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 September 30, 2017March 31, 2024
[ ]☐ 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 incorporation or organization) | (IRS Employer Identification No.) |
310 Leonard Street, NW, Grand Rapids, MI 49504
(Address of principal executive offices) (Zip Code)
(616) 406-3000
(Registrant’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | MBWM | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesSecurities 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 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 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 |
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 ExchangeExchange Act).
Yes ☐ No X ☒
At November 6, 2017,April 30, 2024, there were 16,491,79016,120,758 shares of common stock outstanding.
PART I. | Page No. | |
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| Notes to | |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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PART II. |
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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PART I --- FINANCIAL INFORMATION
ItemItem 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 53,941,000 | $ | 50,200,000 | ||||
Interest-earning deposits | 123,110,000 | 133,396,000 | ||||||
Total cash and cash equivalents | 177,051,000 | 183,596,000 | ||||||
Securities available for sale | 330,090,000 | 328,060,000 | ||||||
Federal Home Loan Bank stock | 11,036,000 | 8,026,000 | ||||||
Loans | 2,554,272,000 | 2,378,620,000 | ||||||
Allowance for loan losses | (19,193,000 | ) | (17,961,000 | ) | ||||
Loans, net | 2,535,079,000 | 2,360,659,000 | ||||||
Premises and equipment, net | 45,606,000 | 45,456,000 | ||||||
Bank owned life insurance | 66,858,000 | 67,198,000 | ||||||
Goodwill | 49,473,000 | 49,473,000 | ||||||
Core deposit intangible | 8,156,000 | 9,957,000 | ||||||
Other assets | 31,306,000 | 30,146,000 | ||||||
Total assets | $ | 3,254,655,000 | $ | 3,082,571,000 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 826,038,000 | $ | 810,600,000 | ||||
Interest-bearing | 1,663,005,000 | 1,564,385,000 | ||||||
Total deposits | 2,489,043,000 | 2,374,985,000 | ||||||
Securities sold under agreements to repurchase | 122,280,000 | 131,710,000 | ||||||
Federal Home Loan Bank advances | 220,000,000 | 175,000,000 | ||||||
Subordinated debentures | 45,347,000 | 44,835,000 | ||||||
Accrued interest and other liabilities | 15,439,000 | 15,230,000 | ||||||
Total liabilities | 2,892,109,000 | 2,741,760,000 | ||||||
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; 16,490,279 shares issued and outstanding at September 30, 2017 and 16,416,695 shares issued and outstanding at December 31, 2016 | 309,033,000 | 305,488,000 | ||||||
Retained earnings | 55,258,000 | 40,904,000 | ||||||
Accumulated other comprehensive loss | (1,745,000 | ) | (5,581,000 | ) | ||||
Total shareholders’ equity | 362,546,000 | 340,811,000 | ||||||
Total liabilities and shareholders’ equity | $ | 3,254,655,000 | $ | 3,082,571,000 | ||||
March 31, | December 31, | |||||||
(Dollars in thousands) | 2024 | 2023 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 52,606 | $ | 70,408 | ||||
Interest-earning deposits | 184,625 | 60,125 | ||||||
Total cash and cash equivalents | 237,231 | 130,533 | ||||||
Securities available for sale | 609,153 | 617,092 | ||||||
Federal Home Loan Bank stock | 21,513 | 21,513 | ||||||
Mortgage loans held for sale | 14,393 | 18,607 | ||||||
Loans | 4,322,006 | 4,303,758 | ||||||
Allowance for credit losses | (51,638 | ) | (49,914 | ) | ||||
Loans, net | 4,270,368 | 4,253,844 | ||||||
Premises and equipment, net | 50,835 | 50,928 | ||||||
Bank owned life insurance | 85,528 | 85,668 | ||||||
Goodwill | 49,473 | 49,473 | ||||||
Other assets | 127,459 | 125,566 | ||||||
Total assets | $ | 5,465,953 | $ | 5,353,224 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 1,134,995 | $ | 1,247,640 | ||||
Interest-bearing | 2,872,815 | 2,653,278 | ||||||
Total deposits | 4,007,810 | 3,900,918 | ||||||
Securities sold under agreements to repurchase | 228,618 | 229,734 | ||||||
Federal Home Loan Bank advances | 447,083 | 467,910 | ||||||
Subordinated debentures | 49,815 | 49,644 | ||||||
Subordinated notes | 89,057 | 88,971 | ||||||
Accrued interest and other liabilities | 106,926 | 93,902 | ||||||
Total liabilities | 4,929,309 | 4,831,079 | ||||||
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; 16,122,503 shares issued and outstanding at March 31, 2024 and 16,125,662 shares issued and outstanding at December 31, 2023 | 296,065 | 295,106 | ||||||
Retained earnings | 293,554 | 277,526 | ||||||
Accumulated other comprehensive gain (loss) | (52,975 | ) | (50,487 | ) | ||||
Total shareholders’ equity | 536,644 | 522,145 | ||||||
Total liabilities and shareholders’ equity | $ | 5,465,953 | $ | 5,353,224 | ||||
See accompanying notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months | Three Months | |||||||
Ended | Ended | |||||||
(Dollars in thousands except per share amounts) | March 31, 2024 | March 31, 2023 | ||||||
Interest income | ||||||||
Loans, including fees | $ | 71,270 | $ | 57,154 | ||||
Securities, taxable | 2,444 | 2,131 | ||||||
Securities, tax-exempt | 977 | 876 | ||||||
Interest-earning deposits | 2,033 | 324 | ||||||
Total interest income | 76,724 | 60,485 | ||||||
Interest expense | ||||||||
Deposits | 22,224 | 7,907 | ||||||
Short-term borrowings | 1,654 | 459 | ||||||
Federal Home Loan Bank advances | 3,399 | 1,794 | ||||||
Subordinated debt and other borrowings | 2,086 | 1,941 | ||||||
Total interest expense | 29,363 | 12,101 | ||||||
Net interest income | 47,361 | 48,384 | ||||||
Provision for credit losses | 1,300 | 600 | ||||||
Net interest income after provision for credit losses | 46,061 | 47,784 | ||||||
Noninterest income | ||||||||
Service charges on deposit and sweep accounts | 1,531 | 976 | ||||||
Mortgage banking income | 2,343 | 1,216 | ||||||
Credit and debit card income | 2,121 | 2,060 | ||||||
Interest rate swap fees | 1,339 | 1,037 | ||||||
Payroll services income | 896 | 746 | ||||||
Earnings on bank owned life insurance | 1,172 | 401 | ||||||
Other income | 1,466 | 515 | ||||||
Total noninterest income | 10,868 | 6,951 | ||||||
Noninterest expense | ||||||||
Salaries and benefits | 18,237 | 16,682 | ||||||
Occupancy | 2,289 | 2,289 | ||||||
Furniture and equipment depreciation, rent and maintenance | 929 | 822 | ||||||
Data processing costs | 3,289 | 3,162 | ||||||
Charitable foundation contributions | 703 | 10 | ||||||
Other expense | 4,497 | 5,634 | ||||||
Total noninterest expense | 29,944 | 28,599 | ||||||
Income before federal income tax expense | 26,985 | 26,136 | ||||||
Federal income tax expense | 5,423 | 5,162 | ||||||
Net income | $ | 21,562 | $ | 20,974 | ||||
Basic earnings per share | $ | 1.34 | $ | 1.31 | ||||
Diluted earnings per share | $ | 1.34 | $ | 1.31 | ||||
Average basic shares outstanding | 16,118,858 | 15,996,138 | ||||||
Average diluted shares outstanding | 16,118,858 | 15,996,138 | ||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months | Three Months | |||||||
Ended | Ended | |||||||
(Dollars in thousands) | March 31, 2024 | March 31, 2023 | ||||||
Net income | $ | 21,562 | $ | 20,974 | ||||
Other comprehensive income (loss): | ||||||||
Unrealized holding gains (losses) on securities available for sale | (3,150 | ) | 11,486 | |||||
Tax effect of unrealized holding gains (losses) on securities available for sale | 662 | (2,412 | ) | |||||
Other comprehensive income (loss), net of tax | (2,488 | ) | 9,074 | |||||
Comprehensive income (loss) | $ | 19,074 | $ | 30,048 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Preferred | Common | Retained | Comprehensive | Shareholders’ | ||||||||||||||||
(Dollars in thousands except per share amounts) | Stock | Stock | Earnings | Income (Loss) | Equity | |||||||||||||||
Balances, January 1, 2024 | $ | 0 | $ | 295,106 | $ | 277,526 | $ | (50,487 | ) | $ | 522,145 | |||||||||
Employee stock purchase plan (290 shares) | 11 | 11 | ||||||||||||||||||
Dividend reinvestment plan (5,567 shares) | 204 | 204 | ||||||||||||||||||
Stock grants to directors for retainer fees (69 shares) | 2 | 2 | ||||||||||||||||||
Stock-based compensation expense | 742 | 742 | ||||||||||||||||||
Cash dividends ($0.35 per common share) | (5,534 | ) | (5,534 | ) | ||||||||||||||||
Net income for the three months ended March 31, 2024 | 21,562 | 21,562 | ||||||||||||||||||
Change in net unrealized holding gain (loss) on securities available for sale, net of tax effect | (2,488 | ) | (2,488 | ) | ||||||||||||||||
Balances, March 31, 2024 | $ | 0 | $ | 296,065 | $ | 293,554 | $ | (52,975 | ) | $ | 536,644 | |||||||||
See accompanying notes to consolidated financial statements.
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)
Three Months Ended Sept 30, 2017 | Three Months Ended Sept 30, 2016 | Nine Months Ended Sept 30, 2017 | Nine Months Ended Sept 30, 2016 | |||||||||||||
Interest income | ||||||||||||||||
Loans, including fees | $ | 30,746,000 | $ | 27,553,000 | $ | 86,406,000 | $ | 81,219,000 | ||||||||
Securities, taxable | 1,322,000 | 1,488,000 | 3,885,000 | 5,661,000 | ||||||||||||
Securities, tax-exempt | 584,000 | 545,000 | 1,709,000 | 1,622,000 | ||||||||||||
Other interest-earning assets | 382,000 | 120,000 | 641,000 | 240,000 | ||||||||||||
Total interest income | 33,034,000 | 29,706,000 | 92,641,000 | 88,742,000 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 2,652,000 | 1,924,000 | 6,543,000 | 5,608,000 | ||||||||||||
Short-term borrowings | 45,000 | 62,000 | 142,000 | 154,000 | ||||||||||||
Federal Home Loan Bank advances | 1,033,000 | 670,000 | 2,690,000 | 1,595,000 | ||||||||||||
Subordinated debentures and other borrowings | 660,000 | 600,000 | 1,920,000 | 1,952,000 | ||||||||||||
Total interest expense | 4,390,000 | 3,256,000 | 11,295,000 | 9,309,000 | ||||||||||||
Net interest income | 28,644,000 | 26,450,000 | 81,346,000 | 79,433,000 | ||||||||||||
Provision for loan losses | 1,000,000 | 600,000 | 2,350,000 | 2,300,000 | ||||||||||||
Net interest income after provision for loan losses | 27,644,000 | 25,850,000 | 78,996,000 | 77,133,000 | ||||||||||||
Noninterest income | ||||||||||||||||
Services charges on deposit and sweep accounts | 1,076,000 | 1,140,000 | 3,148,000 | 3,178,000 | ||||||||||||
Credit and debit card income | 1,215,000 | 1,090,000 | 3,497,000 | 3,185,000 | ||||||||||||
Mortgage banking income | 1,326,000 | 1,236,000 | 3,233,000 | 2,578,000 | ||||||||||||
Earnings on bank owned life insurance | 328,000 | 349,000 | 2,394,000 | 933,000 | ||||||||||||
Gain on trust preferred securities repurchase | 0 | 0 | 0 | 2,970,000 | ||||||||||||
Other income | 660,000 | 1,469,000 | 2,226,000 | 3,590,000 | ||||||||||||
Total noninterest income | 4,605,000 | 5,284,000 | 14,498,000 | 16,434,000 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and benefits | 11,636,000 | 11,162,000 | 33,796,000 | 32,959,000 | ||||||||||||
Occupancy | 1,598,000 | 1,515,000 | 4,707,000 | 4,600,000 | ||||||||||||
Furniture and equipment depreciation, rent and maintenance | 543,000 | 531,000 | 1,625,000 | 1,579,000 | ||||||||||||
Data processing costs | 2,071,000 | 1,987,000 | 6,155,000 | 5,949,000 | ||||||||||||
FDIC insurance costs | 250,000 | 351,000 | 708,000 | 1,108,000 | ||||||||||||
Other expense | 4,112,000 | 4,117,000 | 12,877,000 | 12,530,000 | ||||||||||||
Total noninterest expenses | 20,210,000 | 19,663,000 | 59,868,000 | 58,725,000 | ||||||||||||
Income before federal income tax expense | 12,039,000 | 11,471,000 | 33,626,000 | 34,842,000 | ||||||||||||
Federal income tax expense | 3,702,000 | 3,626,000 | 10,331,000 | 11,014,000 | ||||||||||||
Net income | $ | 8,337,000 | $ | 7,845,000 | $ | 23,295,000 | $ | 23,828,000 | ||||||||
Basic earnings per share | $ | 0.51 | $ | 0.48 | $ | 1.41 | $ | 1.46 | ||||||||
Diluted earnings per share | $ | 0.51 | $ | 0.48 | $ | 1.41 | $ | 1.46 | ||||||||
Cash dividends per share | $ | 0.19 | $ | 0.17 | $ | 0.55 | $ | 0.49 | ||||||||
Average basic shares outstanding | 16,483,492 | 16,282,804 | 16,463,245 | 16,271,848 | ||||||||||||
Average diluted shares outstanding | 16,494,540 | 16,307,350 | 16,474,534 | 16,294,093 | ||||||||||||
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Preferred | Common | Retained | Comprehensive | Shareholders’ | ||||||||||||||||
(Dollars in thousands except per share amounts) | Stock | Stock | Earnings | Income (Loss) | Equity | |||||||||||||||
Balances, January 1, 2023 | $ | 0 | $ | 290,436 | $ | 216,313 | $ | (65,341 | ) | $ | 441,408 | |||||||||
Employee stock purchase plan (412 shares) | 10 | 10 | ||||||||||||||||||
Dividend reinvestment plan (6,733 shares) | 217 | 217 | ||||||||||||||||||
Stock-based compensation expense | 853 | 853 | ||||||||||||||||||
Cash dividends ($0.32 per common share) | (5,164 | ) | (5,164 | ) | ||||||||||||||||
Net income for the three months ended March 31, 2023 | 20,974 | 20,974 | ||||||||||||||||||
Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect | 9,074 | 9,074 | ||||||||||||||||||
Balances, March 31, 2023 | $ | 0 | $ | 291,516 | $ | 232,123 | $ | (56,267 | ) | $ | 467,372 | |||||||||
See accompanying notes to condensed consolidated financial statements.
MERCANTILEMERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
(Unaudited)
Three Months Ended Sept 30, 2017 | Three Months Ended Sept 30, 2016 | Nine Months Ended Sept 30, 2017 | Nine Months Ended Sept 30, 2016 | |||||||||||||
Net income | $ | 8,337,000 | $ | 7,845,000 | $ | 23,295,000 | $ | 23,828,000 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized holding gains (losses) on securities available for sale | (1,381,000 | ) | (1,495,000 | ) | 5,833,000 | 722,000 | ||||||||||
Fair value of interest rate swap | 13,000 | 113,000 | 69,000 | 88,000 | ||||||||||||
Total other comprehensive income | (1,368,000 | ) | (1,382,000 | ) | 5,902,000 | 810,000 | ||||||||||
Tax effect of unrealized holding gains (losses) on securities available for sale | 484,000 | 523,000 | (2,042,000 | ) | (253,000 | ) | ||||||||||
Tax effect of fair value of interest rate swap | (5,000 | ) | (40,000 | ) | (24,000 | ) | (31,000 | ) | ||||||||
Total tax effect of other comprehensive income | 479,000 | 483,000 | (2,066,000 | ) | (284,000 | ) | ||||||||||
Other comprehensive income (loss), net of tax | (889,000 | ) | (899,000 | ) | 3,836,000 | 526,000 | ||||||||||
Comprehensive income | $ | 7,448,000 | $ | 6,946,000 | $ | 27,131,000 | $ | 24,354,000 | ||||||||
Three Months | Three Months | |||||||
Ended | Ended | |||||||
(Dollars in thousands) | March 31, 2024 | March 31, 2023 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 21,562 | $ | 20,974 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||
Depreciation and amortization | 2,773 | 3,049 | ||||||
Provision for credit losses | 1,300 | 600 | ||||||
Stock-based compensation expense | 742 | 853 | ||||||
Stock grants to directors for retainer fee | 2 | 0 | ||||||
Proceeds from sales of mortgage loans held for sale | 65,603 | 25,645 | ||||||
Origination of mortgage loans held for sale | (59,297 | ) | (24,951 | ) | ||||
Net gain from sales of mortgage loans held for sale | (2,092 | ) | (950 | ) | ||||
Net gain from sales and valuation write-downs of foreclosed assets | (79 | ) | 0 | |||||
Net loss from sales and write-downs of fixed assets | 0 | 377 | ||||||
Earnings on bank owned life insurance | (1,172 | ) | (401 | ) | ||||
Net (gain) loss on instruments designated at fair value and related derivatives | (83 | ) | 180 | |||||
Net change in: | ||||||||
Accrued interest receivable | (1,875 | ) | (1,947 | ) | ||||
Other assets | 1,849 | 131 | ||||||
Accrued interest payable and other liabilities | 11,004 | (5,495 | ) | |||||
Net cash from operating activities | 40,237 | 18,065 | ||||||
Cash flows from investing activities | ||||||||
Loan originations and payments, net | (17,824 | ) | (48,939 | ) | ||||
Purchases of securities available for sale | (591 | ) | (7,392 | ) | ||||
Proceeds from maturities, calls and repayments of securities available for sale | 5,271 | 1,703 | ||||||
Proceeds from sales of foreclosed assets | 79 | 0 | ||||||
Proceeds from bank owned life insurance death benefits claim | 1,357 | 0 | ||||||
Net purchases of premises and equipment and lease activity | (1,461 | ) | (2,508 | ) | ||||
Net cash for investing activities | (13,169 | ) | (57,136 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY CASH FLOWS (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, 2017 | $ | 0 | $ | 305,488 | $ | 40,904 | $ | (5,581 | ) | $ | 340,811 | |||||||||
Employee stock purchase plan (1,053 shares) | 36 | 36 | ||||||||||||||||||
Dividend reinvestment plan (43,938 shares) | 1,426 | 1,426 | ||||||||||||||||||
Stock option exercises (25,075 shares) | 289 | 289 | ||||||||||||||||||
Stock grants to directors for retainer fees (11,712 shares) | 363 | 363 | ||||||||||||||||||
Stock-based compensation expense | 1,431 | 1,431 | ||||||||||||||||||
Cash dividends ($0.55 per common share) | (8,941 | ) | (8,941 | ) | ||||||||||||||||
Net income for the nine months ended September 30, 2017 | 23,295 | 23,295 | ||||||||||||||||||
Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect | 3,791 | 3,791 | ||||||||||||||||||
Change in fair value of interest rate swap, net of tax effect | 45 | 45 | ||||||||||||||||||
Balances, September 30, 2017 | $ | 0 | $ | 309,033 | $ | 55,258 | $ | (1,745 | ) | $ | 362,546 | |||||||||
Three Months | Three Months | |||||||
Ended | Ended | |||||||
(Dollars in thousands) | March 31, 2024 | March 31, 2023 | ||||||
Cash flows from financing activities | ||||||||
Net increase in time deposits | 55,606 | 87,115 | ||||||
Net increase (decrease) in all other deposits | 51,286 | (201,908 | ) | |||||
Net increase (decrease) in securities sold under agreements to repurchase | (1,116 | ) | 33,113 | |||||
Net increase in federal funds purchased | 0 | 17,207 | ||||||
Proceeds from Federal Home Loan Bank advances | 10,000 | 80,000 | ||||||
Payoffs of and paydowns on Federal Home Loan Bank advances | (30,827 | ) | (10,353 | ) | ||||
Employee stock purchase plan | 11 | 10 | ||||||
Dividend reinvestment plan | 204 | 217 | ||||||
Payment of cash dividends to common shareholders | (5,534 | ) | (5,164 | ) | ||||
Net cash from financing activities | 79,630 | 237 | ||||||
Net change in cash and cash equivalents | 106,698 | (38,834 | ) | |||||
Cash and cash equivalents at beginning of period | 130,533 | 96,772 | ||||||
Cash and cash equivalents at end of period | $ | 237,231 | $ | 57,938 | ||||
Supplemental disclosures of cash flows information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 28,268 | $ | 11,838 | ||||
Noncash financing and investing activities: | ||||||||
Transfers from bank premises to other real estate owned | 0 | 600 | ||||||
Transfers from loans to foreclosed assets | 0 | 61 | ||||||
See accompanying notes to condensed consolidated financial statements.
CONDENSED
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, 2016 | $ | 0 | $ | 304,819 | $ | 27,722 | $ | 1,263 | $ | 333,804 | ||||||||||
Employee stock purchase plan (1,121 shares) | 27 | 27 | ||||||||||||||||||
Dividend reinvestment plan (44,535 shares) | 1,079 | 1,079 | ||||||||||||||||||
Stock option exercises (50,323 shares) | 606 | 606 | ||||||||||||||||||
Stock grants to directors for retainer fees (13,000 shares) | 327 | 327 | ||||||||||||||||||
Stock-based compensation expense | 901 | 901 | ||||||||||||||||||
Share repurchase program (167,878 shares) | (3,732 | ) | (3,732 | ) | ||||||||||||||||
Cash dividends ($0.49 per common share) | (7,895 | ) | (7,895 | ) | ||||||||||||||||
Net income for the nine months ended September 30, 2016 | 23,828 | 23,828 | ||||||||||||||||||
Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect | 469 | 469 | ||||||||||||||||||
Change in fair value of interest rate swap, net of tax effect | 57 | 57 | ||||||||||||||||||
Balances, September 30, 2016 | $ | 0 | $ | 304,027 | $ | 43,655 | $ | 1,789 | $ | 349,471 | ||||||||||
See accompanying notes to condensed consolidated financial statements.
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept 30, 2017 | Nine Months Ended Sept 30, 2016 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 23,295,000 | $ | 23,828,000 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||
Depreciation and amortization | 7,820,000 | 6,730,000 | ||||||
Accretion of acquired loans | (1,867,000 | ) | (3,253,000 | ) | ||||
Provision for loan losses | 2,350,000 | 2,300,000 | ||||||
Stock-based compensation expense | 1,431,000 | 901,000 | ||||||
Stock grants to directors for retainer fee | 363,000 | 327,000 | ||||||
Proceeds from sales of mortgage loans held for sale | 81,368,000 | 83,440,000 | ||||||
Origination of mortgage loans held for sale | (81,570,000 | ) | (83,000,000 | ) | ||||
Net gain from sales of mortgage loans held for sale | (2,875,000 | ) | (2,463,000 | ) | ||||
Gain on trust preferred securities repurchase | 0 | (2,970,000 | ) | |||||
Net gain from sales and valuation write-down of foreclosed assets | (199,000 | ) | (322,000 | ) | ||||
Net (gain) loss from sales and valuation write-down of former bank premises | 123,000 | (10,000 | ) | |||||
Net loss from sales of fixed assets | 67,000 | 174,000 | ||||||
Net (gain) loss from sales of available for sale securities | (36,000 | ) | 1,000 | |||||
Earnings on bank owned life insurance | (2,394,000 | ) | (933,000 | ) | ||||
Net change in: | ||||||||
Accrued interest receivable | (1,404,000 | ) | (228,000 | ) | ||||
Other assets | (1,987,000 | ) | (1,554,000 | ) | ||||
Accrued interest and other liabilities | 278,000 | (809,000 | ) | |||||
Net cash from operating activities | 24,763,000 | 22,159,000 | ||||||
Cash flows from investing activities | ||||||||
Loan originations and payments, net | (172,665,000 | ) | (124,126,000 | ) | ||||
Purchases of securities available for sale | (50,276,000 | ) | (130,414,000 | ) | ||||
Proceeds from maturities, calls and repayments of securities available for sale | 46,177,000 | 152,781,000 | ||||||
Proceeds from sales of securities available for sale | 6,706,000 | 264,000 | ||||||
Proceeds from sales of foreclosed assets | 772,000 | 1,458,000 | ||||||
Proceeds from sales of former bank premises | 22,000 | 45,000 | ||||||
Purchases of Federal Home Loan Bank stock | (3,010,000 | ) | (459,000 | ) | ||||
Proceeds from bank owned life insurance cash value release and death benefits | 2,720,000 | 0 | ||||||
Purchases of bank owned life insurance | 0 | (7,000,000 | ) | |||||
Net purchases of premises and equipment | (4,192,000 | ) | (1,051,000 | ) | ||||
Net cash for investing activities | (173,746,000 | ) | (108,502,000 | ) | ||||
1.SIGNIFICANT ACCOUNTING POLICIES
See accompanying notes to condensed consolidated financial statements.
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended Sept 30, 2017 | Nine Months Ended Sept 30, 2016 | |||||||
Cash flows from financing activities | ||||||||
Net increase (decrease) in time deposits | (49,466,000 | ) | 17,823,000 | |||||
Net increase in all other deposits | 163,524,000 | 36,232,000 | ||||||
Net decrease in securities sold under agreements to repurchase | (9,430,000 | ) | (7,928,000 | ) | ||||
Maturities of Federal Home Loan Bank advances | (45,000,000 | ) | 0 | |||||
Proceeds from Federal Home Loan Bank advances | 90,000,000 | 110,000,000 | ||||||
Proceeds from stock option exercises | 289,000 | 606,000 | ||||||
Employee stock purchase plan | 36,000 | 27,000 | ||||||
Dividend reinvestment plan | 1,426,000 | 1,079,000 | ||||||
Repurchase of common stock shares | 0 | (3,732,000 | ) | |||||
Repurchase of trust preferred securities | 0 | (8,030,000 | ) | |||||
Payment of cash dividends to common shareholders | (8,941,000 | ) | (7,895,000 | ) | ||||
Net cash from financing activities | 142,438,000 | 138,182,000 | ||||||
Net change in cash and cash equivalents | (6,545,000 | ) | 51,839,000 | |||||
Cash and cash equivalents at beginning of period | 183,596,000 | 89,891,000 | ||||||
Cash and cash equivalents at end of period | $ | 177,051,000 | $ | 141,730,000 | ||||
Supplemental disclosures of cash flows information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 11,064,000 | $ | 9,218,000 | ||||
Federal income tax | 10,275,000 | 10,950,000 | ||||||
Noncash financing and investing activities: | ||||||||
Transfers from loans to foreclosed assets | 839,000 | 297,000 | ||||||
Transfers from bank premises to other real estate owned | 1,737,000 | 371,000 | ||||||
See accompanying notes to condensed consolidated financial statements.
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited financial statements for the ninethree months ended September 30, 2017March 31, 2024 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Community Partners, LLC ("MCP") and Mercantile Bank of Michigan (“our bank”) and our bank’s twoits subsidiaries, Mercantile Bank Real Estate Co., LLC (“our real estate company”) andincluding Mercantile Insurance Center, Inc. (“our insurance center”). These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q10-Q and Item 303(b)303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) 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 September 30, 2017March 31, 2024 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-K10-K for the year ended December 31, 2016.2023.
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 220,000327,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2017. In addition, stock options for approximately 28,000 shares of common stock were included in determining diluted earnings per share for the three and nine months ended September 30, 2017. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and nine months ended September 30, 2017.
March 31, 2024. Approximately 148,000360,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2016. In addition, stockMarch 31, 2023. Stock options for approximately 79,0005,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and nine months ended September 30, 2016. Stock options for approximately 4,000 sharesMarch 31, 2023.
(Continued)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
Debt 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 areavailable for sale consist of bonds which might be sold prior to maturity due to a number of factors, including changes in interest rates, prepayment risks, yield, availability of alternative investments or liquidity needs. Debt securities classified as available for sale when they might be sold prior to maturity. Equity securities with readily determinableare reported at their fair values are classified as available for sale. Securitiesvalue. For available for sale are carried atdebt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis is written down to fair value through income with unrealized holding gainsthe establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and losses reportedadverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income net of tax. Federal Home Loan Bank stock is carried at cost.(loss).
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2024, and December 31, 2023, there was no allowance related to the available for sale debt securities portfolio.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on debt securities are amortized to the initial call date, if applicable, or to the maturity date, on the level-yield method. Discounts on debt securities are accreted to the maturity date on the level-yield method. Premiums and discounts on mortgage-backed securities are amortized or accreted based on anticipated prepayments on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Declines in the fair valueFederal Home Loan Bank of debt securities below their amortizedIndianapolis (“FHLBI”) stock is carried at cost, that are other than temporary (“OTTI”) are reflected in earnings or other comprehensive income,classified as appropriate. For those debt securities whose fair value is less than their amortized cost, we consider our intent to sell thea restricted 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 securityperiodically evaluated for impairment based on our assessmentultimate recovery 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.par value.
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.costs. 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 costs amounted to $2.5 million and $2.4 million at March 31, 2024, and December 31, 2023, respectively.
Interest income on commercialcommercial 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 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.
Accrued interest is included in other assets in the Consolidated Balance Sheets. 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.
(Continued)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
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,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 September 30, 2017March 31, 2024 and December 31, 2016,2023, we determined that the fair value of our mortgage loans held for sale approximated the recorded cost of $4.1totaled $14.6 million and $1.0$19.0 million, respectively. Loans held for sale are reported as part of our total loans on the balance sheet.
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, which includes a gain or loss on the interest rate commitment coverage position, 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 priceMarket rate risk on interest rate commitments with borrowers prior to the purchaser of the loan at the same time we make a rate commitmentclosing is mitigated through forward commitments referred to the borrower.as to-be-announced mortgage-backed securities. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income.
Allowance for Credit Losses (“allowance”): The allowance is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The allowance is increased by a provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off. Loans are charged-off against the allowance when we believe the uncollectability of a loan balance is confirmed. The allowance is measured on a collective pool basis when similar risk characteristics exist and on an individual basis when a loan exhibits unique risk characteristic which differentiate the loan from other loans within the loan segments. Loan segments are further discussed in Note 3 - Loans and Allowance for Credit Losses.
The “remaining life methodology” is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. The contractual term generally excludes potential extensions, renewals and modifications.
Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. We are not required to develop and use our own economic forecast model, and elect to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.
During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses.
(Continued)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
Our qualitative factors include:
o Changes in lending policies and procedures
o Changes in the nature and volume of the loan portfolio and in the terms of loans
o Changes in the experience, ability and depth of lending management and other relevant staff
o Changes in the volume and severity of past due loans, nonaccrual loans and adversely classified loans
o Changes in the quality of the loan review program
o Changes in the value of underlying collateral dependent loans
o Existence and effect of any concentrations of credit and any changes in such
o Effect of other factors such as competition and legal and regulatory requirements
o Local or regional conditions that depart from the conditions and forecasts for the entire country
The estimation of future credit losses should reflect consideration of all significant factors that affect the collectability of the loan portfolio at each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered. Effective January 1, 2022, we established a historical loss information factor to address the relatively low level of loan losses during the look-back period.
We recorded a provision for credit losses of $1.3 million during the first three months of 2024. The provision for credit losses recorded during the current-year first quarter primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in the historical loss information qualitative factor for commercial loans, which more than offset the impacts of an improved economic forecast and changes to the loan portfolio composition.
Accrued interest receivable on loans totaling $17.4 million and $16.9 million as of March 31, 2024 and December 31, 2023, respectively, is included in other assets on the Consolidated Balance Sheets. We elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if we believe the collection of interest is doubtful. We believe this policy results in the timely reversal of uncollectable interest. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. In some cases, we may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed and collateral deficiencies, among other things.
(Continued)
1.SIGNIFICANT ACCOUNTING POLICIES(Continued)
For individually analyzed loans which are deemed to be collateral dependent loans, we adopted the practical expedient to measure the allowance based on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral and the recorded principal balance. If the fair value of the collateral exceeds the recorded principal balance, no allowance is required. Fair value estimates of collateral on individually analyzed loans, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
Mortgage Banking Activities: Mortgage loans serviced for others totaled approximately $611 million$1.42 billion and $1.40 billion as of September 30, 2017.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Banking Activities:March 31, 2024 and December 31, 2023, respectively. 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 recordedrecorded 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.
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.
(Continued)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have historically generally consisted of interest rate swap agreements that qualified for hedge accounting. In February 2012, we entered into an interest rate swap agreement that qualifies for hedge accounting. The current outstanding interest rate swap is discussed in more detail in Note 9. 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.income (loss). 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. We had no derivative instruments designated as hedges as of March 31, 2024, and December 31, 2023.
If designated as a hedge, we formally document the relationship between the derivatives and 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
Goodwill: The acquisition method of accounting requires that assets and liabilities on the balance sheet. If designatedacquired in a business combination are recorded at fair value 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 flowsacquisition date. The valuation 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. Goodwilloften involves estimates based on third-party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. This typically results in goodwill, the amount by which the cost of net assets acquired in a business combination exceeds their fair value, which is assessedsubject to impairment testing at least annuallyannually. We review goodwill for impairment and any such impairment is recognized in the period identified. Aon an annual basis as of October 1 or more frequent assessment is performed shouldoften if 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 indicatesthat it is more likely than more-likely-than-not that the fair value of a reporting unit is less thanbelow 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. The quantitative test is a two-step process consisting of comparing the carrying value of the reporting unit to an estimate of its fair value. 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 2015 and 2016, we elected to perform a qualitative assessment forBased on our annual impairment test and concluded analysis of goodwill as of October 1, it is more likely than not ourwas determined that the fair value was greater thanin excess of its respective carrying amount; value as of October 1, 2023; therefore, no further testing was required.goodwill is considered not impaired.
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.
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Standards: In May 2014, the FASB issued ASU 2014-09, 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”). This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i)Under Topic 606, we must identify the contract with thea customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfieswe satisfy a performance obligation. This ASU was originally effective for annualSignificant 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 interim periods beginning after December 15, 2016, with two transition methods available – full retrospectivedividends earned on loans, securities and cumulative effect approach. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of Effective Date, which delays the implementation of this guidance by one year. Since the guidance does not apply to revenue associated withother financial instruments including loans and securities that are accounted for under other GAAP,not within the new guidance will notscope of Topic 606. We have an impact on interest income. We are completing an overall assessmentevaluated the nature of our contracts with customers and determined that further disaggregation of revenue streams and review of relatedfrom contracts potentially affected by the ASU. In addition, we are evaluating the ASU’s expanded disclosure requirements. We plan to adopt this ASU on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustmentcustomers into more granular categories beyond what is applicable.
In January 2016, the FASB issued ASU 2016-1, Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires an entity to (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses on available for sale debt securities in combination with other deferred tax assets. This ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. This ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and are not expected to have a material effect on our financial position or results of operations when adopted.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU is effective for annual and interim periods beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,Consolidated Statements of Income was not necessary.
We generally satisfy our performance obligations on contracts with certain practical expedients available. Adoptioncustomers 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 this ASU is not expected to have a material effect on our financial position or resultsthe amount and timing of operations.revenue from contracts with customers.
(Continued)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 2016,The following table depicts our sources of noninterest income presented in the FASB issued ASU 2016-09, Consolidated Statements of Income that are scoped within Topic 606:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
(Dollars in thousands) | March 31, 2024 | March 31, 2023 | ||||||
Service charges on deposit and sweep accounts | $ | 1,531 | $ | 976 | ||||
Credit and debit card fees | 2,121 | 2,060 | ||||||
Payroll processing | 896 | 746 | ||||||
Customer service fees | 198 | 220 | ||||||
Compensation – Stock Compensation: ImprovementsService Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services. Account maintenance fees, which relate primarily to Employee Share-Based Payment Accounting. This ASU requiresmonthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that prospectively, all tax effects relatedis the point in time we fulfill the customer request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.
Credit and Debit Card Fees: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to share-based payments be made through the income statementcardholder.
Payroll Processing Fees: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.
Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks and money orders, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of settlementthe contract signing or renewal. Customer service fees are recorded as opposed to excess tax benefits being recognized in additional paid-in capital under the current guidance. The ASU also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the current requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, entities will be allowed to withhold an amount up to the employees’ maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach. This standard will be effective for annual and interim periods beginning after December 15, 2016. Adoption of this ASU did not have a material effectother noninterest income on our financial position or resultsConsolidated Statements of operations.Income.
In June 2016, the FASB issued
Standards Recently Adopted: ASU No. 2016-13, 2022-02,Measurement of Credit Losses on Financial Instruments. This ASU significantly changes how entities will measure credit losses for most financial assetsTroubled Debt Restructurings 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.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash PaymentsVintage Disclosures. This ASU will make eight targeted changeseliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to how cash receipts and cash payments are presented and classifieddetermine whether the modification results in a new loan or a continuation of an existing loan. Additionally, the statementASU requires disclosures of cash flows andcurrent period gross charge-offs by year of origination for financing receivables. This ASU is effective for fiscal years beginning after December 15, 2017. The new2022. We have adopted the standard will require adoption on a retrospective basis unless it is impracticaland included the required disclosures in our financial statements.
ASU No.2023-02,Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits reporting entities to apply, inelect to account for their tax equity investments, regardless of the tax credit program from which case it would be requiredthe income tax credits are received, using the proportional amortization if certain conditions are met. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. Mercantile adopted the standard using a modified retrospective transition approach to the amendments prospectivelyrelated to our low-income housing tax credit ("LIHTC") investments that are eligible to apply proportional amortization, which were previously accounted for under the equity method. The cumulative effect to retained earnings as of the earliest date practicable. We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform the Step 1 annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. If the carrying amount exceeds the fair value, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is effective January 1, 2020 and early adoption is permitted. The ASU should be applied prospectively. Adoption of this ASU is not expected to have a material effect on our financial position or results of operations.2023 was immaterial.
(Continued)
1. 2.SIGNIFICANT ACCOUNTING POLICIESSECURITIES (Continued)
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Previously, entities were allowed to amortize to contractual maturity or to call date. This ASU is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial statements.
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 (loss) are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
September 30, 2017 | ||||||||||||||||
U.S. Government agency debt obligations | $ | 165,551,000 | $ | 208,000 | $ | (4,591,000 | ) | $ | 161,168,000 | |||||||
Mortgage-backed securities | 39,304,000 | 405,000 | (214,000 | ) | 39,495,000 | |||||||||||
Municipal general obligation bonds | 121,803,000 | 1,750,000 | (243,000 | ) | 123,310,000 | |||||||||||
Municipal revenue bonds | 4,099,000 | 51,000 | (16,000 | ) | 4,134,000 | |||||||||||
Other investments | 2,002,000 | 0 | (19,000 | ) | 1,983,000 | |||||||||||
| $ | 332,759,000 | $ | 2,414,000 | $ | (5,083,000 | ) | $ | 330,090,000 | ||||||||
December 31, 2016 | ||||||||||||||||
U.S. Government agency debt obligations | $ | 159,271,000 | $ | 106,000 | $ | (7,337,000 | ) | $ | 152,040,000 | |||||||
Mortgage-backed securities | 47,329,000 | 486,000 | (423,000 | ) | 47,392,000 | |||||||||||
Municipal general obligation bonds | 120,284,000 | 312,000 | (1,549,000 | ) | 119,047,000 | |||||||||||
Municipal revenue bonds | 7,699,000 | 23,000 | (91,000 | ) | 7,631,000 | |||||||||||
Other investments | 1,979,000 | 0 | (29,000 | ) | 1,950,000 | |||||||||||
| $ | 336,562,000 | $ | 927,000 | $ | (9,429,000 | ) | $ | 328,060,000 | ||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SECURITIES (Continued)
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
March 31, 2024 | ||||||||||||||||
U.S. Government agency debt obligations | $ | 438,662 | $ | 0 | $ | (52,953 | ) | $ | 385,709 | |||||||
Mortgage-backed securities | 34,059 | 10 | (6,287 | ) | 27,782 | |||||||||||
Municipal general obligation bonds | 172,279 | 1,244 | (6,891 | ) | 166,632 | |||||||||||
Municipal revenue bonds | 30,708 | 151 | (2,329 | ) | 28,530 | |||||||||||
Other investments | 500 | 0 | 0 | 500 | ||||||||||||
| $ | 676,208 | $ | 1,405 | $ | (68,460 | ) | $ | 609,153 | ||||||||
December 31, 2023 | ||||||||||||||||
U.S. Government agency debt obligations | $ | 442,496 | $ | 0 | $ | (52,000 | ) | $ | 390,496 | |||||||
Mortgage-backed securities | 35,168 | 20 | (5,715 | ) | 29,473 | |||||||||||
Municipal general obligation bonds | 172,126 | 1,924 | (6,190 | ) | 167,860 | |||||||||||
Municipal revenue bonds | 30,708 | 262 | (2,207 | ) | 28,763 | |||||||||||
Other investments | 500 | 0 | 0 | 500 | ||||||||||||
| $ | 680,998 | $ | 2,206 | $ | (66,112 | ) | $ | 617,092 | ||||||||
Securities with unrealized losses at September 30, 2017March 31, 2024 and December 31, 2016,2023, 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 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agency debt obligations | $ | 81,981,000 | $ | 2,496,000 | $ | 47,265,000 | $ | 2,095,000 | $ | 129,246,000 | $ | 4,591,000 | $ | 0 | $ | 0 | $ | 385,709 | $ | 52,953 | $ | 385,709 | $ | 52,953 | ||||||||||||||||||||||||
Mortgage-backed securities | 21,482,000 | 121,000 | 9,416,000 | 93,000 | 30,898,000 | 214,000 | 201 | 3 | 27,089 | 6,284 | 27,290 | 6,287 | ||||||||||||||||||||||||||||||||||||
Municipal general obligation bonds | 10,280,000 | 90,000 | 8,436,000 | 153,000 | 18,716,000 | 243,000 | 20,393 | 189 | 100,489 | 6,702 | 120,882 | 6,891 | ||||||||||||||||||||||||||||||||||||
Municipal revenue bonds | 0 | 0 | 1,101,000 | 16,000 | 1,101,000 | 16,000 | 1,141 | 10 | 21,061 | 2,319 | 22,202 | 2,329 | ||||||||||||||||||||||||||||||||||||
Other investments | 1,502,000 | 19,000 | 0 | 0 | 1,502,000 | 19,000 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
| $ | 115,245,000 | $ | 2,726,000 | $ | 66,218,000 | $ | 2,357,000 | $ | 181,463,000 | $ | 5,083,000 | $ | 21,735 | $ | 202 | $ | 534,348 | $ | 68,258 | $ | 556,083 | $ | 68,460 | |||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
U.S. Government agency debt obligations | $ | 110,160,000 | $ | 7,172,000 | $ | 5,073,000 | $ | 165,000 | $ | 115,233,000 | $ | 7,337,000 | ||||||||||||
Mortgage-backed securities | 3,670,000 | 4,000 | 37,072,000 | 419,000 | 40,742,000 | 423,000 | ||||||||||||||||||
Municipal general obligation bonds | 65,895,000 | 1,360,000 | 27,734,000 | 189,000 | 93,629,000 | 1,549,000 | ||||||||||||||||||
Municipal revenue bonds | 1,921,000 | 90,000 | 206,000 | 1,000 | 2,127,000 | 91,000 | ||||||||||||||||||
Other investments | 1,479,000 | 29,000 | 0 | 0 | 1,479,000 | 29,000 | ||||||||||||||||||
| $ | 183,125,000 | $ | 8,655,000 | $ | 70,085,000 | $ | 774,000 | $ | 253,210,000 | $ | 9,429,000 | |||||||||||||
(Continued)
2.SECURITIES (Continued)
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||
U.S. Government agency debt obligations | $ | 0 | $ | 0 | $ | 390,496 | $ | 52,000 | $ | 390,496 | $ | 52,000 | ||||||||||||
Mortgage-backed securities | 114 | 0 | 28,749 | 5,715 | 28,863 | 5,715 | ||||||||||||||||||
Municipal general obligation bonds | 1,109 | 6 | 106,171 | 6,184 | 107,280 | 6,190 | ||||||||||||||||||
Municipal revenue bonds | 1,506 | 8 | 20,602 | 2,199 | 22,108 | 2,207 | ||||||||||||||||||
Other investments | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
| $ | 2,729 | $ | 14 | $ | 546,018 | $ | 66,098 | $ | 548,747 | $ | 66,112 | |||||||||||||
We evaluate securities for other-than-temporary impairmentin an unrealized loss position at least on a quarterly basis.quarterly. 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 September 30, 2017, 195March 31, 2024, 679 debt securities and one mutual fund with estimated fair values totaling $181$556 million havehad unrealized losses aggregating $5.1$68.5 million. After we considered whetherAt December 31, 2023, 641 debt securities with estimated fair values totaling $549 million had unrealized losses aggregating $66.1 million. At March 31, 2024, unrealized losses aggregating $59.2 million were attributable to bonds issued or guaranteed by agencies of the securitiesU.S. Federal Government, while unrealized losses totaling $9.2 million were associated with bonds issued by the federal government or its agencies andstate-based municipalities. For available for sale debt securities in an unrealized loss position, we first assess 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 believeor if it is more likely than not that we will not be required to sell our debt securitiesthe security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis no unrealized losses are deemedis written down to be other-than-temporary.fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors.
(Continued)
2.SECURITIES (Continued)
The amortized cost and fair value of debt securities at September 30, 2017,March 31, 2024, 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.
Weighted Average Yield | Amortized Cost | Fair Value | ||||||||||
Due in 2017 | 1.51 | % | $ | 3,307,000 | $ | 3,307,000 | ||||||
Due in 2018 through 2022 | 2.20 | 95,857,000 | 96,451,000 | |||||||||
Due in 2023 through 2027 | 2.71 | 99,198,000 | 98,217,000 | |||||||||
Due in 2028 and beyond | 2.94 | 93,091,000 | 90,637,000 | |||||||||
Mortgage-backed securities | 2.06 | 39,304,000 | 39,495,000 | |||||||||
Other investments | 2.03 | 2,002,000 | 1,983,000 | |||||||||
Total available for sale securities | 2.53 | % | $ | 332,759,000 | $ | 330,090,000 | ||||||
Amortized | Fair | |||||||
(Dollars in thousands) | Cost | Value | ||||||
Due in 2024 | $ | 53,520 | $ | 52,568 | ||||
Due in 2025 through 2029 | 329,740 | 301,553 | ||||||
Due in 2030 through 2034 | 227,431 | 196,189 | ||||||
Due in 2035 and beyond | 30,958 | 30,561 | ||||||
Mortgage-backed securities | 34,059 | 27,782 | ||||||
Other investments | 500 | 500 | ||||||
Total available for sale securities | $ | 676,208 | $ | 609,153 | ||||
No securities were sold during the first three months of 2024 or the full-year 2023.
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $113$203 million at September 30, 2017as of both March 31, 2024 and $109 million at December 31, 2016,2023, with estimated market values of $114$195 million and $107$197 million respectively. Securitiesat the respective dates. We had no securities issued by all other states and their political subdivisions had a combined amortized costas of $13.4 millionMarch 31, 2024, and $19.5 million at September 30, 2017 and December 31, 2016, respectively, with estimated market values of $13.6 million and $19.5 million, respectively.2023. 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.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SECURITIES (Continued)
The carrying value of U.S. Government agency debt obligations and mortgage-backedobligation securities that are pledged to secure repurchase agreementsagreements was $122$229 million and $132$230 million at September 30, 2017March 31, 2024, and December 31, 2016,2023, 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.
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.
(Continued)
3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
We evaluate quarterlyCommercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the remaining contractual required payments receivablecommercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on risk characteristics and estimate cash flows expectedsource of repayment. Our allowance for credit loss pools are consistent with those used for loan note disclosure purposes.
Our loan portfolio segments as of March 31, 2024 were as follows:
o | Commercial Loans |
■ | Commercial and Industrial: Risks to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. |
■ | Owner Occupied Commercial Real Estate: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category. |
■ | Non-Owner Occupied Commercial Real Estate: Loans in this category are susceptible to declines in occupancy rates, business failure, and general economic conditions. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category. |
■ | Multi-Family and Residential Rental: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates, as well as market demand and supply of similar property and the resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values. Also, the lack of a suitable alternative use for the properties is a risk for loans in this category. |
■ | Vacant Land, Land Development and Residential Construction: Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates. |
o | Retail Loans |
■ | 1-4 Family Mortgages: Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values. |
■ | Other Consumer Loans: Risks common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property. |
During the year ended December 31, 2023, we changed the segmentation of credit cards to be collected over the livesbusiness customers from other consumer loans to commercial and industrial loans. This division of the impaired loans. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, whencredit card balances was done to better align the contractual termsrisk characteristics of the loan agreementportfolio, which include the customer type and source of repayment. Credit cards to business customers totaled $17.8 million as of December 31, 2023. We also changed the segmentation of home equity lines of credit from 1-4 family mortgage loans to other consumer loans during the year ended December 31, 2023. Home equity lines of credit share many of the same risk characteristics of both segments, however, losses 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 impairedprimarily driven by a lack of underlying collateral value during distressed situations as many of the loans are estimated by incorporating several key assumptions similar toin a second lien position, and thus, best segmented within the initial estimateother consumer portfolio. Home equity lines of fair value. These key assumptions include probabilitycredit totaled $38.1 million as 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.December 31, 2023.
Our total loans at September 30, 2017March 31, 2024 were $2.55$4.32 billion compared to $2.38$4.30 billion at December 31, 2016,2023, an increase of $176$18.2 million, or 7.4%0.4%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at September 30, 2017March 31, 2024 and December 31, 2016,2023, and the percentage change in loans from the end of 20162023 to the end of the thirdfirst quarter of 2017,2024, are as follows:
Percent | Percent | |||||||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | Increase | March 31, 2024 | December 31, 2023 | Increase | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | % | Balance | % | (Decrease) | |||||||||||||||||||||||||||||||||||
Balance | % | Balance | % | (Decrease) | ||||||||||||||||||||||||||||||||||||
Originated loans | ||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 710,699,000 | 33.3 | % | $ | 636,771,000 | 33.8 | % | 11.6 | % | $ | 1,222,637 | 28.3 | % | $ | 1,254,586 | 29.2 | % | (2.5 | )% | ||||||||||||||||||||
Vacant land, land development, and residential construction | 21,272,000 | 1.0 | 26,519,000 | 1.4 | (19.8 | ) | 75,091 | 1.7 | 74,753 | 1.7 | 0.5 | |||||||||||||||||||||||||||||
Real estate �� owner occupied | 411,367,000 | 19.3 | 363,509,000 | 19.3 | 13.2 | |||||||||||||||||||||||||||||||||||
Real estate – owner occupied | 719,338 | 16.6 | 717,667 | 16.7 | 0.2 | |||||||||||||||||||||||||||||||||||
Real estate – non-owner occupied | 721,304,000 | 33.8 | 652,054,000 | 34.6 | 10.6 | 1,045,615 | 24.2 | 1,035,684 | 24.1 | 1.0 | ||||||||||||||||||||||||||||||
Real estate – multi-family and residential rental | 58,356,000 | 2.7 | 50,045,000 | 2.6 | 16.6 | 366,961 | 8.5 | 332,609 | 7.7 | 10.3 | ||||||||||||||||||||||||||||||
Total commercial | 1,922,998,000 | 90.1 | 1,728,898,000 | 91.7 | 11.2 | 3,429,642 | 79.3 | 3,415,299 | 79.4 | 0.4 | ||||||||||||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||||||||||
Home equity and other | 69,325,000 | 3.3 | 69,831,000 | 3.7 | (0.7 | ) | ||||||||||||||||||||||||||||||||||
1-4 family mortgages | 141,443,000 | 6.6 | 85,819,000 | 4.6 | 64.8 | 840,653 | 19.5 | 837,406 | 19.5 | 0.4 | ||||||||||||||||||||||||||||||
Other consumer loans | 51,711 | 1.2 | 51,053 | 1.1 | 1.3 | |||||||||||||||||||||||||||||||||||
Total retail | 210,768,000 | 9.9 | 155,650,000 | 8.3 | 35.4 | 892,364 | 20.7 | 888,459 | 20.6 | 0.4 | ||||||||||||||||||||||||||||||
Total originated loans | $ | 2,133,766,000 | 100.0 | % | $ | 1,884,548,000 | 100.0 | % | 13.2 | % | ||||||||||||||||||||||||||||||
Total loans | $ | 4,322,006 | 100.0 | % | $ | 4,303,758 | 100.0 | % | 0.4 | % | ||||||||||||||||||||||||||||||
(Continued)
MERCANTILE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
Percent | ||||||||||||||||||||
September 30, 2017 | December 31, 2016 | Increase | ||||||||||||||||||
Balance | % | Balance | % | (Decrease) | ||||||||||||||||
Acquired loans | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | $ | 65,864,000 | 15.7 | % | $ | 77,132,000 | 15.6 | % | (14.6% | ) | ||||||||||
Vacant land, land development, and residential construction | 7,303,000 | 1.7 | 8,309,000 | 1.7 | (12.1 | ) | ||||||||||||||
Real estate – owner occupied | 73,980,000 | 17.6 | 86,955,000 | 17.6 | (14.9 | ) | ||||||||||||||
Real estate – non-owner occupied | 83,863,000 | 19.9 | 96,215,000 | 19.5 | (12.8 | ) | ||||||||||||||
Real estate – multi-family and residential rental | 60,814,000 | 14.5 | 67,838,000 | 13.7 | (10.4 | ) | ||||||||||||||
Total commercial | 291,824,000 | 69.4 | 336,449,000 | 68.1 | (13.3 | ) | ||||||||||||||
Retail: | ||||||||||||||||||||
Home equity and other | 34,051,000 | 8.1 | 48,216,000 | 9.8 | (29.4 | ) | ||||||||||||||
1-4 family mortgages | 94,631,000 | 22.5 | 109,407,000 | 22.1 | (13.5 | ) | ||||||||||||||
Total retail | 128,682,000 | 30.6 | 157,623,000 | 31.9 | (18.4 | ) | ||||||||||||||
Total acquired loans | $ | 420,506,000 | 100.0 | % | $ | 494,072,000 | 100.0 | % | (14.9% | ) | ||||||||||
Percent | ||||||||||||||||||||
September 30, 2017 | December 31, 2016 | Increase | ||||||||||||||||||
Balance | % | Balance | % | (Decrease) | ||||||||||||||||
Total loans | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | $ | 776,563,000 | 30.4 | % | $ | 713,903,000 | 30.0 | % | 8.8 | % | ||||||||||
Vacant land, land development, and residential construction | 28,575,000 | 1.1 | 34,828,000 | 1.5 | (18.0 | ) | ||||||||||||||
Real estate – owner occupied | 485,347,000 | 19.0 | 450,464,000 | 18.9 | 7.7 | |||||||||||||||
Real estate – non-owner occupied | 805,167,000 | 31.5 | 748,269,000 | 31.5 | 7.6 | |||||||||||||||
Real estate – multi-family and residential rental | 119,170,000 | 4.7 | 117,883,000 | 4.9 | 1.1 | |||||||||||||||
Total commercial | 2,214,822,000 | 86.7 | 2,065,347,000 | 86.8 | 7.2 | |||||||||||||||
Retail: | ||||||||||||||||||||
Home equity and other | 103,376,000 | 4.0 | 118,047,000 | 5.0 | (12.4 | ) | ||||||||||||||
1-4 family mortgages | 236,074,000 | 9.3 | 195,226,000 | 8.2 | 20.9 | |||||||||||||||
Total retail | 339,450,000 | 13.3 | 313,273,000 | 13.2 | 8.4 | |||||||||||||||
Total loans | $ | 2,554,272,000 | 100.0 | % | $ | 2,378,620,000 | 100.0 | % | 7.4 | % | ||||||||||
(Continued)
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 $12.4 million and $5.3 million, respectively, as of September 30, 2017. The total contractually required payments due on and carrying value of acquired impaired loans were $15.5 million and $6.2 million, respectively, as of December 31, 2016. Changes in the accretable yield for acquired impaired loans for the three and nine months ended September 30, 2017 and September 30, 2016 were as follows:
Balance at June 30, 2017 | $ | 1,658,000 | ||
Additions | 2,000 | |||
Accretion income | (141,000 | ) | ||
Net reclassification from nonaccretable to accretable | 83,000 | |||
Reductions (1) | (23,000 | ) | ||
Balance at September 30, 2017 | $ | 1,579,000 | ||
Balance at December 31, 2016 | $ | 1,726,000 | ||
Additions | 223,000 | |||
Accretion income | (429,000 | ) | ||
Net reclassification from nonaccretable to accretable | 330,000 | |||
Reductions (1) | (271,000 | ) | ||
Balance at September 30, 2017 | $ | 1,579,000 | ||
Balance at June 30, 2016 | $ | 6,602,000 | ||
Additions | 224,000 | |||
Accretion income | (638,000 | ) | ||
Net reclassification from nonaccretable to accretable | 1,000,000 | |||
Reductions (1) | (407,000 | ) | ||
Balance at September 30, 2016 | $ | 6,781,000 | ||
Balance at December 31, 2015 | $ | 5,193,000 | ||
Additions | 245,000 | |||
Accretion income | (1,992,000 | ) | ||
Net reclassification from nonaccretable to accretable | 4,565,000 | |||
Reductions (1) | (1,230,000 | ) | ||
Balance at September 30, 2016 | $ | 6,781,000 |
(1) Reductions primarily reflect the result of exit events, including loan payoffs and charge-offs.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Nonperforming originated loans as of September 30, 2017 and December 31, 2016 were as follows:
September 30, 2017 | December 31, 2016 | |||||||
Loans past due 90 days or more still accruing interest | $ | 0 | $ | 0 | ||||
Nonaccrual loans | 4,696,000 | 3,328,000 | ||||||
Total nonperforming originated loans | $ | 4,696,000 | $ | 3,328,000 | ||||
Nonperforming acquired loans as of September 30, 2017 and December 31, 2016 were as follows:
September 30, 2017 | December 31, 2016 | |||||||
Loans past due 90 days or more still accruing interest | $ | 0 | $ | 0 | ||||
Nonaccrual loans | 3,535,000 | 2,611,000 | ||||||
Total nonperforming acquired loans | $ | 3,535,000 | $ | 2,611,000 | ||||
The recorded principal balance of nonperforming loans was as follows:
September 30, 2017 | December 31, 2016 | |||||||
Commercial: | ||||||||
Commercial and industrial | $ | 2,401,000 | $ | 2,296,000 | ||||
Vacant land, land development, and residential construction | 50,000 | 95,000 | ||||||
Real estate – owner occupied | 2,309,000 | 285,000 | ||||||
Real estate – non-owner occupied | 45,000 | 488,000 | ||||||
Real estate – multi-family and residential rental | 247,000 | 17,000 | ||||||
Total commercial | 5,052,000 | 3,181,000 | ||||||
Retail: | ||||||||
Home equity and other | 543,000 | 496,000 | ||||||
1-4 family mortgages | 2,636,000 | 2,262,000 | ||||||
Total retail | 3,179,000 | 2,758,000 | ||||||
Total nonperforming loans | $ | 8,231,000 | $ | 5,939,000 | ||||
Acquired impaired loans are generally 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)
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 September 30, 2017:March 31, 2024:
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 | Recorded | |||||||||||||||||||||||||||||||||||||||||||||||||
Originated loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater | Balance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 30 – 59 | 60 – 89 | Than 89 | > 89 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Days | Days | Days | Total | Total | Days and | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | Past Due | Past Due | Current | Loans | Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 710,699,000 | $ | 710,699,000 | $ | 0 | $ | 16 | $ | 0 | $ | 249 | $ | 265 | $ | 1,222,372 | $ | 1,222,637 | $ | 0 | ||||||||||||||||||||||||||||
Vacant land, land development, and residential construction | 50,000 | 0 | 0 | 50,000 | 21,222,000 | 21,272,000 | 0 | 0 | 0 | 0 | 0 | 75,091 | 75,091 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Real estate – owner occupied | 0 | 0 | 0 | 0 | 411,367,000 | 411,367,000 | 0 | 0 | 0 | 0 | 0 | 719,338 | 719,338 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | 0 | 721,304,000 | 721,304,000 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Real estate – non- owner occupied | 0 | 0 | 0 | 0 | 1,045,615 | 1,045,615 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | 0 | 58,356,000 | 58,356,000 | 0 | 0 | 0 | 0 | 0 | 366,961 | 366,961 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Total commercial | 50,000 | 0 | 0 | 50,000 | 1,922,948,000 | 1,922,998,000 | 0 | 16 | 0 | 249 | 265 | 3,429,377 | 3,429,642 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity and other | 35,000 | 111,000 | 0 | 146,000 | 69,179,000 | 69,325,000 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
1-4 family mortgages | 0 | 69,000 | 248,000 | 317,000 | 141,126,000 | 141,443,000 | 0 | 508 | 71 | 165 | 744 | 839,909 | 840,653 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Other consumer loans | 37 | 0 | 27 | 64 | 51,647 | 51,711 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total retail | 35,000 | 180,000 | 248,000 | 463,000 | 210,305,000 | 210,768,000 | 0 | 545 | 71 | 192 | 808 | 891,556 | 892,364 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Total past due loans | $ | 85,000 | $ | 180,000 | $ | 248,000 | $ | 513,000 | $ | 2,133,253,000 | $ | 2,133,766,000 | $ | 0 | $ | 561 | $ | 71 | $ | 441 | $ | 1,073 | $ | 4,320,933 | $ | 4,322,006 | $ | 0 | ||||||||||||||||||||||||||||
(Continued)
3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
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 | ||||||||||||||||||||||
Acquired loans | ||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 114,000 | $ | 0 | $ | 1,000 | $ | 115,000 | $ | 65,749,000 | $ | 65,864,000 | $ | 0 | ||||||||||||||
Vacant land, land development, and residential construction | 0 | 0 | 0 | 0 | 7,303,000 | 7,303,000 | 0 | |||||||||||||||||||||
Real estate – owner occupied | 153,000 | 139,000 | 0 | 292,000 | 73,688,000 | 73,980,000 | 0 | |||||||||||||||||||||
Real estate – non-owner occupied | 0 | 45,000 | 0 | 45,000 | 83,818,000 | 83,863,000 | 0 | |||||||||||||||||||||
Real estate – multi-family and residential rental | 0 | 99,000 | 10,000 | 109,000 | 60,705,000 | 60,814,000 | 0 | |||||||||||||||||||||
Total commercial | 267,000 | 283,000 | 11,000 | 561,000 | 291,263,000 | 291,824,000 | 0 | |||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||
Home equity and other | 207,000 | 157,000 | 21,000 | 385,000 | 33,666,000 | 34,051,000 | 0 | |||||||||||||||||||||
1-4 family mortgages | 481,000 | 363,000 | 707,000 | 1,551,000 | 93,080,000 | 94,631,000 | 0 | |||||||||||||||||||||
Total retail | 688,000 | 520,000 | 728,000 | 1,936,000 | 126,746,000 | 128,682,000 | 0 | |||||||||||||||||||||
Total past due loans | $ | 955,000 | $ | 803,000 | $ | 739,000 | $ | 2,497,000 | $ | 418,009,000 | $ | 420,506,000 | $ | 0 | ||||||||||||||
(Continued)
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, 2016:2023:
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 | Recorded | |||||||||||||||||||||||||||||||||||||||||||||||||
Originated loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater | Balance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 30 – 59 | 60 – 89 | Than 89 | > 89 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Days | Days | Days | Total | Total | Days and | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | Past Due | Past Due | Current | Loans | Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 0 | $ | 27,000 | $ | 0 | $ | 27,000 | $ | 636,744,000 | $ | 636,771,000 | $ | 0 | $ | 4 | $ | 0 | $ | 249 | $ | 253 | $ | 1,254,333 | $ | 1,254,586 | $ | 0 | ||||||||||||||||||||||||||||
Vacant land, land development, and residential construction | 0 | 0 | 0 | 0 | 26,519,000 | 26,519,000 | 0 | 0 | 0 | 0 | 0 | 74,753 | 74,753 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Real estate – owner occupied | 0 | 0 | 0 | 0 | 363,509,000 | 363,509,000 | 0 | 0 | 0 | 70 | 70 | 717,597 | 717,667 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | 0 | 652,054,000 | 652,054,000 | 0 | 0 | 0 | 0 | 0 | 1,035,684 | 1,035,684 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | 0 | 50,045,000 | 50,045,000 | 0 | 0 | 0 | 0 | 0 | 332,609 | 332,609 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Total commercial | 0 | 27,000 | 0 | 27,000 | 1,728,871,000 | 1,728,898,000 | 0 | 4 | 0 | 319 | 323 | 3,414,976 | 3,415,299 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity and other | 46,000 | 98,000 | 0 | 144,000 | 69,687,000 | 69,831,000 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
1-4 family mortgages | 758,000 | 122,000 | 337,000 | 1,217,000 | 84,602,000 | 85,819,000 | 0 | 934 | 145 | 38 | 1,117 | 836,289 | 837,406 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Other consumer loans | 97 | 0 | 0 | 97 | 50,956 | 51,053 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total retail | 804,000 | 220,000 | 337,000 | 1,361,000 | 154,289,000 | 155,650,000 | 0 | 1,031 | 145 | 38 | 1,214 | 887,245 | 888,459 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Total past due loans | $ | 804,000 | $ | 247,000 | $ | 337,000 | $ | 1,388,000 | $ | 1,883,160,000 | $ | 1,884,548,000 | $ | 0 | $ | 1,035 | $ | 145 | $ | 357 | $ | 1,537 | $ | 4,302,221 | $ | 4,303,758 | $ | 0 | ||||||||||||||||||||||||||||
(Continued)
3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
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 | ||||||||||||||||||||||
Acquired Loans | ||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 0 | $ | 11,000 | $ | 16,000 | $ | 27,000 | $ | 77,105,000 | $ | 77,132,000 | $ | 0 | ||||||||||||||
Vacant land, land development, and residential construction | 0 | 0 | 0 | 0 | 8,309,000 | 8,309,000 | 0 | |||||||||||||||||||||
Real estate – owner occupied | 62,000 | 0 | 50,000 | 112,000 | 86,843,000 | 86,955,000 | 0 | |||||||||||||||||||||
Real estate – non-owner occupied | 0 | 0 | 353,000 | 353,000 | 95,862,000 | 96,215,000 | 0 | |||||||||||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | 17,000 | 17,000 | 67,821,000 | 67,838,000 | 0 | |||||||||||||||||||||
Total commercial | 62,000 | 11,000 | 436,000 | 509,000 | 335,940,000 | 336,449,000 | 0 | |||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||
Home equity and other | 258,000 | 26,000 | 45,000 | 329,000 | 47,887,000 | 48,216,000 | 0 | |||||||||||||||||||||
1-4 family mortgages | 1,255,000 | 467,000 | 439,000 | 2,161,000 | 107,246,000 | 109,407,000 | 0 | |||||||||||||||||||||
Total retail | 1,513,000 | 493,000 | 484,000 | 2,490,000 | 155,133,000 | 157,623,000 | 0 | |||||||||||||||||||||
Total past due loans | $ | 1,575,000 | $ | 504,000 | $ | 920,000 | $ | 2,999,000 | $ | 491,073,000 | $ | 494,072,000 | $ | 0 | ||||||||||||||
Nonaccrual loans as of March 31, 2024 were as follows:
| Recorded | ||||||||
Principal | Related | |||||||
(Dollars in thousands) | Balance | Allowance | ||||||
With no allowance recorded: | ||||||||
Commercial: | ||||||||
Commercial and industrial | $ | 16 | $ | 0 | ||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 16 | 0 | ||||||
Retail: | ||||||||
1-4 family mortgages | 2,431 | 0 | ||||||
Other consumer loans | 27 | 0 | ||||||
Total retail | 2,458 | 0 | ||||||
Total with no allowance recorded | $ | 2,474 | $ | 0 | ||||
With an allowance recorded: | ||||||||
Commercial: | ||||||||
Commercial and industrial | $ | 2,652 | $ | 2,050 | ||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 2,652 | 2,050 | ||||||
Retail: | ||||||||
1-4 family mortgages | 805 | 221 | ||||||
Other consumer loans | 108 | 108 | ||||||
Total retail | 913 | 329 | ||||||
Total with an allowance recorded | $ | 3,565 | $ | 2,379 | ||||
Total nonaccrual loans: | ||||||||
Commercial | $ | 2,668 | $ | 2,050 | ||||
Retail | 3,371 | 329 | ||||||
Total nonaccrual loans | $ | 6,039 | $ | 2,379 | ||||
Nonaccrual loans represent the entire balance of collateral dependent loans. As of March 31, 2024 and December 31, 2023, all collateral dependent loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts receivable, inventory, and equipment. Interest income recognized on nonaccrual loans totaled $0.2 million and less than $0.1 million during the three months ended March 31, 2024 and 2023, respectively, reflecting the collection of interest at the time of principal pay-off.
(Continued)
3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
Impaired originatedNonaccrual loans as of September 30, 2017, and average originated impaired loans for the three and nine months ended September 30, 2017,December 31, 2023 were as follows:
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | Recorded | ||||||||||||||||||||||
Principal | Related | ||||||||||||||||||||||||||
With no related allowance recorded | |||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Allowance | |||||||||||||||||||||||||
With no allowance recorded: | |||||||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||||||
Commercial and industrial | $ | 83,000 | $ | 70,000 | $ | 56,000 | $ | 823,000 | $ | 0 | $ | 0 | |||||||||||||||
Vacant land, land development and residential construction | 463,000 | 50,000 | 58,000 | 73,000 | 0 | 0 | |||||||||||||||||||||
Real estate – owner occupied | 224,000 | 214,000 | 266,000 | 189,000 | 70 | 0 | |||||||||||||||||||||
Real estate – non-owner occupied | 178,000 | 178,000 | 89,000 | 45,000 | 0 | 0 | |||||||||||||||||||||
Real estate – multi-family and residential rental | 360,000 | 360,000 | 180,000 | 189,000 | 0 | 0 | |||||||||||||||||||||
Total commercial | 1,308,000 | 872,000 | 649,000 | 1,319,000 | 70 | 0 | |||||||||||||||||||||
Retail: | |||||||||||||||||||||||||||
Home equity and other | 849,000 | 776,000 | 729,000 | 488,000 | |||||||||||||||||||||||
1-4 family mortgages | 1,264,000 | 603,000 | 614,000 | 632,000 | 2,272 | 0 | |||||||||||||||||||||
Other consumer loans | 0 | 0 | |||||||||||||||||||||||||
Total retail | 2,113,000 | 1,379,000 | 1,343,000 | 1,120,000 | 2,272 | 0 | |||||||||||||||||||||
Total with no related allowance recorded | $ | 3,421,000 | $ | 2,251,000 | $ | 1,992,000 | $ | 2,439,000 | |||||||||||||||||||
Total with no allowance recorded | $ | 2,342 | $ | 0 | |||||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||||||
Commercial and industrial | $ | 249 | $ | 1 | |||||||||||||||||||||||
Vacant land, land development and residential construction | 0 | 0 | |||||||||||||||||||||||||
Real estate – owner occupied | 0 | 0 | |||||||||||||||||||||||||
Real estate – non-owner occupied | 0 | 0 | |||||||||||||||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | |||||||||||||||||||||||||
Total commercial | 249 | 1 | |||||||||||||||||||||||||
Retail: | |||||||||||||||||||||||||||
1-4 family mortgages | 824 | 240 | |||||||||||||||||||||||||
Other consumer loans | 0 | 0 | |||||||||||||||||||||||||
Total retail | 824 | 240 | |||||||||||||||||||||||||
Total with an allowance recorded | $ | 1,073 | $ | 241 | |||||||||||||||||||||||
Total nonaccrual loans: | |||||||||||||||||||||||||||
Commercial | $ | 319 | $ | 1 | |||||||||||||||||||||||
Retail | 3,096 | 240 | |||||||||||||||||||||||||
Total nonaccrual loans | $ | 3,415 | $ | 241 | |||||||||||||||||||||||
(Continued)
3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | ||||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | $ | 4,066,000 | $ | 4,030,000 | $ | 1,252,000 | $ | 4,100,000 | $ | 3,395,000 | ||||||||||
Vacant land, land development and residential construction | 249,000 | 249,000 | 6,000 | 374,000 | 561,000 | |||||||||||||||
Real estate – owner occupied | 2,819,000 | 2,807,000 | 530,000 | 2,319,000 | 1,731,000 | |||||||||||||||
Real estate – non-owner occupied | 296,000 | 296,000 | 2,000 | 392,000 | 2,569,000 | |||||||||||||||
Real estate – multi-family and residential rental | 66,000 | 66,000 | 66,000 | 321,000 | 536,000 | |||||||||||||||
Total commercial | 7,496,000 | 7,448,000 | 1,856,000 | 7,506,000 | 8,792,000 | |||||||||||||||
Retail: | ||||||||||||||||||||
Home equity and other | 1,085,000 | 1,066,000 | 723,000 | 1,035,000 | 866,000 | |||||||||||||||
1-4 family mortgages | 165,000 | 112,000 | 15,000 | 113,000 | 125,000 | |||||||||||||||
Total retail | 1,250,000 | 1,178,000 | 738,000 | 1,148,000 | 991,000 | |||||||||||||||
Total with an allowance recorded | $ | 8,746,000 | $ | 8,626,000 | $ | 2,594,000 | $ | 8,654,000 | $ | 9,783,000 | ||||||||||
Total impaired loans: | ||||||||||||||||||||
Commercial | $ | 8,804,000 | $ | 8,320,000 | $ | 1,856,000 | $ | 8,155,000 | $ | 10,111,000 | ||||||||||
Retail | 3,363,000 | 2,557,000 | 738,000 | 2,491,000 | 2,111,000 | |||||||||||||||
Total impaired loans | $ | 12,167,000 | $ | 10,877,000 | $ | 2,594,000 | $ | 10,646,000 | $ | 12,222,000 | ||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans as of September 30, 2017, and average impaired acquired loans for the three and nine months ended September 30, 2017, were as follows:
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | |||||||||||||||
With no related allowance recorded | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 1,074,000 | $ | 1,057,000 | $ | 1,196,000 | $ | 1,044,000 | |||||||||||
Vacant land, land development and residential construction | 29,000 | 29,000 | 31,000 | 15,000 | |||||||||||||||
Real estate – owner occupied | 1,206,000 | 904,000 | 1,031,000 | 1,091,000 | |||||||||||||||
Real estate – non-owner occupied | 989,000 | 988,000 | 975,000 | 863,000 | |||||||||||||||
Real estate – multi-family and residential rental | 1,306,000 | 1,289,000 | 750,000 | 455,000 | |||||||||||||||
Total commercial | 4,604,000 | 4,267,000 | 3,983,000 | 3,468,000 | |||||||||||||||
Retail: | |||||||||||||||||||
Home equity and other | 677,000 | 495,000 | 453,000 | 394,000 | |||||||||||||||
1-4 family mortgages | 2,485,000 | 2,022,000 | 1,974,000 | 1,818,000 | |||||||||||||||
Total retail | 3,162,000 | 2,517,000 | 2,427,000 | 2,212,000 | |||||||||||||||
Total with no related allowance recorded | $ | 7,766,000 | $ | 6,784,000 | $ | 6,410,000 | $ | 5,680,000 | |||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | ||||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | $ | 0 | $ | 0 | $ | 0 | $ | 6,000 | $ | 12,000 | ||||||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Real estate – owner occupied | 46,000 | 46,000 | 3,000 | 47,000 | 47,000 | |||||||||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total commercial | 46,000 | 46,000 | 3,000 | 53,000 | 59,000 | |||||||||||||||
Retail: | ||||||||||||||||||||
Home equity and other | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
1-4 family mortgages | 170,000 | 170,000 | 3,000 | 170,000 | 171,000 | |||||||||||||||
Total retail | 170,000 | 170,000 | 3,000 | 170,000 | 171,000 | |||||||||||||||
Total with an allowance recorded | $ | 216,000 | $ | 216,000 | $ | 6,000 | $ | 223,000 | $ | 230,000 | ||||||||||
Total impaired loans: | ||||||||||||||||||||
Commercial | $ | 4,650,000 | $ | 4,313,000 | $ | 3,000 | $ | 4,036,000 | $ | 3,527,000 | ||||||||||
Retail | 3,332,000 | 2,687,000 | 3,000 | 2,597,000 | 2,383,000 | |||||||||||||||
Total impaired loans | $ | 7,982,000 | $ | 7,000,000 | $ | 6,000 | $ | 6,633,000 | $ | 5,910,000 | ||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired originated loans as of December 31, 2016, and average impaired originated loans for the three and nine months ended September 30, 2016, were as follows:
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | |||||||||||||||
With no related allowance recorded | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 1,498,000 | $ | 1,498,000 | $ | 1,809,000 | $ | 1,752,000 | |||||||||||
Vacant land, land development and residential construction | 487,000 | 95,000 | 0 | 0 | |||||||||||||||
Real estate – owner occupied | 0 | 0 | 327,000 | 307,000 | |||||||||||||||
Real estate – non-owner occupied | 0 | 0 | 5,616,000 | 5,647,000 | |||||||||||||||
Real estate – multi-family and residential rental | 130,000 | 130,000 | 0 | 0 | |||||||||||||||
Total commercial | 2,115,000 | 1,723,000 | 7,752,000 | 7,706,000 | |||||||||||||||
Retail: | |||||||||||||||||||
Home equity and other | 114,000 | 114,000 | 118,000 | 63,000 | |||||||||||||||
1-4 family mortgages | 1,270,000 | 630,000 | 618,000 | 616,000 | |||||||||||||||
Total retail | 1,384,000 | 744,000 | 736,000 | 679,000 | |||||||||||||||
Total with no related allowance recorded | $ | 3,499,000 | $ | 2,467,000 | $ | 8,488,000 | $ | 8,385,000 | |||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | ||||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | $ | 2,405,000 | $ | 2,382,000 | $ | 673,000 | $ | 185,000 | $ | 227,000 | ||||||||||
Vacant land, land development and residential construction | 999,000 | 999,000 | 28,000 | 1,367,000 | 1,507,000 | |||||||||||||||
Real estate – owner occupied | 906,000 | 906,000 | 97,000 | 1,366,000 | 1,337,000 | |||||||||||||||
Real estate – non-owner occupied | 5,020,000 | 5,020,000 | 247,000 | 4,670,000 | 4,734,000 | |||||||||||||||
Real estate – multi-family and residential rental | 1,040,000 | 1,040,000 | 258,000 | 966,000 | 992,000 | |||||||||||||||
Total commercial | 10,370,000 | 10,347,000 | 1,303,000 | 8,554,000 | 8,797,000 | |||||||||||||||
Retail: | ||||||||||||||||||||
Home equity and other | 434,000 | 412,000 | 203,000 | 551,000 | 534,000 | |||||||||||||||
1-4 family mortgages | 204,000 | 157,000 | 66,000 | 162,000 | 144,000 | |||||||||||||||
Total retail | 638,000 | 569,000 | 269,000 | 713,000 | 678,000 | |||||||||||||||
Total with an allowance recorded | $ | 11,008,000 | $ | 10,916,000 | $ | 1,572,000 | $ | 9,267,000 | $ | 9,475,000 | ||||||||||
Total impaired loans: | ||||||||||||||||||||
Commercial | $ | 12,485,000 | $ | 12,070,000 | $ | 1,303,000 | $ | 16,306,000 | $ | 16,503,000 | ||||||||||
Retail | 2,022,000 | 1,313,000 | 269,000 | 1,449,000 | 1,357,000 | |||||||||||||||
Total impaired loans | $ | 14,507,000 | $ | 13,383,000 | $ | 1,572,000 | $ | 17,755,000 | $ | 17,860,000 | ||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired acquired loans as of December 31, 2016, and average impaired acquired loans for the three and nine months ended September 30, 2016, were as follows:
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | |||||||||||||||
With no related allowance recorded | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 853,000 | $ | 826,000 | $ | 1,327,000 | $ | 1,395,000 | |||||||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | 0 | |||||||||||||||
Real estate – owner occupied | 1,281,000 | 1,210,000 | 1,021,000 | 1,416,000 | |||||||||||||||
Real estate – non-owner occupied | 928,000 | 789,000 | 961,000 | 894,000 | |||||||||||||||
Real estate – multi-family and residential rental | 152,000 | 89,000 | 327,000 | 335,000 | |||||||||||||||
Total commercial | 3,214,000 | 2,914,000 | 3,636,000 | 4,040,000 | |||||||||||||||
Retail: | |||||||||||||||||||
Home equity and other | 531,000 | 351,000 | 347,000 | 320,000 | |||||||||||||||
1-4 family mortgages | 2,081,000 | 1,629,000 | 1,307,000 | 1,359,000 | |||||||||||||||
Total retail | 2,612,000 | 1,980,000 | 1,654,000 | 1,679,000 | |||||||||||||||
Total with no related allowance recorded | $ | 5,826,000 | $ | 4,894,000 | $ | 5,290,000 | $ | 5,719,000 | |||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Unpaid Contractual Principal Balance | Recorded Principal Balance | Related Allowance | Third Quarter Average Recorded Principal Balance | Year-To-Date Average Recorded Principal Balance | ||||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | $ | 19,000 | $ | 19,000 | $ | 2,000 | $ | 343,000 | $ | 361,000 | ||||||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Real estate – owner occupied | 48,000 | 48,000 | 3,000 | 49,000 | 49,000 | |||||||||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | 11,000 | 16,000 | |||||||||||||||
Total commercial | 67,000 | 67,000 | 5,000 | 403,000 | 426,000 | |||||||||||||||
Retail: | ||||||||||||||||||||
Home equity and other | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
1-4 family mortgages | 172,000 | 172,000 | 4,000 | 174,000 | 131,000 | |||||||||||||||
Total retail | 172,000 | 172,000 | 4,000 | 174,000 | 131,000 | |||||||||||||||
Total with an allowance recorded | $ | 239,000 | $ | 239,000 | $ | 9,000 | $ | 577,000 | $ | 557,000 | ||||||||||
Total impaired loans: | ||||||||||||||||||||
Commercial | $ | 3,281,000 | $ | 2,981,000 | $ | 5,000 | $ | 4,039,000 | $ | 4,466,000 | ||||||||||
Retail | 2,784,000 | 2,152,000 | 4,000 | 1,828,000 | 1,810,000 | |||||||||||||||
Total impaired loans | $ | 6,065,000 | $ | 5,133,000 | $ | 9,000 | $ | 5,867,000 | $ | 6,276,000 | ||||||||||
Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt restructurings totaled $0.1 million and $0.3 million during the third quarters of 2017 and 2016, respectively, and $0.4 million and $0.8 million during the first nine months of 2017 and 2016, respectively. No interest income was recognized on nonaccrual loans during the third quarter and first nine months of 2017 or during the respective 2016 periods. Lost interest income on nonaccrual loans totaled $0.1 million during the third quarter of 2017 and $0.2 million during the first nine months of 2017. Lost interest income on nonaccrual loans totaled $0.1 million during the third quarter of 2016 and $0.4 million during the first nine months of 2016.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Credit Quality Indicators.We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral and delinquency.
Credit quality indicators were as follows as of September 30, 2017:
Originated loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Internal credit risk grade groupings: | ||||||||||||||||||||
Grades 1 – 4 | $ | 534,639,000 | $ | 13,017,000 | $ | 312,650,000 | $ | 573,763,000 | $ | 37,127,000 | ||||||||||
Grades 5 – 7 | 171,658,000 | 8,205,000 | 95,973,000 | 147,541,000 | 20,803,000 | |||||||||||||||
Grades 8 – 9 | 4,402,000 | 50,000 | 2,744,000 | 0 | 426,000 | |||||||||||||||
Total commercial | $ | 710,699,000 | $ | 21,272,000 | $ | 411,367,000 | $ | 721,304,000 | $ | 58,356,000 | ||||||||||
Retail credit exposure – credit risk profiled by collateral type:
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Total retail | $ | 69,325,000 | $ | 141,443,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Internal credit risk grade groupings: | ||||||||||||||||||||
Grades 1 – 4 | $ | 38,477,000 | $ | 1,536,000 | $ | 29,429,000 | $ | 50,688,000 | $ | 36,523,000 | ||||||||||
Grades 5 – 7 | 26,315,000 | 4,831,000 | 43,010,000 | 32,161,000 | 22,899,000 | |||||||||||||||
Grades 8 – 9 | 1,072,000 | 936,000 | 1,541,000 | 1,014,000 | 1,392,000 | |||||||||||||||
Total commercial | $ | 65,864,000 | $ | 7,303,000 | $ | 73,980,000 | $ | 83,863,000 | $ | 60,814,000 | ||||||||||
Retail credit exposure – credit risk profiled by collateral type:
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Total retail | $ | 34,051,000 | $ | 94,631,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Credit quality indicators were as follows as of December 31, 2016:
Originated loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Internal credit risk grade groupings: | ||||||||||||||||||||
Grades 1 – 4 | $ | 440,219,000 | $ | 16,378,000 | $ | 238,890,000 | $ | 542,294,000 | $ | 29,793,000 | ||||||||||
Grades 5 – 7 | 190,170,000 | 10,046,000 | 123,517,000 | 109,304,000 | 19,082,000 | |||||||||||||||
Grades 8 – 9 | 6,382,000 | 95,000 | 1,102,000 | 456,000 | 1,170,000 | |||||||||||||||
Total commercial | $ | 636,771,000 | $ | 26,519,000 | $ | 363,509,000 | $ | 652,054,000 | $ | 50,045,000 | ||||||||||
Retail credit exposure – credit risk profiled by collateral type:
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Total retail | $ | 69,831,000 | $ | 85,819,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Acquired loans
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Internal credit risk grade groupings: | ||||||||||||||||||||
Grades 1 – 4 | $ | 40,911,000 | $ | 1,887,000 | $ | 36,246,000 | $ | 57,671,000 | $ | 39,574,000 | ||||||||||
Grades 5 – 7 | 35,233,000 | 6,164,000 | 49,255,000 | 37,040,000 | 28,015,000 | |||||||||||||||
Grades 8 – 9 | 988,000 | 258,000 | 1,454,000 | 1,504,000 | 249,000 | |||||||||||||||
Total commercial | $ | 77,132,000 | $ | 8,309,000 | $ | 86,955,000 | $ | 96,215,000 | $ | 67,838,000 | ||||||||||
Retail credit exposure – credit risk profiled by collateral type:
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Total retail | $ | 48,216,000 | $ | 109,407,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
All commercial loans are graded using the following criteria:
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The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewingreviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan isAll commercial loans are graded using the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.following criteria:
Grade 1. | “Exceptional” Loans with this rating contain very little, if any, risk. |
Grade 2. | “Outstanding” Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements. |
Grade 3. | “Very Good” Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are acceptable. |
Grade 4. | “Good” Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are modest. |
Grade 5. | “Acceptable” Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all regulatory requirements. These are for loans for which repayment risks are satisfactory. |
Grade 6. | “Monitor” Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report. |
Grade 7. | “Special Mention” Loans with this rating have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date. |
Grade 8. | “Substandard” Loans with this rate are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected. |
Grade 9. | “Doubtful” Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable. |
Grade 10. | “Loss” Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is not warranted. |
The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position. Retail loans that reach 90 days or more past due are generally placed into nonaccrual status and are categorized as nonperforming. |
(Continued)
3. 3.LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of March 31, 2024 based on year of origination:
Revolving | Grand | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Term Total | Loans | Total | |||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 27,101 | $ | 96,301 | $ | 69,429 | $ | 82,590 | $ | 18,922 | $ | 12,501 | $ | 306,844 | $ | 392,847 | $ | 699,691 | ||||||||||||||||||
Grades 5 – 7 | 22,011 | 152,270 | 50,958 | 15,246 | 16,947 | 8,116 | 265,548 | 233,465 | 499,013 | |||||||||||||||||||||||||||
Grades 8 – 9 | 3,608 | 314 | 1,968 | 290 | 0 | 0 | 6,180 | 17,753 | 23,933 | |||||||||||||||||||||||||||
Total | $ | 52,720 | $ | 248,885 | $ | 122,355 | $ | 98,126 | $ | 35,869 | $ | 20,617 | $ | 578,572 | $ | 644,065 | $ | 1,222,637 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 6 | $ | 6 | ||||||||||||||||||
Vacant Land, Land Development and Residential Construction: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 6,294 | $ | 19,799 | $ | 3,727 | $ | 604 | $ | 189 | $ | 270 | $ | 30,883 | $ | 0 | $ | 30,883 | ||||||||||||||||||
Grades 5 – 7 | 7,269 | 16,830 | 19,371 | 134 | 2 | 594 | 44,200 | 0 | 44,200 | |||||||||||||||||||||||||||
Grades 8 – 9 | 0 | 8 | 0 | 0 | 0 | 0 | 8 | 0 | 8 | |||||||||||||||||||||||||||
Total | $ | 13,563 | $ | 36,637 | $ | 23,098 | $ | 738 | $ | 191 | $ | 864 | $ | 75,091 | $ | 0 | $ | 75,091 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Real Estate – Owner Occupied: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 25,025 | $ | 198,247 | $ | 108,314 | $ | 82,699 | $ | 45,264 | $ | 14,792 | $ | 474,341 | $ | 0 | $ | 474,341 | ||||||||||||||||||
Grades 5 – 7 | 18,703 | 96,197 | 60,108 | 26,866 | 22,119 | 8,604 | 232,597 | 11,972 | 244,569 | |||||||||||||||||||||||||||
Grades 8 – 9 | 0 | 0 | 391 | 0 | 37 | 0 | 428 | 0 | 428 | |||||||||||||||||||||||||||
Total | $ | 43,728 | $ | 294,444 | $ | 168,813 | $ | 109,565 | $ | 67,420 | $ | 23,396 | $ | 707,366 | $ | 11,972 | $ | 719,338 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Real Estate – Non-Owner Occupied: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 22,924 | $ | 104,075 | $ | 84,362 | $ | 112,211 | $ | 100,079 | $ | 30,405 | $ | 454,056 | $ | 0 | $ | 454,056 | ||||||||||||||||||
Grades 5 – 7 | 83,233 | 220,686 | 89,221 | 79,662 | 87,033 | 20,946 | 580,781 | 0 | 580,781 | |||||||||||||||||||||||||||
Grades 8 – 9 | 0 | 10,778 | 0 | 0 | 0 | 0 | 10,778 | 0 | 10,778 | |||||||||||||||||||||||||||
Total | $ | 106,157 | $ | 335,539 | $ | 173,583 | $ | 191,873 | $ | 187,112 | $ | 51,351 | $ | 1,045,615 | $ | 0 | $ | 1,045,615 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Real Estate – Multi-Family and Residential Rental: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 454 | $ | 41,659 | $ | 10,860 | $ | 65,700 | $ | 34,642 | $ | 8,054 | $ | 161,369 | $ | 0 | $ | 161,369 | ||||||||||||||||||
Grades 5 – 7 | 3,309 | 96,528 | 75,412 | 4,556 | 8,854 | 4,672 | 193,331 | 49 | 193,380 | |||||||||||||||||||||||||||
Grades 8 – 9 | 0 | 11,225 | 0 | 0 | 987 | 0 | 12,212 | 0 | 12,212 | |||||||||||||||||||||||||||
Total | $ | 3,763 | $ | 149,412 | $ | 86,272 | $ | 70,256 | $ | 44,483 | $ | 12,726 | $ | 366,912 | $ | 49 | $ | 366,961 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Total Commercial | $ | 219,931 | $ | 1,064,917 | $ | 574,121 | $ | 470,558 | $ | 335,075 | $ | 108,954 | $ | 2,773,556 | $ | 656,086 | $ | 3,429,642 | ||||||||||||||||||
Total Commercial year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 6 | $ | 6 | ||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||||||
1-4 Family Mortgages: | ||||||||||||||||||||||||||||||||||||
Performing | $ | 11,675 | $ | 138,657 | $ | 326,965 | $ | 225,658 | $ | 78,013 | $ | 56,449 | $ | 837,417 | $ | 0 | $ | 837,417 | ||||||||||||||||||
Nonperforming | 0 | 101 | 1,660 | 268 | 0 | 1,207 | 3,236 | 0 | 3,236 | |||||||||||||||||||||||||||
Total | $ | 11,675 | $ | 138,758 | $ | 328,625 | $ | 225,926 | $ | 78,013 | $ | 57,656 | $ | 840,653 | $ | 0 | $ | 840,653 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Other Consumer Loans: | ||||||||||||||||||||||||||||||||||||
Performing | $ | 1,653 | $ | 4,553 | $ | 2,237 | $ | 1,311 | $ | 522 | $ | 1,179 | $ | 11,455 | $ | 40,121 | $ | 51,576 | ||||||||||||||||||
Nonperforming | 108 | 0 | 0 | 0 | 0 | 0 | 108 | 27 | 135 | |||||||||||||||||||||||||||
Total | $ | 1,761 | $ | 4,553 | $ | 2,237 | $ | 1,311 | $ | 522 | $ | 1,179 | $ | 11,563 | $ | 40,148 | $ | 51,711 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 1 | $ | 0 | $ | 8 | $ | 0 | $ | 0 | $ | 9 | $ | 0 | $ | 9 | ||||||||||||||||||
Total Retail | $ | 13,436 | $ | 143,311 | $ | 330,862 | $ | 227,237 | $ | 78,535 | $ | 58,835 | $ | 852,216 | $ | 40,148 | $ | 892,364 | ||||||||||||||||||
Total Retail year-to-date gross write offs | $ | 0 | $ | 1 | $ | 0 | $ | 8 | $ | 0 | $ | 0 | $ | 9 | $ | 0 | $ | 9 | ||||||||||||||||||
Total | $ | 233,367 | $ | 1,208,228 | $ | 904,983 | $ | 697,795 | $ | 413,610 | $ | 167,789 | $ | 3,625,772 | $ | 696,234 | $ | 4,322,006 | ||||||||||||||||||
Total year-to-date gross write offs | $ | 0 | $ | 1 | $ | 0 | $ | 8 | $ | 0 | $ | 0 | $ | 9 | $ | 6 | $ | 15 | ||||||||||||||||||
There were lines of credit with principal balances of $2.8 million that were converted to term loans during the first three months of 2024.
(Continued)
3.LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table reflects amortized cost basis of loans as of December 31, 2023 and loan charge-offs during three months ended March 31, 2023 based on year of origination:
Revolving | Grand | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Term Total | Loans | Total | |||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 103,531 | $ | 79,883 | $ | 90,107 | $ | 20,577 | $ | 5,978 | $ | 9,160 | $ | 309,236 | $ | 414,920 | $ | 724,156 | ||||||||||||||||||
Grades 5 – 7 | 174,668 | 57,979 | 20,075 | 18,361 | 7,450 | 119 | 278,652 | 227,155 | 505,807 | |||||||||||||||||||||||||||
Grades 8 – 9 | 3,671 | 2,122 | 277 | 0 | 0 | 0 | 6,070 | 18,553 | 24,623 | |||||||||||||||||||||||||||
Total | $ | 281,870 | $ | 139,984 | $ | 110,459 | $ | 38,938 | $ | 13,428 | $ | 9,279 | $ | 593,958 | $ | 660,628 | $ | 1,254,586 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 36 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 36 | $ | 0 | $ | 36 | ||||||||||||||||||
Vacant Land, Land Development and Residential Construction: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 24,875 | $ | 6,570 | $ | 1,108 | $ | 2,110 | $ | 0 | $ | 281 | $ | 34,944 | $ | 0 | $ | 34,944 | ||||||||||||||||||
Grades 5 – 7 | 17,799 | 21,244 | 138 | 2 | 40 | 496 | 39,719 | 0 | 39,719 | |||||||||||||||||||||||||||
Grades 8 – 9 | 9 | 0 | 0 | 0 | 0 | 81 | 90 | 0 | 90 | |||||||||||||||||||||||||||
Total | $ | 42,683 | $ | 27,814 | $ | 1,246 | $ | 2,112 | $ | 40 | $ | 858 | $ | 74,753 | $ | 0 | $ | 74,753 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Real Estate – Owner Occupied: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 205,379 | $ | 110,130 | $ | 85,982 | $ | 47,630 | $ | 14,362 | $ | 2,908 | $ | 466,391 | $ | 1,948 | $ | 468,339 | ||||||||||||||||||
Grades 5 – 7 | 111,197 | 63,271 | 27,729 | 27,029 | 9,419 | 439 | 239,084 | 9,718 | 248,802 | |||||||||||||||||||||||||||
Grades 8 – 9 | 0 | 417 | 0 | 38 | 0 | 71 | 526 | 0 | 526 | |||||||||||||||||||||||||||
Total | $ | 316,576 | $ | 173,818 | $ | 113,711 | $ | 74,697 | $ | 23,781 | $ | 3,418 | $ | 706,001 | $ | 11,666 | $ | 717,667 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 14 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 14 | $ | 0 | $ | 14 | ||||||||||||||||||
Real Estate – Non-Owner Occupied: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 109,125 | $ | 84,912 | $ | 113,846 | $ | 102,279 | $ | 27,664 | $ | 13,193 | $ | 451,019 | $ | 0 | $ | 451,019 | ||||||||||||||||||
Grades 5 – 7 | 233,471 | 118,464 | 109,238 | 88,315 | 6,148 | 18,135 | 573,771 | 0 | 573,771 | |||||||||||||||||||||||||||
Grades 8 – 9 | 10,894 | 0 | 0 | 0 | 0 | 0 | 10,894 | 0 | 10,894 | |||||||||||||||||||||||||||
Total | $ | 353,490 | $ | 203,376 | $ | 223,084 | $ | 190,594 | $ | 33,812 | $ | 31,328 | $ | 1,035,684 | $ | 0 | $ | 1,035,684 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Real Estate – Multi-Family and Residential Rental: | ||||||||||||||||||||||||||||||||||||
Grades 1 – 4 | $ | 36,038 | $ | 28,512 | $ | 64,244 | $ | 35,129 | $ | 4,883 | $ | 3,649 | $ | 172,455 | $ | 0 | $ | 172,455 | ||||||||||||||||||
Grades 5 – 7 | 72,916 | 55,964 | 4,816 | 9,372 | 2,699 | 2,136 | 147,903 | 0 | 147,903 | |||||||||||||||||||||||||||
Grades 8 – 9 | 11,250 | 0 | 0 | 1,001 | 0 | 0 | 12,251 | 0 | 12,251 | |||||||||||||||||||||||||||
Total | $ | 120,204 | $ | 84,476 | $ | 69,060 | $ | 45,502 | $ | 7,582 | $ | 5,785 | $ | 332,609 | $ | 0 | $ | 332,609 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Total Commercial | $ | 1,114,823 | $ | 629,468 | $ | 517,560 | $ | 351,843 | $ | 78,643 | $ | 50,668 | $ | 2,743,005 | $ | 672,294 | $ | 3,415,299 | ||||||||||||||||||
Total Commercial year-to-date gross write offs | $ | 0 | $ | 50 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 50 | $ | 0 | $ | 50 | ||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||||||
1-4 Family Mortgages: | ||||||||||||||||||||||||||||||||||||
Performing | $ | 133,823 | $ | 332,098 | $ | 231,842 | $ | 82,002 | $ | 10,515 | $ | 44,003 | $ | 834,283 | $ | 27 | $ | 834,310 | ||||||||||||||||||
Nonperforming | 108 | 1,728 | 305 | 0 | 10 | 945 | 3,096 | 0 | 3,096 | |||||||||||||||||||||||||||
Total | $ | 133,931 | $ | 333,826 | $ | 232,147 | $ | 82,002 | $ | 10,525 | $ | 44,948 | $ | 837,379 | $ | 27 | $ | 837,406 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 42 | $ | 42 | $ | 0 | $ | 42 | ||||||||||||||||||
Other Consumer Loans: | ||||||||||||||||||||||||||||||||||||
Performing | $ | 5,138 | $ | 2,569 | $ | 1,664 | $ | 608 | $ | 651 | $ | 716 | $ | 11,346 | $ | 39,707 | $ | 51,053 | ||||||||||||||||||
Nonperforming | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Total | $ | 5,138 | $ | 2,569 | $ | 1,664 | $ | 608 | $ | 651 | $ | 716 | $ | 11,346 | $ | 39,707 | $ | 51,053 | ||||||||||||||||||
Year-to-date gross write offs | $ | 0 | $ | 3 | $ | 0 | $ | 0 | $ | 0 | $ | 1 | $ | 4 | $ | 10 | $ | 14 | ||||||||||||||||||
Total Retail | $ | 139,069 | $ | 336,395 | $ | 233,811 | $ | 82,610 | $ | 11,176 | $ | 45,664 | $ | 848,725 | $ | 39,734 | $ | 888,459 | ||||||||||||||||||
Total Retail year-to-date gross write offs | $ | 0 | $ | 3 | $ | 0 | $ | 0 | $ | 0 | $ | 43 | $ | 46 | $ | 10 | $ | 56 | ||||||||||||||||||
Total | $ | 1,253,892 | $ | 965,863 | $ | 751,371 | $ | 434,453 | $ | 89,819 | $ | 96,332 | $ | 3,591,730 | $ | 712,028 | $ | 4,303,758 | ||||||||||||||||||
Total year-to-date gross write offs | $ | 0 | $ | 53 | $ | 0 | $ | 0 | $ | 0 | $ | 43 | $ | 96 | $ | 10 | $ | 106 | ||||||||||||||||||
There were lines of credit with principal balances of $6.4 million as of December 31, 2022 that were converted to term loans during 2023.
(Continued)
3.LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
We use a migration to loss methodology to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by our bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate, which was used in the calculation of both the March 31, 2024 and December 31, 2023 allowance for credit losses.
Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. Our prepayment speed assumptions are developed at the loan segment level based upon the consideration of all relevant data which we believe could impact anticipated customer behavior, including changes in interest rates, economic conditions, and underlying property valuations. For the commercial portfolio segments, we assumed a 2.0% prepayment speed as of both March 31, 2024 and December 31, 2023 as we deemed there to be no considerable changes from historical experience. For the retail 1-4 family mortgage and retail other consumer portfolios, we used a prepayment speed of 9.0% as of March 31, 2024 and December 31, 2023.
During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses. As of March 31, 2024 and December 31, 2023, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period for all loan segments. The economic forecasts used for our March 31, 2024 allowance calculation reflected a $2.3 million allowance balance reduction. The forecasts used for our December 31, 2023 allowance calculation reflected a $2.0 million allowance balance reduction.
Individual loans exhibiting unique risk characteristics which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis totaled $7.9 million and $5.4 million as of March 31, 2024 and December 31, 2023, respectively. Individual allowance allocations totaled $2.5 million and $0.4 million as of March 31, 2024 and December 31, 2023, respectively.
(Continued)
3.LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Activity in the allowance for loancredit losses and the recorded investments in originated loans as of and during the three and nine months ended September 30, 2017 areMarch 31, 2024 is as follows:
Commercial Loans | Retail Loans | Unallocated | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance at June 30, 2017 | $ | 15,363,000 | $ | 2,433,000 | $ | 159,000 | $ | 17,955,000 | ||||||||
Provision for loan losses | 452,000 | 415,000 | 46,000 | 913,000 | ||||||||||||
Charge-offs | (347,000 | ) | (320,000 | ) | 0 | (667,000 | ) | |||||||||
Recoveries | 565,000 | 41,000 | 0 | 606,000 | ||||||||||||
Ending balance | $ | 16,033,000 | $ | 2,569,000 | $ | 205,000 | $ | 18,807,000 | ||||||||
Allowance for loan losses: | ||||||||||||||||
Balance at December 31, 2016 | $ | 16,026,000 | $ | 1,882,000 | $ | (40,000 | ) | $ | 17,868,000 | |||||||
Provision for loan losses | 600,000 | 1,178,000 | 245,000 | 2,023,000 | ||||||||||||
Charge-offs | (1,579,000 | ) | (683,000 | ) | 0 | (2,262,000 | ) | |||||||||
Recoveries | 986,000 | 192,000 | 0 | 1,178,000 | ||||||||||||
Ending balance | $ | 16,033,000 | $ | 2,569,000 | $ | 205,000 | $ | 18,807,000 | ||||||||
Ending balance: individually evaluated for impairment | $ | 1,856,000 | $ | 738,000 | $ | 0 | $ | 2,594,000 | ||||||||
Ending balance: collectively evaluated for impairment | $ | 14,177,000 | $ | 1,831,000 | $ | 205,000 | $ | 16,213,000 | ||||||||
Total loans: | ||||||||||||||||
Ending balance | $ | 1,922,998,000 | $ | 210,768,000 | $ | 2,133,766,000 | ||||||||||
Ending balance: individually evaluated for impairment | $ | 8,320,000 | $ | 2,557,000 | $ | 10,877,000 | ||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,914,678,000 | $ | 208,211,000 | $ | 2,122,889,000 | ||||||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
| Commercial | ||||||||||||||||||||||||||||||||||||
vacant land, | Commercial | |||||||||||||||||||||||||||||||||||
| land development | Commercial | Commercial | real estate – | |||||||||||||||||||||||||||||||||
| Commercial | and | real estate – | real estate – | multi-family | Other | |||||||||||||||||||||||||||||||
(Dollars in | and | residential | owner | non-owner | and | 1-4 family | consumer | |||||||||||||||||||||||||||||
thousands) | industrial | construction | occupied | occupied | residential rental | mortgages | loans | Unallocated | Total | |||||||||||||||||||||||||||
Balance at 12-31-23 | $ | 7,441 | $ | 384 | $ | 7,186 | $ | 9,852 | $ | 3,184 | $ | 18,986 | $ | 2,881 | $ | 0 | $ | 49,914 | ||||||||||||||||||
Provision for credit losses | 1,466 | 2 | (151 | ) | 289 | 232 | (476 | ) | (77 | ) | 15 | 1,300 | ||||||||||||||||||||||||
Charge-offs | (6 | ) | 0 | 0 | 0 | 0 | 0 | (9 | ) | 0 | (15 | ) | ||||||||||||||||||||||||
Recoveries | 277 | 1 | 57 | 0 | 4 | 70 | 30 | 0 | 439 | |||||||||||||||||||||||||||
Ending balance | $ | 9,178 | $ | 387 | $ | 7,092 | $ | 10,141 | $ | 3,420 | $ | 18,580 | $ | 2,825 | $ | 15 | $ | 51,638 | ||||||||||||||||||
Activity in the allowance for loancredit losses for acquired loans during the three and nine months ended September 30, 2017March 31, 2023 is as follows:
Commercial Loans | Retail Loans | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2017 | $ | 324,000 | $ | 16,000 | $ | 0 | $ | 340,000 | ||||||||||||||||||||||||||||||||||||||||||||
Provision for loan losses | (18,000 | ) | 105,000 | 0 | 87,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | (1,000 | ) | (41,000 | ) | 0 | (42,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 1,000 | 0 | 0 | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 306,000 | $ | 80,000 | $ | 0 | $ | 386,000 | ||||||||||||||||||||||||||||||||||||||||||||
vacant land, | Commercial | |||||||||||||||||||||||||||||||||||||||||||||||||||
| land development | Commercial | Commercial | real estate – | |||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 75,000 | $ | 18,000 | $ | 0 | $ | 93,000 | ||||||||||||||||||||||||||||||||||||||||||||
Provision for loan losses | 224,000 | 103,000 | 0 | 327,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | and | real estate – | real estate – | multi-family | Other | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in | and | residential | owner | non-owner | and | 1-4 family | consumer | |||||||||||||||||||||||||||||||||||||||||||||
thousands) | industrial | construction | occupied | occupied | residential rental | mortgages | loans | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at 12-31-22 | $ | 10,203 | $ | 490 | $ | 5,914 | $ | 9,242 | $ | 2,191 | $ | 14,027 | $ | 160 | $ | 19 | $ | 42,246 | ||||||||||||||||||||||||||||||||||
Credit risk reclassifications | 90 | 0 | 0 | 0 | 0 | (697 | ) | 607 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Balance after reclassifications | 10,293 | 490 | 5,914 | 9,242 | 2,191 | 13,330 | 767 | 19 | 42,246 | |||||||||||||||||||||||||||||||||||||||||||
Provision for credit losses | (757 | ) | (41 | ) | (28 | ) | (115 | ) | 313 | 1,168 | 3 | 57 | 600 | |||||||||||||||||||||||||||||||||||||||
Charge-offs | (12,000 | ) | (41,000 | ) | 0 | (53,000 | ) | (36 | ) | 0 | (14 | ) | 0 | 0 | (42 | ) | (14 | ) | 0 | (106 | ) | |||||||||||||||||||||||||||||||
Recoveries | 19,000 | 0 | 0 | 19,000 | 21 | 1 | 48 | 0 | 7 | 41 | 19 | 0 | 137 | |||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 306,000 | $ | 80,000 | $ | 0 | $ | 386,000 | $ | 9,521 | $ | 450 | $ | 5,920 | $ | 9,127 | $ | 2,511 | $ | 14,497 | $ | 775 | $ | 76 | $ | 42,877 | ||||||||||||||||||||||||||
(Continued)
3. LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES (Continued)
ActivityThe following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the three months ended March 31, 2024:
Interest Rate | Principal | |||||||||||
(Dollars in thousands) | Reduction | Term Extension | Forgiveness | |||||||||
Commercial: | ||||||||||||
Commercial and industrial | $ | 0 | $ | 500 | $ | 0 | ||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 0 | 0 | 0 | |||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | |||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | |||||||||
Total commercial | $ | 0 | $ | 500 | $ | 0 | ||||||
Retail: | ||||||||||||
1-4 family mortgages | 0 | 0 | 0 | |||||||||
Other consumer loans | 0 | 0 | 0 | |||||||||
Total retail | $ | 0 | $ | 0 | $ | 0 | ||||||
Total loans | $ | 0 | $ | 500 | $ | 0 | ||||||
Loans listed under Term Extension were generally granted a series of short-term maturity extensions as part of the workout process and associated forbearance agreements.
The following table presents the period-end amortized cost basis of loans that have been modified in the allowance forpast twelve months to borrowers experiencing financial difficulty by payment status and loan losses for originatedsegment:
30 – 89 Days | 90 + Days | |||||||||||||||
(Dollars in thousands) | Current | Past Due | Past Due | Total | ||||||||||||
Commercial: | ||||||||||||||||
Commercial and industrial | $ | 18,506 | $ | 0 | $ | 0 | $ | 18,506 | ||||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | 0 | ||||||||||||
Real estate – owner occupied | 0 | 0 | 0 | 0 | ||||||||||||
Real estate – non-owner occupied | 10,778 | 0 | 0 | 10,778 | ||||||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | 0 | ||||||||||||
Total commercial | $ | 29,284 | $ | 0 | $ | 0 | $ | 29,284 | ||||||||
Retail: | ||||||||||||||||
1-4 family mortgages | 0 | 0 | 0 | 0 | ||||||||||||
Other consumer loans | 0 | 0 | 0 | 0 | ||||||||||||
Total retail | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Total loans | $ | 29,284 | $ | 0 | $ | 0 | $ | 29,284 | ||||||||
There were no loans modified to borrowers experiencing financial difficulty during the firstthree and nine months ended September 30, 2016 and the recorded investments in originated loans as of December 31, 2016 are as follows:2023.
Commercial Loans | Retail Loans | Unallocated | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance at June 30, 2016 | $ | 14,729,000 | $ | 1,913,000 | $ | 234,000 | $ | 16,876,000 | ||||||||
Provision for loan losses | 493,000 | 329,000 | (252,000 | ) | 570,000 | |||||||||||
Charge-offs | (1,000 | ) | (290,000 | ) | 0 | (291,000 | ) | |||||||||
Recoveries | 78,000 | 101,000 | 0 | 179,000 | ||||||||||||
Ending balance | $ | 15,299,000 | $ | 2,053,000 | $ | (18,000 | ) | $ | 17,334,000 | |||||||
Allowance for loan losses: | ||||||||||||||||
Balance at December 31, 2015 | $ | 13,672,000 | $ | 1,421,000 | $ | 140,000 | $ | 15,233,000 | ||||||||
Provision for loan losses | 1,429,000 | 1,128,000 | (158,000 | ) | 2,399,000 | |||||||||||
Charge-offs | (256,000 | ) | (907,000 | ) | 0 | (1,163,000 | ) | |||||||||
Recoveries | 454,000 | 411,000 | 0 | 865,000 | ||||||||||||
Ending balance | $ | 15,299,000 | $ | 2,053,000 | $ | (18,000 | ) | $ | 17,334,000 | |||||||
Ending balance: individually evaluated for impairment | $ | 754,000 | $ | 286,000 | $ | 0 | $ | 1,040,000 | ||||||||
Ending balance: collectively evaluated for impairment | $ | 14,545,000 | $ | 1,767,000 | $ | (18,000 | ) | $ | 16,294,000 | |||||||
Total loans: | ||||||||||||||||
Ending balance | $ | 1,728,898,000 | $ | 155,650,000 | $ | 1,884,548,000 | ||||||||||
Ending balance: individually evaluated for impairment | $ | 12,070,000 | $ | 1,313,000 | $ | 13,383,000 | ||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,716,828,000 | $ | 154,337,000 | $ | 1,871,165,000 | ||||||||||
(Continued)
3. 4.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity in the allowance for loan losses for acquired loans during the three and nine months ended September 30, 2016 is as follows:
Commercial Loans | Retail Loans | Unallocated | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance at June 30, 2016 | $ | 211,000 | $ | 23,000 | $ | 0 | $ | 234,000 | ||||||||
Provision for loan losses | (39,000 | ) | 69,000 | 0 | 30,000 | |||||||||||
Charge-offs | 0 | (72,000 | ) | 0 | (72,000 | ) | ||||||||||
Recoveries | 0 | 0 | 0 | 0 | ||||||||||||
Ending balance | $ | 172,000 | $ | 20,000 | $ | 0 | $ | 192,000 | ||||||||
Allowance for loan losses: | ||||||||||||||||
Balance at December 31, 2015 | $ | 420,000 | $ | 28,000 | $ | 0 | $ | 448,000 | ||||||||
Provision for loan losses | (206,000 | ) | 107,000 | 0 | (99,000 | ) | ||||||||||
Charge-offs | 0 | (72,000 | ) | 0 | (72,000 | ) | ||||||||||
Recoveries | (42,000 | ) | (43,000 | ) | 0 | (85,000 | ) | |||||||||
Ending balance | $ | 172,000 | $ | 20,000 | $ | 0 | $ | 192,000 | ||||||||
The negative loan recoveries reflected for acquired loans during the first nine months of 2016 resulted from reversals of prior-period recoveries associated with certain purchased credit impaired (“PCI”) loans that were subject to pre-acquisition charge-offs. Post-acquisition payments received on these PCI loans were previously reported as loan loss recoveries in prior periods; during the first quarter of 2016, these recoveries were reversed and reported as recovery income if associated with specifically reviewed PCI loans or retained gains if associated with PCI-pooled loans.
In accordance with acquisition accounting rules, acquired loans were recorded at fair value at the merger date and the prior allowance was eliminated.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the three months ended September 30, 2017 were as follows:
Number of Contracts | Pre- Modification Recorded Principal Balance | Post- Modification Recorded Principal Balance | ||||||||||
Originated loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 3 | $ | 1,362,000 | $ | 1,362,000 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 2 | 477,000 | 477,000 | |||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | |||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | |||||||||
Total originated commercial | 5 | 1,839,000 | 1,839,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 1 | 68,000 | 68,000 | |||||||||
1-4 family mortgages | 0 | 0 | 0 | |||||||||
Total originated retail | 1 | 68,000 | 68,000 | |||||||||
Total originated loans | 6 | $ | 1,907,000 | $ | 1,907,000 | |||||||
Acquired loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 1 | $ | 282,000 | $ | 282,000 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 0 | 0 | 0 | |||||||||
Real estate – non-owner occupied | 1 | 64,000 | 64,000 | |||||||||
Real estate – multi-family and residential rental | 1 | 1,064,000 | 1,064,000 | |||||||||
Total acquired commercial | 3 | 1,410,000 | 1,410,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 2 | 90,000 | 90,000 | |||||||||
1-4 family mortgages | 1 | 51,000 | 51,000 | |||||||||
Total acquired retail | 3 | 141,000 | 141,000 | |||||||||
Total acquired loans | 6 | $ | 1,551,000 | $ | 1,551,000 | |||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the nine months ended September 30, 2017 were as follows:
Number of Contracts | Pre- Modification Recorded Principal Balance | Post- Modification Recorded Principal Balance | ||||||||||
Originated loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 9 | $ | 4,114,000 | $ | 4,293,000 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 4 | 1,195,000 | 1,195,000 | |||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | |||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | |||||||||
Total originated commercial | 13 | 5,309,000 | 5,488,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 7 | 657,000 | 658,000 | |||||||||
1-4 family mortgages | 0 | 0 | 0 | |||||||||
Total originated retail | 7 | 657,000 | 658,000 | |||||||||
Total originated loans | 20 | $ | 5,966,000 | $ | 6,146,000 | |||||||
Acquired loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 2 | $ | 399,000 | $ | 399,000 | |||||||
Vacant land, land development and residential construction | 1 | 38,000 | 38,000 | |||||||||
Real estate – owner occupied | 0 | 0 | 0 | |||||||||
Real estate – non-owner occupied | 2 | 745,000 | 744,000 | |||||||||
Real estate – multi-family and residential rental | 1 | 1,064,000 | 1,064,000 | |||||||||
Total acquired commercial | 6 | 2,246,000 | 2,245,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 7 | 256,000 | 258,000 | |||||||||
1-4 family mortgages | 3 | 185,000 | 185,000 | |||||||||
Total acquired retail | 10 | 441,000 | 443,000 | |||||||||
Total acquired loans | 16 | $ | 2,687,000 | $ | 2,688,000 | |||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the three months ended September 30, 2016 were as follows:
Number of Contracts | Pre- Modification Recorded Principal Balance | Post- Modification Recorded Principal Balance | ||||||||||
Originated loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 0 | $ | 0 | $ | 0 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 0 | 0 | 0 | |||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | |||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | |||||||||
Total originated commercial | 0 | 0 | 0 | |||||||||
Retail: | ||||||||||||
Home equity and other | 1 | 56,000 | 56,000 | |||||||||
1-4 family mortgages | 0 | 0 | 0 | |||||||||
Total originated retail | 1 | 56,000 | 56,000 | |||||||||
Total originated loans | 1 | $ | 56,000 | $ | 56,000 | |||||||
Acquired loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 0 | $ | 0 | $ | 0 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 1 | 44,000 | 44,000 | |||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | |||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | |||||||||
Total acquired commercial | 1 | 44,000 | 44,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 1 | 3,000 | 3,000 | |||||||||
1-4 family mortgages | 0 | 0 | 0 | |||||||||
Total acquired retail | 1 | 3,000 | 3,000 | |||||||||
Total acquired loans | 2 | $ | 47,000 | $ | 47,000 | |||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the nine months ended September 30, 2016 were as follows:
Number of Contracts | Pre- Modification Recorded Principal Balance | Post- Modification Recorded Principal Balance | ||||||||||
Originated loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 1 | $ | 20,000 | $ | 20,000 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 1 | 167,000 | 167,000 | |||||||||
Real estate – non-owner occupied | 0 | 0 | 0 | |||||||||
Real estate – multi-family and residential rental | 0 | 0 | 0 | |||||||||
Total originated commercial | 2 | 187,000 | 187,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 3 | 240,000 | 240,000 | |||||||||
1-4 family mortgages | 1 | 33,000 | 40,000 | |||||||||
Total originated retail | 4 | 273,000 | 280,000 | |||||||||
Total originated loans | 6 | $ | 460,000 | $ | 467,000 | |||||||
Acquired loans | ||||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 0 | $ | 0 | $ | 0 | |||||||
Vacant land, land development and residential construction | 0 | 0 | 0 | |||||||||
Real estate – owner occupied | 1 | 44,000 | 44,000 | |||||||||
Real estate – non-owner occupied | 1 | 60,000 | 60,000 | |||||||||
Real estate – multi-family and residential rental | 1 | 7,000 | 7,000 | |||||||||
Total acquired commercial | 3 | 111,000 | 111,000 | |||||||||
Retail: | ||||||||||||
Home equity and other | 3 | 54,000 | 54,000 | |||||||||
1-4 family mortgages | 1 | 19,000 | 19,000 | |||||||||
Total acquired retail | 4 | 73,000 | 73,000 | |||||||||
Total acquired loans | 7 | $ | 184,000 | $ | 184,000 | |||||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2017 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 0 | $ | 0 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 0 | 0 | ||||||
Retail: | ||||||||
Home equity and other | 0 | 0 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 0 | 0 | ||||||
Total | 0 | $ | 0 | |||||
The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2017 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 0 | $ | 0 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 0 | 0 | ||||||
Retail: | ||||||||
Home equity and other | 0 | 0 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 0 | 0 | ||||||
Total | 0 | $ | 0 | |||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2017 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 1 | $ | 114,000 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 1 | 114,000 | ||||||
Retail: | ||||||||
Home equity and other | 1 | 99,000 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 1 | 99,000 | ||||||
Total | 2 | $ | 213,000 | |||||
The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2017 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 1 | $ | 114,000 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 1 | 114,000 | ||||||
Retail: | ||||||||
Home equity and other | 1 | 99,000 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 1 | 99,000 | ||||||
Total | 2 | $ | 213,000 | |||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2016 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 0 | $ | 0 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 0 | 0 | ||||||
Retail: | ||||||||
Home equity and other | 0 | 0 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 0 | 0 | ||||||
Total | 0 | $ | 0 | |||||
The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2016 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 0 | $ | 0 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 0 | 0 | ||||||
Retail: | ||||||||
Home equity and other | 0 | 0 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 0 | 0 | ||||||
Total | 0 | $ | 0 | |||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2016 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 0 | $ | 0 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 0 | 0 | ||||||
Retail: | ||||||||
Home equity and other | 0 | 0 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 0 | 0 | ||||||
Total | 0 | $ | 0 | |||||
The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2016 (amounts as of period end):
Number of Contracts | Recorded Principal Balance | |||||||
Commercial: | ||||||||
Commercial and industrial | 0 | $ | 0 | |||||
Vacant land, land development and residential construction | 0 | 0 | ||||||
Real estate – owner occupied | 0 | 0 | ||||||
Real estate – non-owner occupied | 0 | 0 | ||||||
Real estate – multi-family and residential rental | 0 | 0 | ||||||
Total commercial | 0 | 0 | ||||||
Retail: | ||||||||
Home equity and other | 0 | 0 | ||||||
1-4 family mortgages | 0 | 0 | ||||||
Total retail | 0 | 0 | ||||||
Total | 0 | $ | 0 | |||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the three months ended September 30, 2017 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Commercial Loan Portfolio: | ||||||||||||||||||||
Beginning Balance | $ | 2,775,000 | $ | 934,000 | $ | 1,658,000 | $ | 564,000 | $ | 131,000 | ||||||||||
Charge-Offs | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Payments | (572,000 | ) | (276,000 | ) | (144,000 | ) | (24,000 | ) | (131,000 | ) | ||||||||||
Transfers to ORE | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Net Additions/Deletions | 858,000 | 0 | 477,000 | 0 | 0 | |||||||||||||||
Ending Balance | $ | 3,061,000 | $ | 658,000 | $ | 1,991,000 | $ | 540,000 | $ | 0 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 1,050,000 | $ | 151,000 | ||||
Charge-Offs | 0 | 0 | ||||||
Payments | (17,000 | ) | (3,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 69,000 | 0 | ||||||
Ending Balance | $ | 1,102,000 | $ | 148,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the three months ended September 30, 2017 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Commercial Loan Portfolio: | ||||||||||||||||||||
Beginning Balance | $ | 992,000 | $ | 33,000 | $ | 980,000 | $ | 914,000 | $ | 63,000 | ||||||||||
Charge-Offs | 0 | 0 | (227,000 | ) | 0 | 0 | ||||||||||||||
Payments | (239,000 | ) | (4,000 | ) | (253,000 | ) | (33,000 | ) | (19,000 | ) | ||||||||||
Transfers to ORE | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Net Additions/Deletions | 280,000 | 0 | 0 | 62,000 | 1,064,000 | |||||||||||||||
Ending Balance | $ | 1,033,000 | $ | 29,000 | $ | 500,000 | $ | 943,000 | $ | 1,108,000 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 202,000 | $ | 510,000 | ||||
Charge-Offs | 0 | 0 | ||||||
Payments | (8,000 | ) | (6,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 92,000 | 50,000 | ||||||
Ending Balance | $ | 286,000 | $ | 554,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the nine months ended September 30, 2017 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi-Family and Residential Rental | ||||||||||||||||
Commercial Loan Portfolio: | ||||||||||||||||||||
Beginning Balance | $ | 1,503,000 | $ | 1,488,000 | $ | 906,000 | $ | 5,110,000 | $ | 716,000 | ||||||||||
Charge-Offs | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Payments | (1,950,000 | ) | (830,000 | ) | (196,000 | ) | (167,000 | ) | (404,000 | ) | ||||||||||
Transfers to ORE | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Net Additions/Deletions | 3,508,000 | 0 | 1,281,000 | (4,403,000 | ) | (312,000 | ) | |||||||||||||
Ending Balance | $ | 3,061,000 | $ | 658,000 | $ | 1,991,000 | $ | 540,000 | $ | 0 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 385,000 | $ | 157,000 | ||||
Charge-Offs | 0 | 0 | ||||||
Payments | (69,000 | ) | (9,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 786,000 | 0 | ||||||
Ending Balance | $ | 1,102,000 | $ | 148,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the nine months ended September 30, 2017 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi Family and Residential Rental | ||||||||||||||||
Commercial Loan Portfolio: | �� | |||||||||||||||||||
Beginning Balance | $ | 1,125,000 | $ | 0 | $ | 900,000 | $ | 728,000 | $ | 60,000 | ||||||||||
Charge-Offs | 0 | 0 | (239,000 | ) | 0 | 0 | ||||||||||||||
Payments | (518,000 | ) | (4,000 | ) | (161,000 | ) | (218,000 | ) | (16,000 | ) | ||||||||||
Transfers to ORE | 0 | 0 | 0 | (291,000 | ) | 0 | ||||||||||||||
Net Additions/Deletions | 426,000 | 33,000 | 0 | 724,000 | 1,064,000 | |||||||||||||||
Ending Balance | $ | 1,033,000 | $ | 29,000 | $ | 500,000 | $ | 943,000 | $ | 1,108,000 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 208,000 | $ | 326,000 | ||||
Charge-Offs | (25,000 | ) | 0 | |||||
Payments | (49,000 | ) | (12,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 152,000 | 240,000 | ||||||
Ending Balance | $ | 286,000 | $ | 554,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the three months ended September 30, 2016 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi Family and Residential Rental | ||||||||||||||||
Commercial Loan Portfolio: | ||||||||||||||||||||
Beginning Balance | $ | 2,103,000 | $ | 2,036,000 | $ | 1,431,000 | $ | 10,435,000 | $ | 461,000 | ||||||||||
Charge-Offs | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Payments | (230,000 | ) | (526,000 | ) | (37,000 | ) | (91,000 | ) | (7,000 | ) | ||||||||||
Transfers to ORE | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Net Additions/Deletions | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Ending Balance | $ | 1,873,000 | $ | 1,510,000 | $ | 1,394,000 | $ | 10,344,000 | $ | 454,000 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 329,000 | $ | 163,000 | ||||
Charge-Offs | 0 | 0 | ||||||
Payments | (1,000 | ) | (3,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 59,000 | 0 | ||||||
Ending Balance | $ | 387,000 | $ | 160,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the three months ended September 30, 2016 is as follows:
|
|
Commercial and Industrial |
|
|
Commercial Vacant Land, Land Development, and Residential Construction |
|
|
Commercial Real Estate - Owner Occupied |
|
|
Commercial Real Estate - Non-Owner Occupied |
|
| Commercial Real Estate - Multi Family and Residential Rental |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | 1,644,000 |
|
| $ | 0 |
|
| $ | 1,283,000 |
|
| $ | 681,000 |
|
| $ | 274,000 |
|
Charge-Offs |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
| 0 |
|
|
| 0 |
| |
Payments |
|
| (397,000 | ) |
|
| 0 |
|
|
| (747,000 | ) |
|
| (24,000 | ) |
|
| (35,000 | ) |
Transfers to ORE |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Net Additions/Deletions |
|
| 0 |
|
|
| 0 |
|
|
| 41,000 |
|
|
| 0 |
|
|
| 0 |
|
Ending Balance |
| $ | 1,247,000 |
|
| $ | 0 |
|
| $ | 577,000 |
|
| $ | 657,000 |
|
| $ | 239,000 |
|
|
| Retail Home Equity and Other |
|
| Retail 1-4 Family Mortgages |
| ||
Retail Loan Portfolio: |
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | 180,000 |
|
| $ | 333,000 |
|
Charge-Offs |
|
| 0 |
|
|
| 0 |
|
Payments |
|
| (7,000 | ) |
|
| (4,000 | ) |
Transfers to ORE |
|
| 0 |
|
|
| 0 |
|
Net Additions/Deletions |
|
| 3,000 |
|
|
| 0 |
|
Ending Balance |
| $ | 176,000 |
|
| $ | 329,000 |
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for originated loans categorized as troubled debt restructurings during the nine months ended September 30, 2016 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi Family and Residential Rental | ||||||||||||||||
Commercial Loan Portfolio: | ||||||||||||||||||||
Beginning Balance | $ | 2,028,000 | $ | 2,086,000 | $ | 1,400,000 | $ | 10,657,000 | $ | 476,000 | ||||||||||
Charge-Offs | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Payments | (175,000 | ) | (576,000 | ) | (103,000 | ) | (313,000 | ) | (22,000 | ) | ||||||||||
Transfers to ORE | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Net Additions/Deletions | 20,000 | 0 | 97,000 | 0 | 0 | |||||||||||||||
Ending Balance | $ | 1,873,000 | $ | 1,510,000 | $ | 1,394,000 | $ | 10,344,000 | $ | 454,000 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 146,000 | $ | 128,000 | ||||
Charge-Offs | 0 | 0 | ||||||
Payments | (1,000 | ) | (8,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 242,000 | 40,000 | ||||||
Ending Balance | $ | 387,000 | $ | 160,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for acquired loans categorized as troubled debt restructurings during the nine months ended September 30, 2016 is as follows:
Commercial and Industrial | Commercial Vacant Land, Land Development, and Residential Construction | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-Owner Occupied | Commercial Real Estate - Multi Family and Residential Rental | ||||||||||||||||
| �� | ||||||||||||||||||||
Commercial Loan Portfolio: | ||||||||||||||||||||
Beginning Balance | $ | 1,686,000 | $ | 0 | $ | 1,652,000 | $ | 647,000 | $ | 331,000 | ||||||||||
Charge-Offs | (48,000 | ) | 0 | 0 | 0 | 0 | ||||||||||||||
Payments | (391,000 | ) | 0 | (1,116,000 | ) | (46,000 | ) | (99,000 | ) | |||||||||||
Transfers to ORE | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Net Additions/Deletions | 0 | 0 | 41,000 | 56,000 | 7,000 | |||||||||||||||
Ending Balance | $ | 1,247,000 | $ | 0 | $ | 577,000 | $ | 657,000 | $ | 239,000 | ||||||||||
Retail Home Equity and Other | Retail 1-4 Family Mortgages | |||||||
Retail Loan Portfolio: | ||||||||
Beginning Balance | $ | 141,000 | $ | 316,000 | ||||
Charge-Offs | 0 | 0 | ||||||
Payments | (20,000 | ) | (6,000 | ) | ||||
Transfers to ORE | 0 | 0 | ||||||
Net Additions/Deletions | 55,000 | 19,000 | ||||||
Ending Balance | $ | 176,000 | $ | 329,000 | ||||
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance related to loans categorized as troubled debt restructurings was as follows:
September 30, 2017 | December 31, 2016 | |||||||
Commercial: | ||||||||
Commercial and industrial | $ | 111,000 | $ | 9,000 | ||||
Vacant land, land development, and residential construction | 6,000 | 28,000 | ||||||
Real estate – owner occupied | 157,000 | 100,000 | ||||||
Real estate – non-owner occupied | 2,000 | 247,000 | ||||||
Real estate – multi-family and residential rental | 0 | 258,000 | ||||||
Total commercial | 276,000 | 642,000 | ||||||
Retail: | ||||||||
Home equity and other | 187,000 | 48,000 | ||||||
1-4 family mortgages | 3,000 | 4,000 | ||||||
Total retail | 190,000 | 52,000 | ||||||
Total related allowance | $ | 466,000 | $ | 694,000 | ||||
In general, our policy dictates that a renewal or modification of an 8- or 9-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal; we believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8- or 9-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.PREMISES AND EQUIPMENT, NET
Premises and equipment are comprised of the following:
September 30, 2017 | December 31, 2016 | March 31, | December 31, | |||||||||||||
(Dollars in thousands) | 2024 | 2023 | ||||||||||||||
Land and improvements | $ | 17,970,000 | $ | 16,649,000 | $ | 12,782 | $ | 12,782 | ||||||||
Buildings | 40,245,000 | 40,327,000 | 57,881 | 56,778 | ||||||||||||
Furniture and equipment | 17,774,000 | 17,195,000 | 25,428 | 25,157 | ||||||||||||
| 75,989,000 | 74,171,000 | 96,091 | 94,717 | |||||||||||||
Less: accumulated depreciation | 30,383,000 | 28,715,000 | 45,256 | 43,789 | ||||||||||||
Premises and equipment, net | $ | 45,606,000 | $ | 45,456,000 | $ | 50,835 | $ | 50,928 | ||||||||
Depreciation expense totaled $0.8$1.6 million and $1.5 million during the third quarterfirst quarters of 2017, compared2024 and 2023, respectively.
We enter into facility leases in the normal course of business. As of March 31, 2024, we were under lease contracts for ten of our banking facilities. The leases have maturity dates ranging from April, 2024 through May, 2048, with a weighted average life of 9.6 years as of March 31, 2024. All of our leases have multiple three- to $0.7five-year extensions; however, these were not factored in the lease maturities and weighted average lease term as it was not reasonably certain we would exercise the options on the dates we entered into the lease agreements.
Leases are classified as either operating or finance leases at the lease commencement date, with all of our current leases determined to be operating leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments over the lease term. We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments. The weighted average discount rate for leases was 6.5% as of March 31, 2024.
The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, totaled $4.7 million and $3.7 million as of March 31, 2024, and December 31, 2023, respectively. As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheets. Total operating lease expense associated with the leases aggregated $0.4 million during the third quarterfirstthree months of 2016. Depreciation expense totaled $2.22024 and $0.3 million during the first ninethree months of 2017 and 2016.2023.
(Continued)
4.PREMISES AND EQUIPMENT, NET (Continued)
Future lease payments were as follows as of March 31, 2024:
(Dollars in thousands) | ||||
2024 | $ | 920 | ||
2025 | 1,010 | |||
2026 | 950 | |||
2027 | 878 | |||
2028 | 697 | |||
Thereafter | 1,519 | |||
Total undiscounted lease payments | 5,974 | |||
Less effect of discounting | (1,298 | ) | ||
Present value of future lease payments (lease liability) | $ | 4,676 |
5.DEPOSITS
Our total deposits at September 30, 2017March 31, 2024 totaled $2.49$4.01 billion, an increase of $114$107 million, or 4.8%2.7%, from December 31, 2016.2023. The components of our outstanding balances at September 30, 2017March 31, 2024 and December 31, 2016,2023, and percentage change in deposits from the end of 20162023 to the end of the thirdfirst quarter of 2017,2024, are as follows:
September 30, 2017 | December 31, 2016 | Percent Increase | Percent | |||||||||||||||||||||||||||||||||||||
March 31, 2024 | December 31, 2023 | Increase | ||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | % | Balance | % | (Decrease) | |||||||||||||||||||||||||||||||||||
Balance | % | Balance | % | (Decrease) | ||||||||||||||||||||||||||||||||||||
Noninterest-bearing checking | $ | 826,038,000 | 33.2 | % | $ | 810,600,000 | 34.1 | % | 1.9 | % | $ | 1,134,995 | 28.3 | % | $ | 1,247,640 | 32.1 | % | (9.0 | )% | ||||||||||||||||||||
Interest-bearing checking | 405,223,000 | 16.3 | 377,929,000 | 15.9 | 7.2 | 622,287 | 15.5 | 635,790 | 16.3 | (2.1 | ) | |||||||||||||||||||||||||||||
Money market | 404,336,000 | 16.2 | 272,051,000 | 11.5 | 48.6 | 1,137,877 | 28.4 | 957,434 | 24.5 | 18.8 | ||||||||||||||||||||||||||||||
Savings | 333,495,000 | 13.4 | 344,988,000 | 14.5 | (3.3 | ) | 259,556 | 6.5 | 262,566 | 6.7 | (1.1 | ) | ||||||||||||||||||||||||||||
Time, under $100,000 | 151,049,000 | 6.1 | 146,169,000 | 6.2 | 3.3 | 187,249 | 4.7 | 175,741 | 4.5 | 6.5 | ||||||||||||||||||||||||||||||
Time, $100,000 and over | 264,247,000 | 10.6 | 347,058,000 | 14.6 | (23.9 | ) | 492,734 | 12.3 | 453,366 | 11.6 | 8.7 | |||||||||||||||||||||||||||||
Total local deposits | 2,384,388,000 | 95.8 | 2,298,795,000 | 96.8 | 3.7 | 3,834,698 | 95.7 | 3,732,537 | 95.7 | 2.7 | ||||||||||||||||||||||||||||||
Out-of-area time, under $100,000 | 0 | NA | 0 | NA | NA | |||||||||||||||||||||||||||||||||||
Out-of-area time, $100,000 and over | 104,655,000 | 4.2 | 76,190,000 | 3.2 | 37.4 | 173,112 | 4.3 | 168,381 | 4.3 | 2.8 | ||||||||||||||||||||||||||||||
Total out-of-area deposits | 104,655,000 | 4.2 | 76,190,000 | 3.2 | 37.4 | |||||||||||||||||||||||||||||||||||
Total deposits | $ | 2,489,043,000 | 100.0 | % | $ | 2,374,985,000 | 100.0 | % | 4.8 | % | $ | 4,007,810 | 100.0 | % | $ | 3,900,918 | 100.0 | % | 2.7 | % | ||||||||||||||||||||
Total time deposits of more than $250,000 totaled $269 million and $214 million at September 30, 2017 and December 31, 2016, respectively.
(Continued)
6.SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (“(“repurchase agreements”) are offered principally to certain large deposit customers. Information relating to our repurchase agreements is as follows:
Nine Months Ended September 30, 2017 | Twelve Months Ended December 31, 2016 | Three Months Ended | Twelve Months Ended | |||||||||||||
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||||||||||
Outstanding balance at end of period | $ | 122,280,000 | $ | 131,710,000 | $ | 228,618 | $ | 229,734 | ||||||||
Average interest rate at end of period | 0.16 | % | 0.16 | % | 3.30 | % | 3.17 | % | ||||||||
Average daily balance during the period | $ | 116,947,000 | $ | 149,079,000 | $ | 216,674 | $ | 204,334 | ||||||||
Average interest rate during the period | 0.16 | % | 0.14 | % | 3.06 | % | 1.33 | % | ||||||||
Maximum daily balance during the period | $ | 142,459,000 | $ | 175,088,000 | $ | 247,056 | $ | 269,324 | ||||||||
Repurchase agreements generally have maturities of one business day. Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with theliabilities on our Consolidated Balance Sheets. Repurchase agreements are recorded as assetssecured by U.S. Government agency securities with an aggregate fair value equal to the aggregate outstanding balance of the repurchase agreements. The securities, which are included in securities available for sale on our bank andConsolidated Balance Sheets, are held in safekeeping by a correspondent bank. Repurchase agreements are secured by securities with an aggregate market value equal to the aggregate outstanding balance.
7.FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES
Federal Home Loan Bank of Indianapolis (“FHLBI”)FHLBI bullet advances totaled $220$420 million at September 30, 2017,March 31, 2024, and were scheduled to mature at varying dates from May 2018April 2024 through April 2024,January 2029, with fixed rates of interest from 1.04%0.55% to 2.39%4.54% and averaging 1.72%2.96%. FHLBI bullet advances totaled $175$440 million at December 31, 2016,2023, and were expectedscheduled to mature at varying dates ranging from March 2017January 2024 through April 2023,December 2028, with fixed rates of interest from 1.04%0.55% to 2.11%5.05% and averaging 1.48%2.93%.
Maturities of FHLBI bullet advances as of March 31, 2024 were as follows:
(Dollars in thousands) | ||||
2024 | $ | 60,000 | ||
2025 | 80,000 | |||
2026 | 80,000 | |||
2027 | 100,000 | |||
2028 | 90,000 | |||
Thereafter | 10,000 |
(Continued)
7.FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES(Continued)
FHLBI amortizing advances totaled $27.1 million as of March 31, 2024, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances totaled $27.9 million as of December 31, 2023, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.
Scheduled principal payments on FHLBI amortizing advances as of March 31, 2024 were as follows:
(Dollars in thousands) | ||||
2024 | $ | 0 | ||
2025 | 826 | |||
2026 | 862 | |||
2027 | 899 | |||
2028 | 938 | |||
Thereafter | 23,558 |
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 September 30, 2017March 31, 2024 totaled approximately $650$908 million, with remaining availability based on collateral approximating $430of $464 million.
Maturities of currently outstanding FHLBI advances are as follows:
2017 | $ | 0 | ||
2018 | 20,000,000 | |||
2019 | 40,000,000 | |||
2020 | 30,000,000 | |||
2021 | 40,000,000 | |||
Thereafter | 90,000,000 |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.COMMITMENTS AND OFF-BALANCE SHEET RISK
Our bank isWe are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of itsour 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 bank’s 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. Our bank usesWe use the same credit policies in making commitments and conditional obligations as it doeswe do for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on ourmanagement’s credit assessment of the borrower. If
We are required estimated loss exposure resulting from these instrumentsto consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is expensedunconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is generally recordedincreased or decreased via other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
(Continued)
8.COMMITMENTS AND OFF-BALANCE SHEET RISK(Continued)
For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding at the end of the period and applying the respective expected loss allocation factors to the difference as a liability. There was no reserve or liability balance for these instrumentsthis difference represents the average of unfunded commitments we expect to eventually be drawn upon. For commitments to make loans, we determine an allowance by applying the expected loss allocation factor to the amount expected to fund. The calculated allowance aggregated $0.8 million and $1.3 million as of September 30, 2017March 31, 2024 and December 31, 2016.2023, respectively. We do not reserve for residential mortgage construction loans, as the loans are for one year or less and draws are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements. Letters of credit are rarely drawn.
At March 31, 2024, and December 31, 2023, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.
A summary of the contractual amountsamounts of our financial instruments with off-balance sheet risk at September 30, 2017March 31, 2024 and December 31, 20162023 is as follows:
September 30, 2017 | December 31, 2016 | March 31, | December 31, | |||||||||||||
(Dollars in thousands) | 2024 | 2023 | ||||||||||||||
Commercial unused lines of credit | $ | 687,396,000 | $ | 553,345,000 | $ | 1,562,294 | $ | 1,557,429 | ||||||||
Unused lines of credit secured by 1 – 4 family residential properties | 60,564,000 | 56,275,000 | ||||||||||||||
Unused lines of credit secured by 1–4 family residential properties | 74,824 | 74,120 | ||||||||||||||
Credit card unused lines of credit | 37,258,000 | 22,689,000 | 150,098 | 142,096 | ||||||||||||
Other consumer unused lines of credit | 15,575,000 | 8,489,000 | 40,140 | 50,063 | ||||||||||||
Commitments to make loans | 130,455,000 | 154,338,000 | 234,946 | 270,403 | ||||||||||||
Standby letters of credit | 26,956,000 | 26,202,000 | 19,540 | 19,393 | ||||||||||||
| $ | 958,204,000 | $ | 821,338,000 | $ | 2,081,842 | $ | 2,113,504 | |||||||||
9.DERIVATIVES AND HEDGING ACTIVITIES
CertainWe are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of ouroperational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers had previously entereddesiring longer-term fixed rate loans, while simultaneously entering into interest rate swap agreements directlyswaps with our correspondent banks. To assist our commercial loan customers in these transactions, and to encourage our correspondent banks to enter intooffset the impact of the interest rate swap transactions with minimal credit underwriting analyses on their part, we had entered into risk participation agreementsswaps with the correspondent banks whereby we agreed to make payments tocommercial banking customers. The net result is the correspondent banks owed by our commercial loan customers underdesired floating rate loans and a minimization of the interest rate swap agreement in the event that our commercial loan customers did not make the payments. We were not a party to the interest rate swap agreements under these arrangements. As of September 30, 2017, all such interest rate swap agreements had been terminated by our commercial loan customers. These risk participation agreements were considered financial guarantees in accordance with applicable accounting guidance and were therefore recorded as liabilities at fair value, generally equal to the fees collected at the time of their execution. These liabilities were accreted into income during the termexposure of the interest rate swap agreements, generally ranging from fourtransactions.
As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent banks are recognized directly to fifteen years.earnings. Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement date.
(Continued)
9.DERIVATIVES AND HEDGING ACTIVITIES (Continued)
OurThe fair values of derivative instruments as of March 31, 2024, are reflected in the following table.
Balance Sheet | |||||||||
(Dollars in thousands) | Notional Amount | Location | Fair Value | ||||||
Derivative Assets | |||||||||
Interest rate swaps | $ | 766,564 | Other Assets | $ | 29,661 | ||||
Derivative Liabilities | |||||||||
Interest rate swaps | 764,537 | Other Liabilities | 30,036 | ||||||
The effect of interest rate risk policy includes guidelines for measuring and monitoring interest rate risk. Within these guidelines, parameters have been established for maximum fluctuationsswaps that are not designated as hedging instruments resulted in net interest income. Possible fluctuations are measured and monitored using net interest income simulation. Our policy provides forof $0.1 million during the usefirst three months of certain derivative instruments and hedging activities to aid2024 that was recorded in managing interest rate risk to within the policy parameters.
In February 2012, we entered into an interest rate swap agreement with a correspondent bank to hedge the floating rateother noninterest expense on our subordinated debentures, which became effective in January 2013 and matures in January 2018. Our $32.0 millionConsolidated Statements of subordinated debenturesIncome. We have a rate equal to the 90-Day Libor Rate plus a fixed spread of 218 basis points, and are subject to repricing quarterly. The interest rate swap agreement provides formaster netting arrangements with our correspondent banks that allow us to pay our correspondent bank a fixed rate, while our correspondent bank will paynet receivables and payables. The netting agreement also allows us the 90-Day Libor Rate on a $32.0 million notional amount. The quarterly re-set dates for the floating rate on the interest rate swap agreement are the same as the re-set dates for the floating rate on the subordinated debentures. The interest rate swap agreement does qualify for hedge accounting; therefore, monthly fluctuations in the present value of the interest rate swap agreement,to net of tax effect, are recordedrelated cash collateral received and transferred up to other comprehensive income. As of September 30, 2017 and December 31, 2016, the fair value exposure amount. We have elected to not offset these transactions on the Consolidated Balance Sheets. The netting of the interest rate swap agreement was recordedderivative instruments as a liabilityof March 31, 2024 is presented in the amount of less than $0.1 million.following table.
Gross Amounts Not Offset on the Consolidated Balance Sheet | ||||||||||||||||
(Dollars in thousands) | Net Amounts Recognized | Financial Instruments | Cash Collateral Received or Posted | Net Amount | ||||||||||||
Derivative Assets | ||||||||||||||||
Interest rate swaps | $ | 29,661 | $ | 2,303 | $ | 22,770 | $ | 4,588 | ||||||||
Derivative Liabilities | ||||||||||||||||
Interest rate swaps | 30,036 | 2,303 | 2,250 | 25,483 | ||||||||||||
Effective January 26, 2016,
The fair values of derivative instruments as of December 31, 2023, are reflected in the notional amount of the interest rate swap agreement was reduced from $32.0 million down to $21.0 million, reflecting the $11.0 million repurchase of the associated trust preferred securities on that date. We reclassified out of accumulated other comprehensive income and recorded interest expense of approximately $0.2 million in January 2016 as part of the transaction, reflecting the market value (i.e., present value of expected future cash flows) of the interest rate swap on that date of the $11.0 million portion.following table.
Balance Sheet | |||||||||
(Dollars in thousands) | Notional Amount | Location | Fair Value | ||||||
Derivative Assets | |||||||||
Interest rate swaps | $ | 676,526 | Other Assets | $ | 27,505 | ||||
Derivative Liabilities | |||||||||
Interest rate swaps | 674,499 | Other Liabilities | 27,964 | ||||||
(Continued)
9.DERIVATIVES AND HEDGING ACTIVITIES (Continued)
The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $0.3 million during the year ended December 31, 2023 that was recorded in other noninterest expense on our Consolidated Statements of Income. The netting of derivative instruments as of December 31, 2023 is presented in the following table.
Gross Amounts Not Offset on the Consolidated Balance Sheet | ||||||||||||||||
(Dollars in thousands) | Net Amounts Recognized | Financial Instruments | Cash Collateral Received or Posted | Net Amount | ||||||||||||
Derivative Assets | ||||||||||||||||
Interest rate swaps | $ | 27,505 | $ | 5,175 | $ | 14,010 | $ | 8,320 | ||||||||
Derivative Liabilities | ||||||||||||||||
Interest rate swaps | 27,964 | 5,175 | 3,120 | 19,669 | ||||||||||||
(Continued)
10.FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instrumentsinstruments were as follows as of September 30, 2017March 31, 2024 and December 31, 2016 (dollars in thousands)2023:
Level in | September 30, 2017 | December 31, 2016 | Level in | March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
Fair Value Hierarchy | Carrying Values | Fair Values | Carrying Values | Fair Values | Fair | ||||||||||||||||||||||||||||||||||
Value | Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||||||||||||
Cash | Level 1 | $ | 11,389 | $ | 11,389 | $ | 11,493 | $ | 11,493 | ||||||||||||||||||||||||||||||
Cash equivalents | Level 2 | 165,662 | 165,662 | 172,103 | 172,103 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Hierarchy | Values | Values | Values | Values | ||||||||||||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 237,231 | $ | 237,231 | $ | 130,533 | $ | 130,533 | ||||||||||||||||||||||||||||||
Securities available for sale | (1) | 330,090 | 330,090 | 328,060 | 328,060 | (1) | 609,153 | 609,153 | 617,092 | 617,092 | |||||||||||||||||||||||||||||
FHLBI stock | (2) | 11,036 | 11,036 | 8,026 | 8,026 | (2) | 21,513 | 21,513 | 21,513 | 21,513 | |||||||||||||||||||||||||||||
Loans, net | Level 3 | 2,530,967 | 2,513,324 | 2,359,624 | 2,353,276 | Level 3 | 4,270,368 | 4,243,647 | 4,253,844 | 4,191,644 | |||||||||||||||||||||||||||||
Loans held for sale | Level 2 | 4,112 | 4,112 | 1,035 | 1,035 | ||||||||||||||||||||||||||||||||||
Mortgage servicing rights | Level 2 | 5,195 | 8,076 | 5,544 | 7,997 | ||||||||||||||||||||||||||||||||||
Mortgage loans held for sale | Level 2 | 14,393 | 14,603 | 18,607 | 19,027 | ||||||||||||||||||||||||||||||||||
Accrued interest receivable | Level 2 | 9,118 | 9,118 | 7,714 | 7,714 | Level 2 | 21,681 | 21,681 | 19,806 | 19,806 | |||||||||||||||||||||||||||||
Interest rate swaps | Level 2 | 29,661 | 29,661 | 27,505 | 27,505 | ||||||||||||||||||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||||||||||||||||||
Deposits | Level 2 | 2,489,043 | 2,375,476 | 2,374,985 | 2,286,548 | ||||||||||||||||||||||||||||||||||
Repurchase agreements | Level 2 | 122,280 | 122,280 | 131,710 | 131,710 | ||||||||||||||||||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||||||||||||||||||
Deposits | Level 2 | 4,007,810 | 3,900,366 | 3,900,918 | 3,814,778 | ||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | Level 2 | 228,618 | 228,618 | 229,734 | 229,734 | ||||||||||||||||||||||||||||||||||
FHLBI advances | Level 2 | 220,000 | 221,103 | 175,000 | 174,734 | Level 2 | 447,083 | 430,397 | 467,910 | 454,857 | |||||||||||||||||||||||||||||
Subordinated debentures | Level 2 | 45,347 | 45,390 | 44,835 | 45,220 | Level 2 | 49,815 | 49,824 | 49,644 | 49,653 | |||||||||||||||||||||||||||||
Subordinated notes | Level 2 | 89,057 | 78,131 | 88,971 | 77,218 | ||||||||||||||||||||||||||||||||||
Accrued interest payable | Level 2 | 1,823 | 1,823 | 1,592 | 1,592 | Level 2 | 10,107 | 10,107 | 9,012 | 9,012 | |||||||||||||||||||||||||||||
Interest rate swap | (1) | 15 | 15 | 84 | 84 | ||||||||||||||||||||||||||||||||||
Interest rate swaps | Level 2 | 30,036 | 30,036 | 27,964 | 27,964 | ||||||||||||||||||||||||||||||||||
| See Note 11 for a description of the fair value hierarchy as well as a disclosure of levels for |
| It is not practical to determine the fair value of FHLBI stock due to transferability |
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterestnoninterest-bearing checking deposits,accounts and securities sold under agreements to repurchase, and variable rate loans and deposits that reprice frequently and fully.repurchase. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rateFair value for loans is based on an exit price model as required by ASU 2016-01, taking into account inputs such as discounted cash flows, probability of default and deposits and for variable rate loans and deposits with infrequent repricing or repricing limits,loss given default assumptions. The fair value for deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated life and credit risk.life. The fair value of mortgage servicing rights is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. Fair valueThe fair values of subordinated debentures, subordinated notes, and FHLBI advances isare based on current rates for similar financing. FairThe fair values of interest rate swaps are based on discounted cash flows using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads. The fair value of the interest rate swap is determined primarily utilizing market-consensus forecasted yield curves. Fair value ofother off-balance sheet items is estimated to be nominal.
(Continued)
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 based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions 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 conclusions about the assumptions that market participants would use in pricingpricing 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 that are recorded at fair value on a recurring or nonrecurring basis:
SecuritiesSecurities 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,debt obligations, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and municipal general obligation and revenue bonds and mutual funds.bonds. Level 3 securities include bonds issued by certain relatively small municipalities located within our markets that have very limited marketability due to their size and lack of ratings from a recognized rating service. We carry these bonds at historical cost, which we believe approximates fair value, unless our periodic financial analysis or other information that becomes known whichto us necessitates a valuation allowance.an impairment. There was no such valuation allowanceimpairment as of September 30, 2017March 31, 2024, or December 31, 2016.2023. We have no Level 1 securities available for sale.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. FAIR VALUES(Continued)
Derivatives. The interest rate swap is measured at fair value on a recurring basis. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves, and accordingly, the interest rate swap agreement is classifiedcurves. Insignificant unobservable inputs, such as Level 2.borrower credit spreads, are also utilized.
(Continued)
11.FAIR VALUES (Continued)
Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis. Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, we determined that the fair value of our mortgage loans held for sale approximated the recorded cost of $4.1to be $14.6 million and $1.0$19.0 million, respectively.
Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of impairmentsignificant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of impaireddistressed loans are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
ForeclosedForeclosed Assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value of foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value estimates. The fair values of parcels of other real estate owned are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
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 September 30, 2017March 31, 2024 are as follows:
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Quoted | ||||||||||||||||||||||||||||
Prices in | ||||||||||||||||||||||||||||||||
Active | ||||||||||||||||||||||||||||||||
Markets | Significant | |||||||||||||||||||||||||||||||
for | Other | Significant | ||||||||||||||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
U.S. Government agency debt obligations | $ | 161,168,000 | $ | 0 | $ | 161,168,000 | $ | 0 | $ | 385,709 | $ | 0 | $ | 385,709 | $ | 0 | ||||||||||||||||
Mortgage-backed securities | 39,495,000 | 0 | 39,495,000 | 0 | 27,782 | 0 | 27,782 | 0 | ||||||||||||||||||||||||
Municipal general obligation bonds | 123,310,000 | 0 | 118,084,000 | 5,226,000 | 166,632 | 0 | 166,126 | 506 | ||||||||||||||||||||||||
Municipal revenue bonds | 4,134,000 | 0 | 4,134,000 | 0 | 28,530 | 0 | 28,530 | 0 | ||||||||||||||||||||||||
Other investments | 1,983,000 | 0 | 1,983,000 | 0 | 500 | 0 | 500 | 0 | ||||||||||||||||||||||||
Interest rate swap | (15,000 | ) | 0 | (15,000 | ) | 0 | ||||||||||||||||||||||||||
Total | $ | 330,075,000 | $ | 0 | $ | 324,849,000 | $ | 5,226,000 | ||||||||||||||||||||||||
Interest rate swaps | 29,661 | 0 | 29,661 | 0 | ||||||||||||||||||||||||||||
Total assets | $ | 638,814 | $ | 0 | $ | 638,308 | $ | 506 | ||||||||||||||||||||||||
Interest rate swaps | 30,036 | 0 | 30,036 | 0 | ||||||||||||||||||||||||||||
Total liabilities | $ | 30,036 | $ | 0 | $ | 30,036 | $ | 0 | ||||||||||||||||||||||||
(Continued)
11.FAIR VALUES (Continued)
There were no sales, purchases or transfers in or out of Level 1, Level 2 or Level 3 during the first ninethree months of 2017.2024.
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 20162023 are as follows:
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Quoted | ||||||||||||||||||||||||||||
Prices in | ||||||||||||||||||||||||||||||||
Active | ||||||||||||||||||||||||||||||||
Markets | Significant | |||||||||||||||||||||||||||||||
for | Other | Significant | ||||||||||||||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
U.S. Government agency debt obligations | $ | 152,040,000 | $ | 0 | $ | 152,040,000 | $ | 0 | $ | 390,496 | $ | 0 | $ | 390,496 | $ | 0 | ||||||||||||||||
Mortgage-backed securities | 47,392,000 | 0 | 47,392,000 | 0 | 29,473 | 0 | 29,473 | 0 | ||||||||||||||||||||||||
Municipal general obligation bonds | 119,047,000 | 0 | 112,648,000 | 6,399,000 | 167,860 | 0 | 167,347 | 513 | ||||||||||||||||||||||||
Municipal revenue bonds | 7,631,000 | 0 | 7,631,000 | 0 | 28,763 | 0 | 28,763 | 0 | ||||||||||||||||||||||||
Other investments | 1,950,000 | 0 | 1,950,000 | 0 | 500 | 0 | 500 | 0 | ||||||||||||||||||||||||
Interest rate swap | (84,000 | ) | 0 | (84,000 | ) | 0 | ||||||||||||||||||||||||||
Total | $ | 327,976,000 | $ | 0 | $ | 321,577,000 | $ | 6,399,000 | ||||||||||||||||||||||||
Interest rate swaps | 27,505 | 0 | 27,505 | 0 | ||||||||||||||||||||||||||||
Total assets | $ | 644,597 | $ | 0 | $ | 644,084 | $ | 513 | ||||||||||||||||||||||||
Interest rate swaps | 27,964 | 0 | 27,964 | 0 | ||||||||||||||||||||||||||||
Total liabilities | $ | 27,964 | $ | 0 | $ | 27,964 | $ | 0 | ||||||||||||||||||||||||
There were no sales, purchases or transfers in or out of Level 1,3 during 2023. The $0.1 million reduction in Level 2 or Level 3 municipal general obligation bonds during 2016.
2023 reflects the scheduled maturities of such bonds.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2017March 31, 2024 are as follows:
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Quoted | ||||||||||||||||||||||||||||
Prices in | ||||||||||||||||||||||||||||||||
Impaired loans | $ | 6,915,000 | $ | 0 | $ | 0 | $ | 6,915,000 | ||||||||||||||||||||||||
Active | Significant | |||||||||||||||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||
Collateral dependent loans | $ | 1,573 | $ | 0 | $ | 0 | $ | 1,573 | ||||||||||||||||||||||||
Foreclosed assets | 2,327,000 | 0 | 0 | 2,327,000 | 200 | 0 | 0 | 200 | ||||||||||||||||||||||||
Total | $ | 9,242,000 | $ | 0 | $ | 0 | $ | 9,242,000 | $ | 1,773 | $ | 0 | $ | 0 | $ | 1,773 | ||||||||||||||||
(Continued)
11.FAIR VALUES (Continued)
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 20162023 are as follows:
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Impaired loans | $ | 9,896,000 | $ | 0 | $ | 0 | $ | 9,896,000 | ||||||||
Foreclosed assets | 469,000 | 0 | 0 | 469,000 | ||||||||||||
Total | $ | 10,365,000 | $ | 0 | $ | 0 | $ | 10,365,000 | ||||||||
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Collateral dependent loans | $ | 1,434 | $ | 0 | $ | 0 | $ | 1,434 | ||||||||
Foreclosed assets | 200 | 0 | 0 | 200 | ||||||||||||
Total | $ | 1,634 | $ | 0 | $ | 0 | $ | 1,634 | ||||||||
The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on impairednonperforming loans and foreclosed assets are reviewed periodically. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside appraisals and internal evaluations based on identifiable trends within our markets, such as sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address current distressed market conditions. ForWe generally assign a discount factor range of 25% to 35% for commercial real estate dependent loans and foreclosed assets, we generally assignand a 15% to 25% discount factor for commercial-related properties, and arange of 25% to 50% discount factor for residential-related properties. In a vast majority of cases, we assign a 10% discount factor for estimated selling costs.
12.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 sheetsheet 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 ourthe financial statements.
The prompt corrective action regulations provide five classifications, including well capitalized,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 September 30, 2017As of March 31, 2024 and December 31, 2016,2023, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since September 30, 2017March 31, 2024, that we believe have changed our bank’s categorization.
(Continued)
12.REGULATORY MATTERS (Continued)
Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were:
Actual | Minimum Required for Capital Adequacy Purposes | Minimum Required to be Well Capitalized Under Prompt Corrective Action Regulations | Minimum Required | |||||||||||||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | to be Well | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Minimum Required | Capitalized Under | |||||||||||||||||||||||||||||||||||||||||||||||
for Capital | Prompt Corrective | |||||||||||||||||||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | Action Regulations | ||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 373,280 | 12.7 | % | $ | 235,921 | 8.0 | % | NA | NA | $ | 729,410 | 14.1 | % | $ | 415,299 | 8.0 | % | $ NA | NA% | ||||||||||||||||||||||||||||
Bank | 368,143 | 12.5 | 235,709 | 8.0 | 294,636 | 10.0 | % | 712,688 | 13.8 | 413,264 | 8.0 | 516,580 | 10.0 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 354,087 | 12.0 | 176,941 | 6.0 | NA | NA | 587,888 | 11.3 | 311,474 | 6.0 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 348,949 | 11.8 | 176,782 | 6.0 | 235,709 | 8.0 | 660,223 | 12.8 | 309,948 | 6.0 | 413,264 | 8.0 | ||||||||||||||||||||||||||||||||||||
Common equity tier 1 (to risk weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 310,814 | 10.5 | 132,706 | 4.5 | NA | NA | 540,147 | 10.4 | 233,606 | 4.5 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 348,949 | 11.8 | 132,587 | 4.5 | 191,514 | 6.5 | 660,223 | 12.8 | 232,461 | 4.5 | 335,777 | 6.5 | ||||||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 354,087 | 11.2 | 126,664 | 4.0 | NA | NA | 587,888 | 10.9 | 216,108 | 4.0 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 348,949 | 11.0 | 126,583 | 4.0 | 158,228 | 5.0 | 660,223 | 12.3 | 215,092 | 4.0 | 268,865 | 5.0 | ||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 354,278 | 13.1 | % | $ | 215,819 | 8.0 | % | $ | NA | NA | $ | 710,905 | 13.7 | % | $ | 415,841 | 8.0 | % | $ NA | NA% | |||||||||||||||||||||||||||
Bank | 353,243 | 13.1 | 215,605 | 8.0 | 269,506 | 10.0 | % | 694,431 | 13.4 | 414,019 | 8.0 | 517,524 | 10.0 | |||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 336,316 | 12.5 | 161,864 | 6.0 | NA | NA | 570,730 | 11.0 | 311,881 | 6.0 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 335,282 | 12.4 | 161,704 | 6.0 | 215,605 | 8.0 | 643,227 | 12.4 | 310,514 | 6.0 | 414,019 | 8.0 | ||||||||||||||||||||||||||||||||||||
Common equity tier 1 (to risk weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 293,555 | 10.9 | 121,398 | 4.5 | NA | NA | 523,160 | 10.1 | 233,911 | 4.5 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 335,282 | 12.4 | 121,278 | 4.5 | 175,179 | 6.5 | 643,227 | 12.4 | 232,886 | 4.5 | 336,391 | 6.5 | ||||||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 336,316 | 11.2 | 120,486 | 4.0 | NA | NA | 570,730 | 10.8 | 210,527 | 4.0 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 335,282 | 11.1 | 120,383 | 4.0 | 150,479 | 5.0 | 643,227 | 12.2 | 210,427 | 4.0 | 263,034 | 5.0 | ||||||||||||||||||||||||||||||||||||
(Continued)
12.REGULATORY MATTERS (Continued)
Our consolidatedconsolidated capital levels as of September 30, 2017March 31, 2024 and December 31, 20162023 include $43.3$47.7 million and $42.8$47.6 million, respectively, of trust preferred securities subject to certain limitations.securities. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element. The guidelines provide that the aggregate amount of restricted core elements that may be included in our Tier 1 capital must not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Our ability to include the trust preferred securities in Tier 1 capital in accordance with the guidelines is not affected by the provision of the Dodd-Frank Act generally restricting such treatment, because (i) the trust preferred securities were issued before May 19, 2010, and (ii) our total consolidated assets as of December 31, 2009 were less than $15.0 billion. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, all $43.3$47.7 million and $42.8$47.6 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.
Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is beingwas phased in over three years beginning in 2016. The capital buffer requirement effectively raisesraised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of September 30, 2017,March 31, 2024, our bank would meetmeets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis as if all such requirements were currently in effect.basis.
Our and our bank’sbank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. On January 12, 2017, 11, 2024, our Board of Directors declared a cash dividend on our common stock in the amount of $0.18$0.35 per share that was paid on March 22, 2017 13, 2024 to shareholders of record as of March 10, 2017. On April 13, 2017, our Board of Directors declared a cash dividend on our common stock in the amount of $0.18 per share that was paid on June 21, 2017 to shareholders of record as of June 9, 2017. On July 13, 2017, our Board of Directors declared a cash dividend on our common stock in the amount of $0.19 per share that was paid on September 20, 2017 to shareholders of record as of September 8, 2017. On October 12, 2017, our Board of Directors declared a cash dividend on our common stock in the amount of $0.19 per share that will be paid on December 20, 2017 to shareholders of record as of December 8, 2017.1, 2024.
On January 30, 2015,As of March 31, 2024, we announced that our Board of Directors had authorized a programthe ability to repurchase up to $20.0$6.8 million of ourin common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. On April 19, 2016, we announcedregulations as part of a $15.0$20.0 million expansion of thecommon stock repurchase plan. Since inception, we have purchased a total of 956,419 shares at a total price of $19.5 million, at an average price per share of $20.38; noprogram announced in May 2021. No shares were purchased under the authorized planrepurchased during the first ninethree months of 2017. The2024. Historically, stock buybacksrepurchases have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank. The actual timing, number and value of shares repurchased will be determined by us in our discretion and will depend on a number of factors, including the stock price, capital position, financial performance, general market and economic conditions, alternative uses of capital and applicable legal requirements.
13.SUBSEQUENT EVENTS
On April 11, 2024, our Board of Directors declared a cash dividend on our common stock in the amount of $0.35 per share that will be paid on June 19, 2024, to shareholders of record as of June 7, 2024.
ItemItem 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements that are based on management’smanagement’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and our company. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” “indicates,” “strategy,” “future,” “likely,” “may,” “should,” “will,” 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,forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include, among others, adverse changes in interest rates and interest rate relationships;relationships; increasing rates of inflation and slower growth rates or recession; significant declines in the value of commercial real estate; market volatility; demand for products and services; climate impacts; labor markets; the degree of competition by traditional and non-traditional competitors;financial services companies; changes in banking regulation or actions by bank regulators; changes in tax laws;laws and other laws and regulations applicable to us; changes in prices, levies, and assessments; the impact of technological advances; potential cyber-attacks, information security breaches, and other criminal activities; litigation liabilities; governmental and regulatory policy changes; the outcomes of existing or future contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, and the failure to meet client expectations and other facts; the transition from Libor to SOFR; changes in the national and local economies; unstable political and economic environments; disease outbreaks, such as the Covid-19 pandemic or similar public health threats, and measures implemented to combat them; and other risk factors, including those described in our annual report on Form 10-K for the year ended December 31, 2016 or in this report.2023. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.
Introduction
The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Community Partners, LLC ("MCP") and Mercantile Bank of Michigan (“our bank”) and our bank’s twoits subsidiaries, Mercantile Bank Real Estate Co., LLC (“our real estate company”) andincluding Mercantile Insurance Center, Inc. (“our insurance company”), at September 30, 2017March 31, 2024 and December 31, 20162023 and the results of operations for the three months ended March 31, 2024 and nine months ended September 30, 2017 and September 30, 2016.March 31, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.
Critical Accounting Policies
Accounting principles generally accepted in the United States of America (“GAAP”) are complex and require us to apply significant judgment to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a discussion of our significant accounting policies,estimates, see Note 1 of the Notes to our Consolidated Financial Statements included on pages F-42 through F-49 in our Form 10-K for the fiscal year ended December 31, 20162023 (Commission file number 000-26719). Our critical accounting policies are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.
AllowanceAllowance for LoanCredit Losses (“allowance”): The allowance for loan losses (“allowance”) is maintained at a level we believe is adequate to absorb probable incurredestimated credit losses identified and inherentexpected in the originated loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on past loanhistorical credit loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. LoanCredit losses are charged against the allowance when we believe the uncollectability of a loan is likely. The balance of the allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance in the future. In either instance, unanticipated changes could have a significant impact on the allowance and operating results.
The allowance is increased through a provision charged to operating expense. Uncollectable loans are charged-off through the allowance. Recoveriesallowance, while recoveries of loans previously charged-off are added to the allowance. A loan 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 agreement. Impairment is evaluated on an individual loan basis. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The timing of obtaining outside appraisals varies, generally depending on the nature and complexity of the property being evaluated, general breadth of activity within the marketplace and the age of the most recent appraisal. For collateral dependent impaired loans, in most cases we obtain and use the “as is” value as indicated in the appraisal report, adjusting for any expected selling costs. In certain circumstances, we may internally update outside appraisals based on recent information impacting a particular or similar property, or due to identifiable trends (e.g., recent sales of similar properties) within our markets. The expected future cash flows exclude potential cash flows from certain guarantors. To the extent these guarantors provide repayments, a recovery would be recorded upon receipt. Loans are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship. Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. We put loans into nonaccrual status when the full collection of principal and interest is not expected.
Income TaxSee Note 1- Significant Accounting: Current income tax assets and liabilities are established Policies in this Quarterly Report on Form 10-Q 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 statusfurther detailed descriptions of our tax positionsestimation process and make adjustments as necessary. Deferred income tax assets and liabilities are also established for the future tax consequences of events that have been recognized in our financial statements or tax returns. A deferred income tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences that can be carried forward (used) in future years. The valuation of our net deferred income tax asset is considered critical as it requires us to make estimates based on provisions of the enacted tax laws. The assessment of the realizability of the net deferred income tax asset involves the use of estimates, assumptions, interpretations and judgments concerning accounting pronouncements, federal and state tax codes and the extent of future taxable income. There can be no assurance that future events, such as court decisions, positions of federal and state tax authorities, and the extent of future taxable income will not differ from our current assessment, the impact of which could be significantmethodology related to the consolidated results of operationsallowance. See also Note 3 – Loans and reported earnings.Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.
MERCANTILE BANK CORPORATION
Accounting guidance requires that we assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified.
Securities and Other Financial Instruments: Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other than temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Fair values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current fair value of securities is recorded as a valuation adjustment and reported in other comprehensive income.
Mortgage Servicing Rights:Rights: Mortgage servicing rights are recognized as assets based on the allocated fair value of retained servicing rights on loans sold. Servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing income. We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage loan prepayment speeds, the remaining life of the mortgage loan pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from servingservicing each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated quarterly based on the fair value of the servicing rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.
Goodwill: Generally accepted accounting principlesGoodwill: Accounting rules require us to determine the fair value of all of the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition. We employ a variety of means in determination of thedetermining fair value, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For certainthose items thatfor which we believeconclude that we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of thefair value. In other cases, where the fair value is not easilyreadily determined, we consultconsultation with outside parties is used to determine the fair value of the asset or liability.value. Once valuations have been adjusted,determined, the net difference between the price paid for the acquired companyentity and the fair value of itsthe balance sheet is recorded as goodwill.
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, andwith any such impairment is recognized in the period identified. A more frequent assessment is performed if conditionsthere are material changes in the market place or changes inwithin the company’s organizational structure occur. We use a discounted income approach and a market valuation model, which compares the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill has been impaired.
structure.
Financial Overview
We reported net income of $8.3$21.6 million, or $0.51$1.34 per diluted share, for the thirdfirst quarter of 2017. During the third quarter2024, compared with net income of 2016, we earned $7.8$21.0 million, or $0.48 per diluted share. Net income for the first nine months of 2017 totaled $23.3 million, or $1.41 per diluted share, compared to $23.8 million, or $1.46$1.31 per diluted share, during the first nine months of 2016. Excluding the impacts of certain noncore transactions, including a bank owned life insurance death benefit claim during the first quarter of 2017, the repurchase of trust preferred securities at a large discount during the first quarter of 2016, and accelerated purchase discount accretion on called U.S. Government agency bonds during the first nine months of 2016, diluted earnings per share during the first nine months of 2017 and 2016 equaled $1.34 and $1.27, respectively.
2023. The overall quality of our loan portfolio remains strong, with continued low levels of nonperforming assets and net loan charge-offs. Nonperforming assets as a percent of total assets equaled only 32 basis points as of the end of the third quarter of 2017. Of the $3.3 million net increase in nonperforming assets during the third quarter, nearly one-half is associated with a transfer of a bank-owned facility that is no longer being considered for use in bank operations to the other real estate owned category. We expect to sell the facility within the next six months at a price that approximates its current carrying value. Gross loan charge-offs equaled $0.7 million during the third quarter of 2017, and totaled $2.3 million for the first nine months of the year, while recoveries of prior period loan charge-offs equaled $0.6 million and $1.2 million during the respective time periods. Net loan charge-offs, as a percent of average total loans, equaled an annualized 0.02% and 0.06% during the third quarter and first nine months of 2017, respectively. We continue our collection efforts on charged-off loans, and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.
New commercial term loan originations totaled approximately $128 million during the third quarter of 2017, bringing the year-to-date total to approximately $410 million. We also generally experienced net increases in commercial lines of credit during those time periods, in large part reflecting lines that are part of new commercial lending relationships established during recent quarterly periods. Net loan growth equaled $27.0 million and $176 million during the third quarter and first nine months of 2017, respectively. The new loan pipeline remains strong, and at September 30, 2017, we had $163 million in unfunded loan commitments on commercial construction and development projects that are in the construction phase. We believe our loan portfolio remains well diversified, with commercial real estate non-owner occupied loans comprising 32%, commercial and industrial loans equaling 30%, commercial real estate owner occupied loans comprising 19% and residential mortgage and consumer loans aggregating 13% of total loans at September 30, 2017. As a percent of total commercial loans, commercial and industrial loans and commercial real estate owner occupied loans combined equaled 57% at September 30, 2017.
We recorded a provision for loan losses of $1.0 million during the third quarter of 2017,improved operating results were in large part driven by anhigher noninterest income, which more than offset a lower level of net interest income, larger provision expense and increased allocation relating to our economic conditions environmental factor and commercial loan growth. The provision for loan losses totaled $2.4 million for the first nine months of 2017, slightly higher than the $2.3 million expensed during the first nine months of 2016, primarily driven by commercial loan growth.noninterest expenses.
We believe our funding structure also remains well diversified. As of September 30, 2017, noninterest-bearing checking accounts comprised 29% of total funds, interest-bearing checking and sweep accounts combined for 19%, savings deposits and money market accounts aggregated to 26% and local time deposits accounted for 15%. Wholesale funds, comprised of brokered deposits and Federal Home Loan Bank of Indianapolis (“FHLBI”) advances, represented 11% of total funds.
Financial Condition
Our total assets increased $172 million during the first nine months of 2017, and totaled $3.25 billion as of September 30, 2017. Total loans increased $176 million and securities available for sale were up $2.0 million, while cash and cash equivalents decreased $6.5 million. Total deposits increased $114 million and FHLBI advances were up $45.0 million, while securities sold under agreements to repurchase (“sweep accounts”) were down $9.4 million during the first nine months of 2017. A majority of our deposit growth resulted from increases in noninterest-bearing checking accounts associated with commercial and industrial loan growth and from increases in money market deposit accounts associated with product enhancements. The increase in FHLBI advances generally reflects new advances obtained to fund loan growth.
MERCANTILE BANK CORPORATION
Commercial loans increased $149$14.3 million during the first ninethree months of 2017,2024, providing for an annualized growth rate of about 2%. Multi-family and at September 30, 2017 totaled $2.21 billion, or 86.7% of the loan portfolio. As of December 31, 2016, the commercial loan portfolio comprised 86.8% of total loans. The increaseresidential rental property loans increased $34.4 million, in commerciallarge part reflecting draws on multi-family construction loans, during the first nine months of 2017 primarily reflects new commercial term loans to existing and new borrowers. Commercial and industrial loans were up $62.7 million,while non-owner occupied commercial real estate (“CRE”) loans increased $56.9 million, owner occupied CRE loans grew $34.9 million, multi-family$9.9 million. Commercial and residential rental loans grew $1.3 million and vacant land, land development and residential constructionindustrial loans declined $6.3 million.$31.9 million, primarily reflecting paydowns on commercial lines of credit. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 57.0%56.6% as of September 30, 2017,March 31, 2024, compared to 56.4%57.7% at December 31, 2016.2023. The new commercial loan pipeline remains strong, and as of March 31, 2024, we had $345 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.
We are very pleased with the approximately $1.6 billion in new commercial term loan fundings since the beginning of 2015, including approximately $410Residential mortgage loans increased $3.2 million during the first ninequarter of 2024, representing an annualized growth rate of about 2%. Residential mortgage loan originations totaled $79.9 million during the first quarter of 2024, of which almost 75% was originated with the intent to sell.
The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.14% of total loans as of March 31, 2024. Accruing loans past due 30 to 89 days remain very low. Foreclosed properties, consisting of a former branch facility, totaled $0.2 million as of March 31, 2024. Gross loan charge-offs totaled less than $0.1 million during the first quarter of 2024, while recoveries of prior period loan charge-offs aggregated $0.4 million.
We recorded a provision expense of $1.3 million during the first quarter of 2024, compared to $0.6 million during the first quarter of 2023. The first quarter 2024 provision expense primarily reflects a specific allocation associated with a nonperforming commercial loan relationship. An additional allocation was needed to reflect loan growth, while the allocation associated with the economic forecast was reduced.
Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $150 million during the first quarter of 2024, compared to $31.1 million during the first quarter of 2023. The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of on balance sheet liquidity.
Total deposits increased $107 million during the first three months of 2017. 2024, providing for an annualized growth rate of about 11%. Growth in money market deposit accounts and time deposits more than offset a reduction in noninterest-bearing business checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter. Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $20.8 million during the first quarter of 2024. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $620 million, or about 13% of total funds, as of March 31, 2024.
During the first quarter of 2024 compared to the first quarter of 2023, interest income was up $16.3 million, while interest expense increased $17.3 million. As a result, net interest income declined $1.0 million for the comparative periods. Our net interest margin declined 54 basis points during the first quarter of 2024 compared to the same time period in 2023. Although our yield on earning assets increased 71 basis points during that time period, our cost of funds was up 125 basis points. While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023 when the Federal Open Market Committee (“FOMC”) raised the targeted federal funds rate by 525 basis points, meaningful increases in our cost of funds did not begin to materialize until the latter part of 2022 when competition for deposit balances increased deposit rates and depositors began to move funds from no- and lower-costing deposit types to higher-costing deposit products. Our net interest margin peaked during the latter part of 2022 and early stages of 2023.
Noninterest income totaled $10.9 million during the first quarter of 2024, compared to $7.0 million during the first quarter of 2023. The higher level of noninterest income primarily stemmed from increases in all treasury management fee income categories, along with higher levels of mortgage banking and interest rate swap income, and revenue associated with a private equity investment. Benefit claims on bank owned life insurance policies totaled $0.7 million during the first quarter of 2024.
Noninterest expense totaled $29.9 million during the first quarter of 2024, compared to $28.6 million during the same time period in 2023. The higher level of noninterest expense primarily resulted from increased compensation and benefit costs. Contributions to The Mercantile Bank Foundation ("Foundation") totaled $0.7 million during the first quarter of 2024.
Financial Condition
Our total assets increased $113 million during the first quarter of 2024, and totaled $5.47 billion as of March 31, 2024. Interest-earning deposits were up $125 million and total loans increased $18.2 million, while securities available for sale declined $7.9 million. Total deposits increased $107 million, while FHLBI advances decreased $20.8 million during the first quarter of 2024.
Commercial loans increased $14.3 million during the first quarter of 2024, providing for an annualized growth rate of about 2%. Multi-family and residential rental property loans increased $34.4 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied CRE loans grew $9.9 million. Commercial and industrial loans declined $31.9 million, primarily reflecting paydowns on commercial lines of credit. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.6% as of March 31, 2024, compared to 57.7% at December 31, 2023. Commercial loans totaled $3.43 billion, or 79.4% of total loans, as of March 31, 2024, compared to $3.42 billion, or 79.4% of total loans, as of December 31, 2023.
As of September 30, 2017, availabilityMarch 31, 2024, we had $345 million in unfunded loan commitments on existingcommercial construction and development loans totaled $163 million,that are in the construction phase which we expect to be drawn over the next 12 to 18 months. Our loancurrent pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including approximately $130$235 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months. Our commercial lenders also report substantialongoing additional opportunities they are currently discussing with existing and potentially new borrowers.
We continue to experience commercial loan principal paydowns and payoffs. While a portion of the principal paydowns and payoffs received have been welcomed, such as on stressed loan relationships, we have also experienced instances where well-performing relationships have been refinanced at other financial institutions or non-bank entities, and other situations where the borrower has sold the underlying asset. In many of those instances where the loans were refinanced elsewhere, we believed the terms and conditions of the new lending arrangements were too aggressive, generally reflecting the very competitive banking environment in our markets. We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits we have established within our commercial loan portfolio. Usage of existing commercial lines of credit has remained relatively steady.averaged 40% during the first quarter of 2024, unchanged from the average during all of 2023.
One-to-four familyResidential mortgage loans increased $40.8$3.2 million during the first nine monthsquarter of 2017, and at September 30, 2017, totaled $236 million, or 9.3%2024, representing an annualized growth rate of total loans. The increase primarily reflects a strategic initiative to enhance our mortgage banking operations, and generally consists ofabout 2%. Generally, we sell fixed rate residential mortgage loans that have a fixed rate for the initial five to seven year period and then convert to anthird-party investors, while we retain adjustable rate that is subject to reset annually thereafter. Home equity and other consumerresidential mortgage loans declined $14.7on our balance sheet. Residential mortgage loan originations totaled $79.9 million during the first nine monthsquarter of 2017, and at September 30, 2017,2024, of which almost 75% was originated with the intent to sell. Residential mortgage loan originations totaled $103$72.0 million during the first quarter of 2023, of which about 35% was originated with the intent to sell. In mid-2023, we altered our residential mortgage loan pricing strategy to encourage the borrower to select a fixed rate residential mortgage product that we could sell rather than selecting the adjustable rate residential mortgage product that we had to fund on our balance sheet. The strategy not only provided for less residential mortgage loans being funded on our balance sheet, but also resulted in higher mortgage banking income.
Other consumer-related loans totaled $51.7 million, or 4.0%1.2% of total loans. One-to-four family mortgage loans, and home equity and other consumer loans equatedat March 31, 2024, compared to 8.2% and 5.0%$51.1 million, or 1.1% of total loans, as of December 31, 2016, respectively.
2023. We expect this loan portfolio segment to remain relatively stable in dollar amount but decline as a percentage of total loans in future periods as the commercial loan segment grows.
The following table summarizes our loan portfolio over the past twelve months:
9/30/17 | 6/30/17 | 3/31/17 | 12/31/16 | 9/30/16 | ||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial & Industrial | $ | 776,563,000 | $ | 780,816,000 | $ | 757,220,000 | $ | 713,903,000 | $ | 750,330,000 | ||||||||||
Land Development & Construction | 28,575,000 | 29,027,000 | 31,924,000 | 34,828,000 | 37,455,000 | |||||||||||||||
Owner Occupied Commercial RE | 485,347,000 | 491,633,000 | 452,382,000 | 450,464,000 | 440,704,000 | |||||||||||||||
Non-Owner Occupied Commercial RE | 805,167,000 | 783,036,000 | 768,565,000 | 748,269,000 | 741,444,000 | |||||||||||||||
Multi-Family & Residential Rental | 119,170,000 | 114,081,000 | 113,257,000 | 117,883,000 | 118,103,000 | |||||||||||||||
Total Commercial | 2,214,822,000 | 2,198,593,000 | 2,123,348,000 | 2,065,347,000 | 2,088,036,000 | |||||||||||||||
Retail: | ||||||||||||||||||||
1-4 Family Mortgages | 236,074,000 | 220,697,000 | 205,849,000 | 195,226,000 | 190,715,000 | |||||||||||||||
Home Equity & Other Consumer Loans | 103,376,000 | 107,991,000 | 112,117,000 | 118,047,000 | 127,626,000 | |||||||||||||||
Total Retail | 339,450,000 | 328,688,000 | 317,966,000 | 313,273,000 | 318,341,000 | |||||||||||||||
Total | $ | 2,554,272,000 | $ | 2,527,281,000 | $ | 2,441,314,000 | $ | 2,378,620,000 | $ | 2,406,377,000 | ||||||||||
Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, we must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions.conditions or other factors. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuringmodification in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. Market value estimates of collateral on impairednonperforming loans, as well as on foreclosed and repossessed assets, are reviewed periodically; however, weperiodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.
Nonperforming loans totaled $6.0 million, or 0.1% of total loans, as of March 31, 2024, compared to $3.4 million, or 0.1% of total loans, as of December 31, 2023. Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and other real estate owned,foreclosed properties, totaled $10.6$6.2 million (0.3%(0.1% of total assets) as of September 30, 2017,March 31, 2024, compared to $6.4$3.6 million (0.2%(0.1% of total assets) as of December 31, 2016. At September 30, 2017,2023. The volume of nonperforming loans totaled $8.2 million and other real estate owned equaled $2.4 million, the latterassets has remained under 0.3% of which includes a facility with a carrying value of $1.6 million that was transferred from fixedtotal assets to other estate owned during the third quarter. This facility, located near our main office, was originally acquired for potential future bank operations; however, we recently decided we no longer need the facility for that purpose. We expect to sell this facility within the next six months at a price that approximates the carrying value.since year-end 2015. Given the low levellevels of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with the manageable and steady level of watch list credits and what we believe are strong credit administration practices, we remainare pleased with the overall quality of the loan portfolio.
MERCANTILE BANK CORPORATION
The following tables provide a breakdown of nonperforming assets by collateral type:
NONPERFORMING LOANS | ||||||||||||||||||||
9/30/17 | 6/30/17 | 3/31/17 | 12/31/16 | 9/30/16 | ||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
Land Development | $ | 0 | $ | 0 | $ | 0 | $ | 16,000 | $ | 23,000 | ||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Owner Occupied / Rental | 3,403,000 | 3,192,000 | 2,787,000 | 2,739,000 | 2,661,000 | |||||||||||||||
| 3,403,000 | 3,192,000 | 2,787,000 | 2,755,000 | 2,684,000 | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Land Development | 50,000 | 65,000 | 80,000 | 95,000 | 110,000 | |||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Owner Occupied | 2,583,000 | 1,052,000 | 911,000 | 285,000 | 1,109,000 | |||||||||||||||
Non-Owner Occupied | 46,000 | 47,000 | 421,000 | 488,000 | 673,000 | |||||||||||||||
| 2,679,000 | 1,164,000 | 1,412,000 | 868,000 | 1,892,000 | ||||||||||||||||
Non-Real Estate: | ||||||||||||||||||||
Commercial Assets | 2,126,000 | 2,081,000 | 3,076,000 | 2,293,000 | 65,000 | |||||||||||||||
Consumer Assets | 23,000 | 13,000 | 17,000 | 23,000 | 28,000 | |||||||||||||||
| 2,149,000 | 2,094,000 | 3,093,000 | 2,316,000 | 93,000 | ||||||||||||||||
Total | $ | 8,231,000 | $ | 6,450,000 | $ | 7,292,000 | $ | 5,939,000 | $ | 4,669,000 | ||||||||||
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS | ||||||||||||||||||||
9/30/17 | 6/30/17 | 3/31/17 | 12/31/16 | 9/30/16 | ||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
Land Development | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Owner Occupied / Rental | 245,000 | 175,000 | 185,000 | 144,000 | 284,000 | |||||||||||||||
| 245,000 | 175,000 | 185,000 | 144,000 | 284,000 | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Land Development | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Owner Occupied | 2,044,000 | 261,000 | 310,000 | 325,000 | 488,000 | |||||||||||||||
Non-Owner Occupied | 38,000 | 353,000 | 0 | 0 | 18,000 | |||||||||||||||
| 2,082,000 | 614,000 | 310,000 | 325,000 | 506,000 | ||||||||||||||||
Non-Real Estate: | ||||||||||||||||||||
Commercial Assets | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Consumer Assets | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Total | $ | 2,327,000 | $ | 789,000 | $ | 495,000 | $ | 469,000 | $ | 790,000 | ||||||||||
MERCANTILE BANK CORPORATION
The following tables provide a reconciliation of nonperforming assets:
NONPERFORMING LOANS RECONCILIATION | ||||||||||||||||||||
3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | ||||||||||||||||
2017 | 2017 | 2017 | 2016 | 2016 | ||||||||||||||||
Beginning balance | $ | 6,450,000 | $ | 7,292,000 | $ | 5,939,000 | $ | 4,669,000 | $ | 5,168,000 | ||||||||||
Additions, net of transfers to ORE | 3,081,000 | 1,279,000 | 2,890,000 | 2,932,000 | 1,111,000 | |||||||||||||||
Returns to performing status | (120,000 | ) | 0 | (113,000 | ) | (13,000 | ) | 0 | ||||||||||||
Principal payments | (1,089,000 | ) | (1,168,000 | ) | (1,289,000 | ) | (1,386,000 | ) | (1,509,000 | ) | ||||||||||
Loan charge-offs | (91,000 | ) | (953,000 | ) | (135,000 | ) | (263,000 | ) | (101,000 | ) | ||||||||||
Total | $ | 8,231,000 | $ | 6,450,000 | $ | 7,292,000 | $ | 5,939,000 | $ | 4,669,000 | ||||||||||
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION | ||||||||||||||||||||
3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | ||||||||||||||||
2017 | 2017 | 2017 | 2016 | 2016 | ||||||||||||||||
Beginning balance | $ | 789,000 | $ | 495,000 | $ | 469,000 | $ | 790,000 | $ | 815,000 | ||||||||||
Additions | 1,918,000 | 511,000 | 97,000 | 54,000 | 61,000 | |||||||||||||||
Sale proceeds | (373,000 | ) | (147,000 | ) | (56,000 | ) | (308,000 | ) | (76,000 | ) | ||||||||||
Valuation write-downs | (7,000 | ) | (70,000 | ) | (15,000 | ) | (67,000 | ) | (10,000 | ) | ||||||||||
Total | $ | 2,327,000 | $ | 789,000 | $ | 495,000 | $ | 469,000 | $ | 790,000 | ||||||||||
Gross2024, loan charge-offs equaled $0.7totaled less than $0.1 million, during the third quarter of 2017, and totaled $2.3 million for the first nine months of the year, while recoveries of prior period loan charge-offs equaled $0.6 million and $1.2 million during the respective time periods. Net loan charge-offs, as a percent of average total loans, equaled an annualized 0.02% and 0.06% during the third quarter and first nine months of 2017, respectively. Loan charge-offs related to one commercial loan relationship, recorded during the second quarter, accounted for approximately one-half of the gross loan charge-off amount during the first nine months of 2017.$0.4 million. We continue our collection efforts on charged-off loans and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.
In each accounting period, we adjust the allowance to the amount we believe is necessary to maintain the allowance at an adequate level. Through the loan review and credit departments, we establish portions of the allowance based on specifically identifiable problem loans. The evaluation of the allowance is further based on, but not limited to, consideration of the internally prepared allowance analysis, loan loss migration analysis, composition of the loan portfolio, third party analysis of the loan administration processes and portfolio, and general economic conditions.
MERCANTILE BANK CORPORATION
The allowance analysis applies reserve allocation factors to non-impaired outstanding loan balances, the result of which is combined with specific reserves to calculate an overall allowance dollar amount. For non-impaired commercial loans, reserve allocation factors are based on the loan ratings as determined by our standardized grade paradigms and by loan purpose. Our commercial loan portfolio is segregated into five classes: 1) commercial and industrial loans; 2) vacant land, land development and residential construction loans; 3) owner occupied real estate loans; 4) non-owner occupied real estate loans; and 5) multi-family and residential rental property loans. The reserve allocation factors are primarily based on the historical trends of net loan charge-offs through a migration analysis whereby net loan losses are tracked via assigned grades over various time periods, with adjustments made for environmental factors reflecting the current status of, or recent changes in, items such as: lending policies and procedures; economic conditions; nature and volume of the loan portfolio; experience, ability and depth of management and lending staff; volume and severity of past due, nonaccrual and adversely classified loans; effectiveness of the loan review program; value of underlying collateral; loan concentrations; and other external factors such as competition and regulatory environment. Adjustments for specific lending relationships, particularly impaired loans, are made on a case-by-case basis. Non-impaired retail loan reserve allocations are determined in a similar fashion as those for non-impaired commercial loans, except that retail loans are segmented by type of credit and not a grading system. We regularly review the allowance analysis and make needed adjustments based upon identifiable trends and experience.
A migration analysis is completed quarterly to assist us in determining appropriate reserve allocation factors for non-impaired loans. Our migration analysis takes into account various time periods, with most weight placed on the time frame from December 31, 2010 through September 30, 2017. We believe this time period represents an appropriate range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation factors given current economic conditions and the general consensus of economic conditions in the near future.
Although the migration analysis provides a historical accounting of our net loan losses, it is not able to fully account for environmental factors that will also very likely impact the collectability of our commercial loans as of any quarter-end date. Therefore, we incorporate the environmental factors as adjustments to the historical data. Environmental factors include both internal and external items. We believe the most significant internal environmental factor is our credit culture and the relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external environmental factor being the assessment of the current economic environment and the resulting implications on our commercial loan portfolio. During the third quarter of 2017, we adjusted the economic conditions environmental factor, which resulted in an increased loan loss reserve level of $0.6 million.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estatemortgage loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’screditors’ rights in order to preserve our collateral position.
See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 – Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.
The allowance for originated loans equaled $18.8$51.6 million, as of September 30, 2017, or 0.9%1.19% of total originated loans, outstanding, compared to $17.9 million, or 0.9% of total originated loans outstanding at December 31, 2016. We also had an allowance for acquired loans as of September 30, 2017 and December 31, 2016, equaling $0.4 million and $0.1 million, respectively. The allowance equaled 233%855% of nonperforming loans, as of September 30, 2017, compared to 302% as of DecemberMarch 31, 2016.
MERCANTILE BANK CORPORATION
2024. As of September 30, 2017,March 31, 2024, the allowance for originated loans was comprised of $16.2$49.1 million in general reserves relating to non-impaired loans, $2.1 million in specific reserve allocations relating to nonaccrualperforming loans and $0.5$2.5 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings. Troubled debt restructurings totaled $12.0 million at September 30, 2017, consisting of $2.6 million that are on nonaccrual status and $9.4 million that are on accrual status. The latter, while considered and accounted for as impaired loans in accordance with accounting guidelines, is not included in our nonperforming loan totals. Impaired loansloans. Loans with an aggregate carrying value of $0.6$0.4 million as of September 30, 2017March 31, 2024 had been subject to previous partial charge-offs aggregating $0.7 million. Those partial charge-offs were recorded as follows: $0.1 million in 2017, less than $0.1 million in 2016, 2015, 2013 and 2012, $0.4 million in 2011 and $0.2 million in 2010.over the past several years. As of September 30, 2017,March 31, 2024, there were no specific reserves allocated to impaired loans that had been subject to a previous partial charge-off.
The following table provides a breakdown of our originated and acquired loans categorized as troubled debt restructurings:
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Although we believe the allowance is adequate to absorb loan losses in our originated loan portfolio as they arise, there can be no assuranceassurance that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.
The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the period ended March 31, 2024.
(Dollars in thousands) | Allowance for Credit Losses | Total Loans | Allowance for Credit Losses to Total Loans | Nonaccrual Loans | Nonaccrual Loans to Total Loans | Allowance for Credit Losses to Nonaccrual Loans | Net Charge-Offs | Annualized Net Charge-Offs to Average Loans | ||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 9,178 | $ | 1,222,637 | 0.75 | % | $ | 2,668 | 0.22 | % | 344.00 | % | $ | (271 | ) | (0.09 | )% | |||||||||||||||
Vacant land, land development and residential construction | 387 | 75,091 | 0.52 | 0 | 0 | NA | (1 | ) | (0.00 | ) | ||||||||||||||||||||||
Real estate – owner occupied | 7,092 | 719,338 | 0.99 | 0 | 0 | NA | (57 | ) | (0.00 | ) | ||||||||||||||||||||||
Real estate – non-owner occupied | 10,141 | 1,045,615 | 0.97 | 0 | 0 | NA | 0 | 0.00 | ||||||||||||||||||||||||
Real estate – multi-family and residential rental | 3,420 | 366,961 | 0.93 | 0 | 0 | NA | (4 | ) | (0.00 | ) | ||||||||||||||||||||||
Total commercial | 30,218 | 3,429,642 | 0.88 | 2,668 | 0.08 | 1,132.61 | (333 | ) | (0.00 | ) | ||||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||
1-4 family mortgages | 18,580 | 840,653 | 2.21 | 3,236 | 0.38 | 574.17 | (70 | ) | (0.00 | ) | ||||||||||||||||||||||
Other consumer | 2,825 | 51,711 | 5.46 | 135 | 0.26 | NA | (21 | ) | (0.00 | ) | ||||||||||||||||||||||
Total retail | 21,405 | 892,364 | 2.40 | 3,371 | 0.38 | 634.97 | (91 | ) | (0.00 | ) | ||||||||||||||||||||||
Unallocated | 15 | 0 | 0 | 0 | 0 | 0 | 0 | 0.00 | ||||||||||||||||||||||||
Total | $ | 51,638 | $ | 4,322,006 | 1.19 | % | $ | 6,039 | 0.14 | % | 855.08 | % | $ | (424 | ) | (0.04 | )% | |||||||||||||||
Securities available for sale increased $2.0decreased $7.9 million during the first nine monthsquarter of 2017,2024, totaling $330$609 million as of September 30, 2017. Purchases during the first nine months of 2017, consisting almost exclusivelyMarch 31, 2024. There were no purchases of U.S. Government agency bonds ($23.7 million),during the first quarter of 2024, while proceeds from maturities aggregated $4.0 million. There were no purchases of U.S. Government issued oragency guaranteed mortgage-backed securities ($7.8 million) and municipal bonds ($18.8 million), totaled $50.3 million. Proceeds from matured and called U.S. Government agency bonds and municipal bonds during the first nine monthsquarter of 2017 totaled $17.3 million and $18.4 million, respectively, with another $10.4 million2024, while proceeds from principal paydowns on U.S. Government agency issued or guaranteed mortgage-backed securities. In addition, proceeds from the sale of U.S. Government agency issued or guaranteed mortgage-backed securities andaggregated $1.1 million. Purchases of municipal bonds totaled $5.0$0.6 million and $1.7 million, respectively.during the first quarter of 2024, while proceeds from matured municipal bonds totaled $0.2 million. At September 30, 2017,March 31, 2024, the portfolio was primarily comprised of U.S. Government agency bonds (49%(63%), municipal bonds (39%(32%) and U.S. Government agency issued or guaranteed mortgage-backed securities (12%(5.0%). All of our securities are currently designated as available for sale, and are therefore stated at fair value. The fair value of securities designated as available for sale at September 30, 2017March 31, 2024 totaled $330$609 million, including a net unrealized loss of $2.7$67.1 million. The net unrealized loss equaled $63.9 million as of December 31, 2023. 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. We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity for our daily operations. In addition, the securities portfolio serves a primary interest rate risk management function. We expect any upcoming purchases during the remainder of 2017 to generally consist of U.S. Government agency bonds and municipal bonds, with the securities portfolio maintained at about 11%12% to 15% of total assets.
FHLBI stock totaled $11.0 million as of September 30, 2017, compared to $8.0 million as of December 31, 2016. The $3.0 million increase reflects additional stock purchased in association with an increase in outstanding advances during the first nine months of 2017. Our investment in FHLBI stock is necessary to engage in their advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.
MERCANTILE BANK CORPORATION
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies and municipal bonds are generally determined on a monthly basis with the assistance of a third partythird-party vendor. Evaluated pricing models that vary by type of security and incorporate available market data are utilized. Standard inputs include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The market value of certain non-rated securities issued by relatively small municipalities generally located within our markets is estimated at carrying value. We believe our valuation methodology provides for a reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.
Interest-bearing balances, primarily consistingFHLBI stock totaled $21.5 million as of excessMarch 31, 2024, unchanged from December 31, 2023. Our investment in FHLBI stock is necessary to engage in their advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.
Interest-earning deposits, a vast majority of which is comprised of funds deposited aton deposit with the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate sensitivity. Duringaveraged $150 million during the first nine monthsquarter of 2017,2024, compared to $31.1 million during the first quarter of 2023. The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of these funds equaled $75.0 million, or 2.6% of average earning assets. We expect the level of these funds to averageon balance sheet liquidity. Historically, we have maintained interest-earning deposits at approximately 1% to 2% of average earning assets in future quarters.$75 million.
Net premises and equipment equaled $45.6$50.8 million at September 30, 2017, an increase of $0.1 million during the first nine months of 2017. Net purchases during the first nine months of 2017 totaled $4.2 million, while depreciation expense aggregated to $2.2 million. Other real estate owned equaled $2.3 million as of September 30, 2017,March 31, 2024, compared to $0.5$50.9 million as of December 31, 2016. During2023. Depreciation expense totaled $1.6 million during the thirdfirst quarter of 2017, a facility2024, while investments associated with a carrying valuerenovations of $1.6 million was transferred from fixed assets to other estate owned. This facility, located near our main office, was originally acquired for potential future bank operations; however, we recently decided we no longer need the facility for that purpose. We expect to sell this facility within the next six months at a price that approximates the carrying value. While we expect further transfers from loans to other real estate owned in future periods reflecting our collection efforts on some impaired lending relationships, we believe the overall strong qualityexisting facilities totaled $1.5 million.
Total deposits increased $114$107 million during the first nine monthsquarter of 2017, totaling $2.49 billion at September 30, 2017. Out-of-area2024, providing for an annualized growth rate of about 11%. Growth in money market deposit accounts and time deposits increased $28.5more than offset a reduction in noninterest-bearing business checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $620 million, or about 13% of total funds, as of March 31, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.
Noninterest-bearing deposits decreased $113 million during the first nine monthsquarter of 2017, and as a percent of total deposits, equaled 4.2% as of September 30, 2017, compared to 3.2% as of December 31, 2016.
Noninterest-bearing checking accounts increased $15.4 million during the first nine months of 2017,2024, in large part reflecting growth from deposit account openings as partthe aforementioned customary level of recently established commercial lending relationshipscustomers’ tax and transfers from closed sweep accounts.bonus payments and partnership distributions. Interest-bearing checking accounts increased $27.3declined $13.5 million, whileand savings deposits declined $11.5were down $3.0 million. Money market deposit accounts increased $132$180 million whileand local time deposits $100,000were up $50.9 million, primarily reflecting growth in deposits from existing customers and over declined $82.8 million, in large part reflecting one depositor transferring their fundsinitial deposits from time deposits to money market accounts. This negotiated transfer was completed at the request of the depositor to ease recordkeeping burdens; although the funds are no longer in time deposit products, we believe the stability of this long-standing deposit relationship is unchanged. In addition, money market deposit accounts increased due to an enhanced high balance money market deposit account product offering. Local time deposits under $100,000 increased $4.9 million.new customers.
Sweep accountsUninsured deposits totaled approximately $1.9 billion, or 47% of total deposits, as of March 31, 2024, compared to approximately $1.9 billion, or 48% of total deposits, as of December 31, 2023. The uninsured amounts are estimates based on the methodologies and assumptions we use for regulatory reporting requirements.
Securities sold under agreements to repurchase (“sweep accounts”) decreased $9.4$1.1 million during the first nine monthsquarter of 2017,2024, totaling $122$229 million as of September 30, 2017. Total balances inMarch 31, 2024. The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product have been on a declining trend overand the past few years, in large part reflectingsizable balances that many of the customers closingmaintain. The average balance of sweep accounts equaled $217 million during the first quarter of 2024, with a high balance of $247 million and depositing the funds into stand-alone noninterest-bearing checking accounts.a low balance of $166 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-nightovernight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. All of our repurchase agreements are accounted for as secured borrowings.
FHLBI advances increased $45.0decreased $20.8 million during the first nine monthsquarter of 2017, reflecting new2024, totaling $447 million as of March 31, 2024. Bullet advances aggregating $10.0 million were obtained primarily to fund loan growth. Asduring the first quarter of September 30, 2017,2024, while bullet advance maturities aggregated $30.0 million. Payments on amortizing FHLBI advances totaled $220$0.8 million. TheBullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI 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 on our residential mortgage loan portfolio and certain commercial real estate loans.arrangement. Our borrowing line of credit as of September 30, 2017March 31, 2024 totaled approximately $650$908 million, with remaining availability approximating $430based on collateral equaling $464 million.
Shareholders’ equity increased $14.5 million during the first quarter of 2024, equaling $537 million at March 31, 2024. Positively impacting shareholders’ equity during the first quarter was net income of $21.6 million, which was partially offset by the payment of a cash dividend totaling $5.5 million. Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity by $1.0 million. A $2.5 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first quarter of 2024.
Shareholders’ equity was $363 million at September 30, 2017, compared to $341 million at December 31, 2016. The $21.7 million increase during the first nine months of 2017 primarily reflects the positive impact of net income totaling $23.3 million and the negative impact of cash dividends on common shares totaling $8.9 million. Also positively impacting shareholder’s equity during the first nine months of 2017 was a $3.8 million after-tax decline in our net unrealized loss on available for sale securities and an aggregate $1.4 million sale of common stock via our cash dividend reinvestment plan.
Liquidity
Liquidity is measuredmeasured by our ability to raise funds through deposits, borrowed funds, and capital, or cash flow from the repayment of loans and securities. These funds are used to fund loans, meet deposit withdrawals, maintain reserve requirements and operate our company. Liquidity is primarily achieved through local and out-of-area deposits and liquid assets such as securities available for sale, matured and called securities, federal funds sold and interest-bearing balances.interest-earning deposits. Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity.
To assist in providing needed funds and managing interest rate risk, we have regularly obtainedperiodically obtain monies from wholesale funding sources. Wholesale funds, primarily comprised of out-of-area deposits from customers outside of our market areas and FHLBI advances, from the FHLBI, totaled $325$620 million, or 11.5%about 13% of combined deposits and borrowedtotal funds, as of September 30, 2017,March 31, 2024, compared to $251$636 million, or 9.4%about 14% of combined deposits and borrowedtotal funds, as of December 31, 2016. The increase in wholesale funds primarily reflects new brokered deposits and FHLBI advances obtained during the first nine months of 2017 to assist in funding loan growth.2023.
Sweep accounts decreased $9.4decreased $1.1 million during the first nine monthsquarter of 2017,2024, totaling $122$229 million as of September 30, 2017. Total balances inMarch 31, 2024. The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product have been on a declining trend overand the past few years, in large part reflectingsizable balances that many of the customers closingmaintain. The average balance of sweep accounts equaled $217 million during the first quarter of 2024, with a high balance of $247 million and depositing the funds into stand-alone noninterest-bearing checking accounts.a low balance of $166 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-nightovernight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. All of our repurchase agreements are accounted for as secured borrowings.
Information regarding our repurchase agreements as of September 30, 2017March 31, 2024 and during the first ninethree months of 20172024 is as follows:
Outstanding balance at September 30, 2017 | $ | 122,280,000 | ||
Weighted average interest rate at September 30, 2017 | 0.16 | % | ||
Maximum daily balance nine months ended September 30, 2017 | $ | 142,459,000 | ||
Average daily balance for nine months ended September 30, 2017 | $ | 116,947,000 | ||
Weighted average interest rate for nine months ended September 30, 2017 | 0.16 | % |
(Dollars in thousands) | ||||
Outstanding balance at March 31, 2024 | $ | 228,618 | ||
Weighted average interest rate at March 31, 2024 | 3.30 | % | ||
Maximum daily balance three months ended March 31, 2024 | $ | 247,056 | ||
Average daily balance for three months ended March 31, 2024 | $ | 216,674 | ||
Weighted average interest rate for three months ended March 31, 2024 | 3.06 | % |
As a member of FHLBI, we have access to FHLBI advance borrowing programs. FHLBI advances increased $45.0decreased $20.8 million during the first nine monthsquarter of 2017, reflecting new2024, totaling $447 million as of March 31, 2024. Bullet advances primarilyaggregating $10.0 million were obtained during the first quarter of 2024, while bullet advance maturities aggregated $30.0 million. Payments on amortizing FHLBI advances totaled $0.8 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in funding loan growth. As of September 30, 2017,managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI 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 March 31, 2024 totaled $220$908 million, andwith remaining availability based on available collateral we could borrow an additional $430equaling $464 million.
We also havehave the ability to borrow up to $50.0an aggregate $70.0 million on a daily basis through a correspondent bankbanks using an established unsecured federal funds purchased linelines of credit. To provide temporary liquidity, we accessed this lineWe did not access these lines of credit on two occasions in early 2017,during the first instances since Januaryquarter of 2010.2024. In contrast, our interest-bearinginterest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $72.7$140 million during the first nine monthsquarter of 2017.2024. We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago. Using certain municipal bonds as collateral, we could have borrowed up to $20.3$26.6 million as of September 30, 2017.March 31, 2024. We did not utilize this line of credit during the first nine monthsquarter of 20172024 or at any time during the previous eight15 fiscal years, and do not plan to access this line of credit in future periods.
The following table reflects, as of September 30, 2017,March 31, 2024, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:
One Year | One to | Three to | Over | One Year | One to | Three to | Over | |||||||||||||||||||||||||||||||||
or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | or Less | Three Years | Five Years | Five Years | Total | |||||||||||||||||||||||||||||||||||
Deposits without a stated maturity | $ | 1,969,092,000 | $ | 0 | $ | 0 | $ | 0 | $ | 1,969,092,000 | $ | 3,154,715 | $ | 0 | $ | 0 | $ | 0 | $ | 3,154,715 | ||||||||||||||||||||
Time deposits | 287,089,000 | 152,173,000 | 80,689,000 | 0 | 519,951,000 | 716,554 | 91,791 | 44,750 | 0 | 853,095 | ||||||||||||||||||||||||||||||
Short-term borrowings | 122,280,000 | 0 | 0 | 0 | 122,280,000 | 228,618 | 0 | 0 | 0 | 228,618 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 50,000,000 | 40,000,000 | 70,000,000 | 60,000,000 | 220,000,000 | 80,862 | 181,838 | 162,000 | 22,383 | 447,083 | ||||||||||||||||||||||||||||||
Subordinated debentures | 0 | 0 | 0 | 45,347,000 | 45,347,000 | 0 | 0 | 0 | 49,815 | 49,815 | ||||||||||||||||||||||||||||||
Subordinated notes | 0 | 0 | 0 | 89,057 | 89,057 | |||||||||||||||||||||||||||||||||||
Other borrowed money | 0 | 0 | 0 | 3,241,000 | 3,241,000 | 0 | 0 | 0 | 1,171 | 1,171 | ||||||||||||||||||||||||||||||
Property leases | 384,000 | 537,000 | 349,000 | 277,000 | 1,547,000 | |||||||||||||||||||||||||||||||||||
Premises and equipment leases | 1,186 | 1,929 | 1,500 | 1,360 | 5,975 | |||||||||||||||||||||||||||||||||||
The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of March 31, 2024 and December 31, 2023 were as follows:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
Up to three months | $ | 85,365 | $ | 104,400 | ||||
Three months to six months | 85,200 | 86,500 | ||||||
Six months to twelve months | 151,613 | 133,800 | ||||||
Over twelve months | 103,251 | 104,200 | ||||||
Total certificates of deposit | $ | 425,429 | $ | 428,900 | ||||
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. As of September 30, 2017,March 31, 2024, we had a total of $931 million$2.06 billion in unfunded loan commitments and $27.0$19.5 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $801 million$1.83 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $130$235 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management.
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, a 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, weWe have developed a comprehensive contingency funding planplans that providesprovide a framework for meeting liquidity disruptions.
Capital Resources
Shareholders’Shareholders’ equity was $363increased $14.5 million at September 30, 2017, compared to $341 million at December 31, 2016. The $21.7 million increase during the first nine monthsquarter of 2017 primarily reflects the positive impact of net income totaling $23.32024, equaling $537 million and the negative impact of cash dividends on common shares totaling $8.9 million. Also positivelyat March 31, 2024. Positively impacting shareholder’sshareholders’ equity during the first nine monthsquarter was net income of 2017$21.6 million, which was partially offset by the payment of a $3.8cash dividend totaling $5.5 million. Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity by $1.0 million. A $2.5 million after-tax declinedecrease in the market value of our net unrealized loss on available for sale securities andportfolio, reflecting an aggregate $1.4 million sale of common stock via our cash dividend reinvestment plan.
On January 30, 2015, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to timeincrease in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. On April 19, 2016, we announced that our Board of Directors had authorized a $15.0 million expansion of the existing common stock repurchase program. Since inception, we have purchased approximately 956,000 shares of common stock at a total price of $19.5 million, at an average price of $20.38; no shares were purchasedinterest rates, negatively impacted shareholders’ equity during the first nine monthsquarter of 2017. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan, which would also likely be funded from cash dividends paid to us from our bank.2024.
MERCANTILE BANK CORPORATION
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 onon the financial statements. Under the BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of September 30, 2017, our bank would meet all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis as if all such requirements were currently in effect.
As of September 30, 2017,March 31, 2024, our bank’s total risk-based capital ratio was 12.5%13.8%, compared to 13.1%13.4% at December 31, 2016.2023. Our bank’s total regulatory capital increased $14.9$18.3 million during the first nine monthsquarter of 2017,2024, in large part reflecting the net impact of net income totaling $26.4$24.3 million, andwhich was partially offset by cash dividends paid to us aggregating $12.1$7.3 million. Our bank’s total risk-based capital ratio was also impacted by a $251$9.4 million increasedecrease in total risk-weighted assets, primarily resulting from commercial loan growth.assets. As of September 30, 2017,March 31, 2024, our bank’s total regulatory capital equaled $368$713 million, or approximately $74$196 million in excess of the 10.0% minimum whichthat is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of September 30, 2017March 31, 2024 and December 31, 20162023 are disclosed in Note 12 of the Notes to Condensed Consolidated Financial Statements.
Results of Operations
We recorded net income of $8.3$21.6 million, or $0.51 per basic and diluted share, for the third quarter of 2017, compared to net income of $7.8 million, or $0.48 per basic and diluted share, for the third quarter of 2016. We recorded net income of $23.3 million, or $1.41$1.34 per basic and diluted share, for the first nine monthsquarter of 2017,2024, compared towith net income of $23.8$21.0 million, or $1.46$1.31 per basic and diluted share, for the first nine monthsquarter of 2016.2023.
A bank owned life insurance death benefit claim in the first quarterThe higher level of 2017 increased reported net income during the first ninequarter of 2024 compared to the respective 2023 period resulted from increased noninterest income, which more than offset decreased net interest income and higher overhead costs and provision expense. The growth in noninterest income mainly stemmed from increased mortgage banking income, treasury management fees, interest rate swap revenue, and bank owned life insurance income, along with profits generated from an investment in a private equity fund. The increase in bank owned life insurance income primarily resulted from the receipt of death benefit claims during the first three months of 20172024. Net interest income declined as increased yields on, along with growth in, earning assets were more than offset by approximately $1.2 million, or $0.07 per diluted share, whilea higher cost of funds. The increase in overhead costs mainly reflected larger salary and benefit costs and contributions to the repurchase of $11.0 million in trust preferred securities at a 27% discount inFoundation. The provision expense recorded during the first quarter of 20162024 primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and recording of accelerated purchase discount accretion on called U.S. Government agency bonds during the first nine months of 2016 increased reported neta change in a commercial loan environmental factor.
Interest income during the first nine months of 2016 by approximately $1.8 million, or $0.11 per diluted share, and $1.3 million, or $0.08 per diluted share, respectively. Excluding the impacts of these noncore transactions, diluted earnings per share during the first nine months of 2017 and 2016 equaled $1.34 and $1.27, respectively.
Interest income during the third quarter of 20172024 was $33.0$76.7 million, an increase of $3.3$16.2 million, or 11.2%26.8%, from the $29.7$60.5 million earned during the thirdfirst quarter of 2016.2023. The increase in interest income resulted from a higher yield on, and growth in, average earning assets. The yield on average earning assets was 6.06% during the first quarter of 2024, up from 5.35% during the respective 2023 period. The higher yield primarily resulted from an increased yield on loans, reflecting the rising interest rate environment. The yield on loans was 6.65% during the first three months of 2024, up from 5.90% during the respective prior-year period mainly due to higher interest rates on variable-rate commercial loans stemming from the FOMC significantly raising the targeted federal funds rate in an effort to curb elevated inflation levels. The FOMC increased the targeted federal funds rate by 100 basis points during the period of February 2023 through July 2023, during which time average variable-rate commercial loans represented approximately 65% of average total commercial loans. Increased yields on securities and interest-earning deposits, reflecting the rising interest rate environment, along with a change in earning asset mix, comprised of a decrease in lower-yielding securities as a percentage of earning assets, also contributed to the higher yield on average earning assets. Average earning assets equaled $2.99$5.08 billion during the thirdfirst quarter of 2017,2024, up $178$496 million, or 6.3%10.8%, from the level of $2.81$4.59 billion during the thirdfirst quarter of 2016;2023; average loans were up $143$371 million, average interest-earning deposit balances were up $25.3deposits grew $119 million, and average securities were up $10.1increased $6.5 million. The yield on average earning assets was 4.41% during the third quarter of 2017, compared to 4.22% during the third quarter of 2016. The higher yield mainly resulted from an increased yield on loans, which equaled 4.81% in the current-year third quarter compared to 4.57% in the prior-year third quarter. The increased yield on loans was primarily due to a higher yield on commercial loans, which equaled 4.82% in the third quarter of 2017 compared to 4.50% in the third quarter of 2016, in large part resulting from increased rates on variable-rate loans stemming from the Federal Open Market Committee (“FOMC”) raising the targeted federal funds rate by 25 basis points in December of 2016, March of 2017, and June of 2017 and an increased level of purchased credit-impaired loan income, which totaled $1.3 million in the third quarter of 2017 compared to $0.8 million during the third quarter of 2016.
Interest expense during the first quarter of 2024 was $29.4 million, an increase of $17.3 million, or 143%, from the $12.1 million expensed during the first quarter of 2023. The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 1.72% during the first three months of 2023 to 3.27% during the respective current-year period primarily due to higher rates on deposits and borrowings. Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.27% during the first quarter of 2023 to 2.61% during the first quarter of 2024, while the cost of time deposits increased from 2.29% to 4.60% during the respective periods. The higher cost of interest-bearing, non-time deposits mainly resulted from increased rates paid on money market and interest-bearing business checking accounts. A change in funding mix, primarily consisting of a decrease in noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits stemming from deposit migration and new deposit relationships, also contributed to the increased cost of funds. The cost of borrowed funds increased from 2.51% during the first quarter of 2023 to 3.51% during the first quarter of 2024 mainly due to higher costs of sweep accounts and FHLBI advances. The cost of sweep accounts increased from 0.84% during the first three months of 2023 to 3.06% during the first three months of 2024, while the cost of FHLBI advances increased from 2.12% to 2.92% during the respective periods, reflecting the rising interest rate environment. Growth in interest-bearing liabilities also contributed to the increase in interest expense during the first quarter of 2024 compared to the prior-year first quarter. Average interest-bearing liabilities totaled $3.61 billion during the current-year first quarter, compared to $2.86 billion during the first quarter of 2023, representing an increase of $746 million, or 26.1%.
Net interest income during the first nine monthsquarter of 20172024 was $92.6$47.4 million, an increasea decrease of $3.9$1.0 million, or 4.4%2.1%, from the $88.7$48.4 million earned during the first nine months of 2016.respective 2023 period. The increase indecline reflected a lower net interest income resulted from a higher level of average earning assets,margin, which more than offset a slightly lower yield on averagegrowth in earning assets. Average earning assets equaled $2.88 billion duringThe net interest margin was 3.74% in the first nine monthsquarter of 2017, up $141 million, or 5.2%,2024, down from 4.28% in the levelprior-year first quarter due to a higher cost of $2.74 billion during the respective 2016 period; average loans were up $130 million, average interest-earning deposit balances were up $13.9 million and average securities were down $2.5 million. The yield on average earning assets was 4.32% during the first nine months of 2017, compared to 4.34% during the first nine months of 2016. The lower yield resulted from a decreased yield on securities,funds, which more than offset an increased yield on loans.earning assets. The yield on securities was 2.43% duringcost of funds equaled 2.32% in the first nine monthsquarter of 2017, down2024, up from 3.07% during1.07% in the first nine monthsquarter of 20162023 primarily due to a decreased levelhigher costs of accelerated purchase discount accretion related to called U.S. Government agency bonds. Approximately $2.0 million in accelerated purchase discount accretion was recorded asdeposits and borrowed funds, reflecting the impact of the rising interest income during the first nine months of 2016, positively impacting therate environment. The increased yield on average earning assets by nine basis points; a nominal level of accelerated purchase discount accretion was recorded during the first nine months of 2017. The increase in the yield on loans from 4.63% during the first nine months of 2016 to 4.68% during the first nine months of 2017 mainly resulted from a higher yield on commercial loans which more than offset a decreased yield on residential mortgage loans. The yield on commercial loans equaled 4.67% during the first nine months of 2017, up from 4.56% during the respective 2016 period as the positive impacts of the three most recent FOMC rate hikes and increased purchased credit-impaired loan income more than offset the negative impact of loans being originated and renewed at lower rates in light of the ongoing relatively low interest rate environment and competitive pressures. The decline in the yield on residential mortgage loans from 5.33% during the first nine months of 2016 to 4.80% during the first nine months of 2017 primarily reflected the booking of adjustable-rate mortgages with initial rates that were generally lower than the existing portfolio’s average rate.
Interest expense during the third quarter of 2017 was $4.4 million, an increase of $1.1 million, or 34.8%, from the $3.3 million expensed during the third quarter of 2016. The increase in interest expense is primarily attributable to a higher weighted average cost of interest-bearing liabilities, which equaled 0.85% in the third quarter of 2017 compared to 0.66% in the third quarter of 2016. The increase mainly reflects higher costs of certain non-time deposit account categories, borrowed funds, and time deposits, along with a change in the interest-bearing liability mix. The cost of interest-bearing non-time deposit accounts increased from 0.10% during the third quarter of 2016 to 0.35% during the third quarter of 2017, primarily reflecting one large depositor transferring funds from time deposits into a money market account product at rates higher than the average rate on the money market product at the time of transfer and the offering of a high balance money market account product with a higher rate. The cost of borrowed funds increased from 1.41% during the third quarter of 2016 to 1.75% during the third quarter of 2017 primarily due to a change in borrowing mix and an increased cost of FHLBI advances. Average lower-costing sweep accounts represented 27.3% of average borrowed funds during the third quarter of 2017, down from 39.6% during the prior-year third quarter, while average higher-costing FHLBI advances represented 60.4% and 47.6% of average borrowed funds during the respective periods. The cost of FHLBI advances increased from 1.47% during the third quarter of 2016 to 1.70% during the third quarter of 2017. The cost of time deposits increased from 1.13% during the third quarter of 2016 to 1.26% during the current-year third quarter primarily due to higher costs of public unit certificates of deposit $100,000 and over and brokered certificates of deposit $100,000 and over. Average higher-costing FHLBI advances represented 11.7% of average interest-bearing liabilities during the third quarter of 2017, up from 9.1% during the prior-year third quarter. Longer-term FHLBI advances totaling $90 million were obtained during the first nine months of 2017 to meet loan funding and other liquidity needs; the advances were longer-term in nature to meet interest rate risk management goals.
MERCANTILE BANK CORPORATION
Interest expense during the first nine months of 2017 was $11.3 million, an increase of $2.0 million, or 21.3%, from the $9.3 million expensed during the first nine months of 2016. The increase is mainly attributable to a higher weighted average cost of interest-bearing liabilities, which equaled 0.77% during the first nine months of 2017 compared to 0.65% during the respective 2016 period. The increase in the weighted average cost of interest-bearing liabilities primarily reflects higher costs of certain non-time deposit account categories and borrowed funds. The cost of interest-bearing non-time deposit accounts increased from 0.10% during the first nine months of 2016 to 0.24% during the first nine months of 2017, mainly reflecting the aforementioned large depositor transferring funds from time deposits to a money market account and the offering of a high balance money market account. The cost of borrowed funds increased from 1.45% during the first nine months of 2016 to 1.66% during the first nine months of 2017 primarily due to a change in borrowing mix and an increased cost of FHLBI advances. Average lower-costing sweep accounts represented 30.6% of average borrowed funds during the first nine months of 2017, down from 44.6% during the first nine months of 2016, while average higher-costing FHLBI advances represented 56.8% and 41.1% of average borrowed funds during the respective periods. An increase in the cost of time deposits and a change in interest-bearing liability mix also contributed to the higher weighted average cost of interest-bearing liabilities during the first nine months of 2017 compared to the respective 2016 period. The cost of time deposits increased from 1.13% during the first nine months of 2016 to 1.21% during the first nine months of 2017, primarily reflecting higher costs of public unit certificates of deposit $100,00 and over and brokered certificates of deposit $100,000 and over. Average higher-costing FHLBI advances represented 11.1% of average interest-bearing liabilities during the first nine months of 2017, up from 7.3% during the respective 2016 period. Longer-term FHLBI advances totaling $90 million were obtained during the first nine months of 2017 to meet loan funding and other liquidity needs.
Net interest income during the third quarter of 2017 was $28.6 million, an increase of $2.2 million, or 8.3%, from the $26.4 million earned during the third quarter of 2016. The increase was due to growth in average earning assets and a higher net interest margin. The net interest margin increased from 3.76% in the third quarter of 2016 to 3.83% in the current-year third quarter due to an increased yield on average earning assets, primarily reflecting a higher yield on commercial loans. The higher commercial loan yield primarily resulted from increased interest rates on variable-rate commercial loans stemming from the aforementioned three FOMC rate hikes and a higher level of purchased credit-impaired loan income. The cost of funds equaled 0.58% during the third quarter of 2017, up from 0.46% during the prior-year third quarter primarily due to higher costs of certain non-time deposit account categories, borrowed funds, and time deposits, along with a change in interest-bearing liability mix.
Net interest income during the first nine months of 2017 was $81.3 million, an increase of $1.9 million, or 2.4%, from the $79.4 million earned during the first nine months of 2016. The increase was due to an increased level of average earning assets, which more than offset a lower net interest margin. The net interest margin declined from 3.89% during the first nine months of 2016 to 3.80% during the first nine months of 2017 due to a slight decline in the yield on average earning assets and an increased cost of funds. The lower yield on average earning assets resulted from a decreased yield on securities, primarily reflecting a decreased level of accelerated purchase discount accretion on called U.S. Government agency bonds, which more than offset an increased yield on loans, mainly reflecting higher interest rates on variable-rate commercial loans stemming from the previously-mentioned FOMC rate hikes and a higher level of purchased credit-impaired commercial loan income. The cost of funds equaled 0.52% during the first nine months of 2017, up from 0.45% during the first nine months of 2016 primarily due to higher costs of certain non-time deposit account categories and borrowed funds.hikes.
The following table sets forth certain information relating to our consolidatedconsolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the third quarterfirst quarters of 20172024 and 2016.2023. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. Tax-exempt securities interest income and yield for the first quarters of 2024 and 2023 have been computed on a tax equivalent basis using a marginal tax rate of 35%21.0%. Securities interest income was increased by $213,000 and $198,000$60,000 in the third quarterfirst quarters of 20172024 and 2016, respectively,2023 for this non-GAAP, but industry standard, adjustment. This adjustmentThese adjustments equated to a three basis point increaseincreases in our net interest margin duringof less than one basis point for both the third quarter of 2017 and the third quarter of 2016.
periods.
Quarters ended September 30, | Quarters ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2 0 1 7 | 2 0 1 6 | 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 2,534,364 | $ | 30,746 | 4.81 | % | $ | 2,391,620 | $ | 27,553 | 4.57 | % | $ | 4,299,163 | $ | 71,270 | 6.65 | % | $ | 3,928,329 | $ | 57,154 | 5.90 | % | ||||||||||||||||||||||||
Investment securities | 339,125 | 2,119 | 2.50 | 328,993 | 2,231 | 2.71 | 634,099 | 3,481 | 2.20 | 627,628 | 3,067 | 1.95 | ||||||||||||||||||||||||||||||||||||
Other interest-earning assets | 116,851 | 382 | 1.28 | 91,590 | 120 | 0.51 | ||||||||||||||||||||||||||||||||||||||||||
Interest-earning deposits | 150,234 | 2,033 | 5.35 | 31,081 | 324 | 4.18 | ||||||||||||||||||||||||||||||||||||||||||
Total interest - earning assets | 2,990,340 | 33,247 | 4.41 | 2,812,203 | 29,904 | 4.22 | 5,083,496 | 76,784 | 6.06 | 4,587,038 | 60,545 | 5.35 | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (18,918 | ) | (17,375 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses | (51,046 | ) | (43,076 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Other assets | 248,631 | 245,496 | 352,225 | 311,915 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 3,220,053 | $ | 3,040,324 | $ | 5,384,675 | $ | 4,855,877 | ||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | 1,648,235 | $ | 2,652 | 0.64 | % | $ | 1,572,424 | $ | 1,924 | 0.49 | % | $ | 2,790,307 | $ | 22,224 | 3.19 | % | $ | 2,184,406 | $ | 7,907 | 1.47 | % | ||||||||||||||||||||||||
Short-term borrowings | 107,355 | 45 | 0.17 | 147,960 | 62 | 0.17 | 216,674 | 1,654 | 3.06 | 199,880 | 459 | 0.93 | ||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 238,043 | 1,033 | 1.70 | 178,000 | 670 | 1.47 | 460,251 | 3,399 | 2.92 | 338,026 | 1,794 | 2.12 | ||||||||||||||||||||||||||||||||||||
Other borrowings | 48,512 | 660 | 5.32 | 48,013 | 600 | 4.89 | 139,923 | 2,086 | 5.90 | 138,818 | 1,941 | 5.59 | ||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 2,042,145 | 4,390 | 0.85 | 1,946,397 | 3,256 | 0.66 | 3,607,155 | 29,363 | 3.27 | 2,861,130 | 12,101 | 1.72 | ||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 805,650 | 733,600 | 1,175,884 | 1,491,477 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 13,126 | 14,383 | 74,455 | 49,746 | ||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 359,132 | 345,944 | ||||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 527,181 | 453,524 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,220,053 | $ | 3,040,324 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 5,384,675 | $ | 4,855,877 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 28,857 | $ | 26,648 | $ | 47,421 | $ | 48,444 | ||||||||||||||||||||||||||||||||||||||||
Net interest rate spread | 3.56 | % | 3.56 | % | 2.79 | % | 3.63 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest spread on average assets | 3.56 | % | 3.48 | % | 3.53 | % | 4.05 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin on earning assets | 3.83 | % | 3.76 | % | 3.74 | % | 4.28 | % | ||||||||||||||||||||||||||||||||||||||||
A loan loss provision expenseProvisions for credit losses of $1.0$1.3 million was recorded during the third quarter of 2017, compared to a provision expense ofand $0.6 million during the third quarter of 2016. A loan loss provision expense of $2.4 million waswere recorded during the first nine monthsquarters of 2017, compared to a provision expense of $2.3 million during the first nine months of 2016.2024 and 2023, respectively. The provision expense recorded during the thirdcurrent-year first quarter primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in a commercial loan environmental factor, which more than offset the impacts of 2017 primarily reflects an increased allocation relatedimproved economic forecast and changes to the economic conditions environmental factor. Ongoing loan growth also necessitated a portion of the provision expense incurred during the current-year third quarter and accounted for a substantial portion of theportfolio composition. The provision expense recorded during the first nine months of 2017 and both 2016 periods.
MERCANTILE BANK CORPORATION
Net loan charge-offs of $0.1 million were recorded during the third quarter of 2017, compared to $0.2 million during the prior-year third quarter. Net2023 mainly reflected allocations necessitated by loan charge-offs of $1.1 million were recorded during the first nine months of 2017, compared to $0.5 million during the same time period in 2016. Net loan charge-offs associated with one commercial loan relationship accounted for approximately 45%growth. The recording of net loan charge-offsrecoveries and ongoing strong loan quality metrics during both periods in large part mitigated additional reserves associated with the first nine months of 2017. The allowance for originated loans, as a percentage of total originated loans, was 0.9% as of both September 30, 2017, and September 30, 2016. Our allowance for acquired loans totaled $0.4 million as of September 30, 2017, compared to $0.2 million as of September 30, 2016.loan growth.
Noninterest income totaled $10.9 million during the thirdthe first quarter of 2017 was $4.62024, compared to $7.0 million a decrease of $0.7 million, or 12.9%, from the $5.3 million recorded during the prior-year third quarter. Growth in several fee income categories, including credit and debit card fees, mortgage banking activity income, and payroll processing revenue, was more than offset by a decline in other income, which was elevated in the thirdfirst quarter of 2016 as a result of certain noncore transactions, including the reimbursement of $0.4 million in medical insurance premiums charged in prior years and $0.3 million in payments received on purchased commercial credit-impaired loans that had been charged-off prior to the merger and non-pooled purchased commercial credit-impaired loans that went into recovery after the merger. Excluding these noncore transactions, noninterest income increased $0.1 million, or 1.9%, during the third quarter of 2017 compared to the prior-year third quarter.
2023. Noninterest income during the first ninethree months of 2017 was $14.5 million, a decrease of $1.9 million, or 11.8%, from the $16.4 million earned during the same time period in 2016. Noninterest income during the first nine months of 20172024 included a bank owned life insurance death benefit claim of $1.4 million, while noninterest income during the first nine months of 2016 included a $3.0 million gain associated with a trust preferred securities repurchase transaction, $0.5 million in payments received on purchased commercial credit-impaired loans that had been charged-off prior to the merger and non-pooled purchased commercial credit-impaired loans that went into recovery after the merger, a $0.4 million reimbursement of certain medical insurance premiums that were charged in prior years, and a $0.3 million gain related to the sale of an equity investment; excludingclaims totaling $0.7 million. Excluding these transactions, noninterest income increased $0.9$3.2 million, or 7.5%45.6%, in the first nine monthsquarter of 20172024 compared to the respective 2016 period.prior-year first quarter. The increase in core noninterest incomegrowth primarily reflectsstemmed from a higher level of mortgage banking income, resulting frommainly reflecting an increased loan sold percentage, which equaled approximately 74% during the positive impactfirst quarter of strategic initiatives that were implemented2024 compared to approximately 35% during the prior-year first quarter, and higher loan production. Increases in the latter halfall treasury management fee income categories, consisting of 2016, including the hiring of additional loan originators, introduction of newservice charges on accounts, payroll servicing fees, and enhanced products, loan programs and increased marketing efforts. Increased credit and debit card feesincome, and payroll processing revenue associated with an investment in a private equity fund also contributed to the higher level of core noninterest income. The growth in treasury management fees primarily resulted from the successful marketing of products and services to existing and new customers.
Noninterest expense totaled $29.9 million during the thirdfirst quarter of 2017 was $20.22024, compared to $28.6 million an increaseduring the prior-year first quarter. Overhead costs during the first three months of $0.52024 included contributions to the Foundation totaling $0.7 million, while overhead costs during the respective 2023 period included a $0.4 million write-down of a former branch facility. Excluding these transactions, noninterest expense increased $1.0 million, or 2.8%3.6%, from the $19.7 million expensed during the thirdfirst quarter of 2016.2024 compared to the first quarter of 2023. The higher level of expense primarily resulted from expected increasesincrease in various operating expenses stemming from recent expansion initiatives and increased salarynoninterest expense mainly stemmed from larger salary and benefit costs, reflecting annual employee merit pay increases, the hiring of additional staff, a larger bonus accrual,market adjustments, lower residential mortgage loan deferred salary costs, higher payroll taxes, and greater stock-based compensation expense.
Noninterest expense during the first nine months of 2017 was $59.9 million, an increase of $1.2 million, or 1.9%, from the $58.7 million expensed during the same time period in 2016. The increase was mainly attributable to expected increases in various operating costs associated with recent expansion initiatives and higher salary expense, primarily reflecting annual employee merit pay increases, the hiring of additional staff, and greater stock-based compensation. FDICincreased health insurance premiums during the first nine months of 2017 were $0.7 million, a decrease of $0.4 million, or 36.1%, from the $1.1 million expensed during the first nine months of 2016; the decrease mainly resulted from changes to the deposit insurance assessment calculation that became effective in the third quarter of 2016.claims, which more than offset decreased credit reserves for unfunded loan commitments.
MERCANTILE BANK CORPORATION
During the thirdfirst quarter of 2017,2024, we recorded income before federal income tax of $12.0$27.0 million and a federal income tax expense of $3.7$5.4 million. During the thirdfirst quarter of 2016,2023, we recorded income before federal income tax of $11.5$26.1 million and a federal income tax expense of $3.6$5.1 million. Our effective tax rate was 30.8% during the third quarter of 2017, compared to 31.6% during the respective 2016 period. During the first nine months of 2017, we recorded income before federal income tax of $33.6 million and a federal income tax expense of $10.3 million. During the first nine months of 2016, we recorded income before federal income tax of $34.8 million and a federal income tax expense of $11.0 million. Our effective tax rate was 30.7% during the first nine months of 2017, compared to 31.6% during the respective 2016 period. The increase in federal income tax expense during the third quarter of 2017 compared to the prior-year thirdcurrent-year first quarter resulted from thea higher level of income before federal income tax. The decrease in federal incomeOur effective tax expenserate was 20.1% during the first ninethree months of 20172024, compared to 19.8% during the respective 2016 period resulted from the lower level of income before federal income tax and the aforementioned nontaxable bank owned life insurance death benefit claim, which positively impacted the effective tax rate.prior-year period.
ItemItem 3. Quantitative and Qualitative Disclosures About Market Risk
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 our interest-earning assets over the interest paid on our 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 riskrisk management process seeks to ensure that appropriate policies, procedures, management information systems and internal control procedures are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest rates on our financial condition, including capital adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurementmeasurement 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 our net interest margin during periods of changing market interest rates.
The following table depicts our GAP position as of September 30, 2017:March 31, 2024:
Within | Three to | One to | After | Within | Three to | One to | After | |||||||||||||||||||||||||||||||||
Three | Twelve | Five | Five | Three | Twelve | Five | Five | |||||||||||||||||||||||||||||||||
Months | Months | Years | Years | Total | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Months | Months | Years | Years | Total | |||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans (1) | $ | 1,148,781,000 | $ | 73,714,000 | $ | 669,144,000 | $ | 298,102,000 | $ | 2,189,741,000 | ||||||||||||||||||||||||||||||
Residential real estate loans | 62,583,000 | 21,384,000 | 124,613,000 | 119,945,000 | 328,525,000 | |||||||||||||||||||||||||||||||||||
Consumer loans | 1,762,000 | 1,416,000 | 26,896,000 | 5,932,000 | 36,006,000 | |||||||||||||||||||||||||||||||||||
Securities (2) | 16,329,000 | 24,809,000 | 99,230,000 | 200,758,000 | 341,126,000 | |||||||||||||||||||||||||||||||||||
Other interest-bearing assets | 121,360,000 | 500,000 | 1,250,000 | 0 | 123,110,000 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses | 0 | 0 | 0 | 0 | (19,193,000 | ) | ||||||||||||||||||||||||||||||||||
Loans (1) | $ | 2,443,512 | $ | 104,065 | $ | 1,119,946 | $ | 654,483 | $ | 4,322,006 | ||||||||||||||||||||||||||||||
Securities available for sale (2) | 39,064 | 41,673 | 244,685 | 305,244 | 630,666 | |||||||||||||||||||||||||||||||||||
Interest-earning deposits | 179,871 | 504 | 4,250 | 0 | 184,625 | |||||||||||||||||||||||||||||||||||
Mortgage loans held for sale | 14,393 | 0 | 0 | 0 | 14,393 | |||||||||||||||||||||||||||||||||||
Allowance for credit losses | 0 | 0 | 0 | 0 | (51,638 | ) | ||||||||||||||||||||||||||||||||||
Other assets | 0 | 0 | 0 | 0 | 255,340,000 | 0 | 0 | 0 | 0 | 365,901 | ||||||||||||||||||||||||||||||
Total assets | 1,350,815,000 | 121,823,000 | 921,133,000 | 624,737,000 | $ | 3,254,655,000 | 2,676,840 | 146,242 | 1,368,881 | 959,727 | $ | 5,465,953 | ||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing checking | 405,223,000 | 0 | 0 | 0 | 405,223,000 | |||||||||||||||||||||||||||||||||||
Savings deposits | 333,495,000 | 0 | 0 | 0 | 333,495,000 | |||||||||||||||||||||||||||||||||||
Money market accounts | 404,336,000 | 0 | 0 | 0 | 404,336,000 | |||||||||||||||||||||||||||||||||||
Time deposits under $100,000 | 22,467,000 | 47,619,000 | 80,963,000 | 0 | 151,049,000 | |||||||||||||||||||||||||||||||||||
Time deposits $100,000 & over | 47,735,000 | 169,268,000 | 151,899,000 | 0 | 368,902,000 | |||||||||||||||||||||||||||||||||||
Interest-bearing deposits | 2,188,818 | 547,457 | 136,540 | 0 | 2,872,815 | |||||||||||||||||||||||||||||||||||
Short-term borrowings | 122,280,000 | 0 | 0 | 0 | 122,280,000 | 228,618 | 0 | 0 | 0 | 228,618 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 0 | 20,000,000 | 140,000,000 | 60,000,000 | 220,000,000 | 20,000 | 60,862 | 343,838 | 22,383 | 447,083 | ||||||||||||||||||||||||||||||
Other borrowed money | 48,588,000 | 0 | 0 | 0 | 48,588,000 | 50,986 | 0 | 89,057 | 0 | 140,043 | ||||||||||||||||||||||||||||||
Noninterest-bearing checking | 0 | 0 | 0 | 0 | 826,038,000 | 0 | 0 | 0 | 0 | 1,134,995 | ||||||||||||||||||||||||||||||
Other liabilities | 0 | 0 | 0 | 0 | 12,198,000 | 0 | 0 | 0 | 0 | 105,755 | ||||||||||||||||||||||||||||||
Total liabilities | 1,384,124,000 | 236,887,000 | 372,862,000 | 60,000,000 | 2,892,109,000 | 2,488,422 | 608,319 | 569,435 | 22,383 | 4,929,309 | ||||||||||||||||||||||||||||||
Shareholders' equity | 0 | 0 | 0 | 0 | 362,546,000 | 0 | 0 | 0 | 0 | 536,644 | ||||||||||||||||||||||||||||||
Total liabilities & shareholders' equity | 1,384,124,000 | 236,887,000 | 372,862,000 | 60,000,000 | $ | 3,254,655,000 | 2,488,422 | 608,319 | 569,435 | 22,383 | $ | 5,465,953 | ||||||||||||||||||||||||||||
Net asset (liability) GAP | $ | (33,309,000 | ) | $ | (115,064,000 | ) | $ | 548,271,000 | $ | 564,737,000 | $ | 188,418 | $ | (462,077 | ) | $ | 799,446 | $ | 937,344 | |||||||||||||||||||||
Cumulative GAP | $ | (33,309,000 | ) | $ | (148,373,000 | ) | $ | 399,898,000 | $ | 964,635,000 | $ | 188,418 | $ | (273,659 | ) | $ | 525,787 | $ | 1,463,131 | |||||||||||||||||||||
Percent of cumulative GAP to total assets | (1.0 | )% | (4.6 | )% | 12.3 | % | 29.6 | % | 3.4 | % | (5.0 | )% | 9.6 | % | 26.8 | % | ||||||||||||||||||||||||
(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 |
The second interest rate risk measurement we use 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.
MERCANTILE BANK CORPORATION
Key assumptions in the model include prepayment speedsspeeds 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 September 30, 2017,March 31, 2024, in which it was assumed that changes in market interest rates occurred ranging from up 400300 basis points to down 400300 basis points in equal quarterly instalments over the next twelve months. The following table reflects the suggested impact ondollar and percentage changes in net interest income over the next twelve months in comparison to estimatedthe $197 million in net interest income based onprojected using our balance sheet structure, including the balancesamounts and interestanticipated replacement rates associated with our specific loans, securities, deposits and borrowed funds, as of September 30, 2017.March 31, 2024. The resulting estimates are generally within our policy parameters established to manage and monitor interest rate risk.
Dollar Change | Percent Change | |||||||||||||||
(Dollars in thousands) | Dollar Change | Percent Change | ||||||||||||||
In Net | In Net | In Net | In Net | |||||||||||||
Interest Rate Scenario | Interest Income | Interest Income | Interest Income | Interest Income | ||||||||||||
Interest rates down 400 basis points | $ | (17,930,000 | ) | (16.5% | ) | |||||||||||
Interest rates down 300 basis points | (14,970,000 | ) | (13.8 | ) | $ | (14,300 | ) | (7.3 | )% | |||||||
Interest rates down 200 basis points | (11,240,000 | ) | (10.4 | ) | (12,400 | ) | (6.3 | ) | ||||||||
Interest rates down 100 basis points | (5,890,000 | ) | (5.4 | ) | (5,600 | ) | (2.8 | ) | ||||||||
No change in interest rates | (360,000 | ) | (0.3 | ) | ||||||||||||
Interest rates up 100 basis points | 1,910,000 | 1.8 | 5,400 | 2.7 | ||||||||||||
Interest rates up 200 basis points | 4,160,000 | 3.8 | 11,200 | 5.7 | ||||||||||||
Interest rates up 300 basis points | 6,420,000 | 5.9 | 16,600 | 8.4 | ||||||||||||
Interest rates up 400 basis points | 8,660,000 | 8.0 | ||||||||||||||
The resulting estimates have been significantly impacted by the current interest rate and economic environments, 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, which comprise a sizable portion of our balance sheet.
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth,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.
Item 4. Controls and Procedures
As of September 30, 2017,March 31, 2024, 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 September 30, 2017.March 31, 2024.
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2017March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ItemItem 1. Legal Proceedings.
From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate.
There have been no material changes in our risk factors from those previously discloseddisclosed in our annual report on Form 10-K for the year ended December 31, 2016, and incorporated therein by reference.2023.
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We made no unregistered sales of equity securities during the quarterquarter ended September 30, 2017.March 31, 2024.
Issuer Purchases of Equity Securities
WeOn May 27, 2021, we announced on January 30, 2015 that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. On April 19, 2016, we announcedThe actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a $15.0 million expansionnumber of factors, including the stock repurchase program. No sharesmarket price of our common stock, general market and economic conditions, our capital position, financial performance and alternative uses of capital, and applicable legal requirements. The program may be discontinued at any time. No shares were repurchased during the thirdfirst three months of 2024. Historically, stock repurchases have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank. As of March 31, 2024, repurchases aggregating $6.8 million were available to be made under the current repurchase program.
Repurchases made during the first quarter of 2017.2024 are detailed in the table below.
Period |
| (a) Total Number of Shares Purchased |
|
| (b) Average Price Paid Per Share |
|
| (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| (d) Maximum Number of Shares or Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs |
| ||||
July 1 – 31 |
|
| 0 |
|
| $ | NA |
|
|
| 0 |
|
| $ | 15,505,000 |
|
August 1 – 31 |
|
| 0 |
|
| NA |
|
|
| 0 |
|
|
| 15,505,000 |
| |
September 1 – 30 |
|
| 0 |
|
|
| NA |
|
|
| 0 |
|
|
| 15,505,000 |
|
Total |
|
| 0 |
|
| $ | NA |
|
|
| 0 |
|
| $ | 15,505,000 |
|
Maximum Number | ||||||||||||||||
of Shares or | ||||||||||||||||
| Approximate Dollar | ||||||||||||||||
Total Number of | Value that May Yet | |||||||||||||||
Total | Shares Purchased as | Be | ||||||||||||||
Number of | Average | Part of Publicly | Purchased Under the | |||||||||||||
Shares | Price Paid Per | Announced Plans or | Plans or Programs | |||||||||||||
Period | Purchased | Share | Programs | (Dollars in thousands) | ||||||||||||
January 1 – 31 | 0 | $ | 0 | 0 | $ | 6,818,000 | ||||||||||
February 1 – 29 | 0 | 0 | 0 | 6,818,000 | ||||||||||||
March 1 – 31 | 0 | 0 | 0 | 6,818,000 | ||||||||||||
Total | 0 | $ | 0 | 0 | $ | 6,818,000 | ||||||||||
ItemItem 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
Item 6. Exhibits4. Mine Safety Disclosures.
The Exhibit Index following the Signature Page hereto is incorporated by reference under this item.Not applicable.
Not applicable.
EXHIBIT NO. | EXHIBIT DESCRIPTION |
3.1 | |
3.2 | |
31 | |
32.1 | |
32.2 | |
101 | The following financial information from Mercantile’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements 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 November 6, 2017.May 3, 2024.
MERCANTILE BANK CORPORATION | ||||
By: /s/ Robert B. Kaminski, Jr. | ||||
Robert B. Kaminski, Jr. | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
By: /s/ Charles E. Christmas | |||
Charles E. Christmas | |||
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |||
EXHIBIT INDEX
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