Mercantile repays half its TARP money

April 9, 2012
| By Pete Daly |
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Mercantile Bank Corp. in Grand Rapids has announced it just repurchased half of the $21 million in non-voting preferred stock it issued in May 2009 to the U.S. Department of the Treasury under Treasury’s Capital Purchase Program, part of the Troubled Asset Relief Program.

The deal was, in effect, a loan from the federal government through TARP. In February, the Business Journal reported a prediction by a GVSU finance professor that Mercantile would pay off its TARP loan as soon as possible this year.

“We are pleased to repurchase a significant portion of our outstanding preferred stock under the CPP without the need to issue any additional stock or debt, and while maintaining our well-capitalized status,” said Michael Price, chairman and CEO of Mercantile Bank Corp.

He said the bank’s ability to complete the repurchase transaction “solely with internally generated funds illustrates Mercantile’s strong capital position, achieved through a return to profitability and effective balance sheet management over the past several years. While participating in the program provided an additional cushion during the Great Recession, we are now in a healthy financial position to support future growth.”

Mercantile repurchased its preferred stock from the Treasury Department following approval from the Federal Reserve and consultation with the Federal Deposit Insurance Corp. Because of the repurchase, Mercantile expects to record a reduction of retained earnings of approximately $300,000 in its second-quarter 2012 results, for the accelerated discount on the preferred stock  that was being amortized over an original period of five years from the issuance date of May 15, 2009.

As a result, Mercantile’s Tier 1 Leverage Capital Ratio will be reduced by approximately 75 basis points; however, it will remain “well capitalized” for regulatory purposes, according to Mercantile.

Gregg Dimkoff, a finance professor at the GVSU Seidman School of Business, noted in February that one of the terms of the TARP or so-called “bailout” loans from the government was the suspension of dividend payments by those banks, until they had repaid their TARP funding. He noted that Mercantile Bank had accepted $21 million in TARP funds but he expected the bank to repay it this year.

“It would surprise me if it doesn’t, and it would also surprise me if Mercantile doesn’t immediately start paying some small dividend” when the total amount has been repaid, “just to send the message” that Mercantile is well on the way to full recovery.

“Mercantile has returned to profitability, and I know one of their top priorities is repaying that money” to the government’s TARP program, said Dimkoff, at the time.

He told the Business Journal last week that “all the very large banks in the U.S. have paid back their TARP money,” citing Chase and Citibank as examples, and said only really small banks that were hit hard during the recession still had outstanding TARP debt.

Dimkoff said so many banks have repaid their TARP money, he now believes the federal government has gotten back more money from the banks than it loaned out, because the government charged interest and fees.

The Wall Street Journal reported last week that the TARP bank programs have now turned an $18 billion profit, according to Treasury.

In the case of the Mercantile preferred stock held by the government, Treasury received annual dividends equal to 8 percent, according to Dimkoff.

Dimkoff said that even considering TARP amounts still owed — such as the remaining $10.5 million owed by Mercantile — by now “the government has gotten back more money than it loaned out.”

Some small banks, such as Independent Bank in Ionia, still owe TARP money, said Dimkoff, “and they’re slowly coming back.”

“But the most recent quarter (was) a loss, not a profit, whereas Mercantile has been generating a profit. And anyone who has been following Mercantile kind of expects that, this year, they will pay back their TARP money,” he said. “It wouldn’t surprise me if they paid the rest later this year, or — worst case scenario — next year,” he added.

Dimkoff noted that Mercantile’s common stock price has experienced a major run-up in the last two and a half years, reflecting its recovering financial strength. In December 2009, the price was slightly more than $3 per share; last week it hit $14.50.

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