The following table depicts the change in shareholders’ equity for the three months ended June 30, 2020:
The following table depicts the change in shareholders’ equity for the six months ended June 30, 2020:
The following table depicts the change in shareholders’ equity for the three months ended June 30, 2019:
The following table depicts the change in shareholders’ equity for the six months ended June 30, 2019:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited financial statements for the six months ended June 30, 2020 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s two subsidiaries, Mercantile Bank Real Estate Co., LLC and Mercantile Insurance Center, Inc. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended June 30, 2020 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2019.
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 256,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2020. In addition, stock options for approximately 2,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2020. Stock options for approximately 9,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2020.
Approximately 261,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2019. In addition, stock options for approximately 10,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2019. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2019.
Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold prior to maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Federal Home Loan Bank stock is carried at cost.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized or accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Declines in the fair value of debt securities below their amortized cost that are other-than-temporary impairment (“OTTI”) are reflected in earnings or other comprehensive income, as appropriate. For those debt securities whose fair value is less than their amortized cost, we consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and whether we expect to recover the entire amortized cost of the security based on our assessment of the issuer’s financial condition. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, and whether downgrades by bond rating agencies have occurred. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost.
Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Interest income on commercial loans and mortgage loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than when they are 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal and interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of June 30, 2020 and December 31, 2019, we determined the fair value of our mortgage loans held for sale to be $42.8 million and $5.0 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 and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives is included in the gain on sale of loans. Mortgage loans serviced for others totaled approximately $846 million and $727 million as of June 30, 2020, and December 31, 2019, respectively.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Mortgage Banking Activities: Mortgage loan servicing rights, included in “other assets” on the consolidated balance sheet, 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.
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Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the income statement.
Troubled Debt Restructurings: A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons, grant a concession to a borrower considered to be experiencing financial difficulties that we would not otherwise consider. A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest, an extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these concessions. Troubled debt restructurings can be in either accrual or nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans. Accruing troubled debt restructurings are generally excluded from nonperforming loans as it is considered probable that all contractual principal and interest due under the restructured terms will be collected.
In accordance with current accounting guidance, loans modified as troubled debt restructurings are, by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-loan basis similar to other impaired loans as described below under “Allowance for Loan Losses.” Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the allowance will be impacted by the difference between the results of these two measurement methodologies. Loans modified as troubled debt restructurings that subsequently default are factored into the determination of the allowance in the same manner as other defaulted loans.
The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, which was subsequently revised on April 7, 2020. This guidance encourages financial institutions to work prudently with borrowers that are or may be unable to meet their contractual obligations because of the effects of the Coronavirus. Pursuant to the guidance, the federal banking agencies have concluded, in consultation with FASB staff, that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current prior to any relief are not troubled debt restructurings. This guidance complements Section 4013 of the CARES Act, which specified that Coronavirus-related modifications made on loans that were current as of December 31, 2019 and that occur between March 1, 2020 and the earlier of 60 days after the date of termination of the National Emergency or December 31, 2020, as applicable, are not troubled debt restructurings.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
In early April 2020, we developed internal programs of loan payment deferments for commercial and retail borrowers. For commercial borrowers, we offer 90-day (three payments) interest only amendments as well as 90-day (three payments) principal and interest payment deferments. Under the latter program, borrowers are extended a 12-month single payment note at 0% interest in an amount equal to three payments, with loan proceeds used to make the scheduled payments. As of June 30, 2020, we had processed 463 interest only amendments with loan balances aggregating $421 million and 242 principal and interest payment deferments with loan balances totaling $298 million and resulting single payment loans aggregating $8.1 million. The single payment notes receive a loan grade equal to the current loan grade of each respective borrowing relationship. For retail borrowers, we offer 90-day (three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan. As of June 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million. These payment deferral transactions largely applied to the borrowers’ April, May and June of 2020 loan payments.
We have also had some instances where commercial borrowers have subsequently requested and received an additional 90-day (three payments) interest only amendment or 90-day (three payments) principal and interest payment deferment. Under the latter program, the amount equal to the three payments is added to the original deferment note which has nine months remaining to maturity; however, the original 0% interest rate is modified to equal the rate associated with each borrower’s traditional lending relationship with us for the remainder of the term. As of July 31, 2020, we had processed an additional 16 interest only amendments with loan balances aggregating $31.0 million and 21 principal and interest payment deferments with loan balances totaling $117 million and resulting single payment loans aggregating $4.2 million. Additional 90-day (three payments) principal and interest payment deferments for retail borrowers have been nominal with loan balances aggregating less than $2.0 million through July 31, 2020.
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 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)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial institutions are not required to comply with the Current Expected Credit Loss (“CECL”) methodology requirements from the enactment date of the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. An economic forecast is a key component of the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by shelter in place declarations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly revised and there continues to be no economic forecast consensus. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting. We do not use derivatives for trading purposes.
Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income. They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does not apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense.
If designated as a hedge, we formally document the relationship between 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 assets and liabilities on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized immediately in current earnings as noninterest income or expense. We discontinue hedge accounting when we determine the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.
Goodwill and Core Deposit Intangible: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We may elect to perform a qualitative assessment for the annual impairment test. If the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. In 2019, we elected to perform a qualitative assessment for our annual impairment test and concluded it was more likely than not our fair value was greater than its carrying amount; therefore, no further testing was required.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Due to current stressed economic and market conditions, we assessed goodwill for impairment as of March 31, 2020 and June 30, 2020. For March 31, 2020, we used a discounted income approach and a market valuation model, which compared the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill had been impaired. It was determined goodwill was not impaired as of March 31, 2020. For June 30, 2020, we used the Step 0 methodology for which we assessed the macro and microeconomic conditions, industry and market conditions, financial performance, and our underlying stock performance. We concluded it was more likely than not our fair value was greater than its carrying amount; therefore, no further testing was required.
The core deposit intangible that arose from the Firstbank Corporation acquisition was initially measured at fair value and is being amortized into noninterest expense over a ten-year period using the sum-of-the-years-digits methodology.
Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Recent Events: The U.S. economy deteriorated rapidly during the latter part of the first quarter and into the second quarter of 2020 due to the ongoing pandemic of coronavirus disease 2019 (“COVID-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”). COVID-19 is primarily spread between people during close contact, often via small droplets produced by coughing, sneezing or talking. People may also become infected by touching a contaminated surface and then touching their eyes, nose or mouth. There is currently no known vaccine or specific antiviral treatment, with the primary treatment being symptomatic and supportive therapies. Recommended preventive measures include hand washing, covering one’s mouth when coughing and maintaining distance from other people, as well as self-isolation for people who suspect they are infected.
The outbreak was initially identified in Wuhan, China in December 2019. The World Health Organization declared the outbreak to be a Public Health Emergency Concern on January 30, 2020, and then recognized it as a pandemic on March 11, 2020. The first known case in the United States was identified in the State of Washington on January 20, 2020. The White House Coronavirus Task Force was established on January 29, 2020. President Trump declared a Public Health Emergency on January 31, 2020, which was elevated by the President’s declaration of a National Emergency on March 13, 2020 (the “National Emergency”).
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Coronavirus Pandemic has caused severe global socioeconomic disruptions. It has led to the postponement or cancellation of sporting, religious, political and cultural events, as well as widespread supply shortages exacerbated by panic buying. Service industry businesses, such as restaurants, hotels, airlines, cruise lines and movie theaters, have been particularly negatively impacted by the restrictions and stay-at-home orders issued by authorities around a vast majority of the world. The health care industry has also been significantly impacted, from a combination of treating infected patients to the cancellation of medical appointments and elective surgeries. At the current time, it is highly uncertain as to when conditions will begin to return to normal. Most agree that a return to normal conditions will be accomplished in phases, taking into account factors such as regional rates and trends of infections, types of businesses and required social distancing measures. Human behavior will also likely play a significant role as people make individual choices to re-engage in permissible activities.
The first known case in the State of Michigan was identified on March 10, 2020, which triggered a State of Emergency response from Governor Whitmer. Soon thereafter, Governor Whitmer ordered the closure of all K-12 school buildings until early April, which was later amended to suspend all face-to-face instruction for the remainder of the 2019-2020 school year. In mid- March, Governor Whitmer ordered all bars, restaurants, entertainment venues and other similar businesses to partially close for two weeks, and banned all gatherings of more than 50 people for the period of mid- March into early April. On March 24, 2020, Governor Whitmer issued a state-wide stay-at-home order limiting all non-essential travel and discontinuing all non-essential business services and operations. The order was originally set to expire on April 13, 2020; however, the order was extended, and expanded with additional restrictions, until April 30, 2020. On April 24, 2020, Governor Whitmer issued an amended stay-at-home order that was scheduled to expire on May 15, 2020 to replace the stay-at-home order that was scheduled to expire on April 30, 2020. On May 7, 2020, Governor Whitmer issued an amended stay-at-home order that expired on May 28, 2020 to replace the stay-at-home order that was scheduled to expire on May 15, 2020. The amended orders reduced some of the restrictions from the previous orders, permitting certain activities in limited or restricted capacities. The stay-at-home order was lifted effective June 5, 2020; however, restrictions on indoor and outdoor gatherings remain, businesses are required to ensure CDC-recommended guidelines are followed and certain industries remain significantly impacted. An increase in COVID-19 cases in Michigan near the end of the second quarter and into the third quarter has temporarily delayed further re-opening activities, and Governor Whitmer has indicated a willingness to reinstitute restrictions on activities of businesses and consumers.
Responding to the Coronavirus Pandemic and Governor Whitmer’s stay-at-home orders, by March 23, 2020, over 75% of our employees were working from home. In addition, beginning on March 18, 2020 our branch lobbies were allowing face-to-face contact with customers by appointment only. On March 25, 2020, we enhanced our social distancing response by closing our branch lobbies to all customers, with all banking transactions conducted via drive-thru, virtual banking machines, online banking and our call center. We have developed comprehensive social distancing guidelines and associated protocols using information provided by the CDC and other federal and state government agencies, and started to return our employees to their work locations in mid- June. On June 26, 2020, we re-opened our branch lobbies, and virtually all of our employees were back to their physical work locations by July 1, 2020.
In response to the substantial negative impact of the Coronavirus Pandemic and the associated social distancing orders and measures on the United States and global economies, Congress passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was signed by President Trump on March 27, 2020. The CARES Act is in large part a $1.8 trillion spending bill that builds upon two earlier and considerably smaller federal government support measures in the wake of the Coronavirus Pandemic and associated economic fallout. The CARES Act is comprehensive and touches on many facets of federal government assistance and banking regulatory requirements. In addition, the Federal Open Market Committee lowered the targeted federal funds rate by 50 basis points on March 3, 2020 and by another 100 basis points on March 15, 2020, and announced the resumption of quantitative easing.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a negative material impact on our financial condition and results of operations. We are in an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic are likely to result in declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which will necessitate additional provisions for our allowance and reduced net income.
The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s 100% guaranteed 7(a) loan program. The CARES Act authorized up to $350 billion in loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors. The PPP provides 100% guaranteed loans to cover specific operating costs, with the maximum loan size capped at the lesser of 250% of the average monthly payroll costs or $10.0 million. PPP loans are eligible to be forgiven based upon certain criteria. In general, the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent and utilities incurred or paid by the business during a prescribed period beginning on the loan origination date. Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the loan. The loan tenor is 24 months for loans originated prior to June 5, 2020 and 60 months for loans originated on or after June 5, 2020. Loans originated prior to June 5, 2020 can be modified to a tenor of 60 months upon the mutual agreement of the lender and borrower. To date, we have not modified the maturity date of any loans made prior to June 5, 2020. The interest rate on the loan is fixed at 1.00%, with the financial institution receiving a loan origination fee ranging from 1% to 5% of the loan amount paid by the Small Business Administration. The loan origination fees, net of the direct origination costs, totaled $14.7 million during the second quarter of 2020 and are being accreted into interest income on loans using the level yield methodology. The program was originally scheduled to end on June 30, 2020, but was recently modified to now end effective August 8, 2020. Participation in the PPP has had a significant impact on the composition of our loan and deposit portfolios and our net interest income starting during the second quarter of 2020, which is expected to remain for at least most of the remainder of 2020. As of July 31, 2020, we had originated almost 2,200 loans aggregating $550 million under the PPP.
Congress passed, and on April 24, 2020 President Trump signed, legislation which added $300 billion to the PPP. Included in the legislation was a specific allocation of $30 billion for financial institutions under $10 billion.
Under the CARES Act, a PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the federal banking agencies issued an interim final rule allowing financial institutions to exclude PPP loans from the average asset calculation to the degree the PPP loans are financed through the Paycheck Protection Program Lending Facility (“PPPLF”) for the Tier 1 Leverage Capital Ratio.
In April, 2020, the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to small businesses under the PPP. Only PPP loans are eligible to serve as collateral for the PPPLF, with each dollar of PPP loans providing one dollar of advance availability. The maturity date of an extension of credit under the PPPLF will equal the maturity date of the pool of PPP loans pledged to secure the extension of credit. Any principal payments received by the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration or principal payments from the borrower after the initial six-month deferment period, must be used to pay down the PPPLF advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance relationship. The interest rate on PPPLF advances is fixed at 0.35%. No PPPLF advances can be obtained after September 30, 2020. We obtained a PPPLF advance in the amount of $43.7 million in late April 2020 and paid it off in full in early June 2020. As of June 30, 2020, we had no advances outstanding under the PPPLF. We may obtain additional PPPLF advances as our borrowers utilize PPP loan proceeds for permissible purposes.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Standards: In February 2016, the FASB issued ASU 2016-02, Leases. This ASU (as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20) establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU was effective for annual and interim periods beginning after December 15, 2018. The adoption of this new standard as of January 1, 2019 resulted in the recording of a ROU asset and associated lease liability of approximately $1.3 million.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i) financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019.
Financial institutions are not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31, 2020. We elected to postpone CECL adoption as permitted. An economic forecast is a key component of the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by shelter in place declarations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments, and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly updated and there is no economic forecast consensus. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted. Had we adopted CECL on January 1, 2020, the allowance would have decreased by $1.0 million, resulting in an increase to retained earnings of $0.8 million.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SECURITIES
The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows:
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Amortized
Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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Fair
Value
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June 30, 2020
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U.S. Government agency debt obligations
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$
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161,575,000
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$
|
957,000
|
|
|
$
|
(35,000
|
)
|
|
$
|
162,497,000
|
|
Mortgage-backed securities
|
|
|
34,765,000
|
|
|
|
1,269,000
|
|
|
|
(1,000
|
)
|
|
|
36,033,000
|
|
Municipal general obligation bonds
|
|
|
97,171,000
|
|
|
|
5,296,000
|
|
|
|
0
|
|
|
|
102,467,000
|
|
Municipal revenue bonds
|
|
|
5,947,000
|
|
|
|
217,000
|
|
|
|
0
|
|
|
|
6,164,000
|
|
Other investments
|
|
|
500,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
299,958,000
|
|
|
$
|
7,739,000
|
|
|
$
|
(36,000
|
)
|
|
$
|
307,661,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt obligations
|
|
$
|
185,103,000
|
|
|
$
|
2,449,000
|
|
|
$
|
(1,142,000
|
)
|
|
$
|
186,410,000
|
|
Mortgage-backed securities
|
|
|
41,998,000
|
|
|
|
554,000
|
|
|
|
(82,000
|
)
|
|
|
42,470,000
|
|
Municipal general obligation bonds
|
|
|
98,245,000
|
|
|
|
2,864,000
|
|
|
|
(30,000
|
)
|
|
|
101,079,000
|
|
Municipal revenue bonds
|
|
|
4,133,000
|
|
|
|
63,000
|
|
|
|
0
|
|
|
|
4,196,000
|
|
Other investments
|
|
|
500,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,979,000
|
|
|
$
|
5,930,000
|
|
|
$
|
(1,254,000
|
)
|
|
$
|
334,655,000
|
|
Securities with unrealized losses at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt obligations
|
|
$
|
16,370,000
|
|
|
$
|
35,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
16,370,000
|
|
|
$
|
35,000
|
|
Mortgage-backed securities
|
|
|
0
|
|
|
|
0
|
|
|
|
26,000
|
|
|
|
1,000
|
|
|
|
26,000
|
|
|
|
1,000
|
|
Municipal general obligation bonds
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Municipal revenue bonds
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,370,000
|
|
|
$
|
35,000
|
|
|
$
|
26,000
|
|
|
$
|
1,000
|
|
|
$
|
16,396,000
|
|
|
$
|
36,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SECURITIES (Continued)
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt obligations
|
|
$
|
25,650,000
|
|
|
$
|
349,000
|
|
|
$
|
73,913,000
|
|
|
$
|
793,000
|
|
|
$
|
99,563,000
|
|
|
$
|
1,142,000
|
|
Mortgage-backed securities
|
|
|
2,838,000
|
|
|
|
28,000
|
|
|
|
10,423,000
|
|
|
|
54,000
|
|
|
|
13,261,000
|
|
|
|
82,000
|
|
Municipal general obligation bonds
|
|
|
3,755,000
|
|
|
|
18,000
|
|
|
|
994,000
|
|
|
|
12,000
|
|
|
|
4,749,000
|
|
|
|
30,000
|
|
Municipal revenue bonds
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,243,000
|
|
|
$
|
395,000
|
|
|
$
|
85,330,000
|
|
|
$
|
859,000
|
|
|
$
|
117,573,000
|
|
|
$
|
1,254,000
|
|
We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those 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 June 30, 2020, ten debt securities with fair values totaling $16.4 million have unrealized losses aggregating less than $0.1 million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.
The amortized cost and fair value of debt securities at June 30, 2020, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SECURITIES (Continued)
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 2020
|
|
4.11%
|
|
|
$
|
410,000
|
|
|
$
|
412,000
|
|
Due in 2021 through 2025
|
|
1.97
|
|
|
|
60,097,000
|
|
|
|
61,369,000
|
|
Due in 2026 through 2030
|
|
2.13
|
|
|
|
133,632,000
|
|
|
|
137,347,000
|
|
Due in 2031 and beyond
|
|
2.64
|
|
|
|
70,554,000
|
|
|
|
72,000,000
|
|
Mortgage-backed securities
|
|
2.57
|
|
|
|
34,765,000
|
|
|
|
36,033,000
|
|
Other investments
|
|
4.50
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
2.27%
|
|
|
$
|
299,958,000
|
|
|
$
|
307,661,000
|
|
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $98.5 million and $96.5 million at June 30, 2020 and December 31, 2019, respectively, with estimated market values of $104 million and $99.4 million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of $4.6 million and $5.9 million at June 30, 2020 and December 31, 2019, respectively, with estimated market values of $4.6 million and $5.9 million, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.
The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $168 million and $103 million at June 30, 2020 and December 31, 2019, 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.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Our total loans at June 30, 2020 were $3.33 billion compared to $2.86 billion at December 31, 2019, an increase of $476 million, or 16.7%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2020 and December 31, 2019, and the percentage change in loans from the end of 2019 to the end of the second quarter of 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Increase
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial (1)
|
|
$
|
1,307,455,000
|
|
|
|
39.2
|
%
|
|
$
|
846,551,000
|
|
|
|
29.6
|
%
|
|
|
54.4
|
%
|
Vacant land, land development, and residential construction
|
|
|
52,984,000
|
|
|
|
1.6
|
|
|
|
56,119,000
|
|
|
|
2.0
|
|
|
|
(5.6
|
)
|
Real estate – owner occupied
|
|
|
567,621,000
|
|
|
|
17.0
|
|
|
|
579,003,000
|
|
|
|
20.3
|
|
|
|
(2.0
|
)
|
Real estate – non-owner occupied
|
|
|
841,145,000
|
|
|
|
25.2
|
|
|
|
835,346,000
|
|
|
|
29.2
|
|
|
|
0.7
|
|
Real estate – multi-family and residential rental
|
|
|
132,047,000
|
|
|
|
4.0
|
|
|
|
124,525,000
|
|
|
|
4.4
|
|
|
|
6.0
|
|
Total commercial
|
|
|
2,901,252,000
|
|
|
|
87.0
|
|
|
|
2,441,544,000
|
|
|
|
85.5
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
64,743,000
|
|
|
|
2.0
|
|
|
|
75,374,000
|
|
|
|
2.6
|
|
|
|
(14.1
|
)
|
1-4 family mortgages
|
|
|
367,061,000
|
|
|
|
11.0
|
|
|
|
339,749,000
|
|
|
|
11.9
|
|
|
|
8.0
|
|
Total retail
|
|
|
431,804,000
|
|
|
|
13.0
|
|
|
|
415,123,000
|
|
|
|
14.5
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
3,333,056,000
|
|
|
|
100.0
|
%
|
|
$
|
2,856,667,000
|
|
|
|
100.0
|
%
|
|
|
16.7
|
%
|
|
(1)
|
For June 30, 2020, includes $549 million in loans originated under the Paycheck Protection Program.
|
Nonperforming loans as of June 30, 2020 and December 31, 2019 were as follows:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more still accruing interest
|
|
$
|
0
|
|
|
$
|
0
|
|
Nonaccrual loans
|
|
|
3,212,000
|
|
|
|
2,284,000
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
3,212,000
|
|
|
$
|
2,284,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The recorded principal balance of nonperforming loans was as follows:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
98,000
|
|
|
$
|
0
|
|
Vacant land, land development, and residential construction
|
|
|
198,000
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
|
275,000
|
|
|
|
134,000
|
|
Real estate – non-owner occupied
|
|
|
25,000
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
|
0
|
|
|
|
2,000
|
|
Total commercial
|
|
|
596,000
|
|
|
|
136,000
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
250,000
|
|
|
|
255,000
|
|
1-4 family mortgages
|
|
|
2,366,000
|
|
|
|
1,893,000
|
|
Total retail
|
|
|
2,616,000
|
|
|
|
2,148,000
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
3,212,000
|
|
|
$
|
2,284,000
|
|
An age analysis of past due loans is as follows as of June 30, 2020:
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
38,000
|
|
|
$
|
38,000
|
|
|
$
|
1,307,417,000
|
|
|
$
|
1,307,455,000
|
|
|
$
|
0
|
|
Vacant land, land development, and residential construction
|
|
|
0
|
|
|
|
22,000
|
|
|
|
198,000
|
|
|
|
220,000
|
|
|
|
52,764,000
|
|
|
|
52,984,000
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
|
0
|
|
|
|
0
|
|
|
|
181,000
|
|
|
|
181,000
|
|
|
|
567,440,000
|
|
|
|
567,621,000
|
|
|
|
0
|
|
Real estate – non-owner occupied
|
|
|
0
|
|
|
|
25,000
|
|
|
|
0
|
|
|
|
25,000
|
|
|
|
841,120,000
|
|
|
|
841,145,000
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
132,047,000
|
|
|
|
132,047,000
|
|
|
|
0
|
|
Total commercial
|
|
|
0
|
|
|
|
47,000
|
|
|
|
417,000
|
|
|
|
464,000
|
|
|
|
2,900,788,000
|
|
|
|
2,901,252,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
49,000
|
|
|
|
39,000
|
|
|
|
90,000
|
|
|
|
178,000
|
|
|
|
64,565,000
|
|
|
|
64,743,000
|
|
|
|
0
|
|
1-4 family mortgages
|
|
|
238,000
|
|
|
|
96,000
|
|
|
|
429,000
|
|
|
|
763,000
|
|
|
|
366,298,000
|
|
|
|
367,061,000
|
|
|
|
0
|
|
Total retail
|
|
|
287,000
|
|
|
|
135,000
|
|
|
|
519,000
|
|
|
|
941,000
|
|
|
|
430,863,000
|
|
|
|
431,804,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans
|
|
$
|
287,000
|
|
|
$
|
182,000
|
|
|
$
|
936,000
|
|
|
$
|
1,405,000
|
|
|
$
|
3,331,651,000
|
|
|
$
|
3,333,056,000
|
|
|
$
|
0
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO 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, 2019:
|
|
30 – 59
Days
Past Due
|
|
|
60 – 89
Days
Past Due
|
|
|
Greater
Than 89
Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Recorded
Balance
> 89
Days and
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
846,551,000
|
|
|
$
|
846,551,000
|
|
|
$
|
0
|
|
Vacant land, land development, and residential construction
|
|
|
191,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
191,000
|
|
|
|
55,928,000
|
|
|
|
56,119,000
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
|
0
|
|
|
|
0
|
|
|
|
134,000
|
|
|
|
134,000
|
|
|
|
578,869,000
|
|
|
|
579,003,000
|
|
|
|
0
|
|
Real estate – non-owner occupied
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
835,346,000
|
|
|
|
835,346,000
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
124,525,000
|
|
|
|
124,525,000
|
|
|
|
0
|
|
Total commercial
|
|
|
191,000
|
|
|
|
0
|
|
|
|
134,000
|
|
|
|
325,000
|
|
|
|
2,441,219,000
|
|
|
|
2,441,544,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
171,000
|
|
|
|
65,000
|
|
|
|
20,000
|
|
|
|
256,000
|
|
|
|
75,118,000
|
|
|
|
75,374,000
|
|
|
|
0
|
|
1-4 family mortgages
|
|
|
745,000
|
|
|
|
29,000
|
|
|
|
529,000
|
|
|
|
1,303,000
|
|
|
|
338,446,000
|
|
|
|
339,749,000
|
|
|
|
0
|
|
Total retail
|
|
|
916,000
|
|
|
|
94,000
|
|
|
|
549,000
|
|
|
|
1,559,000
|
|
|
|
413,564,000
|
|
|
|
415,123,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans
|
|
$
|
1,107,000
|
|
|
$
|
94,000
|
|
|
$
|
683,000
|
|
|
$
|
1,884,000
|
|
|
$
|
2,854,783,000
|
|
|
$
|
2,856,667,000
|
|
|
$
|
0
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans as of June 30, 2020, and average impaired loans for the three and six months ended June 30, 2020, were as follows:
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Principal
Balance
|
|
Related
Allowance
|
|
Second
Quarter
Average
Recorded
Principal
Balance
|
|
|
Year-To-Date
Average
Recorded
Principal
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
8,784,000
|
|
|
$
|
8,753,000
|
|
|
|
$
|
9,460,000
|
|
|
$
|
9,016,000
|
|
Vacant land, land development and residential construction
|
|
|
538,000
|
|
|
|
453,000
|
|
|
|
|
326,000
|
|
|
|
246,000
|
|
Real estate – owner occupied
|
|
|
4,434,000
|
|
|
|
4,375,000
|
|
|
|
|
4,316,000
|
|
|
|
3,100,000
|
|
Real estate – non-owner occupied
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
12,000
|
|
|
|
67,000
|
|
Real estate – multi-family and residential rental
|
|
|
21,000
|
|
|
|
0
|
|
|
|
|
2,000
|
|
|
|
4,000
|
|
Total commercial
|
|
|
13,802,000
|
|
|
|
13,606,000
|
|
|
|
|
14,116,000
|
|
|
|
12,433,000
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
1,359,000
|
|
|
|
1,274,000
|
|
|
|
|
1,273,000
|
|
|
|
1,252,000
|
|
1-4 family mortgages
|
|
|
4,561,000
|
|
|
|
2,571,000
|
|
|
|
|
2,627,000
|
|
|
|
2,407,000
|
|
Total retail
|
|
|
5,920,000
|
|
|
|
3,845,000
|
|
|
|
|
3,900,000
|
|
|
|
3,659,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded
|
|
$
|
19,722,000
|
|
|
$
|
17,451,000
|
|
|
|
$
|
18,016,000
|
|
|
$
|
16,092,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Second
Quarter
Average
Recorded
Principal
Balance
|
|
|
Year-To-Date
Average
Recorded
Principal
Balance
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,331,000
|
|
|
$
|
1,330,000
|
|
|
$
|
1,006,000
|
|
|
$
|
1,751,000
|
|
|
$
|
1,320,000
|
|
Vacant land, land development and residential construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
192,000
|
|
|
|
128,000
|
|
Real estate – owner occupied
|
|
|
49,000
|
|
|
|
49,000
|
|
|
|
2,000
|
|
|
|
126,000
|
|
|
|
443,000
|
|
Real estate – non-owner occupied
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
3,000
|
|
|
|
85,000
|
|
|
|
57,000
|
|
Real estate – multi-family and residential rental
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total commercial
|
|
|
1,551,000
|
|
|
|
1,550,000
|
|
|
|
1,011,000
|
|
|
|
2,154,000
|
|
|
|
1,948,000
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
596,000
|
|
|
|
577,000
|
|
|
|
339,000
|
|
|
|
486,000
|
|
|
|
486,000
|
|
1-4 family mortgages
|
|
|
662,000
|
|
|
|
662,000
|
|
|
|
162,000
|
|
|
|
638,000
|
|
|
|
544,000
|
|
Total retail
|
|
|
1,258,000
|
|
|
|
1,239,000
|
|
|
|
501,000
|
|
|
|
1,124,000
|
|
|
|
1,030,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded
|
|
$
|
2,809,000
|
|
|
$
|
2,789,000
|
|
|
$
|
1,512,000
|
|
|
$
|
3,278,000
|
|
|
$
|
2,978,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
15,353,000
|
|
|
$
|
15,156,000
|
|
|
$
|
1,011,000
|
|
|
$
|
16,270,000
|
|
|
$
|
14,381,000
|
|
Retail
|
|
|
7,178,000
|
|
|
|
5,084,000
|
|
|
|
501,000
|
|
|
|
5,024,000
|
|
|
|
4,689,000
|
|
Total impaired loans
|
|
$
|
22,531,000
|
|
|
$
|
20,240,000
|
|
|
$
|
1,512,000
|
|
|
$
|
21,294,000
|
|
|
$
|
19,070,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans as of December 31, 2019, and average impaired loans for the three and six months ended June 30, 2019, were as follows:
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Principal
Balance
|
|
Related
Allowance
|
|
Second
Quarter
Average
Recorded
Principal
Balance
|
|
|
Year-To-Date
Average
Recorded
Principal
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
8,129,000
|
|
|
$
|
8,129,000
|
|
|
|
$
|
10,214,000
|
|
|
$
|
9,810,000
|
|
Vacant land, land development and residential construction
|
|
|
85,000
|
|
|
|
85,000
|
|
|
|
|
90,000
|
|
|
|
91,000
|
|
Real estate – owner occupied
|
|
|
715,000
|
|
|
|
667,000
|
|
|
|
|
2,083,000
|
|
|
|
1,996,000
|
|
Real estate – non-owner occupied
|
|
|
178,000
|
|
|
|
178,000
|
|
|
|
|
175,000
|
|
|
|
117,000
|
|
Real estate – multi-family and residential rental
|
|
|
29,000
|
|
|
|
9,000
|
|
|
|
|
89,000
|
|
|
|
68,000
|
|
Total commercial
|
|
|
9,136,000
|
|
|
|
9,068,000
|
|
|
|
|
12,651,000
|
|
|
|
12,082,000
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
1,279,000
|
|
|
|
1,209,000
|
|
|
|
|
1,360,000
|
|
|
|
1,222,000
|
|
1-4 family mortgages
|
|
|
3,272,000
|
|
|
|
1,968,000
|
|
|
|
|
2,201,000
|
|
|
|
2,214,000
|
|
Total retail
|
|
|
4,551,000
|
|
|
|
3,177,000
|
|
|
|
|
3,561,000
|
|
|
|
3,436,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded
|
|
$
|
13,687,000
|
|
|
$
|
12,245,000
|
|
|
|
$
|
16,212,000
|
|
|
$
|
15,518,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Second
Quarter
Average
Recorded
Principal
Balance
|
|
|
Year-To-Date
Average
Recorded
Principal
Balance
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
460,000
|
|
|
$
|
458,000
|
|
|
$
|
202,000
|
|
|
$
|
9,687,000
|
|
|
$
|
8,184,000
|
|
Vacant land, land development and residential construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
|
1,078,000
|
|
|
|
1,078,000
|
|
|
|
982,000
|
|
|
|
1,384,000
|
|
|
|
1,858,000
|
|
Real estate – non-owner occupied
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
47,000
|
|
|
|
101,000
|
|
Real estate – multi-family and residential rental
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
65,000
|
|
|
|
90,000
|
|
Total commercial
|
|
|
1,538,000
|
|
|
|
1,536,000
|
|
|
|
1,184,000
|
|
|
|
11,183,000
|
|
|
|
10,233,000
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
502,000
|
|
|
|
485,000
|
|
|
|
356,000
|
|
|
|
572,000
|
|
|
|
672,000
|
|
1-4 family mortgages
|
|
|
358,000
|
|
|
|
356,000
|
|
|
|
83,000
|
|
|
|
639,000
|
|
|
|
663,000
|
|
Total retail
|
|
|
860,000
|
|
|
|
841,000
|
|
|
|
439,000
|
|
|
|
1,211,000
|
|
|
|
1,335,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded
|
|
$
|
2,398,000
|
|
|
$
|
2,377,000
|
|
|
$
|
1,623,000
|
|
|
$
|
12,394,000
|
|
|
$
|
11,568,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
10,674,000
|
|
|
$
|
10,604,000
|
|
|
$
|
1,184,000
|
|
|
$
|
23,834,000
|
|
|
$
|
22,315,000
|
|
Retail
|
|
|
5,411,000
|
|
|
|
4,018,000
|
|
|
|
439,000
|
|
|
|
4,772,000
|
|
|
|
4,771,000
|
|
Total impaired loans
|
|
$
|
16,085,000
|
|
|
$
|
14,622,000
|
|
|
$
|
1,623,000
|
|
|
$
|
28,606,000
|
|
|
$
|
27,086,000
|
|
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 fair value. Interest income recognized on accruing troubled debt restructurings totaled $0.4 million and $0.2 million during the second quarters of 2020 and 2019, respectively, and $0.6 million and $0.5 million during the first six months of 2020 and 2019, respectively. No interest income was recognized on nonaccrual loans during the second quarter and first six months of 2020 or during the respective 2019 periods. Lost interest income on nonaccrual loans totaled less than $0.1 million during the second quarters of 2020 and 2019, and $0.1 million and less than $0.1 million during the first six months of 2020 and 2019, respectively.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO 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.
Credit quality indicators were as follows as of June 30, 2020:
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 (1)
|
|
$
|
1,008,010,000
|
|
|
$
|
21,500,000
|
|
|
$
|
309,221,000
|
|
|
$
|
545,764,000
|
|
|
$
|
73,394,000
|
|
Grades 5 – 7
|
|
|
289,342,000
|
|
|
|
30,914,000
|
|
|
|
253,695,000
|
|
|
|
294,423,000
|
|
|
|
58,461,000
|
|
Grades 8 – 9
|
|
|
10,103,000
|
|
|
|
570,000
|
|
|
|
4,705,000
|
|
|
|
958,000
|
|
|
|
192,000
|
|
Total commercial
|
|
$
|
1,307,455,000
|
|
|
$
|
52,984,000
|
|
|
$
|
567,621,000
|
|
|
$
|
841,145,000
|
|
|
$
|
132,047,000
|
|
Retail credit exposure – credit risk profiled by collateral type:
|
|
Retail
Home Equity
and Other
|
|
|
Retail
1-4 Family
Mortgages
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
64,493,000
|
|
|
|
364,695,000
|
|
Nonperforming
|
|
|
250,000
|
|
|
|
2,366,000
|
|
Total retail
|
|
$
|
64,743,000
|
|
|
$
|
367,061,000
|
|
|
(1)
|
Included in Commercial and Industrial Loans Grades 1 – 4 are $549 million of loans originated under the Paycheck Protection Program.
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Credit quality indicators were as follows as of December 30, 2019:
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
|
|
$
|
521,920,000
|
|
|
$
|
26,065,000
|
|
|
$
|
351,671,000
|
|
|
$
|
563,087,000
|
|
|
$
|
85,152,000
|
|
Grades 5 – 7
|
|
|
309,824,000
|
|
|
|
29,716,000
|
|
|
|
220,980,000
|
|
|
|
272,124,000
|
|
|
|
39,203,000
|
|
Grades 8 – 9
|
|
|
14,807,000
|
|
|
|
338,000
|
|
|
|
6,352,000
|
|
|
|
135,000
|
|
|
|
170,000
|
|
Total commercial
|
|
$
|
846,551,000
|
|
|
$
|
56,119,000
|
|
|
$
|
579,003,000
|
|
|
$
|
835,346,000
|
|
|
$
|
124,525,000
|
|
Retail credit exposure – credit risk profiled by collateral type:
|
|
Retail
Home Equity
and Other
|
|
|
Retail
1-4 Family
Mortgages
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
75,119,000
|
|
|
|
337,856,000
|
|
Nonperforming
|
|
|
255,000
|
|
|
|
1,893,000
|
|
Total retail
|
|
$
|
75,374,000
|
|
|
$
|
339,749,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
All commercial loans are graded using the 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 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 rating 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 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 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 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.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity in the allowance for loan losses and the recorded investments in loans as of and during the three and six months ended June 30, 2020 are as follows:
|
|
Commercial
Loans
|
|
|
Retail
Loans
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
$
|
21,750,000
|
|
|
$
|
3,078,000
|
|
|
$
|
0
|
|
|
$
|
24,828,000
|
|
Provision for loan losses
|
|
|
6,466,000
|
|
|
|
1,074,000
|
|
|
|
60,000
|
|
|
|
7,600,000
|
|
Charge-offs
|
|
|
(301,000
|
)
|
|
|
(34,000
|
)
|
|
|
0
|
|
|
|
(335,000
|
)
|
Recoveries
|
|
|
47,000
|
|
|
|
106,000
|
|
|
|
0
|
|
|
|
153,000
|
|
Ending balance
|
|
$
|
27,962,000
|
|
|
$
|
4,224,000
|
|
|
$
|
60,000
|
|
|
$
|
32,246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
21,070,000
|
|
|
$
|
2,749,000
|
|
|
$
|
70,000
|
|
|
$
|
23,889,000
|
|
Provision for loan losses
|
|
|
7,039,000
|
|
|
|
1,321,000
|
|
|
|
(10,000
|
)
|
|
|
8,350,000
|
|
Charge-offs
|
|
|
(314,000
|
)
|
|
|
(61,000
|
)
|
|
|
0
|
|
|
|
(375,000
|
)
|
Recoveries
|
|
|
167,000
|
|
|
|
215,000
|
|
|
|
0
|
|
|
|
382,000
|
|
Ending balance
|
|
$
|
27,962,000
|
|
|
$
|
4,224,000
|
|
|
$
|
60,000
|
|
|
$
|
32,246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
1,011,000
|
|
|
$
|
501,000
|
|
|
$
|
0
|
|
|
$
|
1,512,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
26,951,000
|
|
|
$
|
3,723,000
|
|
|
$
|
60,000
|
|
|
$
|
30,734,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,901,252,000
|
|
|
$
|
431,804,000
|
|
|
|
|
|
|
$
|
3,333,056,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
15,156,000
|
|
|
$
|
5,084,000
|
|
|
|
|
|
|
$
|
20,240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
2,886,096,000
|
|
|
$
|
426,720,000
|
|
|
|
|
|
|
$
|
3,312,816,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity in the allowance for loan losses for loans during the three and six months ended June 30, 2019 and the recorded investments in loans as of December 31, 2019 are as follows:
|
|
Commercial
Loans
|
|
|
Retail
Loans
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
$
|
20,211,000
|
|
|
$
|
2,696,000
|
|
|
$
|
228,000
|
|
|
$
|
23,135,000
|
|
Provision for loan losses
|
|
|
1,015,000
|
|
|
|
16,000
|
|
|
|
(131,000
|
)
|
|
|
900,000
|
|
Charge-offs
|
|
|
(2,000
|
)
|
|
|
(75,000
|
)
|
|
|
0
|
|
|
|
(77,000
|
)
|
Recoveries
|
|
|
47,000
|
|
|
|
48,000
|
|
|
|
0
|
|
|
|
95,000
|
|
Ending balance
|
|
$
|
21,271,000
|
|
|
$
|
2,685,000
|
|
|
$
|
97,000
|
|
|
$
|
24,053,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
19,619,000
|
|
|
$
|
2,717,000
|
|
|
$
|
44,000
|
|
|
$
|
22,380,000
|
|
Provision for loan losses
|
|
|
1,579,000
|
|
|
|
118,000
|
|
|
|
53,000
|
|
|
|
1,750,000
|
|
Charge-offs
|
|
|
(2,000
|
)
|
|
|
(250,000
|
)
|
|
|
0
|
|
|
|
(252,000
|
)
|
Recoveries
|
|
|
75,000
|
|
|
|
100,000
|
|
|
|
0
|
|
|
|
175,000
|
|
Ending balance
|
|
$
|
21,271,000
|
|
|
$
|
2,685,000
|
|
|
$
|
97,000
|
|
|
$
|
24,053,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
2,149,000
|
|
|
$
|
387,000
|
|
|
$
|
0
|
|
|
$
|
2,536,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
19,122,000
|
|
|
$
|
2,298,000
|
|
|
$
|
97,000
|
|
|
$
|
21,517,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,441,544,000
|
|
|
$
|
415,123,000
|
|
|
|
|
|
|
$
|
2,856,667,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
10,986,000
|
|
|
$
|
4,070,000
|
|
|
|
|
|
|
$
|
15,056,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
2,430,558,000
|
|
|
$
|
411,053,000
|
|
|
|
|
|
|
$
|
2,841,611,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the three months ended June 30, 2020 were as follows:
|
|
Number of
Contracts
|
|
|
Pre-
Modification
Recorded
Principal
Balance
|
|
|
Post-
Modification
Recorded
Principal
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
2
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
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
|
|
2
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
7
|
|
|
|
438,000
|
|
|
|
439,000
|
|
1-4 family mortgages
|
|
1
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Total retail
|
|
8
|
|
|
|
458,000
|
|
|
|
459,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
10
|
|
|
$
|
464,000
|
|
|
$
|
465,000
|
|
Loans modified as troubled debt restructurings during the six months ended June 30, 2020 were as follows:
|
|
Number of
Contracts
|
|
|
Pre-
Modification
Recorded
Principal
Balance
|
|
|
Post-
Modification
Recorded
Principal
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
8
|
|
|
$
|
6,545,000
|
|
|
$
|
6,542,000
|
|
Vacant land, land development and residential construction
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
8
|
|
|
|
4,261,000
|
|
|
|
3,659,000
|
|
Real estate – non-owner occupied
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total commercial
|
|
16
|
|
|
|
10,806,000
|
|
|
|
10,201,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
10
|
|
|
|
503,000
|
|
|
|
505,000
|
|
1-4 family mortgages
|
|
1
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Total retail
|
|
11
|
|
|
|
523,000
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
27
|
|
|
$
|
11,329,000
|
|
|
$
|
10,726,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans modified as troubled debt restructurings during the three months ended June 30, 2019 were as follows:
|
|
Number of
Contracts
|
|
|
Pre-
Modification
Recorded
Principal
Balance
|
|
|
Post-
Modification
Recorded
Principal
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
3
|
|
|
$
|
14,040,000
|
|
|
$
|
14,337,000
|
|
Vacant land, land development and residential construction
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
1
|
|
|
|
1,567,000
|
|
|
|
1,567,000
|
|
Real estate – non-owner occupied
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total commercial
|
|
4
|
|
|
|
15,607,000
|
|
|
|
15,904,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
4
|
|
|
|
93,000
|
|
|
|
94,000
|
|
1-4 family mortgages
|
|
3
|
|
|
|
122,000
|
|
|
|
122,000
|
|
Total retail
|
|
7
|
|
|
|
215,000
|
|
|
|
216,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
11
|
|
|
$
|
15,822,000
|
|
|
$
|
16,120,000
|
|
Loans modified as troubled debt restructurings during the six months ended June 30, 2019 were as follows:
|
|
Number of
Contracts
|
|
|
Pre-
Modification
Recorded
Principal
Balance
|
|
|
Post-
Modification
Recorded
Principal
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
6
|
|
|
$
|
14,429,000
|
|
|
$
|
14,726,000
|
|
Vacant land, land development and residential construction
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
2
|
|
|
|
2,257,000
|
|
|
|
2,246,000
|
|
Real estate – non-owner occupied
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total commercial
|
|
8
|
|
|
|
16,686,000
|
|
|
|
16,972,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
8
|
|
|
|
163,000
|
|
|
|
164,000
|
|
1-4 family mortgages
|
|
4
|
|
|
|
154,000
|
|
|
|
154,000
|
|
Total retail
|
|
12
|
|
|
|
317,000
|
|
|
|
318,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
20
|
|
|
$
|
17,003,000
|
|
|
$
|
17,290,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended June 30, 2020 (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 loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the six months ended June 30, 2020 (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
|
|
1
|
|
|
|
32,000
|
|
Total retail
|
|
1
|
|
|
|
32,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
1
|
|
|
$
|
32,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended June 30, 2019 (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 loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the six months ended June 30, 2019 (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 CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for loans categorized as troubled debt restructurings during the three months ended June 30, 2020 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
|
|
$
|
12,204,000
|
|
|
$
|
82,000
|
|
|
$
|
3,811,000
|
|
|
$
|
174,000
|
|
|
$
|
3,000
|
|
Charge-Offs
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Payments
|
|
|
(2,143,000
|
)
|
|
|
(2,000
|
)
|
|
|
(20,000
|
)
|
|
|
(4,000
|
)
|
|
|
(2,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
6,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Ending Balance
|
|
$
|
10,067,000
|
|
|
$
|
80,000
|
|
|
$
|
3,791,000
|
|
|
$
|
170,000
|
|
|
$
|
1,000
|
|
|
|
Retail
Home Equity
and Other
|
|
|
Retail
1-4 Family
Mortgages
|
|
Retail Loan Portfolio:
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,452,000
|
|
|
$
|
715,000
|
|
Charge-Offs
|
|
|
0
|
|
|
|
0
|
|
Payments
|
|
|
(175,000
|
)
|
|
|
(20,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
438,000
|
|
|
|
20,000
|
|
Ending Balance
|
|
$
|
1,715,000
|
|
|
$
|
715,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for loans categorized as troubled debt restructurings during the six months ended June 30, 2020 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
|
|
$
|
8,587,000
|
|
|
$
|
85,000
|
|
|
$
|
1,145,000
|
|
|
$
|
178,000
|
|
|
$
|
7,000
|
|
Charge-Offs
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Payments
|
|
|
(4,975,000
|
)
|
|
|
(5,000
|
)
|
|
|
(1,008,000
|
)
|
|
|
(8,000
|
)
|
|
|
(6,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
6,455,000
|
|
|
|
0
|
|
|
|
3,654,000
|
|
|
|
0
|
|
|
|
0
|
|
Ending Balance
|
|
$
|
10,067,000
|
|
|
$
|
80,000
|
|
|
$
|
3,791,000
|
|
|
$
|
170,000
|
|
|
$
|
1,000
|
|
|
|
Retail
Home Equity
and Other
|
|
|
Retail
1-4 Family
Mortgages
|
|
Retail Loan Portfolio:
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,415,000
|
|
|
$
|
724,000
|
|
Charge-Offs
|
|
|
0
|
|
|
|
0
|
|
Payments
|
|
|
(203,000
|
)
|
|
|
(29,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
503,000
|
|
|
|
20,000
|
|
Ending Balance
|
|
$
|
1,715,000
|
|
|
$
|
715,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for loans categorized as troubled debt restructurings during the three months ended June 30, 2019 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
|
|
$
|
15,610,000
|
|
|
$
|
0
|
|
|
$
|
3,695,000
|
|
|
$
|
189,000
|
|
|
$
|
21,000
|
|
Charge-Offs
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Payments
|
|
|
(3,148,000
|
)
|
|
|
0
|
|
|
|
(2,377,000
|
)
|
|
|
(4,000
|
)
|
|
|
(4,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
11,672,000
|
|
|
|
0
|
|
|
|
1,180,000
|
|
|
|
0
|
|
|
|
0
|
|
Ending Balance
|
|
$
|
24,134,000
|
|
|
$
|
0
|
|
|
$
|
2,498,000
|
|
|
$
|
185,000
|
|
|
$
|
17,000
|
|
|
|
Retail
Home Equity
and Other
|
|
|
Retail
1-4 Family
Mortgages
|
|
Retail Loan Portfolio:
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,444,000
|
|
|
$
|
600,000
|
|
Charge-Offs
|
|
|
(18,000
|
)
|
|
|
0
|
|
Payments
|
|
|
(62,000
|
)
|
|
|
(14,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
102,000
|
|
|
|
120,000
|
|
Ending Balance
|
|
$
|
1,466,000
|
|
|
$
|
706,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity for loans categorized as troubled debt restructurings during the six months ended June 30, 2019 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
|
|
$
|
14,138,000
|
|
|
$
|
0
|
|
|
$
|
3,100,000
|
|
|
$
|
210,000
|
|
|
$
|
24,000
|
|
Charge-Offs
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Payments
|
|
|
(4,814,000
|
)
|
|
|
0
|
|
|
|
(2,425,000
|
)
|
|
|
(25,000
|
)
|
|
|
(7,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
|
|
(97,000
|
)
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
14,810,000
|
|
|
|
0
|
|
|
|
1,920,000
|
|
|
|
0
|
|
|
|
0
|
|
Ending Balance
|
|
$
|
24,134,000
|
|
|
$
|
0
|
|
|
$
|
2,498,000
|
|
|
$
|
185,000
|
|
|
$
|
17,000
|
|
|
|
Retail
Home Equity
and Other
|
|
|
Retail
1-4 Family
Mortgages
|
|
Retail Loan Portfolio:
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,402,000
|
|
|
$
|
578,000
|
|
Charge-Offs
|
|
|
(18,000
|
)
|
|
|
0
|
|
Payments
|
|
|
(90,000
|
)
|
|
|
(24,000
|
)
|
Transfers to ORE
|
|
|
0
|
|
|
|
0
|
|
Net Additions/Deletions
|
|
|
172,000
|
|
|
|
152,000
|
|
Ending Balance
|
|
$
|
1,466,000
|
|
|
$
|
706,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO 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:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
946,000
|
|
|
$
|
202,000
|
|
Vacant land, land development, and residential construction
|
|
|
0
|
|
|
|
0
|
|
Real estate – owner occupied
|
|
|
2,000
|
|
|
|
982,000
|
|
Real estate – non-owner occupied
|
|
|
3,000
|
|
|
|
0
|
|
Real estate – multi-family and residential rental
|
|
|
0
|
|
|
|
0
|
|
Total commercial
|
|
|
951,000
|
|
|
|
1,184,000
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
Home equity and other
|
|
|
288,000
|
|
|
|
311,000
|
|
1-4 family mortgages
|
|
|
154,000
|
|
|
|
83,000
|
|
Total retail
|
|
|
442,000
|
|
|
|
394,000
|
|
|
|
|
|
|
|
|
|
|
Total related allowance
|
|
$
|
1,393,000
|
|
|
$
|
1,578,000
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. PREMISES AND EQUIPMENT, NET
Premises and equipment are comprised of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
17,218,000
|
|
|
$
|
17,039,000
|
|
Buildings
|
|
|
55,580,000
|
|
|
|
52,847,000
|
|
Furniture and equipment
|
|
|
21,790,000
|
|
|
|
22,712,000
|
|
|
|
|
94,588,000
|
|
|
|
92,598,000
|
|
Less: accumulated depreciation
|
|
|
35,433,000
|
|
|
|
35,271,000
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
59,155,000
|
|
|
$
|
57,327,000
|
|
Depreciation expense totaled $1.3 million and $0.9 million during the second quarters of 2020 and 2019, respectively. Depreciation expense totaled $2.5 million during the first six months of 2020, compared to $1.9 million during the first six months of 2019.
5. DEPOSITS
Our total deposits at June 30, 2020 totaled $3.26 billion, an increase of $572 million, or 21.3%, from December 31, 2019. The components of our outstanding balances at June 30, 2020 and December 31, 2019, and percentage change in deposits from the end of 2019 to the end of the second quarter of 2020, are as follows:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Percent
Increase
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
1,445,620,000
|
|
|
|
44.3
|
%
|
|
$
|
924,916,000
|
|
|
|
34.4
|
%
|
|
|
56.3
|
%
|
Interest-bearing checking
|
|
|
382,522,000
|
|
|
|
11.7
|
|
|
|
332,373,000
|
|
|
|
12.3
|
|
|
|
15.1
|
|
Money market
|
|
|
541,929,000
|
|
|
|
16.6
|
|
|
|
509,368,000
|
|
|
|
18.9
|
|
|
|
6.4
|
|
Savings
|
|
|
301,881,000
|
|
|
|
9.2
|
|
|
|
269,318,000
|
|
|
|
10.0
|
|
|
|
12.1
|
|
Time, under $100,000
|
|
|
178,838,000
|
|
|
|
5.5
|
|
|
|
198,123,000
|
|
|
|
7.4
|
|
|
|
(9.7
|
)
|
Time, $100,000 and over
|
|
|
334,781,000
|
|
|
|
10.3
|
|
|
|
322,827,000
|
|
|
|
12.0
|
|
|
|
3.7
|
|
Total local deposits
|
|
|
3,185,571,000
|
|
|
|
97.6
|
|
|
|
2,556,925,000
|
|
|
|
95.0
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Out-of-area time, under $100,000
|
|
|
0
|
|
|
NA
|
|
|
|
0
|
|
|
NA
|
|
|
NA
|
|
Out-of-area time, $100,000 and over
|
|
|
76,709,000
|
|
|
|
2.4
|
|
|
|
133,459,000
|
|
|
|
5.0
|
|
|
|
(42.5
|
)
|
Total out-of-area deposits
|
|
|
76,709,000
|
|
|
|
2.4
|
|
|
|
133,459,000
|
|
|
|
5.0
|
|
|
|
(42.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
3,262,280,000
|
|
|
|
100.0
|
%
|
|
$
|
2,690,384,000
|
|
|
|
100.0
|
%
|
|
|
21.3
|
%
|
Total time deposits of more than $250,000 totaled $289 million and $320 million at June 30, 2020 and December 31, 2019, respectively.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 follows:
|
|
Six Months
Ended
June 30,
2020
|
|
|
Twelve Months
Ended
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at end of period
|
|
$
|
167,527,000
|
|
|
$
|
102,675,000
|
|
Average interest rate at end of period
|
|
|
0.10
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
Average daily balance during the period
|
|
$
|
123,486,000
|
|
|
$
|
105,234,000
|
|
Average interest rate during the period
|
|
|
0.13
|
%
|
|
|
0.24
|
%
|
Maximum daily balance during the period
|
|
$
|
167,527,000
|
|
|
$
|
133,411,000
|
|
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 the agreements are recorded as assets of our bank and 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”) advances totaled $394 million at June 30, 2020, and mature at varying dates from November 2021 through June 2027, with fixed rates of interest from 0.55% to 3.18% and averaging 2.06%. FHLBI advances totaled $354 million at December 31, 2019, and were scheduled to mature at varying dates from April 2020 through June 2025, with fixed rates of interest from 1.36% to 3.18% and averaging 2.45%. In June 2020, we executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance portfolio as part our interest rate risk management program. We prepaid seven advances aggregating $70.0 million with maturities ranging from August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the proceeds from seven new advances aggregating $70.0 million with maturities ranging from June 2024 through June 2027 and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9 million were embedded into the fixed rates on the newly obtained advances, equating to 0.22% of the 0.84% average rate of the new advances.
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 June 30, 2020 totaled about $775 million, with remaining availability based on collateral approximating $375 million.
Maturities of currently outstanding FHLBI advances are as follows:
2020
|
|
$
|
0
|
|
2021
|
|
|
20,000,000
|
|
2022
|
|
|
94,000,000
|
|
2023
|
|
|
80,000,000
|
|
2024
|
|
|
80,000,000
|
|
Thereafter
|
|
|
120,000,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. COMMITMENTS AND OFF-BALANCE SHEET RISK
Our bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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 uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on our credit assessment of the borrower. If required, estimated loss exposure resulting from these instruments is expensed and recorded as a liability. There was no liability balance for these instruments as of June 30, 2020 and December 31, 2019.
A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, 2020 and December 31, 2019 follows:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Commercial unused lines of credit
|
|
$
|
862,725,000
|
|
|
$
|
776,493,000
|
|
Unused lines of credit secured by 1 – 4 family residential properties
|
|
|
60,196,000
|
|
|
|
60,858,000
|
|
Credit card unused lines of credit
|
|
|
63,951,000
|
|
|
|
58,199,000
|
|
Other consumer unused lines of credit
|
|
|
23,080,000
|
|
|
|
18,135,000
|
|
Commitments to make loans
|
|
|
175,951,000
|
|
|
|
101,961,000
|
|
Standby letters of credit
|
|
|
21,427,000
|
|
|
|
22,798,000
|
|
|
|
$
|
1,207,330,000
|
|
|
$
|
1,038,444,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of June 30, 2020 and December 31, 2019 (dollars in thousands):
|
|
Level in
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Fair Value
Hierarchy
|
|
|
Carrying
Values
|
|
|
Fair
Values
|
|
|
Carrying
Values
|
|
|
Fair
Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Level 1
|
|
|
$
|
18,930
|
|
|
$
|
18,930
|
|
|
$
|
16,430
|
|
|
$
|
16,430
|
|
Cash equivalents
|
|
Level 2
|
|
|
|
452,297
|
|
|
|
452,297
|
|
|
|
217,301
|
|
|
|
217,301
|
|
Securities available for sale
|
|
(1)
|
|
|
|
307,661
|
|
|
|
307,661
|
|
|
|
334,655
|
|
|
|
334,655
|
|
FHLBI stock
|
|
(2)
|
|
|
|
18,002
|
|
|
|
18,002
|
|
|
|
18,002
|
|
|
|
18,002
|
|
Loans, net
|
|
Level 3
|
|
|
|
3,259,673
|
|
|
|
3,346,702
|
|
|
|
2,827,800
|
|
|
|
2,887,168
|
|
Loans held for sale
|
|
Level 2
|
|
|
|
41,137
|
|
|
|
42,806
|
|
|
|
4,978
|
|
|
|
4,978
|
|
Mortgage servicing rights
|
|
Level 2
|
|
|
|
5,636
|
|
|
|
8,418
|
|
|
|
4,652
|
|
|
|
7,375
|
|
Accrued interest receivable
|
|
Level 2
|
|
|
|
9,290
|
|
|
|
9,290
|
|
|
|
9,944
|
|
|
|
9,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Level 2
|
|
|
|
3,262,280
|
|
|
|
3,237,888
|
|
|
|
2,690,384
|
|
|
|
2,600,452
|
|
Repurchase agreements
|
|
Level 2
|
|
|
|
167,527
|
|
|
|
167,527
|
|
|
|
102,675
|
|
|
|
102,675
|
|
FHLBI advances
|
|
Level 2
|
|
|
|
394,000
|
|
|
|
413,915
|
|
|
|
354,000
|
|
|
|
361,887
|
|
Subordinated debentures
|
|
Level 2
|
|
|
|
47,222
|
|
|
|
46,172
|
|
|
|
46,881
|
|
|
|
46,140
|
|
Accrued interest payable
|
|
Level 2
|
|
|
|
3,011
|
|
|
|
3,011
|
|
|
|
3,949
|
|
|
|
3,949
|
|
|
(1)
|
See Note 10 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities.
|
|
(2)
|
It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is estimated at carrying amount.
|
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterest-bearing checking accounts and securities sold under agreements to 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. Fair 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 loss given default assumptions. Fair value for deposits accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated 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. The fair values of subordinated debentures and FHLBI advances are based on current rates for similar financing. The fair value of off-balance sheet items is estimated to be nominal.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. FAIR VALUES
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 pricing an asset or liability.
The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and liabilities that are recorded at fair value on a recurring or nonrecurring basis:
Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 2 securities include U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and municipal general obligation and revenue 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 to us necessitates an impairment. There was no such impairment as of June 30, 2020 or December 31, 2019. We have no Level 1 securities available for sale.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. FAIR VALUES (Continued)
Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves.
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 June 30, 2020 and December 31, 2019, we determined the fair value of our mortgage loans held for sale to be $42.8 million and $5.0 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 impairment and on an ongoing basis until recovery or charge-off. The fair values of impaired 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.
Foreclosed Assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans 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 June 30, 2020 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)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt obligations
|
|
$
|
162,497,000
|
|
|
$
|
0
|
|
|
$
|
162,497,000
|
|
|
$
|
0
|
|
Mortgage-backed securities
|
|
|
36,033,000
|
|
|
|
0
|
|
|
|
36,033,000
|
|
|
|
0
|
|
Municipal general obligation bonds
|
|
|
102,467,000
|
|
|
|
0
|
|
|
|
101,661,000
|
|
|
|
806,000
|
|
Municipal revenue bonds
|
|
|
6,164,000
|
|
|
|
0
|
|
|
|
6,164,000
|
|
|
|
0
|
|
Other investments
|
|
|
500,000
|
|
|
|
0
|
|
|
|
500,000
|
|
|
|
0
|
|
Total
|
|
$
|
307,661,000
|
|
|
$
|
0
|
|
|
$
|
306,855,000
|
|
|
$
|
806,000
|
|
There were no transfers in or out of Level 1, Level 2 or Level 3 during the first six months of 2020. The $1.2 million reduction in Level 3 municipal general obligation bonds during the first six months of 2020 reflects the scheduled maturities of such bonds.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. FAIR VALUES (Continued)
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 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)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt obligations
|
|
$
|
186,410,000
|
|
|
$
|
0
|
|
|
$
|
186,410,000
|
|
|
$
|
0
|
|
Mortgage-backed securities
|
|
|
42,470,000
|
|
|
|
0
|
|
|
|
42,470,000
|
|
|
|
0
|
|
Municipal general obligation bonds
|
|
|
101,079,000
|
|
|
|
0
|
|
|
|
99,029,000
|
|
|
|
2,050,000
|
|
Municipal revenue bonds
|
|
|
4,196,000
|
|
|
|
0
|
|
|
|
4,196,000
|
|
|
|
0
|
|
Other investments
|
|
|
500,000
|
|
|
|
0
|
|
|
|
500,000
|
|
|
|
0
|
|
Total
|
|
$
|
334,655,000
|
|
|
$
|
0
|
|
|
$
|
332,605,000
|
|
|
$
|
2,050,000
|
|
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2019. The $1.7 million reduction in Level 3 municipal general obligation bonds during 2019 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 June 30, 2020 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
|
|
$
|
3,082,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,082,000
|
|
Foreclosed assets
|
|
|
198,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
198,000
|
|
Total
|
|
$
|
3,280,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,280,000
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. FAIR VALUES (Continued)
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 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
|
|
$
|
1,107,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,107,000
|
|
Foreclosed assets
|
|
|
452,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
452,000
|
|
Total
|
|
$
|
1,559,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,559,000
|
|
The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on impaired 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. For real estate dependent loans and foreclosed assets, we generally assign a 15% to 25% discount factor for commercial-related properties, and a 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.
11. REGULATORY MATTERS
We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on our financial statements.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. At June 30, 2020 and December 31, 2019, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since June 30, 2020 that we believe have changed our bank’s categorization.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. 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
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
444,772
|
|
|
|
13.7
|
%
|
|
$
|
259,076
|
|
|
|
8.0
|
%
|
|
$
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
436,832
|
|
|
|
13.5
|
|
|
|
259,017
|
|
|
|
8.0
|
|
|
|
323,771
|
|
|
|
10.0
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
412,526
|
|
|
|
12.7
|
|
|
|
194,307
|
|
|
|
6.0
|
|
|
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
404,587
|
|
|
|
12.5
|
|
|
|
194,263
|
|
|
|
6.0
|
|
|
|
259,017
|
|
|
|
8.0
|
|
Common equity tier 1 (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
367,379
|
|
|
|
11.3
|
|
|
|
145,730
|
|
|
|
4.5
|
|
|
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
404,587
|
|
|
|
12.5
|
|
|
|
145,697
|
|
|
|
4.5
|
|
|
|
210,452
|
|
|
|
6.5
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
412,526
|
|
|
|
10.2
|
|
|
|
161,668
|
|
|
|
4.0
|
|
|
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
404,587
|
|
|
|
10.0
|
|
|
|
161,639
|
|
|
|
4.0
|
|
|
|
202,048
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
429,038
|
|
|
|
13.1
|
%
|
|
$
|
262,141
|
|
|
|
8.0
|
%
|
|
$
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
424,917
|
|
|
|
13.0
|
|
|
|
262,088
|
|
|
|
8.0
|
|
|
|
327,610
|
|
|
|
10.0
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
405,148
|
|
|
|
12.4
|
|
|
|
196,606
|
|
|
|
6.0
|
|
|
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
401,027
|
|
|
|
12.2
|
|
|
|
196,566
|
|
|
|
6.0
|
|
|
|
262,088
|
|
|
|
8.0
|
|
Common equity tier 1 (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
360,342
|
|
|
|
11.0
|
|
|
|
147,454
|
|
|
|
4.5
|
|
|
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
401,027
|
|
|
|
12.2
|
|
|
|
147,425
|
|
|
|
4.5
|
|
|
|
212,947
|
|
|
|
6.5
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
405,148
|
|
|
|
11.3
|
|
|
|
143,689
|
|
|
|
4.0
|
|
|
|
NA
|
|
|
|
NA
|
|
Bank
|
|
|
401,027
|
|
|
|
11.2
|
|
|
|
143,670
|
|
|
|
4.0
|
|
|
|
179,588
|
|
|
|
5.0
|
|
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. REGULATORY MATTERS (Continued)
Our consolidated capital levels as of June 30, 2020 and December 31, 2019 include $45.1 million and $44.8 million, respectively, of trust preferred 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 June 30, 2020 and December 31, 2019, all $45.1 million and $44.8 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 was phased in over three years beginning in 2016. The capital buffer requirement raised 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 June 30, 2020, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.
Our and our bank’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 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on March 18, 2020 to shareholders of record as of March 6, 2020. On April 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that was paid on June 17, 2020 to shareholders of record as of June 5, 2020. On July 16, 2020, our Board of Directors declared a cash dividend on our common stock in the amount of $0.28 per share that will be paid on September 16, 2020 to shareholders of record as of September 4, 2020.
In May 2019, 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 time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. This stock repurchase plan was instituted in conjunction with the completion of our existing program that was introduced in January 2015 and later expanded in April 2016. During the first six months of 2020, we repurchased a total of 222,385 shares at a total price of $6.3 million, at an average price per share of $28.25. During the period of January 2015 through March 31, 2020, we repurchased a total of about 1.6 million shares at a total price of $38.9 million, at an average price per share of $24.13. Availability under our current repurchase plan totals $10.1 million. 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 or a new plan, which would also likely be funded from cash dividends paid to us from our bank.
MERCANTILE BANK CORPORATION