Item 1. Financial Statements
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation: The unaudited financial statements for the three months ended March 31, 2023 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank (“our bank”) and our bank’s subsidiary, 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 (“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, 2023 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, 2022.
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 360,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2023. Stock options for 5,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2023. Approximately 335,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2022. In addition, stock options for approximately 8,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2022.
Debt Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities available for sale consist of bonds which might be sold prior to maturity due to a number of factors, including changes in interest rates, prepayment risks, yield, availability of alternative investments or liquidity needs. Debt securities classified as available for sale are reported at their fair value. For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis is written down to fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Changes in the allowance are recorded as provisions for (or reversals of) credit loss expense. Losses are charged against the allowance when the collectibility of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, and December 31, 2022, there was no allowance related to the available for sale debt securities portfolio.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on debt securities are amortized to the initial call date, if applicable, or to the maturity date, on the level-yield method. Discounts on debt securities are accreted to the maturity date on the level-yield method. Premiums and discounts on mortgage-backed securities are amortized or accreted based on anticipated prepayments on the level-yield method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
FHLBI stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.
Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Net unamortized deferred loan fees/(costs) amounted to ($1.4) million and ($1.0) million at March 31, 2023, and December 31, 2022, respectively.
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.
Accrued interest is included in other assets in the Consolidated Balance Sheets. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
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, 2023 and December 31, 2022, we determined that the fair value of our mortgage loans held for sale totaled $3.9 million and $3.6 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, which includes a gain or loss on the interest rate commitment coverage position, and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. Market rate risk on interest rate commitments with borrowers prior to loan closing is mitigated through forward commitments referred to as to-be-announced mortgage-backed securities. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Allowance for Credit Losses (“Allowance”): In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expanded the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, entities 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 was effective for interim and annual reporting periods beginning after December 15, 2019.
We recorded a provision expense of $0.6 million during the first quarter of 2023, mainly reflecting allocations necessitated by net loan growth; nominal loan charge-offs and continued strong loan quality metrics in large part mitigated additional reserves associated with loan growth. We did not adjust any qualitative reserve factors during the first quarter of 2023, and the impact of the updated economic forecast was less than $0.1 million.
We adopted CECL effective January 1, 2022 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included a decrease in the allowance of $0.4 million, which included a $0.3 million increase to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.
Accrued interest receivable for loans is included in other assets on our Consolidated Balance Sheet. We elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if we believe the collection of interest is doubtful. We believe this policy results in the timely reversal of uncollectible interest.
The allowance is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance is confirmed.
The allowance is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on if the loan is secured by residential real estate or not.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Our loan portfolio segments as of March 31, 2023 and December 31, 2022 were as follows:
| | ■ | Commercial and Industrial: Risks to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. |
| | ■ | Owner Occupied Commercial Real Estate: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category. |
| | ■ | Non-Owner Occupied Commercial Real Estate: Loans in this category are susceptible to declines in occupancy rates, business failure, and general economic conditions. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category. |
| | ■ | Multi-Family and Residential Rental: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates, as well as market demand and supply of similar property and the resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values. Also, the lack of a suitable alternative use for the properties is a risk for loans in this category. |
| | ■ | Vacant Land, Land Development and Residential Construction: Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates. |
| | ■ | 1-4 Family Mortgages: Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates, and declining real estate values. |
| | ■ | Other Consumer Loans: Risks common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property. |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
The “remaining life methodology” is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance, repayment terms, and estimated prepayments. Our historical loss rate is then applied to the monthly estimated future loan balances at the instrument level. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.
We use migration to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by the bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods.
Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of March 31, 2023 and December 31, 2022, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period for all loan segments.
We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly. The economic forecasts used for our March 31, 2023 allowance calculation reflected a less than $0.1 million allowance balance increase compared to the forecasts used for our December 31, 2022 allowance calculation. Our methodology does provide for a potential qualitative factor that can be used in the event of local or regional conditions that depart from the conditions and forecasts for the entire country.
During each reporting period, we also consider the need to adjust the historical loss rates as determined by our migration calculations to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the migration-based historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses.
Traditional qualitative factors include:
| | o | Changes in lending policies and procedures |
| | o | Changes in the nature and volume of the loan portfolio and in the terms of loans |
| | o | Changes in the experience, ability and depth of lending management and other relevant staff |
| | o | Changes in the volume and severity of past due loans, nonaccrual loans and adversely classified loans |
| | o | Changes in the quality of the loan review program |
| | o | Changes in the value of underlying collateral dependent loans |
| | o | Existence and effect of any concentrations of credit and any changes in such |
| | o | Effect of other factors such as competition and legal and regulatory requirements |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
The estimation of future credit losses should reflect consideration of all significant factors that affect the collectibility of the loan portfolio at each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered. Effective January 1, 2022, we established a historical loss information factor to address the relatively low level of loan losses during the look-back period.
Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments when appropriate. The contractual term generally excludes potential extensions, renewals and modifications.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
Mortgage Banking Activities: Mortgage loans serviced for others totaled approximately $1.37 billion and $1.38 billion as of March 31, 2023 and December 31, 2022, respectively. Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold. Mortgage loan servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of the underlying mortgage loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.
Servicing fee income is 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. 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.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
The accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors was eliminated upon our adoption of ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have historically generally consisted of interest rate swap agreements that qualified for hedge accounting. 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. We had no derivative instruments designated as hedges as of March 31, 2023, and December 31, 2022.
Goodwill and Core Deposit Intangible: GAAP requires us to determine the fair value of all the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For certain items we concluded to have the appropriate expertise to determine the fair value, we may choose to use our own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired company and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the market place or within the organizational structure. We conducted an annual test during 2022 using step zero, with no impairment identified.
The core deposit intangible that arose from the merger with Firstbank 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.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
The following table depicts our sources of noninterest income presented in the Consolidated Statements of Income that are scoped within Topic 606:
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | |
| Service charges on deposit and sweep accounts | | $ | 976,000 | | | $ | 1,416,000 | |
| Credit and debit card fees | | | 2,060,000 | | | | 1,881,000 | |
| Payroll processing | | | 746,000 | | | | 638,000 | |
| Customer service fees | | | 220,000 | | | | 242,000 | |
Service Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.
Credit and Debit Card Fees: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Payroll Processing Fees: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.
Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks and money orders, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the contract signing or renewal. Customer service fees are recorded as other noninterest income on our Consolidated Statements of Income.
Adoption of New Accounting Standards: ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan. Additionally, the ASU requires disclosures of current period gross charge-offs by year of origination for financing receivables. This ASU was effective for fiscal years beginning after December 15, 2022. The prospective adoption of this ASU did not have a material impact on our financial results.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2023 | | | | | | | | | | | | | | | | |
| U.S. Government agency debt obligations | | $ | 454,000,000 | | | $ | 0 | | | $ | (57,780,000 | ) | | $ | 396,220,000 | |
| Mortgage-backed securities | | | 37,164,000 | | | | 22,000 | | | | (5,596,000 | ) | | | 31,590,000 | |
| Municipal general obligation bonds | | | 168,721,000 | | | | 1,081,000 | | | | (6,731,000 | ) | | | 163,071,000 | |
| Municipal revenue bonds | | | 30,812,000 | | | | 200,000 | | | | (2,420,000 | ) | | | 28,592,000 | |
| Other investments | | | 500,000 | | | | 0 | | | | 0 | | | | 500,000 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 691,197,000 | | | $ | 1,303,000 | | | $ | (72,527,000 | ) | | $ | 619,973,000 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | | | | |
| U.S. Government agency debt obligations | | $ | 453,836,000 | | | $ | 0 | | | $ | (65,092,000 | ) | | $ | 388,744,000 | |
| Mortgage-backed securities | | | 38,002,000 | | | | 19,000 | | | | (6,068,000 | ) | | | 31,953,000 | |
| Municipal general obligation bonds | | | 163,041,000 | | | | 450,000 | | | | (9,058,000 | ) | | | 154,433,000 | |
| Municipal revenue bonds | | | 30,267,000 | | | | 102,000 | | | | (3,063,000 | ) | | | 27,306,000 | |
| Other investments | | | 500,000 | | | | 0 | | | | 0 | | | | 500,000 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 685,646,000 | | | $ | 571,000 | | | $ | (83,281,000 | ) | | $ | 602,936,000 | |
Securities with unrealized losses at March 31, 2023 and December 31, 2022, 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, 2023 | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agency debt obligations | | $ | 14,000,000 | | | $ | 755,000 | | | $ | 382,220,000 | | | $ | 57,025,000 | | | $ | 396,220,000 | | | $ | 57,780,000 | |
| Mortgage-backed securities | | | 29,016,000 | | | | 5,508,000 | | | | 1,742,000 | | | | 88,000 | | | | 30,758,000 | | | | 5,596,000 | |
| Municipal general obligation bonds | | | 43,446,000 | | | | 940,000 | | | | 67,822,000 | | | | 5,791,000 | | | | 111,268,000 | | | | 6,731,000 | |
| Municipal revenue bonds | | | 5,404,000 | | | | 401,000 | | | | 16,407,000 | | | | 2,019,000 | | | | 21,811,000 | | | | 2,420,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 91,866,000 | | | $ | 7,604,000 | | | $ | 468,191,000 | | | $ | 64,923,000 | | | $ | 560,057,000 | | | $ | 72,527,000 | |
(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, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agency debt obligations | | $ | 53,019,000 | | | $ | 5,713,000 | | | $ | 335,725,000 | | | $ | 59,379,000 | | | $ | 388,744,000 | | | $ | 65,092,000 | |
| Mortgage-backed securities | | | 31,127,000 | | | | 6,068,000 | | | | 12,000 | | | | 0 | | | | 31,139,000 | | | | 6,068,000 | |
| Municipal general obligation bonds | | | 97,252,000 | | | | 4,516,000 | | | | 32,870,000 | | | | 4,542,000 | | | | 130,122,000 | | | | 9,058,000 | |
| Municipal revenue bonds | | | 12,532,000 | | | | 1,141,000 | | | | 10,609,000 | | | | 1,922,000 | | | | 23,141,000 | | | | 3,063,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 193,930,000 | | | $ | 17,438,000 | | | $ | 379,216,000 | | | $ | 65,843,000 | | | $ | 573,146,000 | | | $ | 83,281,000 | |
We evaluate securities in an unrealized loss position at least quarterly. Consideration is given to the financial condition 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, 2023, 653 debt securities with estimated fair values totaling $560 million had unrealized losses aggregating $72.5 million. At December 31, 2022, 732 debt securities with estimated fair values totaling $573 million had unrealized losses aggregating $83.3 million. At March 31, 2023, unrealized losses aggregating $63.4 million were attributable to bonds issued or guaranteed by agencies of the U.S. federal government, while unrealized losses totaling $9.1 million were associated with bonds issued by state-based municipalities. For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis is written down to fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SECURITIES (Continued) |
The amortized cost and fair value of debt securities at March 31, 2023, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.
| | | Weighted | | | | | | | | | |
| | | Average | | | Amortized | | | Fair | |
| | | Yield (%) | | | Cost | | | Value | |
| | | | | | | | | | | | | |
| Due in 2023 | | | 0.98 | | | $ | 20,361,000 | | | $ | 19,997,000 | |
| Due in 2024 through 2028 | | | 1.32 | | | | 319,037,000 | | | | 293,271,000 | |
| Due in 2029 through 2033 | | | 2.03 | | | | 278,488,000 | | | | 241,115,000 | |
| Due in 2034 and beyond | | | 3.58 | | | | 35,647,000 | | | | 33,500,000 | |
| Mortgage-backed securities | | | 2.12 | | | | 37,164,000 | | | | 31,590,000 | |
| Other investments | | | 8.00 | | | | 500,000 | | | | 500,000 | |
| | | | | | | | | | | | | |
| Total available for sale securities | | | 1.76 | | | $ | 691,197,000 | | | $ | 619,973,000 | |
No securities were sold during the first three months of 2023 or the full-year 2022.
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $200 million and $193 million at March 31, 2023 and December 31, 2022, respectively, with estimated market values of $192 million and $182 million at the respective dates. We had no securities issued by all other states and their political subdivisions as of March 31, 2023, and December 31, 2022. 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 $227 million and $194 million at March 31, 2023, and December 31, 2022, respectively.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES |
Our total loans at March 31, 2023 were $3.97 billion compared to $3.92 billion at December 31, 2022, an increase of $48.9 million, or 1.2%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2023 and December 31, 2022, and the percentage change in loans from the end of 2022 to the end of the first quarter of 2023, are as follows:
| | | | | | | | | | | | | | | | | | | Percent | |
| | | March 31, 2023 | | | December 31, 2022 | | | Increase | |
| | | Balance | | | % | | | Balance | | | % | | | (Decrease) | |
| | | | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial (1) | | $ | 1,173,440,000 | | | | 29.6 | % | | $ | 1,185,083,000 | | | | 30.3 | % | | | (1.0 | %) |
| Vacant land, land development, and residential construction | | | 66,233,000 | | | | 1.7 | | | | 61,873,000 | | | | 1.6 | | | | 7.0 | |
| Real estate – owner occupied | | | 630,187,000 | | | | 15.9 | | | | 639,192,000 | | | | 16.3 | | | | (1.4 | ) |
| Real estate – non-owner occupied | | | 1,051,221,000 | | | | 26.5 | | | | 1,033,734,000 | | | | 26.4 | | | | 1.7 | |
| Real estate – multi-family and residential rental | | | 219,339,000 | | | | 5.5 | | | | 211,948,000 | | | | 5.4 | | | | 3.5 | |
| Total commercial | | | 3,140,420,000 | | | | 79.2 | | | | 3,131,830,000 | | | | 80.0 | | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | | | | | | | | | |
| 1-4 family mortgages | | | 795,007,000 | | | | 20.0 | | | | 755,036,000 | | | | 19.3 | | | | 5.3 | |
| Other consumer loans | | | 30,101,000 | | | | 0.8 | | | | 29,753,000 | | | | 0.7 | | | | 1.2 | |
| Total retail | | | 825,108,000 | | | | 20.8 | | | | 784,789,000 | | | | 20.0 | | | | 5.1 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 3,965,528,000 | | | | 100.0 | % | | $ | 3,916,619,000 | | | | 100.0 | % | | | 1.2 | % |
| | (1) | For March 31, 2023, and December 31, 2022, includes $0.4 million and $0.9 million in loans originated under the Paycheck Protection Program, respectively. |
Nonperforming loans as of March 31, 2023 and December 31, 2022 were as follows:
| | | March 31, | | | December 31, | |
| | | 2023 | | | 2022 | |
| | | | | | | | | |
| Loans past due 90 days or more still accruing interest | | $ | 0 | | | $ | 0 | |
| Nonaccrual loans | | | 7,782,000 | | | | 7,728,000 | |
| | | | | | | | | |
| Total nonperforming loans | | $ | 7,782,000 | | | $ | 7,728,000 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
The recorded principal balance of nonperforming loans was as follows:
| | | March 31, | | | December 31, | |
| | | 2023 | | | 2022 | |
| Commercial: | | | | | | | | |
| Commercial and industrial | | $ | 5,654,000 | | | $ | 6,024,000 | |
| Vacant land, land development, and residential construction | | | 0 | | | | 0 | |
| Real estate – owner occupied | | | 229,000 | | | | 248,000 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 0 | | | | 0 | |
| Total commercial | | | 5,883,000 | | | | 6,272,000 | |
| | | | | | | | | |
| Retail: | | | | | | | | |
| 1-4 family mortgages | | | 1,899,000 | | | | 1,456,000 | |
| Other consumer loans | | | 0 | | | | 0 | |
| Total retail | | | 1,899,000 | | | | 1,456,000 | |
| | | | | | | | | |
| Total nonperforming loans | | $ | 7,782,000 | | | $ | 7,728,000 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
An age analysis of past due loans is as follows as of March 31, 2023:
| | | 30 – 59 Days Past Due | | | 60 – 89 Days Past Due | | | Greater Than 89 Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | Recorded Balance > 89 Days and Accruing | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | $ | 95,000 | | | $ | 0 | | | $ | 272,000 | | | $ | 367,000 | | | $ | 1,173,073,000 | | | $ | 1,173,440,000 | | | $ | 0 | |
| Vacant land, land development, and residential construction | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 66,233,000 | | | | 66,233,000 | | | | 0 | |
| Real estate – owner occupied | | | 206,000 | | | | 44,000 | | | | 229,000 | | | | 479,000 | | | | 629,708,000 | | | | 630,187,000 | | | | 0 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,051,221,000 | | | | 1,051,221,000 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 27,000 | | | | 0 | | | | 0 | | | | 27,000 | | | | 219,312,000 | | | | 219,339,000 | | | | 0 | |
| Total commercial | | | 328,000 | | | | 44,000 | | | | 501,000 | | | | 873,000 | | | | 3,139,547,000 | | | | 3,140,420,000 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family mortgages | | | 733,000 | | | | 235,000 | | | | 277,000 | | | | 1,245,000 | | | | 793,762,000 | | | | 795,007,000 | | | | 0 | |
| Other consumer loans | | | 41,000 | | | | 3,000 | | | | 0 | | | | 44,000 | | | | 30,057,000 | | | | 30,101,000 | | | | 0 | |
| Total retail | | | 774,000 | | | | 238,000 | | | | 277,000 | | | | 1,289,000 | | | | 823,819,000 | | | | 825,108,000 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total past due loans | | $ | 1,102,000 | | | $ | 282,000 | | | $ | 778,000 | | | $ | 2,162,000 | | | $ | 3,963,366,000 | | | $ | 3,965,528,000 | | | $ | 0 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
An age analysis of past due loans is as follows as of December 31, 2022:
| | | 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 | | | $ | 5,705,000 | | | $ | 249,000 | | | $ | 5,954,000 | | | $ | 1,179,129,000 | | | $ | 1,185,083,000 | | | $ | 0 | |
| Vacant land, land development, and residential construction | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 61,873,000 | | | | 61,873,000 | | | | 0 | |
| Real estate – owner occupied | | | 0 | | | | 248,000 | | | | 0 | | | | 248,000 | | | | 638,944,000 | | | | 639,192,000 | | | | 0 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,033,734,000 | | | | 1,033,734,000 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 211,948,000 | | | | 211,948,000 | | | | 0 | |
| Total commercial | | | 0 | | | | 5,953,000 | | | | 249,000 | | | | 6,202,000 | | | | 3,125,628,000 | | | | 3,131,830,000 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family mortgages | | | 1,334,000 | | | | 88,000 | | | | 116,000 | | | | 1,538,000 | | | | 753,498,000 | | | | 755,036,000 | | | | 0 | |
| Other consumer loans | | | 15,000 | | | | 1,000 | | | | 0 | | | | 16,000 | | | | 29,737,000 | | | | 29,753,000 | | | | 0 | |
| Total retail | | | 1,349,000 | | | | 89,000 | | | | 116,000 | | | | 1,554,000 | | | | 783,235,000 | | | | 784,789,000 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total past due loans | | $ | 1,349,000 | | | $ | 6,042,000 | | | $ | 365,000 | | | $ | 7,756,000 | | | $ | 3,908,863,000 | | | $ | 3,916,619,000 | | | $ | 0 | |
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. Fair value estimates of collateral on distressed lending relationships, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions. Under CECL for collateral dependent loans in instances where the borrower is experiencing financial difficulties, we adopted the practical expedient to measure the allowance based on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral and the recorded principal balance. If the fair value of the collateral exceeds the recorded principal balance, no allowance is required. Collateral dependent loans, representing the entire amount of loans on nonaccrual, totaled $7.8 million and $7.7 million as of March 31, 2023 and December 31, 2022, respectively.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
Nonaccrual loans as of March 31, 2023 were as follows:
| | | Amortized | | | Related | |
| | | Cost | | | Allowance | |
| With no allowance recorded: | | | | | | | | |
| Commercial: | | | | | | | | |
| Commercial and industrial | | $ | 1,986,000 | | | $ | 0 | |
| Vacant land, land development and residential construction | | | 0 | | | | 0 | |
| Real estate – owner occupied | | | 229,000 | | | | 0 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 0 | | | | 0 | |
| Total commercial | | | 2,215,000 | | | | 0 | |
| | | | | | | | | |
| Retail: | | | | | | | | |
| 1-4 family mortgages | | | 1,096,000 | | | | 0 | |
| Other consumer loans | | | 0 | | | | 0 | |
| Total retail | | | 1,096,000 | | | | 0 | |
| | | | | | | | | |
| Total with no allowance recorded | | $ | 3,311,000 | | | $ | 0 | |
| | | | | | | | | |
| With an allowance recorded: | | | | | | | | |
| Commercial: | | | | | | | | |
| Commercial and industrial | | $ | 3,668,000 | | | $ | 2,060,000 | |
| Vacant land, land development and residential construction | | | 0 | | | | 0 | |
| Real estate – owner occupied | | | 0 | | | | 0 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 0 | | | | 0 | |
| Total commercial | | | 3,668,000 | | | | 2,060,000 | |
| | | | | | | | | |
| Retail: | | | | | | | | |
| 1-4 family mortgages | | | 803,000 | | | | 378,000 | |
| Other consumer loans | | | 0 | | | | 0 | |
| Total retail | | | 803,000 | | | | 378,000 | |
| | | | | | | | | |
| Total with an allowance recorded | | $ | 4,471,000 | | | $ | 2,438,000 | |
| | | | | | | | | |
| Total nonaccrual loans: | | | | | | | | |
| Commercial | | $ | 5,883,000 | | | $ | 2,060,000 | |
| Retail | | | 1,899,000 | | | | 378,000 | |
| Total nonaccrual loans | | $ | 7,782,000 | | | $ | 2,438,000 | |
No interest income was recognized on nonaccrual loans during the first quarter of 2023.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
Nonaccrual loans as of December 31, 2022 were as follows:
| | | Amortized | | | Related | |
| | | Cost | | | Allowance | |
| With no allowance recorded: | | | | | | | | |
| Commercial: | | | | | | | | |
| Commercial and industrial | | $ | 249,000 | | | $ | 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 | | | 249,000 | | | | 0 | |
| | | | | | | | | |
| Retail: | | | | | | | | |
| 1-4 family mortgages | | | 1,064,000 | | | | 0 | |
| Other consumer loans | | | 0 | | | | 0 | |
| Total retail | | | 1,064,000 | | | | 0 | |
| | | | | | | | | |
| Total with no allowance recorded | | $ | 1,313,000 | | | $ | 0 | |
| | | | | | | | | |
| With an allowance recorded: | | | | | | | | |
| Commercial: | | | | | | | | |
| Commercial and industrial | | $ | 5,775,000 | | | $ | 2,051,000 | |
| Vacant land, land development and residential construction | | | 0 | | | | 0 | |
| Real estate – owner occupied | | | 248,000 | | | | 32,000 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 0 | | | | 0 | |
| Total commercial | | | 6,023,000 | | | | 2,083,000 | |
| | | | | | | | | |
| Retail: | | | | | | | | |
| 1-4 family mortgages | | | 392,000 | | | | 200,000 | |
| Other consumer loans | | | 0 | | | | 0 | |
| Total retail | | | 392,000 | | | | 200,000 | |
| | | | | | | | | |
| Total with an allowance recorded | | $ | 6,415,000 | | | $ | 2,283,000 | |
| | | | | | | | | |
| Total nonaccrual loans: | | | | | | | | |
| Commercial | | $ | 6,272,000 | | | $ | 2,083,000 | |
| Retail | | | 1,456,000 | | | | 200,000 | |
| Total nonaccrual loans | | $ | 7,728,000 | | | $ | 2,283,000 | |
No interest income was recognized on nonaccrual loans during 2022.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT 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 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. 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 for loans for which repayment risks are satisfactory. |
| | | |
| | Grade 6. | “Monitor” Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report. |
| | | |
| | Grade 7. | “Special Mention” Loans with this rating have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date. |
| | | |
| | Grade 8. | “Substandard” Loans with this rate are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected. |
| | | |
| | Grade 9. | “Doubtful” Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable. |
| | | |
| | Grade 10. | “Loss” Loans with this rating are considered uncollectible, and of such little value that continuance as an active asset is not warranted. |
| | The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position. Retail loans that reach 90 days or more past due are generally placed into nonaccrual status and are categorized as nonperforming. |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of March 31, 2023 based on year of origination (dollars in thousands):
| | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Term Total | | | Revolving Loans | | | Grand Total | |
| Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 38,167 | | | $ | 101,497 | | | $ | 129,476 | | | $ | 38,182 | | | $ | 8,393 | | | $ | 11,100 | | | $ | 326,815 | | | $ | 396,886 | | | $ | 723,701 | |
| Grades 5 – 7 | | | 25,597 | | | | 128,333 | | | | 42,304 | | | | 26,770 | | | | 8,472 | | | | 512 | | | | 231,988 | | | | 194,070 | | | | 426,058 | |
| Grades 8 – 9 | | | 9,947 | | | | 24 | | | | 249 | | | | 0 | | | | 0 | | | | 43 | | | | 10,263 | | | | 13,418 | | | | 23,681 | |
| Total | | $ | 73,711 | | | $ | 229,854 | | | $ | 172,029 | | | $ | 64,952 | | | $ | 16,865 | | | $ | 11,655 | | | $ | 569,066 | | | $ | 604,374 | | | $ | 1,173,440 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 36 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 36 | | | $ | 0 | | | $ | 36 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vacant Land, Land Development and Residential Construction: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 2,916 | | | $ | 28,645 | | | $ | 5,225 | | | $ | 3,121 | | | $ | 0 | | | $ | 321 | | | $ | 40,228 | | | $ | 0 | | | $ | 40,228 | |
| Grades 5 – 7 | | | 5,310 | | | | 11,643 | | | | 7,602 | | | | 341 | | | | 48 | | | | 586 | | | | 25,530 | | | | 374 | | | | 25,904 | |
| Grades 8 – 9 | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 101 | | | | 101 | | | | 0 | | | | 101 | |
| Total | | $ | 8,226 | | | $ | 40,288 | | | $ | 12,827 | | | $ | 3,462 | | | $ | 48 | | | $ | 1,008 | | | $ | 65,859 | | | $ | 374 | | | $ | 66,233 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate – Owner Occupied: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 39,686 | | | $ | 167,851 | | | $ | 110,400 | | | $ | 51,319 | | | $ | 18,545 | | | $ | 22,312 | | | $ | 410,113 | | | $ | 0 | | | $ | 410,113 | |
| Grades 5 – 7 | | | 15,364 | | | | 97,215 | | | | 42,009 | | | | 32,707 | | | | 9,976 | | | | 12,171 | | | | 209,442 | | | | 0 | | | | 209,442 | |
| Grades 8 – 9 | | | 7,500 | | | | 2,966 | | | | 0 | | | | 44 | | | | 0 | | | | 122 | | | | 10,632 | | | | 0 | | | | 10,632 | |
| Total | | $ | 62,550 | | | $ | 268,032 | | | $ | 152,409 | | | $ | 84,070 | | | $ | 28,521 | | | $ | 34,605 | | | $ | 630,187 | | | $ | 0 | | | $ | 630,187 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 14 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 14 | | | $ | 0 | | | $ | 14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate – Non-Owner Occupied: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 11,142 | | | $ | 114,392 | | | $ | 162,687 | | | $ | 92,232 | | | $ | 47,592 | | | $ | 21,345 | | | $ | 449,390 | | | $ | 0 | | | $ | 449,390 | |
| Grades 5 – 7 | | | 65,990 | | | | 174,725 | | | | 156,779 | | | | 112,205 | | | | 31,078 | | | | 48,780 | | | | 589,557 | | | | 0 | | | | 589,557 | |
| Grades 8 – 9 | | | 0 | | | | 6,644 | | | | 5,630 | | | | 0 | | | | 0 | | | | 0 | | | | 12,274 | | | | 0 | | | | 12,274 | |
| Total | | $ | 77,132 | | | $ | 295,761 | | | $ | 325,096 | | | $ | 204,437 | | | $ | 78,670 | | | $ | 70,125 | | | $ | 1,051,221 | | | $ | 0 | | | $ | 1,051,221 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate – Multi-Family and Residential Rental: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 9,717 | | | $ | 31,937 | | | $ | 39,603 | | | $ | 35,737 | | | $ | 5,213 | | | $ | 6,386 | | | $ | 128,593 | | | $ | 0 | | | $ | 128,593 | |
| Grades 5 – 7 | | | 5,470 | | | | 32,355 | | | | 23,634 | | | | 12,323 | | | | 3,041 | | | | 2,602 | | | | 79,425 | | | | 0 | | | | 79,425 | |
| Grades 8 – 9 | | | 0 | | | | 11,250 | | | | 0 | | | | 0 | | | | 0 | | | | 71 | | | | 11,321 | | | | 0 | | | | 11,321 | |
| Total | | $ | 15,187 | | | $ | 75,542 | | | $ | 63,237 | | | $ | 48,060 | | | $ | 8,254 | | | $ | 9,059 | | | $ | 219,339 | | | $ | 0 | | | $ | 219,339 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Commercial | | $ | 236,806 | | | $ | 909,477 | | | $ | 725,598 | | | $ | 404,981 | | | $ | 132,358 | | | $ | 126,452 | | | $ | 2,535,672 | | | $ | 604,748 | | | $ | 3,140,420 | |
| Total Comm current YTD gross write offs | | $ | 0 | | | $ | 50 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 50 | | | $ | 0 | | | $ | 50 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
| | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Term Total | | | Revolving Loans | | | Grand Total | |
| Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 Family Mortgages: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 35,010 | | | $ | 325,078 | | | $ | 240,820 | | | $ | 90,565 | | | $ | 11,799 | | | $ | 52,831 | | | $ | 756,103 | | | $ | 37,005 | | | $ | 793,108 | |
| Nonperforming | | | 0 | | | | 138 | | | | 385 | | | | 0 | | | | 13 | | | | 1,363 | | | | 1,899 | | | | 0 | | | | 1,899 | |
| Total | | $ | 35,010 | | | $ | 325,216 | | | $ | 241,205 | | | $ | 90,565 | | | $ | 11,812 | | | $ | 54,194 | | | $ | 758,002 | | | $ | 37,005 | | | $ | 795,007 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 42 | | | $ | 42 | | | $ | 0 | | | $ | 42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Consumer Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 1,808 | | | $ | 3,771 | | | $ | 2,409 | | | $ | 844 | | | $ | 940 | | | $ | 605 | | | $ | 10,377 | | | $ | 19,724 | | | $ | 30,101 | |
| Nonperforming | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Total | | $ | 1,808 | | | $ | 3,771 | | | $ | 2,409 | | | $ | 844 | | | $ | 940 | | | $ | 605 | | | $ | 10,377 | | | $ | 19,724 | | | $ | 30,101 | |
| Current year-to-date gross write offs | | $ | 0 | | | $ | 3 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | 4 | | | $ | 10 | | | $ | 14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Retail | | $ | 36,818 | | | $ | 328,987 | | | $ | 243,614 | | | $ | 91,409 | | | $ | 12,752 | | | $ | 54,799 | | | $ | 768,379 | | | $ | 56,729 | | | $ | 825,108 | |
| Total Retail Current YTD gross write offs | | $ | 0 | | | $ | 3 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 43 | | | $ | 46 | | | $ | 10 | | | $ | 56 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grand Total | | $ | 273,624 | | | $ | 1,238,464 | | | $ | 969,212 | | | $ | 496,390 | | | $ | 145,110 | | | $ | 181,251 | | | $ | 3,304,051 | | | $ | 661,477 | | | $ | 3,965,528 | |
| Grand Total Current YTD gross write offs | | $ | 0 | | | $ | 53 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 43 | | | $ | 96 | | | $ | 10 | | | $ | 106 | |
There were no revolving loans converted to term loans during the first three months of 2023.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
The following table reflects amortized cost of basis of loans as of December 31, 2022 based on year of origination (dollars in thousands):
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Term Total | | | Revolving Loans | | | Grand Total | |
| Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 115,494 | | | $ | 141,481 | | | $ | 43,961 | | | $ | 9,194 | | | $ | 3,230 | | | $ | 9,851 | | | $ | 323,211 | | | $ | 396,372 | | | $ | 719,583 | |
| Grades 5 – 7 | | | 151,783 | | | | 47,030 | | | | 31,697 | | | | 8,870 | | | | 569 | | | | 93 | | | | 240,042 | | | | 210,363 | | | | 450,405 | |
| Grades 8 – 9 | | | 3,784 | | | | 249 | | | | 0 | | | | 0 | | | | 48 | | | | 29 | | | | 4,110 | | | | 10,985 | | | | 15,095 | |
| Total | | $ | 271,061 | | | $ | 188,760 | | | $ | 75,658 | | | $ | 18,064 | | | $ | 3,847 | | | $ | 9,973 | | | $ | 567,363 | | | $ | 617,720 | | | $ | 1,185,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vacant Land, Land Development and Residential Construction: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 31,756 | | | $ | 6,196 | | | $ | 3,428 | | | $ | 0 | | | $ | 0 | | | $ | 331 | | | $ | 41,711 | | | $ | 0 | | | $ | 41,711 | |
| Grades 5 – 7 | | | 10,270 | | | | 8,760 | | | | 351 | | | | 50 | | | | 0 | | | | 626 | | | | 20,057 | | | | 0 | | | | 20,057 | |
| Grades 8 – 9 | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 14 | | | | 91 | | | | 105 | | | | 0 | | | | 105 | |
| Total | | $ | 42,026 | | | $ | 14,956 | | | $ | 3,779 | | | $ | 50 | | | $ | 14 | | | $ | 1,048 | | | $ | 61,873 | | | $ | 0 | | | $ | 61,873 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate – Owner Occupied: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 194,072 | | | $ | 113,528 | | | $ | 53,630 | | | $ | 19,670 | | | $ | 19,279 | | | $ | 6,162 | | | $ | 406,341 | | | $ | 0 | | | $ | 406,341 | |
| Grades 5 – 7 | | | 115,720 | | | | 56,173 | | | | 33,913 | | | | 10,245 | | | | 12,550 | | | | 1,165 | | | | 229,766 | | | | 0 | | | | 229,766 | |
| Grades 8 – 9 | | | 2,919 | | | | 0 | | | | 44 | | | | 0 | | | | 122 | | | | 0 | | | | 3,085 | | | | 0 | | | | 3,085 | |
| Total | | $ | 312,711 | | | $ | 169,701 | | | $ | 87,587 | | | $ | 29,915 | | | $ | 31,951 | | | $ | 7,327 | | | $ | 639,192 | | | $ | 0 | | | $ | 639,192 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate – Non-Owner Occupied: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 129,153 | | | $ | 163,035 | | | $ | 89,125 | | | $ | 44,196 | | | $ | 10,079 | | | $ | 12,018 | | | $ | 447,606 | | | $ | 0 | | | $ | 447,606 | |
| Grades 5 – 7 | | | 183,388 | | | | 164,334 | | | | 139,951 | | | | 35,200 | | | | 13,456 | | | | 37,399 | | | | 573,728 | | | | 0 | | | | 573,728 | |
| Grades 8 – 9 | | | 6,712 | | | | 5,688 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 12,400 | | | | 0 | | | | 12,400 | |
| Total | | $ | 319,253 | | | $ | 333,057 | | | $ | 229,076 | | | $ | 79,396 | | | $ | 23,535 | | | $ | 49,417 | | | $ | 1,033,734 | | | $ | 0 | | | $ | 1,033,734 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate – Multi-Family and Residential Rental: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grades 1 – 4 | | $ | 31,470 | | | $ | 38,176 | | | $ | 36,348 | | | $ | 5,306 | | | $ | 3,082 | | | $ | 4,003 | | | $ | 118,385 | | | $ | 0 | | | $ | 118,385 | |
| Grades 5 – 7 | | | 48,847 | | | | 25,786 | | | | 12,879 | | | | 3,162 | | | | 2,557 | | | | 283 | | | | 93,514 | | | | 0 | | | | 93,514 | |
| Grades 8 – 9 | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 49 | | | | 49 | | | | 0 | | | | 49 | |
| Total | | $ | 80,317 | | | $ | 63,962 | | | $ | 49,227 | | | $ | 8,468 | | | $ | 5,639 | | | $ | 4,335 | | | $ | 211,948 | | | $ | 0 | | | $ | 211,948 | |
| Total Commercial | | $ | 1,025,368 | | | $ | 770,436 | | | $ | 445,327 | | | $ | 135,893 | | | $ | 64,986 | | | $ | 72,100 | | | $ | 2,514,110 | | | $ | 617,720 | | | $ | 3,131,830 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Term Total | | | Revolving Loans | | | Grand Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 Family Mortgages: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 313,611 | | | $ | 242,950 | | | $ | 91,936 | | | $ | 12,094 | | | $ | 14,297 | | | $ | 41,622 | | | $ | 716,510 | | | $ | 37,070 | | | $ | 753,580 | |
| Nonperforming | | | 142 | | | | 82 | | | | 0 | | | | 0 | | | | 203 | | | | 1,029 | | | | 1,456 | | | | 0 | | | | 1,456 | |
| Total | | $ | 313,753 | | | $ | 243,032 | | | $ | 91,936 | | | $ | 12,094 | | | $ | 14,500 | | | $ | 42,651 | | | $ | 717,966 | | | $ | 37,070 | | | $ | 755,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Consumer Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 4,349 | | | $ | 2,870 | | | $ | 1,040 | | | $ | 1,074 | | | $ | 395 | | | $ | 430 | | | $ | 10,158 | | | $ | 19,595 | | | $ | 29,753 | |
| Nonperforming | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Total | | $ | 4,349 | | | $ | 2,870 | | | $ | 1,040 | | | $ | 1,074 | | | $ | 395 | | | $ | 430 | | | $ | 10,158 | | | $ | 19,595 | | | $ | 29,753 | |
| Total Retail | | $ | 318,102 | | | $ | 245,902 | | | $ | 92,976 | | | $ | 13,168 | | | $ | 14,895 | | | $ | 43,081 | | | $ | 728,124 | | | $ | 56,665 | | | $ | 784,789 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grand Total | | $ | 1,343,470 | | | $ | 1,016,338 | | | $ | 538,303 | | | $ | 149,061 | | | $ | 79,881 | | | $ | 115,181 | | | $ | 3,242,234 | | | $ | 674,385 | | | $ | 3,916,619 | |
There were no revolving loans converted to term loans during 2022.
Activity in the allowance for credit losses during the three months ended March 31, 2023 is as follows (dollars in thousands):
| | | 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 | | | 1-4 family mortgages | | | Other consumer loans | | | Unallocated | | | Total | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 10,203 | | | $ | 490 | | | $ | 5,914 | | | $ | 10,164 | | | $ | 1,269 | | | $ | 14,027 | | | $ | 160 | | | $ | 19 | | | $ | 42,246 | |
| Provision for credit losses | | | (7 | ) | | | 19 | | | | (237 | ) | | | 131 | | | | 24 | | | | 618 | | | | (5 | ) | | | 57 | | | | 600 | |
| Charge-offs | | | (36 | ) | | | 0 | | | | (14 | ) | | | 0 | | | | 0 | | | | (42 | ) | | | (14 | ) | | | 0 | | | | (106 | ) |
| Recoveries | | | 21 | | | | 1 | | | | 48 | | | | 0 | | | | 7 | | | | 45 | | | | 15 | | | | 0 | | | | 137 | |
| Ending balance | | $ | 10,181 | | | $ | 510 | | | $ | 5,711 | | | $ | 10,295 | | | $ | 1,300 | | | $ | 14,648 | | | $ | 156 | | | $ | 76 | | | $ | 42,877 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
Activity in the allowance for credit losses during the three months ended March 31, 2022 is as follows (dollars in thousands):
| | | 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 | | | 1-4 family mortgages | | | Other consumer loans | | | Unallocated | | | Total | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 10,782 | | | $ | 420 | | | $ | 6,045 | | | $ | 13,301 | | | $ | 1,695 | | | $ | 2,449 | | | $ | 626 | | | $ | 45 | | | $ | 35,363 | |
| Adoption of ASU 2016-13 | | | (1,571 | ) | | | (43 | ) | | | (560 | ) | | | (2,534 | ) | | | (621 | ) | | | 5,395 | | | | (411 | ) | | | (55 | ) | | | (400 | ) |
| Provision for credit losses | | | (742 | ) | | | 106 | | | | 286 | | | | (445 | ) | | | 194 | | | | 593 | | | | (33 | ) | | | 141 | | | | 100 | |
| Charge-offs | | | (170 | ) | | | (29 | ) | | | 0 | | | | 0 | | | | 0 | | | | (2 | ) | | | (4 | ) | | | 0 | | | | (205 | ) |
| Recoveries | | | 114 | | | | 1 | | | | 32 | | | | 0 | | | | 8 | | | | 127 | | | | 13 | | | | 0 | | | | 295 | |
| Ending balance | | $ | 8,413 | | | $ | 455 | | | $ | 5,803 | | | $ | 10,322 | | | $ | 1,276 | | | $ | 8,562 | | | $ | 191 | | | $ | 131 | | | $ | 35,153 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
There were no loans modified to borrowers experiencing financial difficulty during the first three months of 2023.
Loans modified as troubled debt restructurings during the three months ended March 31, 2022 were as follows:
| | | | | | | Pre- | | | Post- | |
| | | | | | | Modification | | | Modification | |
| | | | | | | Recorded | | | Recorded | |
| | | Number of | | | Principal | | | Principal | |
| | | Contracts | | | Balance | | | Balance | |
| | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | |
| Commercial and industrial | | | 0 | | | $ | 0 | | | $ | 0 | |
| Vacant land, land development and residential construction | | | 0 | | | | 0 | | | | 0 | |
| Real estate – owner occupied | | | 0 | | | | 0 | | | | 0 | |
| Real estate – non-owner occupied | | | 0 | | | | 0 | | | | 0 | |
| Real estate – multi-family and residential rental | | | 0 | | | | 0 | | | | 0 | |
| Total commercial | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | |
| 1-4 family mortgages | | | 2 | | | | 128,000 | | | | 128,000 | |
| Other consumer loans | | | 0 | | | | 0 | | | | 0 | |
| Total retail | | | 2 | | | | 128,000 | | | | 128,000 | |
| | | | | | | | | | | | | |
| Total loans | | | 2 | | | $ | 128,000 | | | $ | 128,000 | |
The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2022 (amounts as of period end):
| | | | | | | Recorded | |
| | | Number of | | | Principal | |
| | | Contracts | | | 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: | | | | | | | | |
| 1-4 family mortgages | | | 0 | | | | 0 | |
| Other consumer loans | | | 0 | | | | 0 | |
| Total retail | | | 0 | | | | 0 | |
| | | | | | | | | |
| Total loans | | | 0 | | | $ | 0 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) |
Activity for loans categorized as troubled debt restructurings during the three months ended March 31, 2022 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 | | $ | 4,973,000 | | | $ | 0 | | | $ | 10,435,000 | | | $ | 146,000 | | | $ | 91,000 | |
| Charge-Offs | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Payments | | | (212,000 | ) | | | 0 | | | | (9,677,000 | ) | | | (3,000 | ) | | | (1,000 | ) |
| Transfers to ORE | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Net Additions/Deletions | | | (1,932,000 | ) | | | 0 | | | | (669,000 | ) | | | 0 | | | | 0 | |
| Ending Balance | | $ | 2,829,000 | | | $ | 0 | | | $ | 89,000 | | | $ | 143,000 | | | $ | 90,000 | |
| | | Retail | | | Retail | |
| | | 1-4 Family | | | Other Consumer | |
| | | Mortgages | | | Loans | |
| Retail Loan Portfolio: | | | | | | | | |
| Beginning Balance | | $ | 627,000 | | | $ | 1,202,000 | |
| Charge-Offs | | | 0 | | | | 0 | |
| Payments | | | (78,000 | ) | | | (2,000 | ) |
| Transfers to ORE | | | 0 | | | | 0 | |
| Net Additions/Deletions (1) | | | 1,797,000 | | | | (1,187,000 | ) |
| Ending Balance | | $ | 2,346,000 | | | $ | 13,000 | |
| | (1) | Includes $1.2 million in the transfer of home equity lines of credit from other consumer loans to 1-4 family mortgages in association with the adoption of the CECL methodology effective January 1, 2022. |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 4. | PREMISES AND EQUIPMENT, NET |
Premises and equipment are comprised of the following:
| | | March 31, | | | December 31, | |
| | | 2023 | | | 2022 | |
| | | | | | | | | |
| Land and improvements | | $ | 13,050,000 | | | $ | 13,532,000 | |
| Buildings | | | 55,527,000 | | | | 53,865,000 | |
| Furniture and equipment | | | 23,064,000 | | | | 22,941,000 | |
| | | | 91,641,000 | | | | 90,338,000 | |
| Less: accumulated depreciation | | | 40,131,000 | | | | 38,862,000 | |
| | | | | | | | | |
| Premises and equipment, net | | $ | 51,510,000 | | | $ | 51,476,000 | |
Depreciation expense totaled $1.5 million and $1.6 million during the first quarters of 2023 and 2022, respectively.
We enter into facility leases in the normal course of business. As of March 31, 2023, we were under lease contracts for eleven of our branch facilities. The leases have maturity dates ranging from February, 2024 through December, 2029, with a weighted average life of 2.7 years as of March 31, 2023. All of our leases have multiple three- to five-year extensions; however, these were not factored in the lease maturities and weighted average lease term as it was not reasonably certain we would exercise the options on the dates we entered into the lease agreements.
Leases are classified as either operating or finance leases at the lease commencement date, with all of our current leases determined to be operating leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments over the lease term. We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments. The weighted average discount rate for leases was 5.79% as of March 31, 2023.
The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, totaled $3.9 million and $3.5 million as of March 31, 2023, and December 31, 2022, respectively. As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheet. Total operating lease expense associated with the leases aggregated $0.3 million during the first three months of 2023 and $1.3 million during the full year 2022.
Future lease payments were as follows as of March 31, 2023:
| 2023 | | $ | 904,000 | |
| 2024 | | | 1,012,000 | |
| 2025 | | | 578,000 | |
| 2026 | | | 479,000 | |
| 2027 | | | 434,000 | |
| Thereafter | | | 1,638,000 | |
| Total undiscounted lease payments | | | 5,045,000 | |
| Less effect of discounting | | | (1,169,000 | ) |
| Present value of future lease payments (lease liability) | | | 3,876,000 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our total deposits at March 31, 2023 totaled $3.60 billion, a decrease of $115 million, or 3.1%, from December 31, 2022. The components of our outstanding balances at March 31, 2023 and December 31, 2022, and percentage change in deposits from the end of 2022 to the end of the first quarter of 2023, are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
| |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
Increase |
|
| |
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
|
(Decrease) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Noninterest-bearing checking |
|
$ |
1,376,782,000 |
|
|
|
38.3 |
% |
|
$ |
1,604,750,000 |
|
|
|
43.2 |
% |
|
|
(14.2 |
%) |
| Interest-bearing checking |
|
|
576,678,000 |
|
|
|
16.0 |
|
|
|
575,028,000 |
|
|
|
15.5 |
|
|
|
0.3 |
|
| Money market |
|
|
842,557,000 |
|
|
|
23.4 |
|
|
|
776,723,000 |
|
|
|
20.9 |
|
|
|
8.5 |
|
| Savings |
|
|
340,178,000 |
|
|
|
9.5 |
|
|
|
381,602,000 |
|
|
|
10.3 |
|
|
|
(10.9 |
) |
| Time, under $100,000 |
|
|
132,482,000 |
|
|
|
3.7 |
|
|
|
113,099,000 |
|
|
|
3.0 |
|
|
|
17.1 |
|
| Time, $100,000 and over |
|
|
329,341,000 |
|
|
|
9.1 |
|
|
|
261,609,000 |
|
|
|
7.1 |
|
|
|
25.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total deposits |
|
$ |
3,598,018,000 |
|
|
|
100.0 |
% |
|
$ |
3,712,811,000 |
|
|
|
100.0 |
% |
|
|
(3.1 |
%) |
| 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:
| | | Three Months Ended | | | Twelve Months Ended | |
| | | March 31, 2023 | | | December 31, 2022 | |
| | | | | | | | | |
| Outstanding balance at end of period | | $ | 227,453,000 | | | $ | 194,340,000 | |
| Average interest rate at end of period | | | 1.44 | % | | | 0.75 | % |
| | | | | | | | | |
| Average daily balance during the period | | $ | 195,574,000 | | | $ | 200,499,000 | |
| Average interest rate during the period | | | 0.84 | % | | | 0.15 | % |
| | | | | | | | | |
| Maximum daily balance during the period | | $ | 255,180,000 | | | $ | 235,577,000 | |
Repurchase agreements have maturities of one business day. Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities on our Consolidated Balance Sheets. Repurchase agreements are secured by U.S. Government agency securities with an aggregate fair value equal to the aggregate outstanding balance of the repurchase agreements. The securities, which are included in securities available for sale on our Consolidated Balance Sheets, are held in safekeeping by a correspondent bank.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 7. |
FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES |
Federal Home Loan Bank of Indianapolis (“FHLBI”) bullet advances totaled $350 million at March 31, 2023, and were scheduled to mature at varying dates from April 2023 through March 2028, with fixed rates of interest from 0.55% to 4.37% and averaging 2.31%. FHLBI bullet advances totaled $280 million at December 31, 2022, and were scheduled to mature at varying dates from January 2023 through June 2027, with fixed rates of interest from 0.55% to 3.13% and averaging 1.84%.
Maturities of FHLBI bullet advances as of March 31, 2023 were as follows:
| 2023 | | $ | 70,000,000 | |
| 2024 | | | 80,000,000 | |
| 2025 | | | 50,000,000 | |
| 2026 | | | 50,000,000 | |
| 2027 | | | 70,000,000 | |
| Thereafter | | | 30,000,000 | |
FHLBI amortizing advances totaled $27.9 million as of March 31, 2023, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances total $28.3 million as of December 31, 2022, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.
Scheduled principal payments of FHLBI amortizing advances as of March 31, 2023 were as follows:
| 2023 |
|
$ |
0 |
|
| 2024 |
|
|
826,000 |
|
| 2025 |
|
|
862,000 |
|
| 2026 |
|
|
899,000 |
|
| 2027 |
|
|
938,000 |
|
| Thereafter |
|
|
24,385,000 |
|
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 March 31, 2023 totaled $665 million, with remaining availability based on collateral of $281 million.
| 8. | COMMITMENTS AND OFF-BALANCE SHEET RISK |
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our 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.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 8. | COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued) |
These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our 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. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on management’s credit assessment of the borrower.
We are required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding at the end of the period and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon. The calculated allowance aggregated $0.2 million and $0.1 million as of March 31, 2023 and December 31, 2022, respectively. We do not reserve for residential mortgage construction loans, as the loans are for one year or less and draws are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements. Letters of credit are rarely drawn.
At March 31, 2023, and December 31, 2022, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.
A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2023 and December 31, 2022 is as follows:
| | | March 31, | | | December 31, | |
| | | 2023 | | | 2022 | |
| | | | | | | | | |
| Commercial unused lines of credit | | $ | 1,359,164,000 | | | $ | 1,283,703,000 | |
| Unused lines of credit secured by 1–4 family residential properties | | | 72,014,000 | | | | 71,972,000 | |
| Credit card unused lines of credit | | | 127,863,000 | | | | 123,687,000 | |
| Other consumer unused lines of credit | | | 62,298,000 | | | | 75,747,000 | |
| Commitments to make loans | | | 347,062,000 | | | | 329,646,000 | |
| Standby letters of credit | | | 22,720,000 | | | | 23,539,000 | |
| | | $ | 1,991,121,000 | | | $ | 1,908,294,000 | |
| 9. | DERIVATIVES AND HEDGING ACTIVITIES |
We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 9. | DERIVATIVES AND HEDGING ACTIVITIES (Continued) |
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with correspondent banks to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions.
As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent banks are recognized directly to earnings. Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement date.
The fair values of derivative instruments as of March 31, 2023, are reflected in the following table.
| | | Notional Amount | | Balance Sheet Location | | Fair Value | |
| | | | | | | | | | |
| Derivative Assets | | | | | | | | | |
| Interest rate swaps | | $ | 470,678,000 | | Other Assets | | $ | 22,871,000 | |
| | | | | | | | | | |
| Derivative Liabilities | | | | | | | | | |
| Interest rate swaps | | | 470,678,000 | | Other Liabilities | | | 23,254,000 | |
The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $0.2 million during the first three months of 2023 that was recorded in other noninterest expense on our Consolidated Statements of Income. The fair value of interest rate swaps in a liability position, which includes accrued interest, was $23.3 million as of March 31, 2023. We have master netting arrangements with our correspondent banks that allow us to net receivables and payables. The netting agreement also allows us to net related cash collateral received and transferred up to the fair value exposure amount. We have elected to not offset these transactions on the Consolidated Balance Sheets. As of March 31, 2023, the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $19.6 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $20.8 million, providing for an over-collateralized position on the Consolidated Balance Sheets of $1.2 million. As of March 31, 2023, the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $3.3 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $3.0 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $0.3 million. Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000. Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $471 million as of March 31, 2023. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instruments.
The fair values of derivative instruments as of December 31, 2022, are reflected in the following table.
| | | Notional Amount | | Balance Sheet Location | | Fair Value | |
| | | | | | | | | | |
| Derivative Assets | | | | | | | | | |
| Interest rate swaps | | $ | 401,572,000 | | Other Assets | | $ | 25,697,000 | |
| | | | | | | | | | |
| Derivative Liabilities | | | | | | | | | |
| Interest rate swaps | | | 401,572,000 | | Other Liabilities | | | 25,900,000 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 9. | DERIVATIVES AND HEDGING ACTIVITIES (Continued) |
The effect of interest rate swaps that are not designated as hedging instruments resulted in income of less than $0.1 million during the year-ended December 31, 2022 that was recorded in other noninterest expense on our Consolidated Statements of Income. The fair value of interest rate swaps in a liability position, which includes accrued interest, was $25.9 million as of December 31, 2022. We have master netting arrangements with our correspondent banks that allow us to net receivables and payables. The netting agreement also allows us to net related cash collateral received and transferred up to the fair value exposure amount. We have elected to not offset these transactions on the Consolidated Balance Sheets. As of December 31, 2022, the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $25.3 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $25.2 million, and the net amount of derivative assets not offset in the Consolidated Balance Sheets was $0.1 million. As of December 31, 2022, the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $0.4 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $0.4 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $0. Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000. Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $402 million as of December 31, 2022. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instruments.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 10. | 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 March 31, 2023 and December 31, 2022 (dollars in thousands):
| | Level in | | March 31, 2023 | | | December 31, 2022 | |
| | Fair Value | | Carrying | | | Fair | | | Carrying | | | Fair | |
| | Hierarchy | | Values | | | Values | | | Values | | | Values | |
| Financial assets: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | Level 1 | | $ | 57,938 | | | $ | 57,938 | | | $ | 96,772 | | | $ | 96,772 | |
| Securities available for sale | (1) | | | 619,973 | | | | 619,973 | | | | 602,936 | | | | 602,936 | |
| FHLBI stock | (2) | | | 17,721 | | | | 17,721 | | | | 17,721 | | | | 17,721 | |
| Loans, net | Level 3 | | | 3,922,651 | | | | 3,837,260 | | | | 3,874,373 | | | | 3,800,042 | |
| Mortgage loans held for sale | Level 2 | | | 3,821 | | | | 3,932 | | | | 3,565 | | | | 3,643 | |
| Mortgage servicing rights | Level 3 | | | 11,402 | | | | 18,726 | | | | 11,837 | | | | 17,727 | |
| Accrued interest receivable | Level 2 | | | 17,424 | | | | 17,424 | | | | 15,476 | | | | 15,476 | |
| Interest rate swaps | Level 2 | | | 22,871 | | | | 22,871 | | | | 25,697 | | | | 25,697 | |
| | | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | |
| Deposits | Level 2 | | | 3,598,018 | | | | 3,330,349 | | | | 3,712,811 | | | | 3,379,403 | |
| Repurchase agreements | Level 2 | | | 227,453 | | | | 227,453 | | | | 194,340 | | | | 194,340 | |
| FHLBI advances | Level 2 | | | 377,910 | | | | 360,723 | | | | 308,263 | | | | 292,044 | |
| Subordinated debentures | Level 2 | | | 49,130 | | | | 49,119 | | | | 48,958 | | | | 49,531 | |
| Subordinated notes | Level 2 | | | 88,714 | | | | 75,911 | | | | 88,628 | | | | 75,024 | |
| Accrued interest payable | Level 2 | | | 3,486 | | | | 3,486 | | | | 3,223 | | | | 3,223 | |
| Interest rate swaps | Level 2 | | | 23,254 | | | | 23,254 | | | | 25,900 | | | | 25,900 | |
| | (1) | See Note 11 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 deposit 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, subordinated notes, and FHLBI advances are based on current rates for similar financing. The fair values of interest rate swaps are based on discounted cash flows using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads. The fair value of other off-balance sheet items is estimated to be nominal.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 debt obligations, 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 March 31, 2023, or December 31, 2022. We have no Level 1 securities available for sale.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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| 11. | FAIR VALUES (Continued) |
Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves. Insignificant unobservable inputs, such as borrower credit spreads, are also utilized.
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 March 31, 2023 and December 31, 2022, we determined the fair value of our mortgage loans held for sale to be $3.9 million and $3.6 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 significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed 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 March 31, 2023 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 | | $ | 396,220,000 | | | $ | 0 | | | $ | 396,220,000 | | | $ | 0 | |
| Mortgage-backed securities | | | 31,590,000 | | | | 0 | | | | 31,590,000 | | | | 0 | |
| Municipal general obligation bonds | | | 163,071,000 | | | | 0 | | | | 162,493,000 | | | | 578,000 | |
| Municipal revenue bonds | | | 28,592,000 | | | | 0 | | | | 28,592,000 | | | | 0 | |
| Other investments | | | 500,000 | | | | 0 | | | | 500,000 | | | | 0 | |
| Interest rate swaps | | | 22,871,000 | | | | 0 | | | | 22,871,000 | | | | 0 | |
| Total assets | | $ | 642,844,000 | | | $ | 0 | | | $ | 642,266,000 | | | $ | 578,000 | |
| | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 23,254,000 | | | | 0 | | | | 23,254,000 | | | | 0 | |
| Total liabilities | | $ | 23,254,000 | | | $ | 0 | | | $ | 23,254,000 | | | $ | 0 | |
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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| 11. | FAIR VALUES (Continued) |
There were no sales, purchases or transfers in or out of Level 3 during the first quarter of 2023.
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 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 | | $ | 388,744,000 | | | $ | 0 | | | $ | 388,744,000 | | | $ | 0 | |
| Mortgage-backed securities | | | 31,953,000 | | | | 0 | | | | 31,953,000 | | | | 0 | |
| Municipal general obligation bonds | | | 154,433,000 | | | | 0 | | | | 153,855,000 | | | | 578,000 | |
| Municipal revenue bonds | | | 27,306,000 | | | | 0 | | | | 27,306,000 | | | | 0 | |
| Other investments | | | 500,000 | | | | 0 | | | | 500,000 | | | | 0 | |
| Interest rate swaps | | | 25,697,000 | | | | 0 | | | | 25,697,000 | | | | 0 | |
| Total assets | | $ | 628,633,000 | | | $ | 0 | | | $ | 628,055,000 | | | $ | 578,000 | |
| | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 25,900,000 | | | | 0 | | | | 25,900,000 | | | | 0 | |
| Total liabilities | | $ | 25,900,000 | | | $ | 0 | | | $ | 25,900,000 | | | $ | 0 | |
There were no sales, purchases or transfers in or out of Level 3 during 2022. The $0.1 million reduction in Level 3 municipal general obligation bonds during 2022 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 March 31, 2023 are as follows:
| | | | | | | Quoted | | | | | | | | | |
| | | | | | | Prices in | | | | | | | | | |
| | | | | | | Active | | | Significant | | | | | |
| | | | | | | Markets for | | | Other | | | Significant | |
| | | | | | | Identical | | | Observable | | | Unobservable | |
| | | | | | | Assets | | | Inputs | | | Inputs | |
| | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | | | | | | |
| Collateral Dependent Loans | | $ | 4,456,000 | | | $ | 0 | | | $ | 0 | | | $ | 4,456,000 | |
| Foreclosed assets | | | 661,000 | | | | 0 | | | | 0 | | | | 661,000 | |
| Total | | $ | 5,117,000 | | | $ | 0 | | | $ | 0 | | | $ | 5,117,000 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 11. | FAIR VALUES (Continued) |
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2022 are as follows:
| | | | | | | Quoted | | | | | | | | | |
| | | | | | | Prices | | | | | | | | | |
| | | | | | | in Active | | | Significant | | | | | |
| | | | | | | Markets for | | | Other | | | Significant | |
| | | | | | | Identical | | | Observable | | | Unobservable | |
| | | | | | | Assets | | | Inputs | | | Inputs | |
| | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | | | | | | |
| Collateral dependent loans | | $ | 5,290,000 | | | $ | 0 | | | $ | 0 | | | $ | 5,290,000 | |
| Foreclosed assets | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Total | | $ | 5,290,000 | | | $ | 0 | | | $ | 0 | | | $ | 5,290,000 | |
The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on nonperforming 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. We generally assign a discount factor range of 25% to 35% for commercial real estate dependent loans and foreclosed assets, and a discount factor range of 25% to 50% for residential-related properties. In a vast majority of cases, we assign a 10% discount factor for estimated selling costs.
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 the 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. As of March 31, 2023 and December 31, 2022, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since March 31, 2023 that we believe have changed our bank’s categorization.
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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| 12. | REGULATORY MATTERS (Continued) |
Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were:
| | | | | | | | | | | | | | | | | | | Minimum Required | |
| | | | | | | | | | | | | | | | | | | to be Well | |
| | | | | | | | | | | Minimum Required | | | Capitalized Under | |
| | | | | | | | | | | for Capital | | | Prompt Corrective | |
| | | Actual | | | Adequacy Purposes | | | Action Regulations | |
| | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| March 31, 2023 | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 652,509 | | | | 14.1 | % | | $ | 369,891 | | | | 8.0 | % | | $ | NA | | | | NA | |
| Bank | | | 636,393 | | | | 13.8 | | | | 369,708 | | | | 8.0 | | | | 462,134 | | | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 520,918 | | | | 11.3 | | | | 277,418 | | | | 6.0 | | | NA | | | NA | |
| Bank | | | 593,516 | | | | 12.8 | | | | 277,281 | | | | 6.0 | | | | 369,708 | | | | 8.0 | |
| Common equity tier 1 (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 473,863 | | | | 10.3 | | | | 208,064 | | | | 4.5 | | | NA | | | NA | |
| Bank | | | 593,516 | | | | 12.8 | | | | 207,961 | | | | 4.5 | | | | 300,388 | | | | 6.5 | |
| Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 520,918 | | | | 10.7 | | | | 195,380 | | | | 4.0 | | | NA | | | NA | |
| Bank | | | 593,516 | | | | 12.2 | | | | 195,290 | | | | 4.0 | | | | 244,112 | | | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 634,729 | | | | 14.0 | % | | $ | 362,675 | | | | 8.0 | % | | $ | NA | | | | NA | |
| Bank | | | 618,709 | | | | 13.7 | | | | 362,490 | | | | 8.0 | | | | 453,112 | | | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 503,855 | | | | 11.1 | | | | 272,007 | | | | 6.0 | | | NA | | | NA | |
| Bank | | | 576,463 | | | | 12.7 | | | | 271,868 | | | | 6.0 | | | | 362,490 | | | | 8.0 | |
| Common equity tier 1 (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 456,970 | | | | 10.1 | | | | 204,005 | | | | 4.5 | | | NA | | | NA | |
| Bank | | | 576,463 | | | | 12.7 | | | | 203,901 | | | | 4.5 | | | | 294,523 | | | | 6.5 | |
| Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 503,855 | | | | 10.1 | | | | 199,647 | | | | 4.0 | | | NA | | | NA | |
| Bank | | | 576,463 | | | | 11.6 | | | | 199,563 | | | | 4.0 | | | | 249,453 | | | | 5.0 | |
(Continued)
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 12. | REGULATORY MATTERS (Continued) |
Our consolidated capital levels as of March 31, 2023 and December 31, 2022 include $47.1 million and $46.9 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 March 31, 2023 and December 31, 2022, all $47.1 million and $46.9 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 March 31, 2023, 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 12, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $0.33 per share that was paid on March 15, 2023 to shareholders of record as of March 3, 2023.
As of March 31, 2023, we had the ability to repurchase up to $6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $20.0 million common stock repurchase program announced in May 2021. No shares were repurchased during the first quarter of 2023. Historically, stock repurchases have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank. The actual timing, number and value of shares repurchased will be determined by us in our discretion and will depend on a number of factors, including the stock price, capital position, financial performance, general market and economic conditions, alternative uses of capital and applicable legal requirements.
On April 13, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $0.33 per share that will be paid on June 14, 2023, to shareholders of record as of June 2, 2023.
MERCANTILE BANK CORPORATION