Note 2 - Business Combination

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

NOTE 2 - BUSINESS COMBINATION

We completed the merger of Firstbank Corporation (“Firstbank”), a Michigan corporation with approximately $1.5 billion in total assets and 46 branch locations, into Mercantile Bank Corporation as of June 1, 2014 (“Merger Date”). Each share of Firstbank’s common stock was converted into the right to receive one share of Mercantile common stock, resulting in Mercantile issuing 8,087,272 shares of its common stock. The merger provided an expanded geographic footprint for the Company and increased the size of the balance sheet. In conjunction with the completion of the merger, Mercantile assumed the obligations of Firstbank Capital Trust I, Firstbank Capital Trust II, Firstbank Capital Trust III and Firstbank Capital Trust IV.

The Firstbank transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the Merger Date. Preliminary goodwill of $49.5 million was calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created from combining the two banking organizations as well as the economies of scale expected from combining the operations of the two companies. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a tax-free exchange.

The following table provides the purchase price calculation as of the Merger Date and the identifiable assets purchased and the liabilities assumed at their estimated fair values. These fair value measurements are provisional based on third-party valuations that are currently under review and are subject to refinement for up to one year after the Merger Date based on additional information that may be obtained by us that existed as of the Merger Date.

Purchase Price:
Mercantile common shares issued for Firstbank common shares		8,087,272
Price per share, based on Mercantile closing price on May 30, 2014	$	21.43
Value of common stock issued		173,310,000
Value of replacement stock options granted		1,664,000
Total purchase price	$	174,974,000

Preliminary Statement of Net Assets Acquired at Fair Value:
Assets
Cash and cash equivalents	$	91,806,000
Securities		358,599,000
Total loans		943,662,000
Premises and equipment		24,049,000
Core deposit intangible		17,478,000
Mortgage servicing rights		7,389,000
Other assets		9,897,000
Total Assets	$	1,452,880,000
Liabilities
Deposits	$	1,229,609,000
Borrowings		87,615,000
Other liabilities		10,155,000
Total Liabilities	$	1,327,379,000
Net Identifiable Assets Acquired			$	125,501,000
Goodwill			$	49,473,000

Effective December 31, 2014, we identified certain Firstbank deferred tax assets and liabilities that should have been addressed on the Merger Date. The net impact of recording the necessary entries was a $1.4 million reduction to Goodwill and a $1.4 million increase to our net deferred tax asset account (included in other assets above) from what we reported in our June 30, 2014 and September 30, 2014 Form 10-Qs.

Firstbank’s results of operations prior to the Merger Date are not included in our Consolidated Statements of Income or Consolidated Statements of Comprehensive Income. We recorded merger-related expenses of $5.4 million and $1.2 million during 2014 and 2013, respectively. Such expenses were generally for professional services, costs related to termination of existing contractual arrangements for various services, retention and severance compensation costs, marketing and promotional expenses, travel costs, and printing and supplies costs. We do not expect to record any additional significant expenses related to the Firstbank merger in future periods. We are not presenting the amounts of revenue and earnings of Firstbank since the Merger Date as it is impracticable due to the integration of Firstbank upon the consummation of the merger.

The following table provides the unaudited pro forma information for the results of operations for the twelve month periods ended December 31, 2014 and 2013, as if the acquisition had occurred on January 1, 2013. These adjustments reflect the impact of certain purchase accounting fair value measurements primarily related to Firstbank’s loan and deposit portfolios. In addition, the aggregate $12.2 million in merger-related expenses recorded by us and Firstbank during 2014 and 2013 are reflected to have been recorded during 2013. We expect to achieve further operating cost savings and other business synergies as a result of the merger which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

	2014		2013
Net interest income	$	98,607,000	$	93,862,000
Noninterest expense		81,295,000		93,263,000
Net income		22,659,000		16,068,000
Net income per diluted share		1.33		0.96

In most instances, determining the fair value of the acquired assets and assumed liabilities required us to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Firstbank’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (“acquired non-impaired”). In addition, the loans are further categorized into different loan pools based primarily on the type and purpose of the loan.

The provisional fair value of loans at the Merger Date is presented in the following table: 

	Acquired		Acquired		Acquired
	Impaired		Non-Impaired		Total Loans
Commercial Loans:
Commercial & industrial	$	878,000	$	163,316,000	$	164,194,000
Commercial real estate		12,973,000		378,016,000		390,989,000
Construction & development		1,289,000		33,726,000		35,015,000
Total Commercial Loans	$	15,140,000	$	575,058,000	$	590,198,000
Consumer Loans:
Residential mortgages	$	9,694,000	$	216,653,000	$	226,347,000
Instalment		167,000		61,657,000		61,824,000
Home equity lines		288,000		52,054,000		52,342,000
Construction		76,000		12,875,000		12,951,000
Total Consumer Loans	$	10,225,000	$	343,239,000	$	353,464,000
Total Loans	$	25,365,000	$	918,297,000	$	943,662,000

The following table presents data on acquired impaired loans at the Merger Date:

	Acquired Impaired
Contractually required payments	$	44,936,000
Nonaccretable difference		17,057,000
Expected cash flows		27,879,000
Accretable yield		2,514,000
Carrying balance	$	25,365,000

The nonaccretable difference includes $10.4 million in principal cash flows not expected to be collected, $2.8 million of pre-acquisition charge-offs and $3.9 million of future interest not expected to be collected. The unpaid principal balance of acquired performing loans was $926.4 million at the Merger Date, and the unaccreted discount on such loans was $8.1 million.