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Section 1: 10-Q (FORM 10-Q)

mbwm20190331_10q.htm
 

 

Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           .

 

Commission File No. 000-26719

 

MERCANTILE BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

Michigan     

38-3360865

(State or other jurisdiction of

(IRS Employer Identification No.)

incorporation or organization)

 

 

310 Leonard Street, NW, Grand Rapids, MI 49504

(Address of principal executive offices) (Zip Code)

 

(616) 406-3000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X              No ___

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes    X              No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ___    

Accelerated filer X    

Non-accelerated filer         

Smaller reporting company __ 

Emerging growth company         

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes             No       

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes             No    X   

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

MBWM

The Nasdaq Stock Market LLC

 

At April 30, 2019, there were 16,422,967 shares of common stock outstanding.

 

 

 

 

MERCANTILE BANK CORPORATION

INDEX

 


 

PART I.

Financial Information

Page No.

 

  

  

 

 

Item 1. Financial Statements

  

 

 

  

  

 

 

Condensed Consolidated Balance Sheets (Unaudited) - March 31, 2019 and December 31, 2018

1

 

 

 

  

 

 

Condensed Consolidated Statements of Income (Unaudited) - Three Months Ended March 31, 2019 and March 31, 2018

2

 

 

 

  

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2019 and March 31, 2018

3

 

 

  

  

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2019 and March 31, 2018

4

 

 

 

  

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2019 and March 31, 2018

6

 

 

  

  

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

  

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

60

 

 

  

  

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

75

 

 

  

  

 

 

Item 4. Controls and Procedures

77

 

 

  

  

 

PART II.   

Other Information

  

 

 

  

  

 

 

Item 1. Legal Proceedings

78

 

 

  

  

 

 

Item 1A. Risk Factors

78

 

 

  

  

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

78

 

 

  

  

 

 

Item 3. Defaults Upon Senior Securities

78

 

 

  

  

 

 

Item 4. Mine Safety Disclosures

78

 

 

  

  

 

 

Item 5. Other Information

78

 

 

  

  

 

 

Item 6. Exhibits

79

 

 

  

  

 

 

Signatures

80

 

 

 

 

 

MERCANTILE BANK CORPORATION

PART I --- FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 


 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

ASSETS

               

Cash and due from banks

  $ 46,322,000     $ 64,872,000  

Interest-earning deposits

    168,572,000       10,482,000  

Total cash and cash equivalents

    214,894,000       75,354,000  
                 

Securities available for sale

    337,876,000       337,366,000  

Federal Home Loan Bank stock

    18,002,000       16,022,000  
                 

Loans

    2,799,639,000       2,753,085,000  

Allowance for loan losses

    (23,135,000

)

    (22,380,000

)

Loans, net

    2,776,504,000       2,730,705,000  
                 

Premises and equipment, net

    50,109,000       48,321,000  

Bank owned life insurance

    69,789,000       69,647,000  

Goodwill

    49,473,000       49,473,000  

Core deposit intangible, net

    5,084,000       5,561,000  

Other assets

    30,023,000       31,458,000  
                 

Total assets

  $ 3,551,754,000     $ 3,363,907,000  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Deposits

               

Noninterest-bearing

  $ 857,734,000     $ 889,784,000  

Interest-bearing

    1,753,240,000       1,573,924,000  

Total deposits

    2,610,974,000       2,463,708,000  
                 

Securities sold under agreements to repurchase

    111,235,000       103,519,000  

Federal Home Loan Bank advances

    384,000,000       350,000,000  

Subordinated debentures

    46,369,000       46,199,000  

Accrued interest and other liabilities

    15,447,000       25,232,000  

Total liabilities

    3,168,025,000       2,988,658,000  
                 

Commitments and contingent liabilities (note 8)

               
                 

Shareholders' equity

               

Preferred stock, no par value; 1,000,000 shares authorized; none issued

    0       0  

Common stock, no par value; 40,000,000 shares authorized; 16,421,025 shares outstanding at March 31, 2019 and 16,534,256 shares outstanding at December 31, 2018

    305,346,000       308,005,000  

Retained earnings

    83,107,000       75,483,000  

Accumulated other comprehensive income (loss)

    (4,724,000

)

    (8,239,000

)

Total shareholders’ equity

    383,729,000       375,249,000  
                 

Total liabilities and shareholders’ equity

  $ 3,551,754,000     $ 3,363,907,000  

 


See accompanying notes to condensed consolidated financial statements.

 

1

Table of Contents

 

 

MERCANTILE BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2019

   

2018

 

Interest income

               

Loans, including fees

  $ 35,789,000     $ 32,315,000  

Securities, taxable

    1,880,000       1,602,000  

Securities, tax-exempt

    561,000       594,000  

Other interest-earning assets

    407,000       470,000  

Total interest income

    38,637,000       34,981,000  
                 

Interest expense

               

Deposits

    4,804,000       3,085,000  

Short-term borrowings

    104,000       57,000  

Federal Home Loan Bank advances

    2,234,000       945,000  

Subordinated debentures and other borrowings

    850,000       695,000  

Total interest expense

    7,992,000       4,782,000  
                 

Net interest income

    30,645,000       30,199,000  
                 

Provision for loan losses

    850,000       0  
                 

Net interest income after provision for loan losses

    29,795,000       30,199,000  
                 

Noninterest income

               

Service charges on deposit and sweep accounts

    1,077,000       1,053,000  

Credit and debit card income

    1,337,000       1,243,000  

Mortgage banking income

    1,057,000       884,000  

Payroll services

    505,000       482,000  

Earnings on bank owned life insurance

    1,630,000       331,000  

Other income

    1,026,000       388,000  

Total noninterest income

    6,632,000       4,381,000  
                 

Noninterest expense

               

Salaries and benefits

    13,015,000       12,337,000  

Occupancy

    1,762,000       1,772,000  

Furniture and equipment depreciation, rent and maintenance

    635,000       548,000  

Data processing costs

    2,216,000       2,128,000  

Other expense

    4,202,000       4,362,000  

Total noninterest expenses

    21,830,000       21,147,000  
                 

Income before federal income tax expense

    14,597,000       13,433,000  
                 

Federal income tax expense

    2,773,000       2,552,000  
                 

Net income

  $ 11,824,000     $ 10,881,000  
                 

Basic earnings per share

  $ 0.72     $ 0.66  

Diluted earnings per share

  $ 0.72     $ 0.66  

Cash dividends per share

  $ 0.26     $ 0.22  

Average basic shares outstanding

    16,429,571       16,595,115  

Average diluted shares outstanding

    16,435,176       16,604,325  

 


See accompanying notes to condensed consolidated financial statements.

 

2

Table of Contents

 

 

MERCANTILE BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 


 

   

Three Months

Ended

March 31,

2019

   

Three Months

Ended

March 31,

2018

 
                 

Net income

  $ 11,824,000     $ 10,881,000  
                 

Other comprehensive income (loss):

               

Unrealized holding gains (losses) on securities available for sale

    4,449,000       (7,142,000

)

Fair value of interest rate swap

    0       2,000  

Total other comprehensive income (loss)

    4,449,000       (7,140,000

)

                 

Tax effect of unrealized holding gains (losses) on securities available for sale

    (934,000

)

    1,500,000  

Tax effect of fair value of interest rate swap

    0       (1,000

)

Total tax effect of other comprehensive income

    (934,000

)

    1,499,000  
                 

Other comprehensive income (loss), net of tax effect

    3,515,000       (5,641,000

)

                 

Comprehensive income

  $ 15,339,000     $ 5,240,000  

 


See accompanying notes to condensed consolidated financial statements.

 

3

Table of Contents

 

 

MERCANTILE BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 


   

($ in thousands except per share amounts)

 

Preferred

Stock

   

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

Shareholders’

Equity

 
                                         

Balances, January 1, 2019

  $ 0     $ 308,005     $ 75,483     $ (8,239

)

  $ 375,249  
                                         

Employee stock purchase plan (416 shares)

            14                       14  
                                         

Dividend reinvestment plan (5,425 shares)

            182                       182  
                                         

Stock option exercises (500 shares)

            2                       2  
                                         

Stock-based compensation expense

            744                       744  
                                         

Share repurchase program (119,120 shares)

            (3,601

)

                    (3,601

)

                                         

Cash dividends ($0.26 per common share)

                    (4,200

)

            (4,200

)

                                         

Net income for the three months ended March 31, 2019

                    11,824               11,824  
                                         

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect

                            3,515       3,515  
                                         

Balances, March 31, 2019

  $ 0     $ 305,346     $ 83,107     $ (4,724

)

  $ 383,729  

 


See accompanying notes to condensed consolidated financial statements.

 

4

Table of Contents

 

MERCANTILE BANK CORPORATION 

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

(Unaudited)

 


 

($ in thousands except per share amounts)

 

Preferred

Stock

   

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

Shareholders’

Equity

 
                                         

Balances, January 1, 2018

  $ 0     $ 309,772     $ 61,001     $ (4,903

)

  $ 365,870  
                                         

Reclassification of equity securities related to ASU 2016-01 adoption

                    (42

)

    42       0  
                                         

Employee stock purchase plan (426 shares)

            14                       14  
                                         

Dividend reinvestment plan (4,624 shares)

            164                       164  
                                         

Stock option exercises (7,000 shares)

            54                       54  
                                         

Stock-based compensation expense

            597                       597  
                                         

Cash dividends ($0.22 per common share)

                    (3,599

)

            (3,599

)

                                         

Net income for the three months ended March 31, 2018

                    10,881               10,881  
                                         

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect

                            (5,642

)

    (5,642

)

                                         

Change in fair value of interest rate swap, net of tax effect

                            1       1  
                                         

Balances, March 31, 2018

  $ 0     $ 310,601     $ 68,241     $ (10,502

)

  $ 368,340  

 


See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

 

MERCANTILE BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31, 2019

   

March 31, 2018

 

Cash flows from operating activities

               

Net income

  $ 11,824,000     $ 10,881,000  

Adjustments to reconcile net income to net cash from operating activities

               

Depreciation and amortization

    2,178,000       2,483,000  

Accretion of acquired loans

    (146,000

)

    (357,000

)

Provision for loan losses

    850,000       0  

Stock-based compensation expense

    744,000       597,000  

Proceeds from sales of mortgage loans held for sale

    21,609,000       21,010,000  

Origination of mortgage loans held for sale

    (21,592,000

)

    (19,585,000

)

Net gain from sales of mortgage loans held for sale

    (705,000

)

    (736,000

)

Net gain from sales and valuation write-downs of foreclosed assets

    (27,000

)

    (105,000

)

Net (gain) loss from sales and valuation write-downs of former bank premises

    (558,000

)

    99,000  

Net loss from sales and write-downs of fixed assets

    0       53,000  

Earnings on bank owned life insurance

    (1,630,000

)

    (331,000

)

Net change in:

               

Accrued interest receivable

    (1,464,000

)

    (820,000

)

Other assets

    1,147,000       (866,000

)

Accrued interest and other liabilities

    (9,785,000

)

    722,000  

Net cash from operating activities

    2,445,000       13,045,000  
                 

Cash flows from investing activities

               

Loan originations and payments, net

    (45,840,000

)

    7,257,000  

Purchases of securities available for sale

    (2,415,000

)

    (13,303,000

)

Proceeds from maturities, calls and repayments of securities available for sale

    6,162,000       4,609,000  

Purchases of Federal Home Loan Bank stock

    (1,980,000

)

    0  

Proceeds from sales of foreclosed assets

    171,000       410,000  

Proceeds from sales of former bank premises

    854,000       0  

Proceeds from bank owned life insurance cash value release and death benefits

    3,996,000       0  

Purchases of bank owned life insurance

    (2,500,000

)

    0  

Net purchases of premises and equipment

    (2,732,000

)

    (1,429,000

)

Net cash for investing activities

    (44,284,000

)

    (2,456,000

)

                 

Cash flows from financing activities

               

Net increase (decrease) in time deposits

    165,532,000       (8,412,000

)

Net increase (decrease) in all other deposits

    (18,266,000

)

    26,100,000  

Net increase (decrease) in securities sold under agreements to repurchase

    7,716,000       (13,854,000

)

Maturities of Federal Home Loan Bank advances

    (10,000,000

)

    0  

Proceeds from Federal Home Loan Bank advances

    44,000,000       0  

Proceeds from stock option exercises

    2,000       54,000  

Employee stock purchase plan

    14,000       14,000  

Dividend reinvestment plan

    182,000       164,000  

Repurchases of common stock

    (3,601,000

)

    0  

Payment of cash dividends to common shareholders

    (4,200,000

)

    (3,599,000

)

Net cash from financing activities

    181,379,000       467,000  
                 

Net change in cash and cash equivalents

    139,540,000       11,056,000  

Cash and cash equivalents at beginning of period

    75,354,000       200,101,000  

Cash and cash equivalents at end of period

  $ 214,894,000     $ 211,157,000  

 


See accompanying notes to condensed consolidated financial statements.

 

6

Table of Contents

 

MERCANTILE BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31, 2019

   

March 31, 2018

 

Supplemental disclosures of cash flows information

               

Cash paid during the period for:

               

Interest

  $ 6,518,000     $ 4,529,000  

Federal income tax

    0       0  

Noncash financing and investing activities:

               

Transfers from loans to foreclosed assets

    25,000       232,000  

Transfers from bank premises to other real estate owned

    0       296,000  

 


See accompanying notes to condensed consolidated financial statements.

 

7

Table of Contents

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

 

1.    SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The unaudited financial statements for the three months ended March 31, 2019 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s two subsidiaries, Mercantile Bank Real Estate Co., LLC (“our real estate company”) and Mercantile Insurance Center, Inc. (“our insurance center”). These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 2019 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2018.

 

We have five separate business trusts that were formed to issue trust preferred securities. Subordinated debentures were issued to the trusts in return for the proceeds raised from the issuance of the trust preferred securities. The trusts are not consolidated, but instead we report the subordinated debentures issued to the trusts as a liability.

 

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 are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, our unvested restricted shares are excluded from the calculation of both basic and diluted earnings per share.

 

Approximately 263,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2019. In addition, stock options for approximately 12,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2019. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2019.

 

Approximately 236,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2018. In addition, stock options for approximately 17,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2018. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2018.

 

 


(Continued)

 

8

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold prior to maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Federal Home Loan Bank stock is carried at cost.

 

Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized or accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

Declines in the fair value of debt securities below their amortized cost that are other-than-temporary impairment (“OTTI”) are reflected in earnings or other comprehensive income, as appropriate. For those debt securities whose fair value is less than their amortized cost, we consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and whether we expect to recover the entire amortized cost of the security based on our assessment of the issuer’s financial condition. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, and whether downgrades by bond rating agencies have occurred. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost.

 

Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

 

Interest income on commercial loans and mortgage loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged-off no later than when they are 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal and interest is considered doubtful.

 

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of March 31, 2019 and December 31, 2018, we determined that the fair value of our mortgage loans held for sale approximated the recorded cost of $1.8 million and $1.1 million, respectively. Loans held for sale are reported as part of our total loans on the balance sheet.

 

 


(Continued)

 

9

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the mortgage loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives is included in the gain on sale of loans. Mortgage loans serviced for others totaled approximately $616 million as of March 31, 2019.

 

Mortgage Banking Activities: Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold. Mortgage loan servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of the underlying mortgage loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.

 

Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the income statement.

 

Troubled Debt Restructurings: A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons, grant a concession to a borrower considered to be experiencing financial difficulties that we would not otherwise consider. A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest, an extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these concessions. Troubled debt restructurings can be in either accrual or nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans. Accruing troubled debt restructurings are generally excluded from nonperforming loans as it is considered probable that all contractual principal and interest due under the restructured terms will be collected.

 

In accordance with current accounting guidance, loans modified as troubled debt restructurings are, by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-loan basis similar to other impaired loans as described below under “Allowance for Loan Losses.” Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the allowance will be impacted by the difference between the results of these two measurement methodologies. Loans modified as troubled debt restructurings that subsequently default are factored into the determination of the allowance in the same manner as other defaulted loans.

 

Allowance for Loan Losses: The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when we believe the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using past loan loss experience, the nature and volume of the 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, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

 

 


(Continued)

 

10

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

1.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, 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. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by 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.

 

Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting. We do not use derivatives for trading purposes.

 

Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income. They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does not apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense.

 

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 and liabilities on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative 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 derivative as a hedge is no longer appropriate or intended.

 

Goodwill and Core Deposit Intangible: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We may elect to perform a qualitative assessment for the annual impairment test. If the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. In 2017 and 2018, we elected to perform a qualitative assessment for our annual impairment test and concluded it is more likely than not our fair value was greater than its carrying amount; therefore, no further testing was required.

 

The core deposit intangible that arose from the Firstbank Corporation acquisition was initially measured at fair value and is being amortized into noninterest expense over a ten-year period using the sum-of-the-years-digits methodology.

 

 


(Continued)

 

11

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

1.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

 

Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

Adoption of New Accounting Standards: In February 2016, the FASB issued ASU 2016-02, Leases. This ASU (as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20) establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU is effective for annual and interim periods beginning after December 15, 2018. The adoption of this new standard as of January 1, 2019 resulted in the recording of a ROU asset and associated lease liability of approximately $1.3 million. The ROU asset is included in other assets and the lease liability is included in other liabilities in the March 31, 2019 consolidated balance sheet.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i) financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial statements. We have selected a software vendor for applying this new standard, and are currently working on the framework and assumptions. We expect to have our initial CECL model operational during the second quarter of 2019, and plan to run the new model alongside our current incurred loss methodology for the remainder of 2019.

 

 


(Continued)

 

12

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


   

 

2.    SECURITIES

  

The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows:

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

March 31, 2019

                               

U.S. Government agency debt obligations

  $ 193,163,000     $ 612,000     $ (6,883,000

)

  $ 186,892,000  

Mortgage-backed securities

    42,326,000       238,000       (554,000

)

    42,010,000  

Municipal general obligation bonds

    104,487,000       1,015,000       (390,000

)

    105,112,000  

Municipal revenue bonds

    3,380,000       18,000       (36,000

)

    3,362,000  

Other investments

    500,000       0       0       500,000  
                                 
    $ 343,856,000     $ 1,883,000     $ (7,863,000

)

  $ 337,876,000  
                                 

December 31, 2018

                               

U.S. Government agency debt obligations

  $ 196,109,000     $ 310,000     $ (9,342,000

)

  $ 187,077,000  

Mortgage-backed securities

    44,263,000       187,000       (792,000

)

    43,658,000  

Municipal general obligation bonds

    103,235,000       427,000       (1,165,000

)

    102,497,000  

Municipal revenue bonds

    3,688,000       4,000       (58,000

)

    3,634,000  

Other investments

    500,000       0       0       500,000  
                                 
    $ 347,795,000     $ 928,000     $ (11,357,000

)

  $ 337,366,000  

 

 

Securities with unrealized losses at March 31, 2019 and December 31, 2018, 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

 
   

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 

March 31, 2019

                                               

U.S. Government agency debt obligations

  $ 0     $ 0     $ 153,927,000     $ 6,883,000     $ 153,927,000     $ 6,883,000  

Mortgage-backed securities

    3,404,000       1,000       26,840,000       551,000       30,244,000       552,000  

Municipal general obligation bonds

    253,000       1,000       38,347,000       390,000       38,600,000       391,000  

Municipal revenue bonds

    502,000       1,000       1,313,000       36,000       1,815,000       37,000  

Other investments

    0       0       0       0       0       0  
                                                 
    $ 4,159,000     $ 3,000     $ 220,427,000     $ 7,860,000     $ 224,586,000     $ 7,863,000  

 

 


(Continued)

 

13

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

2.    SECURITIES (Continued)

  

   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

December 31, 2018

                                               

U.S. Government agency debt obligations

  $ 31,220,000     $ 1,136,000     $ 136,445,000     $ 8,206,000     $ 167,665,000     $ 9,342,000  

Mortgage-backed securities

    11,460,000       136,000       23,762,000       656,000       35,222,000       792,000  

Municipal general obligation bonds

    28,923,000       299,000       43,961,000       866,000       72,884,000       1,165,000  

Municipal revenue bonds

    1,188,000       11,000       1,372,000       47,000       2,560,000       58,000  

Other investments

    0       0       0       0       0       0  
                                                 
    $ 72,791,000     $ 1,582,000     $ 205,540,000     $ 9,775,000     $ 278,331,000     $ 11,357,000  

 

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

 

At March 31, 2019, 267 debt securities with fair values totaling $225 million have unrealized losses aggregating $7.9 million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.

 

The amortized cost and fair value of debt securities at March 31, 2019, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.

 

 


(Continued)

 

14

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

2.    SECURITIES (Continued) 

 

   

Weighted

                 
   

Average

   

Amortized

   

Fair

 
   

Yield (%)

   

Cost

   

Value

 
                         

Due in 2019

    2.05     $ 24,718,000     $ 24,702,000  

Due in 2020 through 2024

    2.29       67,504,000       67,148,000  

Due in 2025 through 2029

    2.73       112,356,000       110,312,000  

Due in 2030 and beyond

    3.18       96,452,000       93,204,000  

Mortgage-backed securities

    2.81       42,326,000       42,010,000  

Other investments

    6.50       500,000       500,000  
                         

Total available for sale securities

    2.73     $ 343,856,000     $ 337,876,000  

 

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $100 million and $98.2 million at March 31, 2019 and December 31, 2018, respectively, with estimated market values of $101 million and $97.4 million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of $8.0 million and $8.7 million at March 31, 2019 and December 31, 2018, respectively, with estimated market values of $8.0 million and $8.7 million, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.

 

The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $111 million and $104 million at March 31, 2019 and December 31, 2018, respectively. Investments in Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer.

 

 

 

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

 

Acquired loans are those purchased in the Firstbank merger. These loans were recorded at estimated fair value at the merger date with no carryover of the related allowance. The acquired loans were segregated between those considered to be performing (“acquired non-impaired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Acquired loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the merger date and are accounted for in pools.

 

 


(Continued)

 

15

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

 3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The fair value estimates for acquired loans are based on expected prepayments and the amount and timing of discounted expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value. In determining the merger date fair value of acquired impaired loans, and in subsequent accounting, we have generally aggregated acquired commercial and consumer loans into pools of loans with common risk characteristics.

 

The difference between the fair value of an acquired non-impaired loan and contractual amounts due at the merger date is accreted into income over the estimated life of the loan. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

 

The excess of an acquired impaired loan’s undiscounted contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the non-accretable difference. The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the acquired impaired loan. The excess cash flows expected to be collected over the carrying amount of the acquired loan is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the acquired loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired loans.

 

We evaluate quarterly the remaining contractual required payments receivable and estimate cash flows expected to be collected over the lives of the impaired loans. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the merger date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

 

Increases in expected cash flows of acquired impaired loans subsequent to the merger date are recognized prospectively through adjustments of the yield on the loans or pools over their remaining lives, while decreases in expected cash flows are recognized as impairment through a provision for loan losses and an increase in the allowance.

 

 


(Continued)

 

16

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Our total loans at March 31, 2019 were $2.80 billion compared to $2.75 billion at December 31, 2018, an increase of $46.6 million, or 1.7%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2019 and December 31, 2018, and the percentage change in loans from the end of 2018 to the end of the first quarter of 2019, are as follows:

 

                                   

Percent

 
   

March 31, 2019

   

December 31, 2018

   

Increase

 
   

Balance

   

%

   

Balance

   

%

   

(Decrease)

 

Originated loans

                                       

Commercial:

                                       

Commercial and industrial

  $ 786,705,000       31.3

%

  $ 768,698,000       31.3

%

    2.3

%

Vacant land, land development, and residential construction

    41,179,000       1.6       39,950,000       1.6       3.1  

Real estate – owner occupied

    503,988,000       20.1       500,188,000       20.4       0.8  

Real estate – non-owner occupied

    767,318,000       30.6       745,127,000       30.4       3.0  

Real estate – multi-family and residential rental

    99,523,000       4.0       98,035,000       4.0       1.5  

Total commercial

    2,198,713,000       87.6       2,151,998,000       87.7       2.2  
                                         

Retail:

                                       

Home equity and other

    64,769,000       2.6       65,023,000       2.7       (0.4

)

1-4 family mortgages

    247,554,000       9.8       235,425,000       9.6       5.2  

Total retail

    312,323,000       12.4       300,448,000       12.3       4.0  
                                         

Total originated loans

  $ 2,511,036,000       100.0

%

  $ 2,452,446,000       100.0

%

    2.4

%

 

 


(Continued)

 

17

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


   

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

                                   

Percent

 
   

March 31, 2019

   

December 31, 2018

   

Increase

 
   

Balance

   

%

   

Balance

   

%

   

(Decrease)

 

Acquired loans

                                       

Commercial:

                                       

Commercial and industrial

  $ 52,502,000       18.2

%

  $ 54,025,000       18.0

%

    (2.8

%)

Vacant land, land development, and residential construction

    4,713,000       1.6       4,935,000       1.6       (4.5

)

Real estate – owner occupied

    47,530,000       16.5       48,431,000       16.1       (1.9

)

Real estate – non-owner occupied

    68,360,000       23.7       71,155,000       23.7       (3.9

)

Real estate – multi-family and residential rental

    28,380,000       9.8       29,562,000       9.8       (4.0

)

Total commercial

    201,485,000       69.8       208,108,000       69.2       (3.2

)

                                         

Retail:

                                       

Home equity and other

    18,358,000       6.4       20,416,000       6.8       (10.1

)

1-4 family mortgages

    68,760,000       23.8       72,115,000       24.0       (4.7

)

Total retail

    87,118,000       30.2       92,531,000       30.8       (5.8

)

                                         

Total acquired loans

  $ 288,603,000       100.0

%

  $ 300,639,000       100.0

%

    (4.0

%)

 

 

                                   

Percent

 
   

March 31, 2019

   

December 31, 2018

   

Increase

 
   

Balance

   

%

   

Balance

   

%

   

(Decrease)

 

Total loans

                                       

Commercial:

                                       

Commercial and industrial

  $ 839,207,000       30.0

%

  $ 822,723,000       29.9

%

    2.0

%

Vacant land, land development, and residential construction

    45,892,000       1.6       44,885,000       1.6       2.2  

Real estate – owner occupied

    551,518,000       19.7       548,619,000       19.9       0.5  

Real estate – non-owner occupied

    835,678,000       29.8       816,282,000       29.7       2.4  

Real estate – multi-family and residential rental

    127,903,000       4.6       127,597,000       4.6       0.2  

Total commercial

    2,400,198,000       85.7       2,360,106,000       85.7       1.7  
                                         

Retail:

                                       

Home equity and other

    83,127,000       3.0       85,439,000       3.1       (2.7

)

1-4 family mortgages

    316,314,000       11.3       307,540,000       11.2       2.9  

Total retail

    399,441,000       14.3       392,979,000       14.3       1.6  
                                         

Total loans

  $ 2,799,639,000       100.0

%

  $ 2,753,085,000       100.0

%

    1.7

%

 

 


(Continued)

 

18

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The total contractually required payments due on and carrying value of acquired impaired loans were $7.7 million and $4.5 million, respectively, as of March 31, 2019. The total contractually required payments due on and carrying value of acquired impaired loans were $8.0 million and $4.6 million, respectively, as of December 31, 2018. Changes in the accretable yield for acquired impaired loans for the three months ended March 31, 2019 and March 31, 2018 were as follows:

 

Balance at December 31, 2018

  $ 1,274,000  

Additions

    2,000  

Accretion income

    (119,000

)

Net reclassification from nonaccretable to accretable

    121,000  

Reductions (1)

    (8,000

)

         

Balance at March 31, 2019

  $ 1,270,000  
         

Balance at December 31, 2017

  $ 1,404,000  

Additions

    0  

Accretion income

    (131,000

)

Net reclassification from nonaccretable to accretable

    86,000  

Reductions (1)

    (40,000

)

         

Balance at March 31, 2018

  $ 1,319,000  

 

(1) Reductions primarily reflect the result of exit events, including loan payoffs and charge-offs.

 

 

Nonperforming originated loans as of March 31, 2019 and December 31, 2018 were as follows:

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

Loans past due 90 days or more still accruing interest

  $ 0     $ 0  

Nonaccrual loans

    1,035,000       803,000  
                 

Total nonperforming originated loans

  $ 1,035,000     $ 803,000  

 

 

Nonperforming acquired loans as of March 31, 2019 and December 31, 2018 were as follows:

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

Loans past due 90 days or more still accruing interest

  $ 0     $ 0  

Nonaccrual loans

    3,103,000       3,338,000  
                 

Total nonperforming acquired loans

  $ 3,103,000     $ 3,338,000  

 

 


(Continued)

 

19

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The recorded principal balance of all nonperforming loans was as follows:

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Commercial:

               

Commercial and industrial

  $ 207,000     $ 17,000  

Vacant land, land development, and residential construction

    0       0  

Real estate – owner occupied

    767,000       950,000  

Real estate – non-owner occupied

    62,000       0  

Real estate – multi-family and residential rental

    135,000       141,000  

Total commercial

    1,171,000       1,108,000  
                 

Retail:

               

Home equity and other

    447,000       454,000  

1-4 family mortgages

    2,520,000       2,579,000  

Total retail

    2,967,000       3,033,000  
                 

Total nonperforming loans

  $ 4,138,000     $ 4,141,000  

 

Acquired impaired loans are not reported as nonperforming loans based on acquired impaired loan accounting. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

 

 


(Continued)

 

20

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

An age analysis of past due loans is as follows as of March 31, 2019:

 

   

30 – 59

Days

Past Due

   

60 – 89

Days

Past Due

   

Greater

Than 89

Days

Past Due

   

Total

Past Due

   

Current

   

Total

Loans

   

Recorded

Balance

> 89

Days and

Accruing

 

Originated loans

                                                       

Commercial:

                                                       

Commercial and industrial

  $ 0     $ 6,000     $ 0     $ 6,000     $ 786,699,000     $ 786,705,000     $ 0  

Vacant land, land development, and residential construction

    0       0       0       0       41,179,000       41,179,000       0  

Real estate – owner occupied

    0       0       0       0       503,988,000       503,988,000       0  

Real estate – non-owner occupied

    0       0       0       0       767,318,000       767,318,000       0  

Real estate – multi-family and residential rental

    0       0       0       0       99,523,000       99,523,000       0  

Total commercial

    0       6,000       0       6,000       2,198,707,000       2,198,713,000       0  
                                                         

Retail:

                                                       

Home equity and other

    13,000       17,000       0       30,000       64,739,000       64,769,000       0  

1-4 family mortgages

    426,000       0       125,000       551,000       247,003,000       247,554,000       0  

Total retail

    439,000       17,000       125,000       581,000       311,742,000       312,323,000       0  
                                                         

Total past due loans

  $ 439,000     $ 23,000     $ 125,000     $ 587,000     $ 2,510,449,000     $ 2,511,036,000     $ 0  

 

 


(Continued)

 

21

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.   LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

                                                   

Recorded

 
   

30 – 59

   

60 – 89

   

Greater

Than 89

                           

Balance

> 89

 
   

Days

   

Days

   

Days

   

Total

           

Total

   

Days and

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Loans

   

Accruing

 

Acquired loans

                                                       

Commercial:

                                                       

Commercial and industrial

  $ 359,000     $ 0     $ 0     $ 359,000     $ 52,143,000     $ 52,502,000     $ 0  

Vacant land, land development, and residential construction

    0       0       0       0       4,713,000       4,713,000       0  

Real estate – owner occupied

    106,000       0       27,000       133,000       47,397,000       47,530,000       0  

Real estate – non-owner occupied

    28,000       0       61,000       89,000       68,271,000       68,360,000       0  

Real estate – multi-family and residential rental

    0       0       0       0       28,380,000       28,380,000       0  

Total commercial

    493,000       0       88,000       581,000       200,904,000       201,485,000       0  
                                                         

Retail:

                                                       

Home equity and other

    107,000       1,000       45,000       153,000       18,205,000       18,358,000       0  

1-4 family mortgages

    401,000       192,000       697,000       1,290,000       67,470,000       68,760,000       0  

Total retail

    508,000       193,000       742,000       1,443,000       85,675,000       87,118,000       0  
                                                         

Total past due loans

  $ 1,001,000     $ 193,000     $ 830,000     $ 2,024,000     $ 286,579,000     $ 288,603,000     $ 0  

 

 


(Continued)

 

22

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

An age analysis of past due loans is as follows as of December 31, 2018:

 

   

30 – 59

Days

Past Due

   

60 – 89

Days

Past Due

   

Greater

Than 89

Days

Past Due

   

Total

Past Due

   

Current

   

Total

Loans

   

Recorded

Balance

> 89

Days and

Accruing

 

Originated loans

                                                       

Commercial:

                                                       

Commercial and industrial

  $ 186,000     $ 0     $ 0     $ 186,000     $ 768,512,000     $ 768,698,000     $ 0  

Vacant land, land development, and residential construction

    0       0       0       0       39,950,000       39,950,000       0  

Real estate – owner occupied

    0       0       0       0       500,188,000       500,188,000       0  

Real estate – non-owner occupied

    0       0       0       0       745,127,000       745,127,000       0  

Real estate – multi-family and residential rental

    0       0       0       0       98,035,000       98,035,000       0  

Total commercial

    186,000       0       0       186,000       2,151,812,000       2,151,998,000       0  
                                                         

Retail:

                                                       

Home equity and other

    44,000       0       0       44,000       64,979,000       65,023,000       0  

1-4 family mortgages

    291,000       0       137,000       428,000       234,997,000       235,425,000       0  

Total retail

    335,000       0       137,000       472,000       299,976,000       300,448,000       0  
                                                         

Total past due loans

  $ 521,000     $ 0     $ 137,000     $ 658,000     $ 2,451,788,000     $ 2,452,446,000     $ 0  

 

 


(Continued)

 

23

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


  

3.   LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

                                                   

Recorded

 
   

30 – 59

   

60 – 89

   

Greater

Than 89

                           

Balance

> 89

 
   

Days

   

Days

   

Days

   

Total

           

Total

   

Days and

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Loans

   

Accruing

 

Acquired Loans

                                                       

Commercial:

                                                       

Commercial and industrial

  $ 8,000     $ 0     $ 0     $ 8,000     $ 54,017,000     $ 54,025,000     $ 0  

Vacant land, land development, and residential construction

    19,000       0       0       19,000       4,916,000       4,935,000       0  

Real estate – owner occupied

    108,000       950,000       0       1,058,000       47,373,000       48,431,000       0  

Real estate – non-owner occupied

    62,000       0       0       62,000       71,093,000       71,155,000       0  

Real estate – multi-family and residential rental

    0       0       0       0       29,562,000       29,562,000       0