0001437749-21-011236.txt : 20210507 0001437749-21-011236.hdr.sgml : 20210507 20210507084136 ACCESSION NUMBER: 0001437749-21-011236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 84 CONFORMED PERIOD OF REPORT: 20210331 FILED AS OF DATE: 20210507 DATE AS OF CHANGE: 20210507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANK CORP CENTRAL INDEX KEY: 0001042729 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383360865 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26719 FILM NUMBER: 21900407 BUSINESS ADDRESS: STREET 1: 310 LEONARD STREET NW CITY: GRAND RAPIDS STATE: MI ZIP: 49504 BUSINESS PHONE: 616 406-3000 MAIL ADDRESS: STREET 1: 310 LEONARD STREET NW CITY: GRAND RAPIDS STATE: MI ZIP: 49504 10-Q 1 mbwm20210331_10q.htm FORM 10-Q mbwn20210331_10q.htm
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It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is estimated at carrying amount. 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Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

 

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           .

 

Commission File No. 000-26719

 

MERCANTILE BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

Michigan

38-3360865

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

310 Leonard Street, NW, Grand Rapids, MI 49504

(Address of principal executive offices) (Zip Code)

 

(616) 406-3000

(Registrant’s telephone number, including area code)

 

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

Yes   ☒              No ☐

 

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

Yes   ☒              No ☐

 

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

 

Large accelerated filer ☐   

Accelerated filer ☒ 

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company 

 

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

MBWM

The Nasdaq Stock Market LLC

 

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

Yes   ☐              No ☐

 

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

Yes                 No ☒

At April 30, 2021, there were 16,158,431 shares of common stock outstanding.

 

 
 

 

 

MERCANTILE BANK CORPORATION

INDEX

 


 

 

PART I.

Financial Information

Page No.

 

 

 

 
 

Item 1. Financial Statements

 

 
 

 

 

 
 

Consolidated Balance Sheets (Unaudited) - March 31, 2021 and December 31, 2020

1

 
   

 

 
 

Consolidated Statements of Income (Unaudited) - Three Months Ended March 31, 2021 and March 31, 2020

2

 
   

 

 
 

Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2021 and March 31, 2020

3

 
 

 

 

 
 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2021 and March 31, 2020

4

 
   

 

 
 

Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2021 and March 31, 2020

6

 
 

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited)

8

 
   

 

 
 

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

47

 
 

 

 

 
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

66

 
 

 

 

 
 

Item 4. Controls and Procedures

68

 
 

 

 

 

PART II.   

Other Information

 

 
 

 

 

 
 

Item 1. Legal Proceedings

69

 
 

 

 

 
 

Item 1A. Risk Factors

69

 
 

 

 

 
 

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

71

 
 

 

 

 
 

Item 3. Defaults Upon Senior Securities

71

 
 

 

 

 
 

Item 4. Mine Safety Disclosures

71

 
 

 

 

 
 

Item 5. Other Information

71

 
 

 

 

 
 

Item 6. Exhibits

72

 
 

 

 

 
 

Signatures

73

 

 

 
 

MERCANTILE BANK CORPORATION

PART I --- FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 


 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

ASSETS

        

Cash and due from banks

 $55,489,000  $62,832,000 

Interest-earning deposits

  596,855,000   563,174,000 

Total cash and cash equivalents

  652,344,000   626,006,000 
         

Securities available for sale

  434,257,000   387,347,000 

Federal Home Loan Bank stock

  18,002,000   18,002,000 
         

Loans

  3,364,370,000   3,193,470,000 

Allowance for loan losses

  (38,695,000

)

  (37,967,000

)

Loans, net

  3,325,675,000   3,155,503,000 
         

Premises and equipment, net

  55,388,000   58,959,000 

Bank owned life insurance

  72,395,000   72,131,000 

Goodwill

  49,473,000   49,473,000 

Core deposit intangible, net

  2,118,000   2,436,000 

Mortgage loans held for sale

  40,297,000   22,888,000 

Assets held for sale

  13,159,000   0 

Other assets

  47,246,000   44,599,000 

Total assets

 $4,710,354,000  $4,437,344,000 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Deposits

        

Noninterest-bearing

 $1,605,471,000  $1,433,403,000 

Interest-bearing

  2,039,491,000   1,978,150,000 

Total deposits

  3,644,962,000   3,411,553,000 
         

Securities sold under agreements to repurchase

  141,310,000   118,365,000 

Federal Home Loan Bank advances

  394,000,000   394,000,000 

Subordinated debentures

  47,733,000   47,563,000 

Liabilities held for sale

  17,280,000   0 

Accrued interest and other liabilities

  23,826,000   24,309,000 

Total liabilities

  4,269,111,000   3,995,790,000 
         

Commitments and contingent liabilities (Note 8)

          
         

Shareholders' equity

        

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

  0   0 

Common stock, no par value; 40,000,000 shares authorized; 16,219,138 shares outstanding at March 31, 2021 and 16,330,476 shares outstanding at December 31, 2020

  299,358,000   302,029,000 

Retained earnings

  143,642,000   134,039,000 

Accumulated other comprehensive income (loss)

  (1,757,000

)

  5,486,000 

Total shareholders’ equity

  441,243,000   441,554,000 

Total liabilities and shareholders’ equity

 $4,710,354,000  $4,437,344,000 

 


See accompanying notes to consolidated financial statements.

 

 

 

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 


 

  

Three Months

  

Three Months

 
  

Ended

  

Ended

 
  

March 31,

  

March 31,

 
  

2021

  

2020

 

Interest income

        

Loans, including fees

 $32,985,000  $33,442,000 

Securities, taxable

  1,035,000   3,441,000 

Securities, tax-exempt

  597,000   576,000 

Other interest-earning assets

  168,000   475,000 

Total interest income

  34,785,000   37,934,000 
         

Interest expense

        

Deposits

  2,717,000   4,641,000 

Short-term borrowings

  36,000   40,000 

Federal Home Loan Bank advances

  2,027,000   2,212,000 

Subordinated debentures and other borrowings

  472,000   724,000 

Total interest expense

  5,252,000   7,617,000 
         

Net interest income

  29,533,000   30,317,000 
         

Provision for loan losses

  300,000   750,000 
         

Net interest income after provision for loan losses

  29,233,000   29,567,000 
         

Noninterest income

        

Service charges on deposit and sweep accounts

  1,155,000   1,222,000 

Mortgage banking income

  8,800,000   2,627,000 

Credit and debit card income

  1,678,000   1,361,000 

Interest rate swap fees

  653,000   0 

Payroll processing

  557,000   577,000 

Earnings on bank owned life insurance

  277,000   336,000 

Other income

  343,000   427,000 

Total noninterest income

  13,463,000   6,550,000 
         

Noninterest expense

        

Salaries and benefits

  15,086,000   13,528,000 

Occupancy

  2,014,000   2,059,000 

Furniture and equipment depreciation, rent and maintenance

  889,000   778,000 

Data processing costs

  2,617,000   2,483,000 

Other expense

  4,511,000   4,092,000 

Total noninterest expenses

  25,117,000   22,940,000 
         

Income before federal income tax expense

  17,579,000   13,177,000 
         

Federal income tax expense

  3,340,000   2,504,000 
         

Net income

 $14,239,000  $10,673,000 
         

Basic earnings per share

 $0.87  $0.65 

Diluted earnings per share

 $0.87  $0.65 

Cash dividends per share

 $0.29  $0.28 

Average basic shares outstanding

  16,283,044   16,350,281 

Average diluted shares outstanding

  16,283,490   16,351,559 

 


See accompanying notes to consolidated financial statements.

 

 

 

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 


 

  

Three Months

Ended

March 31,

2021

  

Three Months

Ended

March 31,

2020

 
         

Net income

 $14,239,000  $10,673,000 
         

Other comprehensive income (loss):

        

Unrealized holding gains (losses) on securities available for sale

  (9,168,000

)

  1,391,000 

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

  1,925,000   (293,000

)

Other comprehensive income (loss), net of tax effect

  (7,243,000

)

  1,098,000 
         

Comprehensive income

 $6,996,000  $11,771,000 

 


See accompanying notes to consolidated financial statements.

 

 

 

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

(Unaudited)

 


 

($ in thousands except per share amounts)

 

Preferred

Stock

  

Common

Stock

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Total

Shareholders’

Equity

 
                     

Balances, January 1, 2021

 $0  $302,029  $134,039  $5,486  $441,554 
                     

Employee stock purchase plan (331 shares)

     11         11 
                     

Dividend reinvestment plan (6,647 shares)

     213         213 
                     

Stock-based compensation expense

     643         643 
                     

Share repurchase program (118,261 shares)

     (3,538

)

        (3,538

)

                     

Cash dividends ($0.29 per common share)

        (4,636

)

     (4,636

)

                     

Net income for the three months ended March 31, 2021

        14,239      14,239 
                     

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

           (7,243

)

  (7,243

)

                     

Balances, March 31, 2021

 $0  $299,358  $143,642  $(1,757

)

 $441,243 

 


See accompanying notes to consolidated financial statements.

 

4

 

MERCANTILE BANK CORPORATION 

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY (Continued)

(Unaudited)

 


 

($ in thousands except per share amounts)

 

Preferred

Stock

  

Common

Stock

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Total

Shareholders’

Equity

 
                     

Balances, January 1, 2020

 $0  $305,035  $107,831  $3,695  $416,561 
                     

Employee stock purchase plan (642 shares)

     14         14 
                     

Dividend reinvestment plan (8,073 shares)

     192         192 
                     

Stock-based compensation expense

     625         625 
                     

Share repurchase program (222,385 shares)

     (6,282

)

        (6,282

)

                     

Cash dividends ($0.28 per common share)

        (4,492

)

     (4,492

)

                     

Net income for the three months ended March 31, 2020

        10,673      10,673 
                     

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

           1,098   1,098 
                     

Balances, March 31, 2020

 $0  $299,584  $114,012  $4,793  $418,389 

 


See accompanying notes to consolidated financial statements.

 

5

 

 

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 


 

  

Three Months

  

Three Months

 
  

Ended

  

Ended

 
  

March 31, 2021

  

March 31, 2020

 

Cash flows from operating activities

        

Net income

 $14,239,000  $10,673,000 

Adjustments to reconcile net income to net cash from operating activities

        

Depreciation and amortization

  3,457,000   982,000 

Accretion of acquired loans

  (34,000

)

  (113,000

)

Provision for loan losses

  300,000   750,000 

Stock-based compensation expense

  643,000   625,000 

Proceeds from sales of mortgage loans held for sale

  189,018,000   68,627,000 

Origination of mortgage loans held for sale

  (197,245,000

)

  (86,206,000

)

Net gain from sales of mortgage loans held for sale

  (9,182,000

)

  (2,096,000

)

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

  (81,000

)

  (49,000

)

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

  250,000   (27,000

)

Net loss from sales and write-downs of fixed assets

  312,000   54,000 

Earnings on bank owned life insurance

  (277,000

)

  (336,000

)

Net change in:

        

Accrued interest receivable

  (971,000

)

  220,000 

Other assets

  (1,367,000

)

  271,000 

Accrued interest and other liabilities

  (483,000

)

  (3,153,000

)

Net cash for operating activities

  (1,421,000

)

  (9,778,000

)

         

Cash flows from investing activities

        

Loan originations and payments, net

  (180,147,000

)

  (24,910,000

)

Purchases of securities available for sale

  (87,307,000

)

  (99,002,000

)

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

  30,974,000   124,510,000 

Proceeds from sales of foreclosed assets

  158,000   106,000 

Proceeds from sales of former bank premises

  0   162,000 

Net purchases of premises and equipment

  (1,603,000

)

  (3,159,000

)

Net cash for investing activities

  (237,925,000

)

  (2,293,000

)

         

Cash flows from financing activities

        

Net decrease in time deposits

  (51,961,000

)

  (61,810,000

)

Net increase in all other deposits

  302,650,000   16,842,000 

Net increase in securities sold under agreements to repurchase

  22,945,000   30,595,000 

Proceeds from Federal Home Loan Bank advances

  0   40,000,000 

Employee stock purchase plan

  11,000   14,000 

Dividend reinvestment plan

  213,000   192,000 

Repurchases of common stock

  (3,538,000

)

  (6,282,000

)

Payment of cash dividends to common shareholders

  (4,636,000

)

  (4,492,000

)

Net cash from financing activities

  265,684,000   15,059,000 
         

Net change in cash and cash equivalents

  26,338,000   2,988,000 

Cash and cash equivalents at beginning of period

  626,006,000   233,731,000 

Cash and cash equivalents at end of period

 $652,344,000  $236,719,000 

 


See accompanying notes to consolidated financial statements.

 

6

 

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31, 2021

   

March 31, 2020

 

Supplemental disclosures of cash flows information

               

Cash paid during the period for:

               

Interest

  $ 5,509,000     $ 8,290,000  

Federal income tax

    0       0  

Noncash financing and investing activities:

               

Transfers from loans to foreclosed assets

    0       11,000  

Transfers from loans to assets held for sale

    9,709,000       0  

Transfers from bank premises to assets held for sale

    3,450,000       0  

Transfers from deposits to liabilities held for sale

    17,280,000       0  

 


See accompanying notes to consolidated financial statements.

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

 

1.    SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The unaudited financial statements for the three months ended March 31, 2021 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 subsidiary Mercantile Insurance Center, Inc. (“our insurance center”). These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 2021 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, 2020.

 

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.

 

Coronavirus Pandemic: 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”). While the economic fallout has stabilized somewhat and the adult population in the United States is in the process of being vaccinated, there remains a significant amount of stress and uncertainty across national and global economies. This uncertainty is heightened as certain geographic areas continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes in circumstances.

 

The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a material negative impact on our financial condition and results of operations. We continue to occupy 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 may produce declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which may necessitate additional provisions for our allowance and reduced net income.

 

The following section summarizes the primary measures that directly impact us and our customers.

 

 

Paycheck Protection Program

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. 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 interest rate on the loan is fixed at 1.00%, with the financial institution receiving a loan origination fee paid by the Small Business Administration. The loan origination fees, net of the direct origination costs, are accreted into interest income on loans using the level yield methodology. The program ended on August 8, 2020. We originated approximately 2,200 loans aggregating $553 million. As of March 31, 2021, we recorded forgiveness transactions on approximately 1,600 loans aggregating $302 million. Net loan origination fees of $2.4 million were recorded during the first quarter of 2021.

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Consolidated Appropriations Act, 2021 authorized an additional $284 billion in second draw PPP loans (“round 2 PPP loans”). The program is scheduled to end on May 31, 2021. Through March 31, 2021, we originated approximately 1,100 loans aggregating $203 million. Net loan origination fees of $0.4 million were recorded during the first quarter of 2021.

 

A PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies.

 

 

Individual Economic Impact Payments

The Internal Revenue Service has made three rounds of Individual Economic Impact Payments via direct deposit or mailed checks. In general, and subject to adjusted gross income limitations, qualifying individuals have received payments of $1,200 in April 2020, $600 in January 2021 and $1,400 in March 2021.

 

 

Troubled Debt Restructuring Relief

From March 1, 2020 through 60 days after the end of the National Emergency (or December 31, 2020 if earlier), a financial institution may elect to suspend GAAP principles and regulatory determinations with respect to loan modifications related to Covid-19 that would otherwise be categorized as troubled debt restructurings. Banking agencies must defer to the financial institution’s election. We elected to suspend GAAP principles and regulatory determinations as permitted. The Consolidated Appropriations Act, 2021 extended the suspension date to January 1, 2022.

 

 

Current Expected Credit Loss Methodology Delay 

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. The Consolidated Appropriations Act, 2021 extended the adoption deferral date to January 1, 2022.

 

In early April 2020, in response to the early stages of the Coronavirus Pandemic and its pervasive impact across the economy and financial markets, we developed internal programs of loan payment deferments for commercial and retail borrowers. For commercial borrowers, we offered 90-day (three payments) interest only amendments as well as 90-day (three payments) principal and interest payment deferments. Under the latter program, borrowers were 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. The single payment notes receive a loan grade equal to the loan grade of each respective borrowing relationship. Certain of our commercial loan borrowers 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 was 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.

 

At the peak of activity in mid-2020, nearly 750 borrowers with loan balances aggregating $719 million were participating in the commercial loan deferment program. As of March 31, 2021, only two borrowers with loan balances aggregating $1.8 million remained in the commercial loan deferment program. For retail borrowers, we offered 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. As of March 31, 2021, only ten borrowers with loan balances aggregating $0.8 million remained in the retail loan payment deferment program.

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 262,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2021. In addition, stock options for approximately 3,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2021. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2021.

 

Approximately 256,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2020. In addition, stock options for approximately 4,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2020. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2020.

 

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

 

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

 

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

 


(Continued)

 

10

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

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

 

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

 

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of March 31, 2021 and December 31, 2020, we determined that the fair value of our mortgage loans held for sale totaled $41.3 million and $24.0 million, respectively.

 

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the mortgage loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income. Mortgage loans serviced for others totaled approximately $1.11 billion and $1.04 billion as of March 31, 2021 and December 31, 2020, respectively.

 

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

 

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

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 Pandemic. Pursuant to the guidance, the federal banking agencies 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 declared by President Trump on March 13, 2020 (the “National Emergency”) or December 31, 2020, as applicable, are not troubled debt restructurings. As part of the Consolidated Appropriations Act that was enacted in late 2020, this guidance was extended to January 1, 2022.

 

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. We estimate credit losses based on individual loans determined to be impaired and on all other loans grouped on similar risk characteristics. Our historical loss component is generally the most significant of the allowance components and is based on historical loss experience by credit risk grade for commercial loans and payment status for mortgage and consumer loans. Loans are pooled based on similar risk characteristics supported by observable data. The historical loss experience component of the allowance represents the results of migration analysis of historical net charge-offs for portfolios of loans, including groups of commercial loans within each credit risk grade. For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected future losses to be realized from the pool of loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative environmental factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasing interest rates, external factors, Coronavirus Pandemic environment, and other considerations. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


 

1.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

 

Financial institutions were 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 President’s declaration of a National Emergency or December 31, 2020. The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022. 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 government-imposed activity limitations 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 with 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. Loans made under PPP are fully guaranteed by the Small Business Administration; therefore, such loans do not have an associated allowance.

 

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

 

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

 

If designated as a hedge, we formally document the relationship between derivatives as hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized immediately in current earnings as noninterest income or expense. We discontinue hedge accounting when we determine the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

1.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

 

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.

 

Adoption of New Accounting Standards: 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.

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

1.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Financial institutions were 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 President’s declaration of a National Emergency or December 31, 2020. The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022. 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 government-imposed activity limitations 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.

 

Hastings Branch Sale: As previously disclosed in a Current Report on Form 8-K filed on October 26, 2020, we entered into a Purchase and Assumption Agreement (“Agreement”) on October 21, 2020 regarding the sale of our Hastings, Michigan branch office to Lake Trust Credit Union (“Lake Trust”). All regulatory approvals have been received, and the sale is expected to close on May 14, 2021. Under the terms of the Agreement, as amended on April 20, 2021, Lake Trust will: 1) purchase all loans at book balance; 2) purchase the branch facility at a price of $1.5 million; and 3) assume all deposit accounts at a premium price of 5.0% of the book balance. The loan and branch facility balances ($9.7 million and $1.2 million, respectively) are included in the Assets Held For Sale account, while the deposit balances ($17.3 million) are included in the Liabilities Held For Sale account on the Consolidated Balance Sheet as of March 31, 2021. On the consummation date, we expect to record a $0.9 million deposit premium and a $0.3 million gain on the sale of the branch facility

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

 

2.    SECURITIES  

 

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

 

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 

March 31, 2021

                

U.S. Government agency debt obligations

 $274,038,000  $362,000  $(7,572,000

)

 $266,828,000 

Mortgage-backed securities

  35,211,000   925,000   (328,000

)

  35,808,000 

Municipal general obligation bonds

  111,294,000   4,517,000   (274,000

)

  115,537,000 

Municipal revenue bonds

  15,438,000   303,000   (157,000

)

  15,584,000 

Other investments

  500,000   0   0   500,000 
                 
  $436,481,000  $6,107,000  $(8,331,000

)

 $434,257,000 
                 

December 31, 2020

                

U.S. Government agency debt obligations

 $242,522,000  $516,000  $(897,000

)

 $242,141,000 

Mortgage-backed securities

  23,869,000   1,021,000   0   24,890,000 

Municipal general obligation bonds

  101,991,000   5,833,000   0   107,824,000 

Municipal revenue bonds

  11,521,000   473,000   (2,000

)

  11,992,000 

Other investments

  500,000   0   0   500,000 
                 
  $380,403,000  $7,843,000  $(899,000

)

 $387,347,000 

 

 

Securities with unrealized losses at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

  

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

March 31, 2021

                        

U.S. Government agency debt obligations

 $234,832,000  $7,572,000  $0  $0  $234,832,000  $7,572,000 

Mortgage-backed securities

  7,264,000   328,000   0   0   7,264,000   328,000 

Municipal general obligation bonds

  13,961,000   274,000   0   0   13,961,000   274,000 

Municipal revenue bonds

  6,796,000   157,000   0   0   6,796,000   157,000 
                         
  $262,853,000  $8,331,000  $0  $0  $262,853,000  $8,331,000 

 


(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, 2020

                        

U.S. Government agency debt obligations

 $118,650,000  $897,000  $0  $0  $118,650,000  $897,000 

Mortgage-backed securities

  0   0   0   0   0   0 

Municipal general obligation bonds

  0   0   0   0   0   0 

Municipal revenue bonds

  423,000   2,000   0   0   423,000   2,000 
                         
  $119,073,000  $899,000  $0  $0  $119,073,000  $899,000 

 

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

 

At March 31, 2021, 185 debt securities with estimated fair values totaling $263 million have unrealized losses aggregating $8.3 million. At December 31, 2020, 64 debt securities with estimated fair values totaling $119 million had unrealized losses aggregating $0.9 million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.

 

The amortized cost and fair value of debt securities at March 31, 2021, 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

  

Amortized

  

Fair

 
  

Yield (%)

  

Cost

  

Value

 
             

Due in 2021

  2.53  $5,414,000  $5,425,000 

Due in 2022 through 2026

  1.16   142,876,000   143,569,000 

Due in 2027 through 2031

  1.63   197,842,000   195,378,000 

Due in 2032 and beyond

  2.02   54,638,000   53,577,000 

Mortgage-backed securities

  1.83   35,211,000   35,808,000 

Other investments

  3.75   500,000   500,000 
             

Total available for sale securities

  1.55  $436,481,000  $434,257,000 

 

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $123 million and $109 million at March 31, 2021 and December 31, 2020, respectively, with estimated market values of $128 million and $116 million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of $3.5 million and $4.1 million at March 31, 2021 and December 31, 2020, respectively, with estimated market values of $3.6 million and $4.2 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 $141 million and $118 million at March 31, 2021 and December 31, 2020, respectively. Investments in Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer.

 


(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 


 

 

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.

 

Our total loans at March 31, 2021 were $3.36 billion compared to $3.19 billion at December 31, 2020, an increase of $171 million, or 5.4%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2021 and December 31, 2020, and the percentage change in loans from the end of 2020 to the end of the first quarter of 2021, are as follows:

 

                  

Percent

 
  

March 31, 2021

  

December 31, 2020

  

Increase

 
  

Balance

  

%

  

Balance

  

%

  

(Decrease)

 
                     

Commercial:

                    

Commercial and industrial (1)

 $1,284,507,000   38.2

%

 $1,145,423,000   35.9

%

  12.1

%

Vacant land, land development, and residential construction

  58,738,000   1.7   55,055,000   1.7   6.7 

Real estate – owner occupied

  544,342,000   16.2   529,953,000   16.6   2.7 

Real estate – non-owner occupied

  932,334,000   27.7   917,436,000   28.7   0.6 

Real estate – multi-family and residential rental

  147,294,000   4.4   146,095,000   4.6   0.8 

Total commercial

  2,967,215,000   88.2   2,793,962,000   87.5   6.2 
                     

Retail:

                    

Home equity and other

  59,311,000   1.8   61,620,000   1.9   (3.7

)

1-4 family mortgages

  337,844,000   10.0   337,888,000   10.6   (0.1

)

Total retail

  397,155,000   11.8   399,508,000   12.5   (0.6

)

                     

Total loans

 $3,364,370,000   100.0

%

 $3,193,470,000   100.0

%

  5.4

%

 

 

(1)

Includes $455 million and $365 million in loans originated under the Paycheck Protection Program for March 31, 2021 and December 31, 2020, respectively.

 

 

Nonperforming loans as of March 31, 2021 and December 31, 2020 were as follows:

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 
         

Loans past due 90 days or more still accruing interest

 $0  $0 

Nonaccrual loans

  2,793,000   3,384,000 
         

Total nonperforming loans

 $2,793,000  $3,384,000 

 


(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:

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Commercial:

        

Commercial and industrial

 $169,000  $172,000 

Vacant land, land development, and residential construction

  0   0 

Real estate – owner occupied

  283,000   619,000 

Real estate – non-owner occupied

  0   22,000 

Real estate – multi-family and residential rental

  0   0 

Total commercial

  452,000   813,000 
         

Retail:

        

Home equity and other

  175,000   242,000 

1-4 family mortgages

  2,166,000   2,329,000 

Total retail

  2,341,000   2,571,000 
         

Total nonperforming loans

 $2,793,000  $3,384,000 

 

An age analysis of past due loans is as follows as of March 31, 2021:

 

  

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

 $593,000  $0  $169,000  $762,000  $1,283,745,000  $1,284,507,000  $0 

Vacant land, land development, and residential construction

  0   0   0   0   58,738,000   58,738,000   0 

Real estate – owner occupied

  0   137,000   283,000   420,000   543,922,000   544,342,000   0 

Real estate – non-owner occupied

  0   0   0   0   932,334,000   932,334,000   0 

Real estate – multi-family and residential rental

  0   0   0   0   147,294,000   147,294,000   0 

Total commercial

  593,000   137,000   452,000   1,182,000   2,966,033,000   2,967,215,000   0 
                             

Retail:

                            

Home equity and other

  112,000   0   45,000   157,000   59,154,000   59,311,000   0 

1-4 family mortgages

  565,000   1,000   213,000   779,000   337,065,000   337,844,000   0 

Total retail

  677,000   1,000   258,000   936,000   396,219,000   397,155,000   0 
                             

Total past due loans

 $1,270,000  $138,000  $710,000  $2,118,000  $3,362,252,000  $3,364,370,000  $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, 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

 $261,000  $172,000  $0  $433,000  $1,144,990,000  $1,145,423,000  $0 

Vacant land, land development, and residential construction

  0