in time deposits |
(240,269,000 | ) | 42,774,000 | (50,972,000 | ) | |||||||
Net increase (decrease) in all other deposits |
42,321,000 | (34,380,000 | ) | (4,750,000 | ) | |||||||
Net increase (decrease) in securities sold under
agreements to repurchase |
5,342,000 | (3,052,000 | ) | 11,993,000 | ||||||||
Net increase (decrease) in federal funds purchased |
2,600,000 | (13,800,000 | ) | 4,000,000 | ||||||||
Proceeds from Federal Home Loan Bank advances |
5,000,000 | 266,500,000 | 175,000,000 | |||||||||
Maturities of Federal Home Loan Bank advances |
(70,000,000 | ) | (176,500,000 | ) | (90,000,000 | ) | ||||||
Increase in structured repurchase agreements |
0 | 15,000,000 | 0 | |||||||||
Increase (decrease) in other borrowed money |
(2,638,000 | ) | 515,000 | 697,000 | ||||||||
Cash paid in lieu of fractional shares on stock dividend |
0 | 0 | (4,000 | ) | ||||||||
Proceeds from issuance of preferred stock and common
stock warrant, net |
20,834,000 | 0 | 0 | |||||||||
Employee stock purchase plan |
57,000 | 76,000 | 91,000 | |||||||||
Dividend reinvestment plan |
11,000 | 40,000 | 76,000 | |||||||||
Stock option exercises, net |
0 | 0 | 56,000 | |||||||||
Payment of cash dividends on preferred stock |
(525,000 | ) | 0 | 0 | ||||||||
Payment of cash dividends to common shareholders |
(594,000 | ) | (2,625,000 | ) | (4,677,000 | ) | ||||||
Net cash from (for) financing activities |
(237,861,000 | ) | 94,548,000 | 41,510,000 | ||||||||
See accompanying notes to consolidated financial statements.
F-40
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
Net change in cash and cash equivalents |
(4,069,000 | ) | (3,626,000 | ) | (21,950,000 | ) | ||||||
Cash and cash equivalents at beginning of period |
25,804,000 | 29,430,000 | 51,380,000 | |||||||||
Cash and cash equivalents at end of period |
$ | 21,735,000 | $ | 25,804,000 | $ | 29,430,000 | ||||||
Supplemental disclosures of cash flow information |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 62,663,000 | $ | 80,748,000 | $ | 87,707,000 | ||||||
Federal income taxes |
0 | 0 | 5,730,000 | |||||||||
Noncash financing and investing activities: |
||||||||||||
Transfers from loans and leases to foreclosed assets |
29,317,000 | 9,062,000 | 6,898,000 | |||||||||
Preferred stock cash dividend accrued |
134,000 | 0 | 0 | |||||||||
See accompanying notes to consolidated financial statements.
F-41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of
Mercantile Bank Corporation (“Mercantile”) and its subsidiary, Mercantile Bank of Michigan
(“Bank”), and of Mercantile Bank Mortgage Company, LLC (“Mortgage Company”), Mercantile Bank Real
Estate Co., L.L.C. (“Mercantile Real Estate”) and Mercantile Insurance Center, Inc. (“Mercantile
Insurance”), subsidiaries of our Bank, after elimination of significant intercompany transactions
and accounts.
We formed a business trust, Mercantile Bank Capital Trust I (“our trust”), in 2004 to issue trust
preferred securities. We issued subordinated debentures to our trust in return for the proceeds
raised from the issuance of the trust preferred securities. In accordance with accounting
guidelines, our trust is not consolidated, but instead we report the subordinated debentures issued
to the trust as a liability.
Nature of Operations: Mercantile was incorporated on July 15, 1997 to establish and own
the Bank based in Grand Rapids, Michigan. The Bank is a community-based financial institution.
The Bank began operations on December 15, 1997. The Bank’s primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are commercial loans,
commercial leases, residential mortgage loans, and instalment loans. Substantially all loans and
leases are secured by specific items of collateral including business assets, real estate or
consumer assets. Commercial loans and leases are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by commercial or residential real estate.
The Bank’s loan accounts are primarily with customers located in the Grand Rapids, Holland and
Lansing areas. The Bank’s retail deposits are also from customers located within those areas. As
an alternative source of funds, the Bank has also issued certificates to depositors outside of the
Bank’s primary market areas. Substantially all revenues are derived from banking products and
services and investment securities.
Mercantile Bank Mortgage Company was formed during 2000. A subsidiary of the Bank, Mercantile Bank
Mortgage Company was established to increase the profitability and efficiency of the mortgage loan
operations. Mercantile Bank Mortgage Company initiated business on October 24, 2000 via the Bank’s
contribution of most of its residential mortgage loan portfolio and participation interests in
certain commercial mortgage loans. On the same date, the Bank also transferred its residential
mortgage origination function to Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile
Bank Mortgage Company was reorganized as the Mortgage Company, a limited liability company, which
is 99% owned by the Bank and 1% owned by Mercantile Insurance. Mortgage loans originated and held
by the Mortgage Company are serviced by the Bank pursuant to a servicing agreement.
Mercantile Insurance was formed during 2002 through the acquisition of an existing shelf insurance
agency. Insurance products are offered through an Agency and Institutions Agreement among
Mercantile Insurance, the Bank and Hub International. The insurance products are marketed through
a central facility operated by the Michigan Bankers Insurance Association, members of which include
the insurance subsidiaries of various Michigan-based financial institutions and Hub International.
Mercantile Insurance receives commissions based upon written premiums produced under the Agency and
Institutions Agreement.
Mercantile Real Estate was organized on July 21, 2003, principally to develop, construct, and own a
facility in downtown Grand Rapids that serves as our Bank’s main office and Mercantile’s
headquarters. This facility was placed into service during the second quarter of 2005.
Use of Estimates: To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates and assumptions
based on available information. These
estimates and assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. The allowance for loan and lease losses and
the fair values of financial instruments are particularly subject to change.
(Continued)
F-42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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-bearing time deposits with other financial institutions and short-term
borrowings with maturities of 90 days or less.
Securities: Debt securities classified as held to maturity are carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Debt securities are
classified as available for sale when they might be sold prior to maturity. Equity securities with
readily determinable fair values are classified as available for sale. Securities available for
sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax (as applicable). Other securities such as Federal Home Loan Bank
stock are 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 securities below their amortized cost that are other than temporary
are reflected in earnings or other comprehensive income, as appropriate. For those debt securities
whose fair value is less than their amortized cost basis, 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 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.
Loans and Leases: Loans and leases that management has 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 and lease losses.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized in interest income using the level-yield
method without anticipating prepayments. Net unamortized deferred loan fees amounted to $0.5
million and $0.8 million at December 31, 2009 and 2008, respectively.
Interest income on commercial loans and leases 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 or lease. In all cases, loans and
leases are placed on nonaccrual or charged off at an earlier date if collection of principal and
interest is considered doubtful.
All interest accrued but not received for loans and leases placed on nonaccrual is reversed against
interest income. Interest received on such loans and leases is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans and leases 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 market, as determined by outstanding
commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance
and charged to earnings. Such loans are sold service released. The balance of loans held for sale
equaled $2.5 million and $1.1 million as of December 31, 2009 and 2008, respectively. Mortgage
banking activities include fees on direct brokered mortgage loans and the net gain on sale of
mortgage loans originated for sale.
(Continued)
F-43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Troubled Debt Restructurings: A loan or lease is accounted for as a troubled debt
restructuring if we, for economic or legal reasons related to the borrower’s financial condition,
grant a significant concession to the borrower 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 lease, or a modification of terms such as a reduction of the stated
interest rate or balance of the loan or lease, a reduction of accrued interest, an extension of the
maturity date 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 generally remain categorized as nonperforming loans and leases until a
six-month payment history has been maintained.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a
valuation allowance for probable incurred credit losses. Loan and lease losses are charged against
the allowance when management believes the uncollectability of a loan or lease balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan and lease loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic
conditions and other factors. Allocations of the allowance may be made for specific loans and
leases, but the entire allowance is available for any loan or lease that, in management’s judgment,
should be charged-off.
A loan or lease 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 by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan or lease and the borrower, including
the length of delay, the reasons for the 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 loans and leases and construction loans by either 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. We do not
separately identify individual residential and consumer loans for impairment disclosures.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales
when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when: (1) the assets have been isolated from the corporation and put presumptively
beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2)
the transferee obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain
effective control over the transferred assets through an agreement to repurchase them before their
maturity or the ability to unilaterally cause the holder to return specific assets. Our transfers
of financial assets are limited to commercial loan participations sold, which were insignificant
for 2009, 2008 and 2007, and the sale of residential mortgage loans in the secondary market, the
extent of which is disclosed in the Consolidated Statements of Cash Flows.
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.
(Continued)
F-44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-lived Assets: Premises and equipment and other long-lived assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable from 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 the estimated fair value net of estimated selling costs when acquired, establishing a
new cost basis. If fair value declines, a valuation allowance is recorded through noninterest
expense, as are collection and operating costs after acquisition.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key
officers. Bank owned life insurance is recorded at its cash surrender value, or the amount that
can be realized.
Repurchase Agreements: Substantially all repurchase agreement liabilities represent
amounts advanced by various customers. Securities are pledged to cover these liabilities, which
are not covered by federal deposit insurance.
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.
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. A full
valuation allowance was established at December 31, 2009 against the net deferred income tax asset
as described in Note 8.
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 and our common stock warrants, and are determined using the treasury
stock method. Our unvested stock awards, which contain non-forfeitable rights to dividends whether
paid or unpaid, are considered participating securities and therefore 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.
(Continued)
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Dividend: Earnings per share are restated for all stock dividends, including the 5%
stock dividend paid on May 4, 2007. The fair value of shares issued in stock dividends is
transferred from retained earnings to common stock to the extent of available retained earnings.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and
other comprehensive income (loss). Other comprehensive income includes unrealized gains and losses
on securities available for sale which are also recognized as separate components of equity. For
2009 and 2008, other comprehensive income (loss) also includes the change in fair value of interest
rate swaps, and the reclassification of unrealized gain on the interest rate swaps, as discussed in
more detail in Note 13.
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. During 2008, our derivatives
consisted of interest rate swap agreements, which were used as part of our asset liability
management to help manage interest rate risk. We do not use derivatives for trading purposes.
Changes in the fair value of derivatives that are designated as a hedge of the variability of cash
flows to be received on the hedged asset or liability 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 noninterest income or expense.
If designated as a hedge, we formally document the relationship between derivatives as hedged
items, as well as the risk-management objective and the strategy for undertaking hedge
transactions. 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 inception and on an
ongoing basis, whether the derivative instruments that are used are 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 that would have a material effect on the financial statements.
Reclassifications: Some items in the prior year financial statements were reclassified to
conform to the current presentation.
Operating Segment: While we monitor the revenue streams of the various products and
services offered, the Company manages its business on the basis of one operating segment, banking.
(Continued)
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Standards: In June 2009, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-01, Topic 105 — Generally
Accepted Accounting Principles — FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (formerly Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB
Statement No. 162). ASU No. 2009-01 establishes the FASB Accounting Standards Codification
(“Codification”) as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in conformity with
generally accepted accounting principles in the United States (“U.S. GAAP”). All guidance
contained in the Codification carries an equal level of authority. The Codification does not
change current U.S. GAAP but is intended to simplify user access to all authoritative U.S. GAAP by
providing all of the authoritative literature related to a particular topic in one place. All
existing accounting standard documents are superseded and all other accounting literature not
included in the Codification is considered nonauthoritative. The Codification is effective for
interim or annual reporting periods ending after September 15, 2009. We made the appropriate
changes to U.S. GAAP references in our financial statements.
In December 2007, the FASB issued a new standard now codified in Accounting Standards Codification
(“ASC”) 805, Business Combinations (formerly Statement No. 141(R), Business Combinations), to
further enhance the accounting and financial reporting related to business combinations. This
standard establishes principles and requirements for how the acquirer in a business combination (1)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This standard applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Therefore, the effects of the adoption
of this standard will depend upon the extent and magnitude of acquisitions after December 31, 2008.
The adoption of this standard has had no impact on our results of operations or financial
position.
In September 2006, the FASB issued a new standard now codified in ASC 820, Fair Value Measurements
and Disclosures (formerly Statement No. 157, Fair Value Measurements), which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. This standard applies to other accounting pronouncements that require or permit fair
value measurements, the FASB having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. The standard does not require any new fair value
measurements and was originally effective beginning January 1, 2008, but was subsequently deferred
until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items
recognized or disclosed at fair value on an annual or more frequently recurring basis. We applied
the fair value measurement and disclosure provisions of the new standard to nonfinancial assets and
nonfinancial liabilities effective January 1, 2009. The application of the new standard was not
material to our results of operations or financial position, although it did result in additional
disclosures included in Note 15 relating to nonfinancial assets.
In March 2008, the FASB issued a new standard now codified in ASC 815, Derivatives and Hedging
(formerly Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities — an
Amendment of FASB Statement No. 133). This standard expands disclosure requirements regarding an
entity’s derivative instruments and hedging activities. Expanded qualitative disclosures that are
required under this standard include: (1) how and why an entity uses derivative instruments; (2)
how derivative instruments and related hedged items are accounted for under ASC 815; and (3) how
derivative instruments and related hedged items affect an entity’s financial statements. This
standard was adopted January 1, 2009 and did not have an effect on our disclosures as we have had
no derivative instruments outstanding during the current year.
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In early April 2009, the FASB issued the following additional guidance now codified in the ASC’s
listed below (formerly listed as the FSPs below), that is intended to provide additional guidance
and require additional disclosures relating to fair value measurements and other-than-temporary
impairment (“OTTI”) on an interim and/or annual basis:
| • | FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, codified in ASC 820, Fair Value Measurements and Disclosures. This guidance provides additional direction for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly. Our adoption of this new standard during the quarter ended June 30, 2009 had no impact on our results of operations or financial position, although additional disclosures were required. | ||
| • | FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, codified in ASC 320, Investments — Debt and Equity Securities. This guidance, which applies to debt securities, is intended to provide greater clarity to investors about the credit and noncredit components of an OTTI event and to more effectively communicate when an OTTI event has occurred. It defines the credit component of an OTTI charge as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security. When an entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an OTTI charge in earnings and the remaining portion in other comprehensive income. In addition, it requires additional disclosures about investment securities on an interim basis. Our adoption of this guidance during the quarter ended June 30, 2009 had no impact on our results of operations or financial position, although additional disclosures were required. | ||
| • | FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, codified in ASC 825, Financial Instruments. This guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies in addition to annual reporting periods. It also requires disclosure of the method(s) and significant assumptions used to estimate the fair value of financial instruments and changes in method(s) and significant assumptions, if any, during the period. Our adoption of this guidance during the quarter ended June 30, 2009 had no impact on our results of operations or financial position, although additional disclosures were required. |
In June 2008, the FASB issued new guidance now codified in ASC 260, Earnings Per Share (formerly
FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities). This guidance provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are
participating securities and are required to be included in the computation of earnings per share
pursuant to the two-class method described in ASC 260. The two-class method of computing earnings
per share includes an earnings allocation formula that determines earnings per share for common
stock and any participating securities according to dividends declared, whether paid or unpaid, and
participation rights in undistributed earnings. All prior period earnings per share data presented
is required to be adjusted retrospectively to conform with the provisions of this new guidance.
Adoption of this guidance had no material impact.
In May 2009, the FASB issued a new standard now codified in ASC 855, Subsequent Events
(formerly SFAS No. 165, Subsequent Events), which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that date. It is
effective for interim or annual financial periods ending after June 15, 2009. The adoption of this
standard did not have any impact on our results of operations or financial position.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets
(formerly Statement No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB
Statement No. 140). This standard amends the guidance on accounting for transfers of financial
assets, including securitization transactions, where entities have continued exposure to risks
related to transferred financial assets. This standard also expands the disclosure requirements
for such transactions. It is effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. We are currently evaluating the impact of this standard on
our financial statements.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements.
This standard requires new disclosures on the amount and reason for transfers in and out of Level 1
and 2 recurring fair value measurements. The standard also requires disclosure of activities
(i.e., on a gross basis), including purchases, sales, issuances, and settlements, in the
reconciliation of Level 3 fair value recurring measurements. The standard clarifies existing
disclosure requirements on levels of disaggregation and disclosures about inputs and valuation
techniques. The new disclosures regarding Level 1 and 2 fair value measurements and clarification
of existing disclosures are effective for periods beginning after December 15, 2009. The
disclosures about the reconciliation of information in Level 3 recurring fair value measurements
are required for periods beginning after December 15, 2010. We are currently evaluating the impact
of this standard on our financial statements.
NOTE 2 – SECURITIES
The amortized cost, 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:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
2009 |
||||||||||||||||
U.S. Government agency
debt obligations |
$ | 96,438,000 | $ | 490,000 | $ | (1,384,000 | ) | $ | 95,544,000 | |||||||
Mortgage-backed securities |
62,171,000 | 2,811,000 | 0 | 64,982,000 | ||||||||||||
Michigan Strategic Fund bonds |
20,550,000 | 0 | 0 | 20,550,000 | ||||||||||||
Mutual funds |
1,425,000 | 0 | (9,000 | ) | 1,416,000 | |||||||||||
| $ | 180,584,000 | $ | 3,301,000 | $ | (1,393,000 | ) | $ | 182,492,000 | ||||||||
2008 |
||||||||||||||||
U.S. Government agency
debt obligations |
$ | 61,511,000 | $ | 1,264,000 | $ | (393,000 | ) | $ | 62,382,000 | |||||||
Mortgage-backed securities |
74,702,000 | 2,324,000 | 0 | 77,026,000 | ||||||||||||
Michigan Strategic Fund bonds |
22,105,000 | 0 | 0 | 22,105,000 | ||||||||||||
Mutual fund |
1,175,000 | 0 | (19,000 | ) | 1,156,000 | |||||||||||
| $ | 159,493,000 | $ | 3,588,000 | $ | (412,000 | ) | $ | 162,669,000 | ||||||||
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 2 – SECURITIES (Continued)
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity
were as follows:
| Gross | Gross | |||||||||||||||
| Carrying | Unrealized | Unrealized | Fair | |||||||||||||
| Amount | Gains | Losses | Value | |||||||||||||
2009 |
||||||||||||||||
Municipal general obligation bonds |
$ | 49,892,000 | $ | 1,000,000 | $ | (111,000 | ) | $ | 50,781,000 | |||||||
Municipal revenue bonds |
9,319,000 | 190,000 | (19,000 | ) | 9,490,000 | |||||||||||
| $ | 59,211,000 | $ | 1,190,000 | $ | (130,000 | ) | $ | 60,271,000 | ||||||||
2008 |
||||||||||||||||
Municipal general obligation bonds |
$ | 54,066,000 | $ | 1,034,000 | $ | (342,000 | ) | $ | 54,758,000 | |||||||
Municipal revenue bonds |
10,371,000 | 274,000 | (22,000 | ) | 10,623,000 | |||||||||||
| $ | 64,437,000 | $ | 1,308,000 | $ | (364,000 | ) | $ | 65,381,000 | ||||||||
Securities with unrealized losses at year-end 2009 and 2008, aggregated by investment category and
length of time that individual securities have been in a continuous loss position, are as follows:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Description of Securities | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
2009 |
||||||||||||||||||||||||
U.S. Government agency
debt obligations |
$ | 50,190,000 | $ | (1,322,000 | ) | $ | 7,927,000 | $ | (62,000 | ) | $ | 58,117,000 | $ | (1,384,000 | ) | |||||||||
Mortgage-backed securities |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Michigan Strategic Fund bonds |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Mutual funds |
0 | 0 | 1,211,000 | (9,000 | ) | 1,211,000 | (9,000 | ) | ||||||||||||||||
Municipal general
obligation bonds |
738,000 | (5,000 | ) | 8,638,000 | (106,000 | ) | 9,376,000 | (111,000 | ) | |||||||||||||||
Municipal revenue bonds |
228,000 | (12,000 | ) | 1,073,000 | (7,000 | ) | 1,301,000 | (19,000 | ) | |||||||||||||||
| $ | 51,156,000 | $ | (1,339,000 | ) | $ | 18,849,000 | $ | (184,000 | ) | $ | 70,005,000 | $ | (1,523,000 | ) | ||||||||||
2008 |
||||||||||||||||||||||||
U.S. Government agency
debt obligations |
$ | 20,588,000 | $ | (387,000 | ) | $ | 1,994,000 | $ | (6,000 | ) | $ | 22,582,000 | $ | (393,000 | ) | |||||||||
Mortgage-backed securities |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Michigan Strategic Fund bonds |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Mutual fund |
0 | 0 | 1,156,000 | (19,000 | ) | 1,156,000 | (19,000 | ) | ||||||||||||||||
Municipal general
obligation bonds |
3,547,000 | (76,000 | ) | 10,580,000 | (266,000 | ) | 14,127,000 | (342,000 | ) | |||||||||||||||
Municipal revenue bonds |
307,000 | (1,000 | ) | 1,066,000 | (21,000 | ) | 1,373,000 | (22,000 | ) | |||||||||||||||
| $ | 24,442,000 | $ | (464,000 | ) | $ | 14,796,000 | $ | (312,000 | ) | $ | 39,238,000 | $ | (776,000 | ) | ||||||||||
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
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, 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.
There were five U.S. Government agency debt obligations, 29 municipal general obligation bonds,
four municipal revenue bonds, and one mutual fund in a continuous loss position for 12 months or
more at December 31, 2009. At December 31, 2009, 78 debt securities and a mutual fund with a
combined fair value totaling $70.0 million have unrealized losses with aggregate depreciation of
$1.5 million, or 0.6% from the amortized cost basis of total securities. At December 31, 2009, 275
debt securities with a fair value totaling $136.0 million have unrealized gains with aggregate
appreciation of $4.5 million, or 1.9% from the amortized cost basis of total securities. 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 the securities, we believe it is
more likely than not that we will not be required to sell the securities before recovery and we do
expect to recover the entire amortized cost of the securities, no declines are deemed to be
other-than-temporary.
The amortized cost and fair values of debt securities at year-end 2009, by contractual maturity,
are shown below. The contractual maturity is utilized below 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.
The maturities of securities and their weighted average yields at December 31, 2009 are also shown
in the following table. The yields for municipal securities are shown at their tax equivalent
yield.
| Held-to-Maturity | Available-for-Sale | |||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||
| Average | Carrying | Fair | Average | Amortized | Fair | |||||||||||||||||||||
| Yield | Amount | Value | Yield | Cost | Value | |||||||||||||||||||||
Due in one year or less |
7.32 | % | $ | 4,156,000 | $ | 4,232,000 | 4.76 | % | $ | 2,998,000 | $ | 3,068,000 | ||||||||||||||
Due from one to five years |
6.31 | 8,016,000 | 8,377,000 | 4.96 | 2,983,000 | 3,292,000 | ||||||||||||||||||||
Due from five to ten years |
6.39 | 13,526,000 | 13,850,000 | 4.52 | 13,985,000 | 13,962,000 | ||||||||||||||||||||
Due after ten years |
6.35 | 33,513,000 | 33,812,000 | 5.00 | 76,472,000 | 75,222,000 | ||||||||||||||||||||
Mortgage-backed securities |
NA | 0 | 0 | 5.15 | 62,171,000 | 64,982,000 | ||||||||||||||||||||
Michigan Strategic Fund bonds |
NA | 0 | 0 | 3.06 | 20,550,000 | 20,550,000 | ||||||||||||||||||||
Mutual funds |
NA | 0 | 0 | 3.06 | 1,425,000 | 1,416,000 | ||||||||||||||||||||
| 6.42 | % | $ | 59,211,000 | $ | 60,271,000 | 4.78 | % | $ | 180,584,000 | $ | 182,492,000 | |||||||||||||||
During 2009, 2008 and 2007, there were no securities sold.
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 2 – SECURITIES (Continued)
At year-end 2009 and 2008, the amortized cost of securities issued by the State of Michigan and all
its political subdivisions totaled $59.2 million and $64.4 million, with an estimated fair value of
$60.3 million and $65.4 million, respectively. Total securities of any other specific issuer,
other than the U.S. Government and its agencies, 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, other deposits, and letters of credit issued on behalf
of our customers was $158.1 million and $124.2 million at December 31, 2009 and 2008, respectively.
In addition, substantially all of our municipal bonds have been pledged to the Discount Window of
the Federal Reserve Bank of Chicago. Investments in Federal Home Loan Bank stock are restricted
and may only be resold, or redeemed by, the issuer.
NOTE 3 – LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Year-end loans and leases are as follows:
| Percent | ||||||||||||||||||||
| December 31, 2009 | December 31, 2008 | Increase | ||||||||||||||||||
| Balance | % | Balance | % | (Decrease) | ||||||||||||||||
Real Estate: |
||||||||||||||||||||
Construction and land development |
$ | 176,078,000 | 11.4 | % | $ | 263,392,000 | 14.1 | % | (33.1 | )% | ||||||||||
Secured by 1 – 4 family properties |
124,805,000 | 8.1 | 140,776,000 | 7.6 | (11.3 | ) | ||||||||||||||
Secured by multi-family properties |
47,679,000 | 3.1 | 47,365,000 | 2.6 | 0.6 | |||||||||||||||
Secured by nonresidential properties |
814,058,000 | 52.9 | 881,350,000 | 47.5 | (7.6 | ) | ||||||||||||||
Commercial |
370,146,000 | 24.0 | 516,201,000 | 27.8 | (28.3 | ) | ||||||||||||||
Leases |
1,055,000 | 0.1 | 1,985,000 | 0.1 | (46.9 | ) | ||||||||||||||
Consumer |
5,997,000 | 0.4 | 5,846,000 | 0.3 | 2.6 | |||||||||||||||
| $ | 1,539,818,000 | 100.0 | % | $ | 1,856,915,000 | 100.0 | % | (17.1 | )% | |||||||||||
Activity in the allowance for loan and lease losses is as follows:
| 2009 | 2008 | 2007 | ||||||||||
Beginning balance |
$ | 27,108,000 | $ | 25,814,000 | $ | 21,411,000 | ||||||
Provision for loan and lease losses |
59,000,000 | 21,200,000 | 11,070,000 | |||||||||
Charge-offs |
(39,621,000 | ) | (20,594,000 | ) | (7,274,000 | ) | ||||||
Recoveries |
1,391,000 | 688,000 | 607,000 | |||||||||
Ending balance |
$ | 47,878,000 | $ | 27,108,000 | $ | 25,814,000 | ||||||
(Continued)
F-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 3 — LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
| 2009 | 2008 | |||||||
Impaired loans and leases were as follows: |
||||||||
Year-end loans with no allocated allowance for loan and lease losses |
$ | 25,500,000 | $ | 22,557,000 | ||||
Year-end loans with allocated allowance for loan and lease losses |
39,855,000 | 22,222,000 | ||||||
| $ | 65,355,000 | $ | 44,779,000 | |||||
Amount of the allowance for loan and lease losses allocated |
$ | 9,832,000 | $ | 3,980,000 | ||||
Impaired loans and leases for which no allocation of the allowance for loan and leases losses has
been made generally reflect situations whereby the loans and leases have been charged-down to
estimated collateral value. The Bank recognized no interest income on impaired loans during 2009,
2008 or 2007. Average impaired loans were $65.0 million, $35.9 million and $14.0 million during
2009, 2008 and 2007, respectively. Lost interest income on nonaccrual loans totaled $2.1 million
in both 2009 and 2008, and $0.9 million in 2007. Nonperforming loans include both smaller balance
homogenous loans that are collectively evaluated for impairment and the above individually
classified impaired loans.
| 2009 | 2008 | |||||||
Nonperforming loans and leases were as follows: |
||||||||
Loans and leases past due 90 days or more still accruing interest |
$ | 243,000 | $ | 1,358,000 | ||||
Nonaccrual loans and leases |
81,818,000 | 47,945,000 | ||||||
Troubled debt restructurings |
2,989,000 | 0 | ||||||
| $ | 85,050,000 | $ | 49,303,000 | |||||
Concentrations within the loan portfolio were as follows at year-end:
| 2009 | 2008 | |||||||||||||||
| Percentage of | Percentage of | |||||||||||||||
| Balance | Loan Portfolio | Balance | Loan Portfolio | |||||||||||||
Commercial real estate loans to
lessors of non-residential
buildings |
$ | 467,017,000 | 30.3 | % | $ | 489,580,000 | 26.4 | % | ||||||||
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 4 — PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
| 2009 | 2008 | |||||||
Land and improvements |
$ | 8,531,000 | $ | 8,538,000 | ||||
Buildings and leasehold improvements |
24,515,000 | 24,888,000 | ||||||
Furniture and equipment |
12,532,000 | 12,484,000 | ||||||
| 45,578,000 | 45,910,000 | |||||||
Less: accumulated depreciation |
15,894,000 | 13,576,000 | ||||||
| $ | 29,684,000 | $ | 32,334,000 | |||||
Depreciation expense totaled $2.5 million in 2009 and $2.7 million in both 2008 and 2007.
NOTE 5 — DEPOSITS
Deposits at year-end are summarized as follows:
| Percent | ||||||||||||||||||||
| December 31, 2009 | December 31, 2008 | Increase | ||||||||||||||||||
| Balance | % | Balance | % | (Decrease) | ||||||||||||||||
Noninterest-bearing
demand |
$ | 121,157,000 | 8.6 | % | $ | 110,712,000 | 6.9 | % | 9.4 | % | ||||||||||
Interest-bearing
checking |
86,320,000 | 6.2 | 50,248,000 | 3.1 | 71.8 | |||||||||||||||
Money market |
32,008,000 | 2.3 | 24,886,000 | 1.6 | 28.6 | |||||||||||||||
Savings |
38,625,000 | 2.8 | 49,943,000 | 3.1 | (22.7 | ) | ||||||||||||||
Time, under $100,000 |
105,195,000 | 7.5 | 49,991,000 | 3.1 | 110.4 | |||||||||||||||
Time, $100,000 and
over |
293,455,000 | 20.9 | 184,573,000 | 11.6 | 59.0 | |||||||||||||||
| 676,760,000 | 48.3 | 470,353,000 | 29.4 | 43.9 | ||||||||||||||||
Out-of-area time,
under $100,000 |
62,760,000 | 4.5 | 128,948,000 | 8.1 | (51.3 | ) | ||||||||||||||
Out-of-area time,
$100,000 and over |
662,107,000 | 47.2 | 1,000,274,000 | 62.5 | (33.8 | ) | ||||||||||||||
| 724,867,000 | 51.7 | 1,129,222,000 | 70.6 | (35.8 | ) | |||||||||||||||
| $ | 1,401,627,000 | 100.0 | % | $ | 1,599,575,000 | 100.0 | % | (12.4 | )% | |||||||||||
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the
primary market areas. As of December 31, 2009, out-of-area certificates of deposit totaling $702.0
million were obtained through deposit brokers, with the remaining $22.9 million obtained directly
from the depositors.
(Continued)
F-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 5 — DEPOSITS (Continued)
The following table depicts the maturity distribution for certificates of deposit at year-end:
| 2009 | 2008 | |||||||
In one year or less |
$ | 850,801,000 | $ | 1,179,405,000 | ||||
In one to two years |
186,135,000 | 140,299,000 | ||||||
In two to three years |
68,210,000 | 27,116,000 | ||||||
In three to four years |
11,565,000 | 10,232,000 | ||||||
In four to five years |
6,806,000 | 6,734,000 | ||||||
| $ | 1,123,517,000 | $ | 1,363,786,000 | |||||
The following table depicts the maturity distribution for certificates of deposit with balances of
$100,000 or more at year-end:
| 2009 | 2008 | |||||||
Up to three months |
$ | 314,358,000 | $ | 377,341,000 | ||||
Three months to six months |
164,870,000 | 281,568,000 | ||||||
Six months to twelve months |
235,315,000 | 378,899,000 | ||||||
Over twelve months |
241,019,000 | 147,039,000 | ||||||
| $ | 955,562,000 | $ | 1,184,847,000 | |||||
NOTE 6 — SHORT-TERM BORROWINGS
Information regarding securities sold under agreements to repurchase at year-end is summarized
below:
| 2009 | 2008 | |||||||
Outstanding balance at year-end |
$ | 99,755,000 | $ | 94,413,000 | ||||
Weighted average interest rate at year-end |
1.41 | % | 1.96 | % | ||||
Average daily balance during the year |
98,409,000 | 93,149,000 | ||||||
Weighted average interest rate during the year |
1.87 | % | 2.04 | % | ||||
Maximum month-end balance during the year |
111,692,000 | 105,986,000 | ||||||
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 were secured by securities with a fair value of $125.7 million
and $106.5 million at year-end 2009 and 2008, respectively.
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 7 — FEDERAL HOME LOAN BANK ADVANCES
Our outstanding balances at December 31, 2009 totaled $205.0 million and mature at varying dates
from January 2010 through January 2014, with fixed rates of interest from 2.95% to 4.18% and
averaging 3.50%. At December 31, 2008, outstanding balances totaled $270.0 million with maturities
ranging from January 2009 through December 2013 and fixed rates of interest from 2.95% to 5.30% and
averaging 3.79%.
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, 2009 totaled $277.8 million.
Maturities over the next five years are:
2010 |
$ | 65,000,000 | ||
2011 |
85,000,000 | |||
2012 |
40,000,000 | |||
2013 |
10,000,000 | |||
2014 |
5,000,000 |
NOTE 8 — FEDERAL INCOME TAXES
The consolidated income tax expense (benefit) is as follows:
| 2009 | 2008 | 2007 | ||||||||||
Current expense (benefit) |
$ | (4,483,000 | ) | $ | (3,318,000 | ) | $ | 5,138,000 | ||||
Deferred benefit |
(13,276,000 | ) | (1,558,000 | ) | (2,103,000 | ) | ||||||
Deferred expense — establishment of valuation allowance |
23,249,000 | 0 | 0 | |||||||||
Tax expense (benefit) |
$ | 5,490,000 | $ | (4,876,000 | ) | $ | 3,035,000 | |||||
A reconciliation of the differences between the federal income tax expense (benefit) recorded and
the amount computed by applying the federal statutory rate to income before income taxes is as
follows:
| 2009 | 2008 | 2007 | ||||||||||
Tax at statutory rates |
$ | (16,309,000 | ) | $ | (3,442,000 | ) | $ | 4,200,000 | ||||
Increase (decrease) from |
||||||||||||
Tax-exempt interest |
(866,000 | ) | (818,000 | ) | (794,000 | ) | ||||||
Bank owned life insurance |
(505,000 | ) | (605,000 | ) | (438,000 | ) | ||||||
Establishment of valuation allowance |
23,249,000 | 0 | 0 | |||||||||
Other |
(79,000 | ) | (11,000 | ) | 67,000 | |||||||
Tax expense (benefit) |
$ | 5,490,000 | $ | (4,876,000 | ) | $ | 3,035,000 | |||||
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 8 — FEDERAL INCOME TAXES (Continued)
Significant components of deferred tax assets and liabilities as of December 31, 2009 and 2008 are as follows:
| 2009 | 2008 | |||||||
Deferred income tax assets |
||||||||
Allowance for loan and lease losses |
$ | 16,757,000 | $ | 9,488,000 | ||||
Deferred loan fees |
160,000 | 263,000 | ||||||
Deferred compensation |
661,000 | 1,584,000 | ||||||
Nonaccrual loan interest income |
480,000 | 440,000 | ||||||
Fair value write-downs on foreclosed properties |
1,436,000 | 303,000 | ||||||
Net operating loss carryforward |
4,941,000 | 0 | ||||||
Tax credit carryforwards |
668,000 | 0 | ||||||
Other |
726,000 | 727,000 | ||||||
| 25,829,000 | 12,805,000 | |||||||
Deferred income tax liabilities |
||||||||
Depreciation |
770,000 | 907,000 | ||||||
Unrealized gain on securities |
648,000 | 1,112,000 | ||||||
Interest rate swaps |
33,000 | 666,000 | ||||||
Other |
634,000 | 674,000 | ||||||
| 2,085,000 | 3,359,000 | |||||||
Net deferred tax asset before valuation allowance |
23,744,000 | 9,446,000 | ||||||
Valuation allowance |
(23,744,000 | ) | 0 | |||||
Total net deferred tax asset |
$ | 0 | $ | 9,446,000 | ||||
At December 31, 2009, we had carryfowards of the following tax attributes: gross federal net
operating loss of $14.1 million that expires in 2029; general business tax credits of $0.3 million
that expire in the years 2027 through 2029; and $0.3 million of federal alternative minimum tax
credits with an indefinite life.
Accounting guidance requires that companies assess whether a valuation allowance should be
established against their 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 which
may impact future operating results. Significant weight is given to evidence that can be
objectively verified. Despite improvements achieved throughout 2009 in key areas such as an
expanded net interest margin, increased risk-based regulatory capital levels, a continued shift to
local funding sources and reduced controllable overhead costs, the increased loan and lease loss
provision expense and problem asset administration costs have been sizable. These continuing
recent losses resulting from the distressed operating environment have significantly restricted our
ability to rely on projections of future taxable income to support the recovery of our deferred tax
assets. Consequently, we determined it necessary to establish a valuation allowance against our
entire net deferred tax asset as of December 31, 2009. We will continue to monitor our deferred
tax assets quarterly for changes affecting their realizability.
We had no recognized tax benefits at any time during 2009 or 2008 and do not anticipate any
significant increase in unrecognized tax benefits during 2010. 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 2009 or 2008. We
file U.S. federal income tax returns which are subject to examination for all years after 2005.
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 9 — STOCK-BASED COMPENSATION
Stock-based compensation plans are used to provide directors and employees with an increased
incentive to contribute to the long-term performance and growth of Mercantile, to align the
interests of directors and employees with the interests of Mercantile’s shareholders through the
opportunity for increased stock ownership and to attract and retain directors and employees. From
1997 through 2005, stock option grants were provided to directors and certain employees through
several stock option plans, including the 1997 Employee Stock Option Plan, 2000 Employee Stock
Option Plan, 2004 Employee Stock Option Plan and Independent Director Stock Option Plan. During
2006, 2007 and 2008, stock option and restricted stock grants were provided to certain employees
through the Stock Incentive Plan of 2006. No stock option or restricted stock grants were made
during 2009.
Under our 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan and 2004 Employee Stock
Option Plan, stock options granted to employees were granted at the market price on the date of
grant, generally fully vest after one year and expire ten years from the date of grant. Stock
options granted to non-executive officers during 2005 vested about three weeks after being granted.
Under our Independent Director Stock Option Plan, stock options granted to non-employee directors
are at 125% of the market price on the date of grant, fully vest after five years and expire ten
years from the date of grant. The Stock Incentive Plan of 2006 replaced all of our outstanding
stock option plans for stock options not previously granted. Under the Stock Incentive Plan of
2006, 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
Mercantile stock on the date of grant, or for stock options granted in 2006 or 2007, the day before
the date of grant, if the closing price was higher on the day before the date of grant. Price,
vesting and expiration date parameters are determined by Mercantile’s Compensation Committee on a
grant-by-grant basis. Generally, the stock options granted to employees during 2006, 2007 and 2008
fully vest after two years and expire after seven years. The restricted stock awards granted to
certain employees during 2006, 2007 and 2008 fully vest after four years. No payments were
required from employees for the restricted stock awards. At year-end 2009, there were
approximately 410,000 shares authorized for future incentive awards.
As of December 31, 2009, there was $0.1 million of total unrecognized compensation cost related to
unvested stock options granted under our various stock-based compensation plans. This unrecognized
compensation cost is expected to be recognized over a weighted-average period of 1.0 year. As of
December 31, 2009, there was $0.7 million of total unrecognized compensation cost related to
unvested restricted stock granted under our Stock Incentive Plan of 2006. The compensation cost is
expected to be recognized over a weighted-average period of 2.0 years.
A summary of restricted stock activity is as follows:
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||
Nonvested at
beginning of year |
113,010 | $ | 14.85 | 63,024 | $ | 23.69 | 21,159 | $ | 37.94 | |||||||||||||||
Granted |
0 | NA | 56,710 | 6.21 | 44,450 | 17.74 | ||||||||||||||||||
Vested |
(3,290 | ) | 20.39 | (128 | ) | 30.37 | 0 | NA | ||||||||||||||||
Forfeited |
(18,487 | ) | 13.20 | (6,596 | ) | 24.72 | (2,585 | ) | 37.94 | |||||||||||||||
Nonvested at
end of year |
91,233 | $ | 14.98 | 113,010 | $ | 14.85 | 63,024 | $ | 23.69 | |||||||||||||||
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 9 — STOCK-BASED COMPENSATION (Continued)
A summary of stock option activity is as follows:
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding at
beginning of year |
325,434 | $ | 20.49 | 271,755 | $ | 24.34 | 288,962 | $ | 24.07 | |||||||||||||||
Granted |
0 | NA | 67,460 | 6.21 | 54,099 | 17.74 | ||||||||||||||||||
Exercised |
0 | NA | (2,000 | ) | 8.22 | (52,117 | ) | 12.33 | ||||||||||||||||
Forfeited or expired |
(29,219 | ) | 22.05 | (11,781 | ) | 29.48 | (19,189 | ) | 34.38 | |||||||||||||||
Outstanding at
end of year |
296,215 | $ | 20.34 | 325,434 | $ | 20.49 | 271,755 | $ | 24.34 | |||||||||||||||
Options exercisable
at year-end |
230,895 | $ | 24.04 | 198,694 | $ | 25.23 | 181,544 | $ | 23.68 | |||||||||||||||
The fair value of each stock option award is estimated on the date of grant using a closed
option valuation (Black-Scholes) model that uses the assumptions noted in the table below.
Expected volatilities are based on historical volatilities on our common stock. Historical data is
used to estimate stock option expense and post-vesting termination behavior. The expected term of
stock options granted is based on historical data and represents the period of time that stock
options granted are expected to be outstanding, which takes into account that the stock options are
not transferable. The risk-free interest rate for the expected term of the stock option is based
on the U.S. Treasury yield curve in effect at the time of the stock option grant.
The fair value of stock options granted was determined using the following weighted-average
assumptions as of grant date:
| 2009 | 2008 | 2007 | ||||||||||
Risk-free interest rate |
NA | 2.00 | % | 3.40 | % | |||||||
Expected option life |
NA | 5 Years | 5 Years | |||||||||
Expected stock price volatility |
NA | 44 | % | 26 | % | |||||||
Dividend yield |
NA | 1 | % | 1 | % | |||||||
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 9 — STOCK-BASED COMPENSATION (Continued)
Options outstanding at year-end 2009 were as follows:
| Outstanding | Exercisable | |||||||||||||||||||
| Weighted Average | Weighted | Weighted | ||||||||||||||||||
| Range of | Remaining | Average | Average | |||||||||||||||||
| Exercise | Contractual | Exercise | Exercise | |||||||||||||||||
| Prices | Number | Life | Price | Number | Price | |||||||||||||||
$4.00 - $8.00 |
59,360 | 5.9 Years | $ | 6.21 | 0 | $NA | ||||||||||||||
$8.01 - $12.00 |
21,157 | 0.7 Years | 8.44 | 21,157 | 8.44 | |||||||||||||||
$12.01 - $16.00 |
27,736 | 1.8 Years | 12.89 | 27,736 | 12.89 | |||||||||||||||
$16.01 - $20.00 |
69,513 | 4.1 Years | 17.16 | 63,553 | 17.10 | |||||||||||||||
$20.01 - $24.00 |
6,996 | 2.8 Years | 20.18 | 6,996 | 20.18 | |||||||||||||||
$24.01 - $28.00 |
22,211 | 3.8 Years | 26.61 | 22,211 | 26.61 | |||||||||||||||
$32.01 - $36.00 |
64,995 | 5.3 Years | 34.75 | 64,995 | 34.75 | |||||||||||||||
$36.01 - $40.00 |
17,311 | 3.9 Years | 37.94 | 17,311 | 37.94 | |||||||||||||||
$40.01 - $44.00 |
6,936 | 4.8 Years | 40.28 | 6,936 | 40.28 | |||||||||||||||
Outstanding at year end |
296,215 | 4.2 Years | $ | 20.34 | 230,895 | $ | 24.04 | |||||||||||||
The weighted-average remaining contractual life of the 230,895 stock options exercisable as of
December 31, 2009 was 3.8 years.
Information related to options outstanding at year-end 2009, 2008 and 2007 were as follows:
| 2009 | 2008 | 2007 | ||||||||||
Minimum exercise price |
$ | 6.21 | $ | 6.21 | $ | 8.22 | ||||||
Maximum exercise price |
40.28 | 40.28 | 40.28 | |||||||||
Average remaining option term |
4.2 Years | 5.3 Years | 5.9 Years | |||||||||
Information related to stock option grants and exercises during 2009, 2008 and 2007 follows:
| 2009 | 2008 | 2007 | ||||||||||
Aggregate intrinsic value of stock options exercised |
NA | $ | 13,000 | $ | 1,019,000 | |||||||
Cash received from stock option exercises |
NA | 0 | 56,000 | |||||||||
Tax benefit realized from stock option exercises |
NA | 0 | 0 | |||||||||
Weighted average per share fair value of stock
options granted |
NA | 2.32 | 4.60 | |||||||||
The closing price of our stock on December 31, 2009 was below the exercise price of all of our
stock option grants. Therefore, the aggregate intrinsic value of all stock options outstanding and
exercisable at December 31, 2009 was $0.
Shares issued as a result of the exercise of stock option grants have been authorized and unissued
shares.
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 10 — RELATED PARTIES
Certain directors and executive officers of the Bank, including their immediate families and
companies in which they are principal owners, were loan customers of the Bank. At year-end 2009
and 2008, the Bank had $13.4 million and $17.7 million in loan commitments to directors and
executive officers, of which $12.2 million and $14.1 million were outstanding at year-end 2009 and
2008, respectively, as reflected in the following table:
| 2009 | 2008 | |||||||
Beginning balance |
$ | 14,090,000 | $ | 14,719,000 | ||||
New loans |
519,000 | 1,777,000 | ||||||
Repayments |
(2,435,000 | ) | (2,406,000 | ) | ||||
Ending balance |
$ | 12,174,000 | $ | 14,090,000 | ||||
Related party deposits and repurchase agreements totaled $10.5 million and $12.7 million at
year-end 2009 and 2008, respectively.
NOTE 11 — COMMITMENTS AND OFF-BALANCE-SHEET RISK
Our Bank is 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. The balance of the liability account related to loan commitments was $0.0
million and $0.5 million at year-end 2009 and 2008, respectively.
At year-end 2009 and 2008, the rates on existing off-balance sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing of the
counterparties.
(Continued)
F-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 11 — COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
Our maximum exposure to credit losses for loan commitments and standby letters of credit
outstanding at year-end was as follows:
| 2009 | 2008 | |||||||
Commercial unused lines of credit |
$ | 205,018,000 | $ | 323,785,000 | ||||
Unused lines of credit secured by 1 — 4 family
residential properties |
24,916,000 | 30,658,000 | ||||||
Credit card unused lines of credit |
8,565,000 | 9,413,000 | ||||||
Other consumer unused lines of credit |
4,526,000 | 4,881,000 | ||||||
Commitments to make loans |
7,701,000 | 10,959,000 | ||||||
Standby letters of credit |
36,512,000 | 51,439,000 | ||||||
| $ | 287,238,000 | $ | 431,135,000 | |||||
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 Mercantile Bank
Prime Rate. For term debt secured by real estate, customers are generally offered a floating rate
tied to the Mercantile Bank Prime Rate and a fixed rate currently ranging from 5.00% to 7.00%.
These credit facilities generally balloon within five years, with payments based on amortizations
ranging from 10 to 25 years. For term debt secured by non-real estate collateral, customers are
generally offered a floating rate tied to the Mercantile Bank Prime Rate and a fixed rate currently ranging from 5.00% to 7.50%.
These credit facilities generally mature and fully amortize within five years.
Certain of our commercial loan customers have entered into interest rate swap agreements directly
with our correspondent banks. To assist our commercial loan customers in these transactions, and
to encourage our correspondent banks to enter into the interest rate swap transactions with minimal
credit underwriting analyses on their part, we have entered into risk participation agreements with
the correspondent banks whereby we agree to make payments to the correspondent banks owed by our
commercial loan customers under the interest rate swap agreement in the event that our commercial
loan customers do not make the payments. We are not a party to the interest rate swap agreements
under these arrangements. As of December 31, 2009, the total notional amount of the underlying
interest rate swap agreements was $57.8 million, with a net fair value from our commercial loan
customers’ perspective of negative $3.7 million. Payments made during 2008 and 2009 in regards to
the risk participation agreements totaled $311,000; however, we believe the affected customer will
reimburse us for such payments and therefore we have accrued no valuation allowance for our
receivable from this customer and have accrued no liability for potential future payments. These
risk participation agreements are considered financial guarantees in accordance with applicable
accounting guidance and are therefore recorded as liabilities at fair value, generally equal to the
fees collected at the time of their execution. These liabilities are accreted into income during
the term of the interest rate swap agreements, generally ranging from four to fifteen years. This
liability totaled $0.2 million and $0.3 million at December 31, 2009 and 2008, respectively.
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 11 — 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.
| 2009 | 2008 | |||||||||||||||
| Contract | Carrying | Contract | Carrying | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
Standby letters of credit |
$ | 36,512,000 | $ | 220,000 | $ | 51,439,000 | $ | 282,000 | ||||||||
We were required to have $0.6 million and $0.3 million of cash on hand or on deposit with the
Federal Reserve Bank of Chicago to meet regulatory reserve and clearing requirements at year-end
2009 and 2008, respectively.
NOTE 12 — BENEFIT PLANS
We have a 401(k) benefit plan that covers substantially all of our employees. Our 2009, 2008 and
2007 matching 401(k) contributions charged to expense were $206,000, $781,000 and $747,000,
respectively. The percent of our matching contributions to the 401(k) is determined annually by
the Board of Directors. Effective April 1, 2009, we suspended matching contributions to the 401(k)
benefit plan. The 401(k) benefit plan allows employee contributions up to 15% of their
compensation, which can be matched at 100% of the first 5% of the compensation contributed up to a
maximum matching contribution for the 2009 plan year of $12,250. Matching contributions are
immediately vested.
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. The deferred
amounts are categorized on our financial statements as other borrowed money. The deferred balances
are paid interest at a rate equal to the Wall Street Journal Prime Rate, adjusted at the beginning
of each calendar quarter. Interest expense for the plan during 2009, 2008 and 2007 was $24,000,
$89,000 and $109,000, respectively.
We have a non-qualified deferred compensation program in which selected officers may defer all or
portions of salary and bonus payments. The deferred amounts are categorized on our financial
statements as other borrowed money. The deferred balances are paid interest at a rate equal to the
Wall Street Journal Prime Rate, adjusted at the beginning of each calendar quarter. Interest
expense for the plan during 2009, 2008 and 2007 was $51,000, $140,000 and $190,000, respectively.
The Mercantile Bank Corporation Employee Stock Purchase Plan of 2002 (“Stock Purchase Plan”) 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 55,000 shares of common stock may be issued under the Stock Purchase Plan;
however, the number of shares has been adjusted, and may continue to be adjusted in the future, to
reflect stock dividends and other changes in our capitalization. The number of shares issued under
the Stock Purchase Plan totaled 14,694 and 10,904 in 2009 and 2008, respectively. As of December
31, 2009, there were 21,295 shares available under the Stock Purchase Plan.
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 13 — HEDGING ACTIVITIES
Our interest rate risk policy includes guidelines for measuring and monitoring interest rate risk.
Within these guidelines, parameters have been established for maximum fluctuations in net interest
income. Possible fluctuations are measured and monitored using net interest income simulation.
Our policy provides for the use of certain derivative instruments and hedging activities to aid in
managing interest rate risk to within policy parameters.
A majority of our assets are comprised of commercial loans on which the interest rates are
variable, while a majority of our liabilities are comprised of fixed rate certificates of deposit
and FHLB advances. Due to this repricing mismatch, we may periodically enter into derivative
financial instruments to mitigate the exposure in cash flows resulting from changes in interest
rates.
During 2008, we entered into several interest rate swaps with an aggregate notional amount of
$275.0 million. The interest rate swaps qualified as cash flow hedges that converted the variable
rate cash inflows on certain of our prime-based commercial loans to a fixed rate of interest. The
interest rate swaps paid interest to us at stated fixed rates and required that we make interest
payments based on the average of the Wall Street Journal Prime Rate.
On October 30, 2008, we terminated all of our interest rate swaps. The termination coincided with
our decision to not lower our prime rate in association with the Federal Open Market Committee’s
reduction of the targeted federal funds rate by 50 basis points announced on October 29, 2008.
Virtually all of our prime-based commercial floating rate loans are tied to the Mercantile Bank
Prime Rate, while our interest rate swaps utilized the Wall Street Journal Prime Rate. The
resulting difference negatively impacted the effectiveness of our interest rate swaps, so we
believed it was prudent to terminate them. The aggregate fair value of the interest rate swaps on
October 30, 2008 was $2.4 million, which is being accreted into interest income on loans and leases
based on the original term of the interest rate swaps. As of December 31, 2009, the remaining
amount to be accreted was $100,000, which will be fully accreted during the first quarter of 2010.
During 2009, $1.8 million was accreted into interest income on loans and leases.
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 14 — FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year-end:
| 2009 | 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 21,735,000 | $ | 21,735,000 | $ | 25,804,000 | $ | 25,804,000 | ||||||||
Securities available for sale |
182,492,000 | 182,492,000 | 162,669,000 | 162,669,000 | ||||||||||||
Securities held to maturity |
59,211,000 | 60,271,000 | 64,437,000 | 65,381,000 | ||||||||||||
Federal Home Loan Bank stock |
15,681,000 | 15,681,000 | 15,681,000 | 15,681,000 | ||||||||||||
Loans, net |
1,491,940,000 | 1,501,860,000 | 1,829,807,000 | 1,872,141,000 | ||||||||||||
Bank owned life insurance |
45,024,000 | 45,024,000 | 42,462,000 | 42,462,000 | ||||||||||||
Accrued interest receivable |
7,088,000 | 7,088,000 | 8,513,000 | 8,513,000 | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
1,401,627,000 | 1,407,310,000 | 1,599,575,000 | 1,610,953,000 | ||||||||||||
Securities sold under
agreements to repurchase |
99,755,000 | 99,755,000 | 94,413,000 | 94,413,000 | ||||||||||||
Federal funds purchased |
2,600,000 | 2,600,000 | 0 | 0 | ||||||||||||
Federal Home Loan
Bank advances |
205,000,000 | 208,435,000 | 270,000,000 | 274,847,000 | ||||||||||||
Subordinated debentures |
32,990,000 | 32,971,000 | 32,990,000 | 31,100,000 | ||||||||||||
Accrued interest payable |
6,158,000 | 6,158,000 | 15,245,000 | 15,245,000 | ||||||||||||
Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank
stock, accrued interest receivable and payable, bank owned life insurance, demand deposits,
securities sold under agreements to repurchase, and variable rate loans and deposits that reprice
frequently and fully. Security fair values are based on market prices or dealer quotes, and if no
such information is available, on the rate and term of the security and information about the
issuer. For fixed rate loans and deposits and for variable rate loans and deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows using current market
rates applied to the estimated life and credit risk. Fair value of subordinated debentures and
Federal Home Loan Bank advances is based on current rates for similar financing. Fair value of
off-balance sheet items is estimated to be nominal.
Current accounting pronouncements require disclosure of the estimated fair value of financial
instruments as disclosed in Note 15. Given the current market conditions, a portion of our loan
portfolio is not readily marketable and market prices do not exist. We have not attempted to
market our loans to potential buyers, if any exist, to determine the fair value of those
instruments. Since negotiated prices in illiquid markets depend upon the then present motivations
of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from
any estimate of fair value made without the benefit of negotiations. Additionally, changes in
market interest rates can dramatically impact the value of financial instruments in a short period
of time. Accordingly, the fair value measurements for loans included in the table above are
unlikely to represent the instruments’ liquidation values.
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 15 — 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 bonds and mortgage-backed securities issued or guaranteed by U.S.
Government agencies. We have no Level 1 or 3 securities available for sale.
Securities held to maturity. Securities held to maturity are carried at amortized cost when we have
the positive intent and ability to hold them to maturity. 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 have to sell our debt securities before recovery of their cost basis. The fair value of
held to maturity securities, as disclosed in the accompanying consolidated financial statements, is
based on quoted prices, if available. If quoted prices are not available, fair values are measured
using independent pricing models.
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 15 — FAIR VALUE MEASUREMENTS (Continued)
Mortgage loans held for sale. Mortgage loans held for sale are carried at the lower of cost or fair
value and are measured on a nonrecurring basis. Fair value is based on independent quoted market
prices, where applicable, or the prices for other mortgage whole loans with similar
characteristics. As of December 31, 2009 and 2008, we determined that the fair value of our
mortgage loans held for sale was similar to the cost; therefore, we carried the $2.5 million and
$1.1 million, respectively, of such loans at cost so they are not included in the nonrecurring
table below.
Loans and leases. We do not record loans and leases at fair value on a recurring basis. However,
from time to time, we record nonrecurring fair value adjustments to collateral dependent loans and
leases 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 and leases are reported in the
nonrecurring table below at initial recognition of impairment and on an ongoing basis until
recovery or charge-off.
Foreclosed assets. At time of foreclosure or repossession, foreclosed and repossessed assets are
adjusted to fair value less costs to sell upon transfer of the loans and leases to foreclosed and
repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value on
foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value
estimates.
Derivatives. For interest rate swaps, we measure fair value utilizing models that use primarily
market observable inputs, such as yield curves and option volatilities, and accordingly, are
classified as Level 2. We had no interest rate swap contracts outstanding at year-end 2009 and
2008.
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, 2009 are as follows:
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Securities available for sale |
$ | 182,492,000 | $ | 0 | $ | 182,492,000 | $ | 0 | ||||||||
Total |
$ | 182,492,000 | $ | 0 | $ | 182,492,000 | $ | 0 | ||||||||
(Continued)
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 15 — FAIR VALUE MEASUREMENTS (Continued)
The balances of assets and liabilities measured at fair value on a recurring basis as of December
31, 2008 are as follows:
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Securities available for sale |
$ | 162,669,000 | $ | 0 | $ | 162,669,000 | $ | 0 | ||||||||
Total |
$ | 162,669,000 | $ | 0 | $ | 162,669,000 | $ | 0 | ||||||||
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, 2009 are as follows:
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans (1) |
$ | 41,456,000 | $ | 0 | $ | 0 | $ | 41,456,000 | ||||||||
Foreclosed assets (1) |
26,608,000 | 0 | 0 | 26,608,000 | ||||||||||||
Total |
$ | 68,064,000 | $ | 0 | $ | 0 | $ | 68,064,000 | ||||||||
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of
December 31, 2008 are as follows:
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans (1) |
$ | 33,410,000 | $ | 0 | $ | 33,410,000 | $ | 0 | ||||||||
Total |
$ | 33,410,000 | $ | 0 | $ | 33,410,000 | $ | 0 | ||||||||
| (1) | Represents carrying value and related write-downs for which adjustments are based on the estimated value of the property or other assets. The disclosure relating to foreclosed assets was first required in 2009. |
(Continued)
F-68
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 15 — FAIR VALUE MEASUREMENTS (Continued)
Fair value estimates of collateral on impaired loans, as well as on 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. We have historically reported our
impaired loans and foreclosed assets under Level 2; however, in reviewing our current processes, we
now believe that Level 3 categorization is appropriate.
NOTE 16 — EARNINGS (LOSS) PER SHARE
The factors used in the earnings (loss) per share computation follow:
| 2009 | 2008 | 2007 | ||||||||||
Basic |
||||||||||||
Net income (loss) attributable to common shares |
$ | (52,889,000 | ) | $ | (4,959,000 | ) | $ | 8,966,000 | ||||
Weighted average common shares outstanding |
8,489,679 | 8,470,721 | 8,476,075 | |||||||||
Basic earnings (loss) per common share |
$ | (6.23 | ) | $ | (0.59 | ) | $ | 1.06 | ||||
Diluted |
||||||||||||
Net income (loss) attributable to common shares |
$ | (52,889,000 | ) | $ | (4,959,000 | ) | $ | 8,966,000 | ||||
Weighted average common shares outstanding for
basic earnings (loss) per common share |
8,489,679 | 8,470,721 | 8,476,075 | |||||||||
Add: Dilutive effects of share-based awards |
0 | 0 | 44,765 | |||||||||
Average shares and dilutive potential
common shares |
8,489,679 | 8,470,721 | 8,520,840 | |||||||||
Diluted earnings (loss) per common share |
$ | (6.23 | ) | $ | (0.59 | ) | $ | 1.05 | ||||
Due to our net loss in 2009, approximately 91,000 unvested restricted shares were not included in
determining both basic and diluted earnings per share. In addition, stock options and stock
warrants for approximately 296,000 and 616,000 shares of common stock, respectively, were
antidilutive and were not included in determining diluted earnings per share. Due to our net loss
in 2008, approximately 113,000 unvested restricted shares were not included in determining both
basic and diluted earnings per share. In addition, stock options for approximately 325,000 shares
of common stock were antidilutive and were not included in determining diluted earnings per share.
Weighted average diluted common shares outstanding equals the weighted average basic common shares
outstanding during 2009 and 2008 due to the net losses recorded during those periods.
Our weighted average common shares outstanding during 2007 include approximately 23,000 unvested
restricted shares outstanding that were included in determining both basic and diluted earnings per
share. In addition, stock options for approximately 45,000 shares of common stock were included in
determining diluted earnings per share. Stock options for approximately 133,000 shares of common
stock were antidilutive and were not included in determining diluted earnings per share.
(Continued)
F-69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 17 — SUBORDINATED DEBENTURES
Our trust, a business trust formed by Mercantile, was organized in 2004 for the purpose of issuing
Series A and Series B Preferred Securities. On September 16, 2004, our trust sold the Series A
Preferred Securities in a private sale for $16.0 million, and also sold $495,000 of Series A Common
Securities to Mercantile. The proceeds of the Series A Preferred Securities and the Series A
Common Securities were used by the trust to purchase $16,495,000 of Series A Floating Rate Notes
that were issued by Mercantile on September 16, 2004. Mercantile used the proceeds of the Series A
Floating Rate Notes to finance the redemption on September 17, 2004 of the $16.0 million of 9.60%
Cumulative Preferred Securities issued in 1999 by MBWM Capital Trust I. On December 10, 2004, our
trust sold the Series B Preferred Securities in a private sale for $16.0 million, and also sold
$495,000 of Series B Common Securities to Mercantile. The proceeds of the Series B Preferred
Securities and the Series B Common Securities were used by our trust to purchase $16,495,000 of
Series B Floating Rate Notes that were issued by Mercantile on December 10, 2004. Substantially
all of the net proceeds of the Series B Floating Rate Notes were contributed to our Bank as capital
to provide support for asset growth, fund investments in loans and securities and for general
corporate purposes.
The only significant assets of our trust are the Series A and Series B Floating Rate Notes, and the
only significant liabilities of our trust are the Series A and Series B Preferred Securities. The
Series A and Series B 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 long-term borrowings.
NOTE 18 — 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 2009 and 2008, 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, 2009
that we believe has changed our Bank’s categorization.
(Continued)
F-70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 18 — REGULATORY MATTERS (Continued)
Our actual capital levels (dollars in thousands) and minimum required levels were:
| Minimum Required | ||||||||||||||||||||||||
| to be Well | ||||||||||||||||||||||||
| Minimum Required | Capitalized Under | |||||||||||||||||||||||
| for Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Regulations | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
2009 |
||||||||||||||||||||||||
Total capital (to risk
weighted assets)
|
||||||||||||||||||||||||
Consolidated |
$ | 193,157 | 11.2 | % | $ | 138,169 | 8.0 | % | $NA | NA | ||||||||||||||
Bank |
191,146 | 11.1 | 138,051 | 8.0 | 172,563 | 10.0 | % | |||||||||||||||||
Tier 1 capital (to risk
weighted assets)
|
||||||||||||||||||||||||
Consolidated |
171,244 | 9.9 | 69,085 | 4.0 | NA | NA | ||||||||||||||||||
Bank |
169,251 | 9.8 | 69,026 | 4.0 | 103,538 | 6.0 | ||||||||||||||||||
Tier 1 capital (to average
assets) |
||||||||||||||||||||||||
Consolidated |
171,244 | 8.6 | 79,325 | 4.0 | NA | NA | ||||||||||||||||||
Bank |
169,251 | 8.6 | 79,119 | 4.0 | 98,899 | 5.0 | ||||||||||||||||||
2008 |
||||||||||||||||||||||||
Total capital (to risk
weighted assets)
|
||||||||||||||||||||||||
Consolidated |
$ | 229,307 | 10.9 | % | $ | 167,836 | 8.0 | % | $NA | NA | ||||||||||||||
Bank |
226,034 | 10.8 | 167,480 | 8.0 | 209,350 | 10.0 | % | |||||||||||||||||
Tier 1 capital (to risk
weighted assets)
|
||||||||||||||||||||||||
Consolidated |
203,072 | 9.7 | 83,918 | 4.0 | NA | NA | ||||||||||||||||||
Bank |
199,853 | 9.6 | 83,740 | 4.0 | 125,610 | 6.0 | ||||||||||||||||||
Tier 1 capital (to average
assets)
|
||||||||||||||||||||||||
Consolidated |
203,072 | 9.2 | 88,577 | 4.0 | NA | NA | ||||||||||||||||||
Bank |
199,853 | 9.0 | 88,413 | 4.0 | 110,516 | 5.0 | ||||||||||||||||||
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 2009, under the most restrictive of these regulations (to remain well capitalized), our
Bank could distribute approximately $24.8 million to Mercantile as dividends without prior
regulatory approval.
Our consolidated capital levels as of December 31, 2009 and December 31, 2008 include $32.0 million
of trust preferred securities issued by the trust in September 2004 and December 2004 subject to
certain limitations. Under applicable Federal Reserve guidelines, the trust preferred securities
constitute a restricted core capital element. The guidelines provide that the aggregate amount of
restricted core elements that may be included in Tier 1 capital must not exceed 25% of the sum of
all core capital elements, including restricted core capital elements, net of goodwill less any
associated deferred tax liability. At December 31, 2009 and December 31, 2008, all $32.0 million
of the trust preferred securities were included as Tier 1 capital of Mercantile.
(Continued)
F-71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 19 — U.S. TREASURY CAPITAL PURCHASE PROGRAM PARTICIPATION
On May 15, 2009, we completed the sale of preferred stock and a warrant for common stock to the
United States Treasury Department (“Treasury”) for $21.0 million under the Treasury’s Capital
Purchase Program. The program is designed to attract broad participation by healthy banking
institutions to help stabilize the financial system and increase lending for the benefit of the
U.S. economy. Under the terms of the sale, the Treasury received 21,000 shares of fixed rate
cumulative perpetual preferred stock with a liquidation value of $1,000 per share and a warrant to
purchase 616,438 shares of our common stock, no par value, in exchange for $21.0 million. The
preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5.00%
for the first five years, and 9.00% thereafter. Subject to regulatory approval, we are generally
permitted to redeem the preferred shares at par plus unpaid dividends. The common stock warrant
has a 10-year term and was immediately exercisable upon its issuance, with an exercise price equal
to $5.11 per share. The Treasury has agreed not to exercise voting power with respect to any
shares of common stock issued upon exercise of the warrant, while it holds the shares.
We allocated the $21.0 million in proceeds to the preferred stock and the common stock warrant
based on their relative fair values. To determine the fair value of the preferred stock, we used a
discounted cash flow model that assumed redemption of the preferred stock at the end of year 5.
The discount rate utilized was 12.00% and the estimated fair value was determined to be $15.5
million. The fair value of the common stock warrant was estimated to be $0.9 million using the
Black-Scholes option pricing model with the following assumptions: expected dividend yield of
1.00%; risk-free interest rate of 1.99%; expected life of five years; expected volatility of
53.00%; and a weighted average fair value of $3.92.
The aggregate fair value for both the preferred stock and the common stock warrant was determined
to be $16.4 million, with 94.6% of this aggregate attributable to the preferred stock and 5.4%
attributable to the common stock warrants. Therefore, the $21.0 million issuance was allocated
with $19.9 million being assigned to the preferred stock and $1.1 million being assigned to the
common stock warrant.
The sum of the $1.1 million difference between the $21.0 million face value of the preferred stock
and the $19.9 million allocated to it upon issuance and $0.2 million of direct costs associated
with the transaction, or $1.3 million, was recorded as a discount on the preferred stock. The $1.3
million discount is being accreted, using the effective interest method, as a reduction in net
income available to common shareholders over the next five years at approximately $0.2 million to
$0.3 million per year.
(Continued)
F-72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 20 — OTHER COMPREHENSIVE INCOME
Other comprehensive income components, other than net income (loss), and related taxes were as
follows:
| 2009 | 2008 | 2007 | ||||||||||
Unrealized holding gains (losses) on
available-for-sale securities |
$ | (1,269,000 | ) | $ | 2,761,000 | $ | 2,110,000 | |||||
Change in net fair value of interest rate swaps |
0 | 2,876,000 | 0 | |||||||||
Reclassification adjustments for gains
later recognized in income |
(1,803,000 | ) | (974,000 | ) | 0 | |||||||
| (3,072,000 | ) | 4,663,000 | 2,110,000 | |||||||||
Tax effect of unrealized holding gains
on available-for-sale securities and
unrealized gain on interest rate swaps |
0 | (1,973,000 | ) | (739,000 | ) | |||||||
Tax effect of reclassification adjustments for
gains later recognized in income |
631,000 | 341,000 | 0 | |||||||||
Other comprehensive income |
$ | (2,441,000 | ) | $ | 3,031,000 | $ | 1,371,000 | |||||
Accumulated other comprehensive income, net of tax effects (as applicable), consists of a net
unrealized gain on available-for-sale securities of $795,000 and the remaining unrealized gain on
interest rate swaps of $64,000 at December 31, 2009. At December 31, 2008, accumulated other
comprehensive income, net of tax effects, consists of a net unrealized gain on available-for-sale
securities totaling $2,064,000 and a fair value of interest rate swaps of $1,236,000.
NOTE 21 — QUARTERLY FINANCIAL DATA (UNAUDITED)
| Net Income (Loss) | ||||||||||||||||||||
| Attributable to | ||||||||||||||||||||
| Interest | Net Interest | Common | Earnings (Loss) per Share | |||||||||||||||||
| Income | Income | Shares | Basic | Diluted | ||||||||||||||||
2009 |
||||||||||||||||||||
First quarter |
$ | 28,021,000 | $ | 11,805,000 | $ | (4,489,000 | ) | $ | (0.53 | ) | $ | (0.53 | ) | |||||||
Second quarter |
26,866,000 | 12,450,000 | (6,388,000 | ) | (0.75 | ) | (0.75 | ) | ||||||||||||
Third quarter |
25,893,000 | 13,567,000 | (5,606,000 | ) | (0.66 | ) | (0.66 | ) | ||||||||||||
Fourth quarter |
24,129,000 | 13,511,000 | (36,406,000 | ) | (4.28 | ) | (4.28 | ) | ||||||||||||
2008 |
||||||||||||||||||||
First quarter |
$ | 31,955,000 | $ | 11,383,000 | $ | (3,738,000 | ) | $ | (0.44 | ) | $ | (0.44 | ) | |||||||
Second quarter |
29,139,000 | 10,592,000 | (2,612,000 | ) | (0.31 | ) | (0.31 | ) | ||||||||||||
Third quarter |
29,843,000 | 11,728,000 | 1,079,000 | 0.13 | 0.13 | |||||||||||||||
Fourth quarter |
30,134,000 | 12,505,000 | 313,000 | 0.04 | 0.04 | |||||||||||||||
2007 |
||||||||||||||||||||
First quarter |
$ | 36,025,000 | $ | 14,484,000 | $ | 4,283,000 | $ | 0.51 | $ | 0.51 | ||||||||||
Second quarter |
36,084,000 | 13,948,000 | 2,221,000 | 0.26 | 0.26 | |||||||||||||||
Third quarter |
36,779,000 | 14,051,000 | 2,367,000 | 0.28 | 0.27 | |||||||||||||||
Fourth quarter |
35,293,000 | 13,074,000 | 95,000 | 0.01 | 0.01 | |||||||||||||||
(Continued)
F-73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 21 — QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
During the fourth quarter of 2009, we recorded a charge of $23.2 million to federal income tax
expense to establish a valuation allowance against our net deferred tax asset.
NOTE 22 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements:
CONDENSED BALANCE SHEETS
| 2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 1,928,000 | $ | 407,000 | ||||
Investment in bank subsidiary |
170,111,000 | 203,153,000 | ||||||
Other assets |
1,455,000 | 4,396,000 | ||||||
Total assets |
$ | 173,494,000 | $ | 207,956,000 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
Liabilities |
$ | 400,000 | $ | 594,000 | ||||
Subordinated debentures |
32,990,000 | 32,990,000 | ||||||
Shareholders’ equity |
140,104,000 | 174,372,000 | ||||||
Total liabilities and shareholders’ equity |
$ | 173,494,000 | $ | 207,956,000 | ||||
(Continued)
F-74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 22 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
| 2009 | 2008 | 2007 | ||||||||||
Income |
||||||||||||
Dividends from subsidiaries |
$ | 2,852,000 | $ | 4,739,000 | $ | 7,291,000 | ||||||
Other |
0 | 0 | 19,000 | |||||||||
Total income |
2,852,000 | 4,739,000 | 7,310,000 | |||||||||
Expenses |
||||||||||||
Interest expense |
1,048,000 | 1,914,000 | 2,512,000 | |||||||||
Other operating expenses |
2,514,000 | 2,431,000 | 2,835,000 | |||||||||
Total expenses |
3,562,000 | 4,345,000 | 5,347,000 | |||||||||
Income (loss) before income tax benefit and equity in
undistributed net income (loss) of subsidiary |
(710,000 | ) | 394,000 | 1,963,000 | ||||||||
Federal income tax expense (benefit) |
1,767,000 | (1,417,000 | ) | (1,783,000 | ) | |||||||
Equity in undistributed net income (loss) of subsidiary |
(49,610,000 | ) | (6,770,000 | ) | 5,220,000 | |||||||
Net income (loss) |
(52,087,000 | ) | (4,959,000 | ) | 8,966,000 | |||||||
Preferred stock dividends and accretion |
802,000 | 0 | 0 | |||||||||
Net income (loss) attributable to common shares |
$ | (52,889,000 | ) | $ | (4,959,000 | ) | $ | 8,966,000 | ||||
(Continued)
F-75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE 22 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
| 2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income (loss) |
$ | (52,087,000 | ) | $ | (4,959,000 | ) | $ | 8,966,000 | ||||
Adjustments to reconcile net income (loss) to net
cash from operating activities: |
||||||||||||
Equity in undistributed (income) loss of subsidiary |
49,610,000 | 6,770,000 | (5,220,000 | ) | ||||||||
Stock-based compensation expense |
611,000 | 654,000 | 361,000 | |||||||||
Change in other assets |
2,798,000 | (1,023,000 | ) | (483,000 | ) | |||||||
Change in other liabilities |
(194,000 | ) | (661,000 | ) | 648,000 | |||||||
Net cash from operating activities |
738,000 | 779,000 | 4,272,000 | |||||||||
Cash flows from investing activities |
||||||||||||
Net capital investment into subsidiaries |
(19,000,000 | ) | 0 | 0 | ||||||||
Net cash for investing activities |
(19,000,000 | ) | 0 | 0 | ||||||||
Cash flows from financing activities |
||||||||||||
Proceeds from issuance of preferred stock and
common stock warrant, net |
20,834,000 | 0 | 0 | |||||||||
Stock option exercises, net |
0 | 0 | 56,000 | |||||||||
Employee stock purchase plan |
57,000 | 76,000 | 91,000 | |||||||||
Dividend reinvestment plan |
11,000 | 40,000 | 76,000 | |||||||||
Cash dividends on common stock |
(594,000 | ) | (2,625,000 | ) | (4,677,000 | ) | ||||||
Cash dividends on preferred stock |
(525,000 | ) | 0 | 0 | ||||||||
Fractional shares paid |
0 | 0 | (4,000 | ) | ||||||||
Net cash from (for) financing activities |
19,783,000 | (2,509,000 | ) | (4,458,000 | ) | |||||||
Net change in cash and cash equivalents |
1,521,000 | (1,730,000 | ) | (186,000 | ) | |||||||
Cash and cash equivalents at beginning of period |
407,000 | 2,137,000 | 2,323,000 | |||||||||
Cash and cash equivalents at end of period |
$ | 1,928,000 | $ | 407,000 | $ | 2,137,000 | ||||||
F-76
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 15, 2010.
| MERCANTILE BANK CORPORATION |
||||
| /s/ Michael H. Price | ||||
| Michael H. Price | ||||
| Chairman of the Board, 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 15, 2010.
/s/ Betty S. Burton
|
/s/ Calvin D. Murdock
|
|||
/s/ David M. Cassard
|
/s/ Michael H. Price | |||
David M. Cassard, Director
|
Michael H. Price, Chairman of the Board, | |||
| President and Chief Executive Officer | ||||
| (principal executive officer) | ||||
/s/ Edward J. Clark
|
/s/ Merle J. Prins | |||
Edward J. Clark, Director
|
Merle J. Prins, Director | |||
/s/ Peter A. Cordes
|
/s/ Timothy O. Schad | |||
Peter A. Cordes, Director
|
Timothy O. Schad, Director | |||
/s/ Doyle A. Hayes
|
/s/ Dale J. Visser | |||
Doyle A. Hayes, Director
|
Dale J. Visser, Director | |||
/s/ Susan K. Jones
|
/s/ Donald Williams, Sr. | |||
Susan K. Jones, Director
|
Donald Williams, Sr., Director | |||
/s/ Lawrence W. Larsen
|
/s/ Charles E. Christmas | |||
Lawrence W. Larsen, Director
|
Charles E. Christmas, Senior Vice President, | |||
| Chief Financial Officer and Treasurer | ||||
| (principal financial and accounting officer) |
EXHIBIT INDEX
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |
3.1
|
Our Articles of Incorporation are incorporated by reference to exhibit 3.1 of our Form 10-Q for the quarter ended June 30, 2009 | |
3.2
|
Our Amended and Restated Bylaws dated as of January 16, 2003 are incorporated by reference to exhibit 3.2 of our Registration Statement on Form S-3 (Commission File No. 333-103376) that became effective on February 21, 2003 | |
10.1
|
Our 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of our Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 * | |
10.2
|
Our 2000 Employee Stock Option Plan is incorporated by reference to exhibit 10.14 of our Form 10-K for the year ended December 31, 2000 * | |
10.3
|
Our 2004 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of our Form 10-Q for the quarter ended September 30, 2004 * | |
10.4
|
Form of Stock Option Agreement for options under the 2004 Employee Stock Option Plan is incorporated by reference to exhibit 10.2 of our Form 10-Q for the quarter ended September 30, 2004 * | |
10.5
|
Our Independent Director Stock Option Plan is incorporated by reference to exhibit 10.26 of our Form 10-K for the year ended December 31, 2002 * | |
10.6
|
Form of Stock Option Agreement for options under the Independent Director Stock Option Plan is incorporated by reference to exhibit 10.1 of our Form 8-K filed October 22, 2004 * | |
10.7
|
Mercantile Bank of Michigan Amended and Restated Deferred Compensation Plan for Members of the Board of Directors dated June 29, 2006 is incorporated by reference to exhibit 10.9 of our Form 10-K for the year ended December 31, 2007 | |
10.8
|
First Amendment dated October 25, 2007 to the Mercantile Bank of Michigan Amended and Restated Deferred Compensation Plan for Members of the Board of Directors dated June 29, 2006 is incorporated by reference to exhibit 10.10 of our Form 10-K for the year ended December 31, 2007 | |
10.9
|
Second Amendment dated October 23, 2008 to the Mercantile Bank of Michigan Amended and Restated Deferred Compensation Plan for Members of the Board of Directors dated June 29, 2007 is incorporated by reference to exhibit 10.9 of our Form 10-K for the year ended December 31, 2008 | |
10.10
|
Agreement between Fiserv Solutions, Inc. and our bank dated September 10, 1997, is incorporated by reference to exhibit 10.3 of our Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 | |
10.11
|
Extension Agreement of Data Processing Contract between Fiserv Solutions, Inc. and our bank dated May 12, 2000 extending the agreement between Fiserv Solutions, Inc. and our bank dated September 10, 1997, is incorporated by reference to exhibit 10.15 of our Form 10-K for the year ended December 31, 2000 |
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |
10.12
|
Extension Agreement of Data Processing Contract between Fiserv Solutions, Inc. and our bank dated November 21, 2002 extending the agreement between Fiserv Solutions, Inc. and our bank dated September 10, 1997, is incorporated by reference to exhibit 10.5 of our Form 10-K for the year ended December 31, 2002 | |
10.13
|
Extension Agreement of Data Processing Contract between Fiserv Solutions, Inc. and our bank dated December 20, 2006 extending the agreements between Fiserv Solutions, Inc. and our bank dated September 10, 1997 and November 21, 2002 is incorporated by reference to exhibit 10.14 of our Form 10-K for the year ended December 31, 2007 | |
10.14
|
Amended and Restated Employment Agreement dated as of October 18, 2001, among the company, our bank and Michael H. Price, is incorporated by reference to exhibit 10.22 of our Form 10-K for the year ended December 31, 2001 * | |
10.15
|
Employment Agreement dated as of October 18, 2001, among the company, our bank and Robert B. Kaminski, Jr., is incorporated by reference to exhibit 10.23 of our Form 10-K for the year ended December 31, 2001 * | |
10.16
|
Employment Agreement dated as of October 18, 2001, among the company, our bank and Charles E. Christmas, is incorporated by reference to exhibit 10.23 of our Form 10-K for the year ended December 31, 2001 * | |
10.17
|
Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Michael H. Price, is incorporated by reference to exhibit 10.22 of our Form 10-K for the year ended December 31, 2002 * | |
10.18
|
Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Robert B. Kaminski, Jr., is incorporated by reference to exhibit 10.23 of our Form 10-K for the year ended December 31, 2002 * | |
10.19
|
Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Charles E. Christmas, is incorporated by reference to exhibit 10.24 of our Form 10-K for the year ended December 31, 2002 * | |
10.20
|
Amendment to Employment Agreement dated as of October 28, 2004, among the company, our bank and Robert B. Kaminski, Jr., is incorporated by reference to exhibit 10.21 of our Form 10-K for the year ended December 31, 2004 * | |
10.21
|
Junior Subordinated Indenture between us and Wilmington Trust Company dated September 16, 2004 providing for the issuance of the Series A and Series B Floating Rate Junior Subordinated Notes due 2034 is incorporated by reference to exhibit 10.1 of our Form 8-K filed December 15, 2004 | |
10.22
|
Amended and Restated Trust Agreement dated September 16, 2004 for Mercantile Bank Capital Trust I is incorporated by reference to exhibit 10.2 of our Form 8-K filed December 15, 2004 | |
10.23
|
Placement Agreement between us, Mercantile Bank Capital Trust I, and SunTrust Capital Markets, Inc. dated September 16, 2004 is incorporated by reference to exhibit 10.3 of our Form 8-K filed December 15, 2004 | |
10.24
|
Guarantee Agreement dated September 16, 2004 between Mercantile as Guarantor and Wilmington Trust Company as Guarantee Trustee is incorporated by reference to exhibit 10.4 of our Form 8-K filed December 15, 2004 | |
10.25
|
Form of Agreement Amending Stock Option Agreement, dated November 17, 2005 issued under our 2004 Employee Stock Option Plan, is incorporated by reference to exhibit 10.1 of our Form 8-K filed December 14, 2005 * |
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |
10.26
|
Second Amendment to Employment Agreement dated as of November 17, 2005, among the company, our bank and Michael H. Price is incorporated by reference to exhibit 10.29 of our Form 10-K for the year ended December 31, 2005 * | |
10.27
|
Third Amendment to Employment Agreement dated as of November 17, 2005, among the company, our bank and Robert B. Kaminski, Jr. is incorporated by reference to exhibit 10.30 of our Form 10-K for the year ended December 31, 2005 * | |
10.28
|
Second Amendment to Employment Agreement dated as of November 17, 2005, among the company, our bank and Charles E. Christmas is incorporated by reference to exhibit 10.31 of our Form 10-K for the year ended December 31, 2005 * | |
10.29
|
Form of Mercantile Bank of Michigan Amended and Restated Executive Deferred Compensation Agreement dated November 18, 2006, that has been entered into between our bank and each of Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski, Jr., Charles E. Christmas, and certain other officers of our bank is incorporated by reference to exhibit 10.34 of our Form 10-K for the year ended December 31, 2007 * | |
10.30
|
Form of First Amendment to the Mercantile Bank of Michigan Executive Deferred Compensation Agreement dated November 18, 2006, that has been entered into between our bank and each of Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski, Jr., Charles E. Christmas, and certain other officers of our bank, dated October 25, 2007 is incorporated by reference to exhibit 10.35 of our Form 10-K for the year ended December 31, 2007 * | |
10.31
|
Form of Second Amendment to the Mercantile Bank of Michigan Executive Deferred Compensation Agreement date November 18, 2006, that has been entered into between our bank and each of Michael H. Price, Robert B. Kaminski, Charles E. Christmas, and certain other officers of our bank, dated October 23, 2008 is incorporated by reference to exhibit 10.34 of our Form 10-K for the year ended December 31, 2008 * | |
10.32
|
Form of Mercantile Bank of Michigan Split Dollar Agreement that has been entered into between our bank and each of Gerald R. Johnson, Jr., 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 * | |
10.33
|
Director Fee Summary * | |
10.34
|
Lease Agreement between our bank and The Conlin Company dated July 12, 2005 for our Ann Arbor, Michigan office is incorporated by reference to exhibit 10.36 of our Form 10-K for the year ended December 31, 2005 | |
10.35
|
Stock Incentive Plan of 2006 is incorporated by reference to Appendix A of our proxy statement for our April 27, 2006 annual meeting of shareholders that was filed with the Securities and Exchange Commission * | |
10.36
|
Amendment and Restatement of Stock Incentive Plan of 2006 dated November 18, 2008 is incorporated by reference to exhibit 10.39 of our Form 10-K for the year ended December 31, 2008 * | |
10.37
|
Form of Notice of Grant of Incentive Stock Option and Stock Option Agreement for incentive stock options granted in 2006 under our Stock Incentive Plan of 2006 is incorporated by reference to exhibit 10.1 of our Form 8-K filed November 22, 2006 * |
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |
10.38
|
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 * | |
10.39
|
Form of Restricted Stock Award Agreement Notification of Award and Terms and Conditions of Award for restricted stock granted in 2006 under our Stock Incentive Plan of 2006 is incorporated by reference to exhibit 10.2 of our Form 8-K filed November 22, 2006 * | |
10.40
|
Form of Restricted Stock Award Agreement Notification of Award and Terms and Conditions of Award for restricted stock granted after 2006 under our Stock Incentive Plan of 2006 is incorporated by reference to exhibit 10.43 of our Form 10-K for the year ended December 31, 2007 * | |
10.41
|
Mercantile Bank Corporation Employee Stock Purchase Plan of 2002 is incorporated by reference to exhibit 10.47 of our Form 10-K for the year ended December 31, 2008 | |
10.42
|
First Amendment to Mercantile Bank Corporation Employee Stock Purchase Plan of 2002 is incorporated by reference to exhibit 4(c) of our Registration Statement on Form S-8 (Commission File No. 333-158280) that became effective on March 30, 2009 | |
10.43
|
Second Amendment to Mercantile Bank Corporation Employee Stock Purchase Plan of 2002 is incorporated by reference to exhibit 4(d) of our Registration Statement on Form S-8 (Commission File No. 333-158280) that became effective on March 30, 2009 | |
10.44
|
Lease Agreement between our bank and CD Partners LLC dated October 2, 2007 for our Oakland County, Michigan office is incorporated by reference to exhibit 10.47 of our Form 10-K for the year ended December 31, 2007 | |
10.45
|
Letter Agreement, dated as of May 15, 2009, between Mercantile Bank Corporation and the United States Department of the Treasury, including the Securities Purchase Agreement – Standard Terms and Schedules is incorporated by reference to exhibit 10.1 of our Form 8-K filed May 15, 2009 | |
10.46
|
Side Letter Agreement, dated as of May 15, 2009, between Mercantile Bank Corporation and the United States Department of the Treasury regarding the American Recovery and Reinvestment Act of 2009 is incorporated by reference to exhibit 10.2 of our Form 8-K filed May 15, 2009 | |
10.47
|
Amendment to Employment Agreements, dated May 15, 2009, by and among Mercantile Bank Corporation, Mercantile Bank of Michigan, Michael H. Price, Robert B. Kaminski, Jr. and Charles E. Christmas is incorporated by reference to exhibit 10.3 of our Form 8-K filed May 15, 2009 * | |
10.48
|
Form of Waiver executed by each of Michael H. Price, Robert B. Kaminski, Jr. and Charles E. Christmas is incorporated by reference to exhibit 10.4 of our Form 8-K filed May 15, 2009 | |
10.49
|
Amendment to Commercial Lease between our bank and Jerry Helmer and Ruthann Helmer dated August 14, 2007 for our Ann Arbor, Michigan office is incorporated by reference to exhibit 10.5 of our Form 10-Q for the quarter ended June 30, 2009 |
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |
10.50
|
Termination of Lease Agreement between our bank and CD Partners LLC dated May 21, 2009 for our Oakland County, Michigan office is incorporated by reference to exhibit 10.6 of our Form 10-Q for the quarter ended June 30, 2009 | |
10.51
|
Termination of Lease Agreement between our bank and Jerry Helmer and Ruthann Helmer dated July 22, 2009 for our Ann Arbor, Michigan office is incorporated by reference to exhibit 10.7 of our Form 10-Q for the quarter ended June 30, 2009 | |
10.52
|
Warrant to Purchase Common Stock of Mercantile Bank Corporation, dated May 15, 2009 is incorporated by reference to exhibit 4.2 of our Form 8-K filed May 15, 2009 | |
21
|
Subsidiaries of the company is incorporated by reference to exhibit 21 of our Form 10-K for the year ended December 31, 2008 | |
23
|
Consent of BDO Seidman, LLP | |
31
|
Rule 13a-14(a) Certifications | |
32.1
|
Section 1350 Chief Executive Officer Certification | |
32.2
|
Section 1350 Chief Financial Officer Certification | |
99.1
|
First fiscal year certification of our principal executive officer and principal financial officer required because of our participation in the Capital Purchase Program of the Troubled Asset Relief Program |
| * | Management contract or compensatory plan |