MBWM Mercantile Bank Corporation

 

1.    SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The unaudited financial statements for the nine months ended September 30, 2019 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s two subsidiaries, Mercantile Bank Real Estate Co., LLC and Mercantile Insurance Center, Inc. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended September 30, 2019 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2018.

 

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

 

Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, our unvested restricted shares are excluded from the calculation of both basic and diluted earnings per share.

 

Approximately 260,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2019. In addition, stock options for approximately 4,000 shares of common stock were included in determining diluted earnings per share for the three and nine months ended September 30, 2019. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and nine months ended September 30, 2019.

 

Approximately 230,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2018. In addition, stock options for approximately 16,000 shares of common stock were included in determining diluted earnings per share for the three and nine months ended September 30, 2018. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and nine months ended September 30, 2018.

 

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

 

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(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

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

 

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

 

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

 

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

 

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

 

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of September 30, 2019 and December 31, 2018, we determined that the fair value of our mortgage loans held for sale approximated the recorded cost of $12.8 million and $1.1 million, respectively. Loans held for sale are reported as part of our total loans on the balance sheet.

 

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives is included in the gain on sale of loans. Mortgage loans serviced for others totaled approximately $678 million as of September 30, 2019.

 

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(Continued) 

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

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

 

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

 

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

 

Allowance for Loan Losses: The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when we believe the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

 

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

 

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(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

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

 

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

 

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

 

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

 

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

 

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 (Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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1.    SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

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

  

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

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i) financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). We have completed our initial framework and developed our initial assumptions. We are now finalizing and documenting new processes and controls, challenging assumptions and outputs, refining the qualitative inputs and drafting policies and disclosures. Additionally, parallel runs will be enhanced throughout the remainder of 2019 as the processes, controls and policies are finalized by year-end 2019.

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2.    SECURITIES

 

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2019
U.S. Government agency debt obligations		$	195,926,000			$	3,151,000			$	(958,000	)		$	198,119,000
Mortgage-backed securities			42,563,000				524,000				(116,000	)			42,971,000
Municipal general obligation bonds			97,806,000				2,753,000				(22,000	)			100,537,000
Municipal revenue bonds			3,346,000				61,000				(1,000	)			3,406,000
Other investments			500,000				0				0				500,000
		$	340,141,000			$	6,489,000			$	(1,097,000	)		$	345,533,000
December 31, 2018
U.S. Government agency debt obligations		$	196,109,000			$	310,000			$	(9,342,000	)		$	187,077,000
Mortgage-backed securities			44,263,000				187,000				(792,000	)			43,658,000
Municipal general obligation bonds			103,235,000				427,000				(1,165,000	)			102,497,000
Municipal revenue bonds			3,688,000				4,000				(58,000	)			3,634,000
Other investments			500,000				0				0				500,000
		$	347,795,000			$	928,000			$	(11,357,000	)		$	337,366,000

 

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(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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2.    SECURITIES (Continued)

  

Securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
September 30, 2019
U.S. Government agency debt obligations		$	15,630,000			$	370,000			$	53,935,000			$	588,000			$	69,565,000			$	958,000
Mortgage-backed securities			0				0				17,049,000				116,000				17,049,000				116,000
Municipal general obligation bonds			1,848,000				4,000				2,758,000				18,000				4,606,000				22,000
Municipal revenue bonds			0				0				554,000				1,000				554,000				1,000
Other investments			0				0				0				0				0				0
		$	17,478,000			$	374,000			$	74,296,000			$	723,000			$	91,774,000			$	1,097,000

 

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
December 31, 2018
U.S. Government agency debt obligations		$	31,220,000			$	1,136,000			$	136,445,000			$	8,206,000			$	167,665,000			$	9,342,000
Mortgage-backed securities			11,460,000				136,000				23,762,000				656,000				35,222,000				792,000
Municipal general obligation bonds			28,923,000				299,000				43,961,000				866,000				72,884,000				1,165,000
Municipal revenue bonds			1,188,000				11,000				1,372,000				47,000				2,560,000				58,000
Other investments			0				0				0				0				0				0
		$	72,791,000			$	1,582,000			$	205,540,000			$	9,775,000			$	278,331,000			$	11,357,000

 

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those 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.

 

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 (Continued) 

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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2.    SECURITIES (Continued)

 

At September 30, 2019, 94 debt securities with fair values totaling $91.8 million have unrealized losses aggregating $1.1 million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.

 

The amortized cost and fair value of debt securities at September 30, 2019, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.

 

		Weighted Average Yield				Amortized Cost				Fair Value
Due in 2019			1.92%			$	3,487,000			$	3,488,000
Due in 2020 through 2024			2.31				67,321,000				67,802,000
Due in 2025 through 2029			2.70				113,584,000				115,696,000
Due in 2030 and beyond			3.11				112,686,000				115,076,000
Mortgage-backed securities			2.87				42,563,000				42,971,000
Other investments			4.50				500,000				500,000
Total available for sale securities			2.78%			$	340,141,000			$	345,533,000

 

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $94.3 million and $98.2 million at September 30, 2019 and December 31, 2018, respectively, with estimated market values of $97.0 million and $97.4 million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of $6.9 million and $8.7 million at September 30, 2019 and December 31, 2018, respectively, with estimated market values of $6.9 million and $8.7 million, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.

 

The carrying value of U.S. Government agency debt obligations that are pledged to secure repurchase agreements was $104 million at September 30, 2019 and December 31, 2018. Investments in Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer.

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3.    LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

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

 

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

 

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

 

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

 

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

 

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(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

 

Our total loans at September 30, 2019 were $2.93 billion compared to $2.75 billion at December 31, 2018, an increase of $180 million, or 6.5%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at September 30, 2019 and December 31, 2018, and the percentage change in loans from the end of 2018 to the end of the third quarter of 2019, are as follows:

 

																		Percent
		September 30, 2019								December 31, 2018								Increase
		Balance				%				Balance				%				(Decrease)
Originated loans
Commercial:
Commercial and industrial		$	848,659,000				31.5	%		$	768,698,000				31.3	%			10.4	%
Vacant land, land development, and residential construction			44,016,000				1.6				39,950,000				1.6				10.2
Real estate – owner occupied			527,580,000				19.6				500,188,000				20.4				5.5
Real estate – non-owner occupied			819,743,000				30.5				745,127,000				30.4				10.0
Real estate – multi-family and residential rental			101,799,000				3.8				98,035,000				4.0				3.8
Total commercial			2,341,797,000				87.0				2,151,998,000				87.7				8.8
Retail:
Home equity and other			63,026,000				2.4				65,023,000				2.7				(3.1	)
1-4 family mortgages			285,354,000				10.6				235,425,000				9.6				21.2
Total retail			348,380,000				13.0				300,448,000				12.3				16.0
Total originated loans		$	2,690,177,000				100.0	%		$	2,452,446,000				100.0	%			9.7	%

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.    LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

																		Percent
		September 30, 2019								December 31, 2018								Increase
		Balance				%				Balance				%				(Decrease)
Acquired loans
Commercial:
Commercial and industrial		$	34,089,000				14.1	%		$	54,025,000				18.0	%			(36.9	%)
Vacant land, land development, and residential construction			4,401,000				1.8				4,935,000				1.6				(10.8	)
Real estate – owner occupied			39,687,000				16.3				48,431,000				16.1				(18.1	)
Real estate – non-owner occupied			63,337,000				26.1				71,155,000				23.7				(11.0	)
Real estate – multi-family and residential rental			25,056,000				10.3				29,562,000				9.8				(15.2	)
Total commercial			166,570,000				68.6				208,108,000				69.2				(20.0	)
Retail:
Home equity and other			15,526,000				6.4				20,416,000				6.8				(24.0	)
1-4 family mortgages			60,740,000				25.0				72,115,000				24.0				(15.8	)
Total retail			76,266,000				31.4				92,531,000				30.8				(17.6	)
Total acquired loans		$	242,836,000				100.0	%		$	300,639,000				100.0	%			(19.2	%)

 

 

																		Percent
		September 30, 2019								December 31, 2018								Increase
		Balance				%				Balance				%				(Decrease)
Total loans
Commercial:
Commercial and industrial		$	882,748,000				30.1	%		$	822,723,000				29.9	%			7.3	%
Vacant land, land development, and residential construction			48,417,000				1.7				44,885,000				1.6				7.9
Real estate – owner occupied			567,267,000				19.3				548,619,000				19.9				3.4
Real estate – non-owner occupied			883,080,000				30.1				816,282,000				29.7				8.2
Real estate – multi-family and residential rental			126,855,000				4.3				127,597,000				4.6				(0.6	)
Total commercial			2,508,367,000				85.5				2,360,106,000				85.7				6.3
Retail:
Home equity and other			78,552,000				2.7				85,439,000				3.1				(8.1	)
1-4 family mortgages			346,094,000				11.8				307,540,000				11.2				12.5
Total retail			424,646,000				14.5				392,979,000				14.3				8.1
Total loans		$	2,933,013,000				100.0	%		$	2,753,085,000				100.0	%			6.5	%

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The total contractually required payments due on and carrying value of acquired impaired loans were $6.2 million and $3.6 million, respectively, as of September 30, 2019. The total contractually required payments due on and carrying value of acquired impaired loans were $8.0 million and $4.6 million, respectively, as of December 31, 2018. Changes in the accretable yield for acquired impaired loans for the three and nine months ended September 30, 2019 and September 30, 2018 were as follows:

 

Balance at June 30, 2019		$	1,236,000
Additions			0
Accretion income			(90,000	)
Net reclassification from nonaccretable to accretable			230,000
Reductions (1)			(57,000	)
Balance at September 30, 2019		$	1,319,000
Balance at December 31, 2018		$	1,274,000
Additions			9,000
Accretion income			(315,000	)
Net reclassification from nonaccretable to accretable			435,000
Reductions (1)			(84,000	)
Balance at September 30, 2019		$	1,319,000
Balance at June 30, 2018		$	1,247,000
Additions			0
Accretion income			(118,000	)
Net reclassification from nonaccretable to accretable			118,000
Reductions (1)			(2,000	)
Balance at September 30, 2018		$	1,245,000
Balance at December 31, 2017		$	1,404,000
Additions			0
Accretion income			(372,000	)
Net reclassification from nonaccretable to accretable			289,000
Reductions (1)			(76,000	)
Balance at September 30, 2018		$	1,245,000

 

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

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Nonperforming originated loans as of September 30, 2019 and December 31, 2018 were as follows:

 

		September 30, 2019				December 31, 2018
Loans past due 90 days or more still accruing interest		$	0			$	0
Nonaccrual loans			753,000				803,000
Total nonperforming originated loans		$	753,000			$	803,000

 

 

Nonperforming acquired loans as of September 30, 2019 and December 31, 2018 were as follows:

 

		September 30, 2019				December 31, 2018
Loans past due 90 days or more still accruing interest		$	0			$	0
Nonaccrual loans			1,891,000				3,338,000
Total nonperforming acquired loans		$	1,891,000			$	3,338,000

 

 

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

 

		September 30, 2019				December 31, 2018
Commercial:
Commercial and industrial		$	0			$	17,000
Vacant land, land development, and residential construction			0				0
Real estate – owner occupied			183,000				950,000
Real estate – non-owner occupied			25,000				0
Real estate – multi-family and residential rental			3,000				141,000
Total commercial			211,000				1,108,000
Retail:
Home equity and other			279,000				454,000
1-4 family mortgages			2,154,000				2,579,000
Total retail			2,433,000				3,033,000
Total nonperforming loans		$	2,644,000			$	4,141,000

 

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

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

An age analysis of past due loans is as follows as of September 30, 2019:

 

		30 – 59 Days Past Due				60 – 89 Days Past Due				Greater Than 89 Days Past Due				Total Past Due				Current				Total Loans				Recorded Balance > 89 Days and Accruing
Originated loans
Commercial:
Commercial and industrial		$	0			$	0			$	0			$	0			$	848,659,000			$	848,659,000			$	0
Vacant land, land development, and residential construction			0				0				0				0				44,016,000				44,016,000				0
Real estate – owner occupied			0				0				183,000				183,000				527,397,000				527,580,000				0
Real estate – non-owner occupied			0				0				0				0				819,743,000				819,743,000				0
Real estate – multi-family and residential rental			0				0				0				0				101,799,000				101,799,000				0
Total commercial			0				0				183,000				183,000				2,341,614,000				2,341,797,000				0
Retail:
Home equity and other			75,000				0				0				75,000				62,951,000				63,026,000				0
1-4 family mortgages			10,000				0				100,000				110,000				285,244,000				285,354,000				0
Total retail			85,000				0				100,000				185,000				348,195,000				348,380,000				0
Total past due loans		$	85,000			$	0			$	283,000			$	368,000			$	2,689,809,000			$	2,690,177,000			$	0

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

		30 – 59 Days Past Due				60 – 89 Days Past Due				Greater Than 89 Days Past Due				Total Past Due				Current				Total Loans				Recorded Balance > 89 Days and Accruing
Acquired loans
Commercial:
Commercial and industrial		$	0			$	0			$	0			$	0			$	34,089,000			$	34,089,000			$	0
Vacant land, land development, and residential construction			24,000				0				0				24,000				4,377,000				4,401,000				0
Real estate – owner occupied			0				0				0				0				39,687,000				39,687,000				0
Real estate – non-owner occupied			0				0				26,000				26,000				63,311,000				63,337,000				0
Real estate – multi-family and residential rental			1,000				0				0				1,000				25,055,000				25,056,000				0
Total commercial			25,000				0				26,000				51,000				166,519,000				166,570,000				0
Retail:
Home equity and other			124,000				1,000				32,000				157,000				15,369,000				15,526,000				0
1-4 family mortgages			310,000				299,000				387,000				996,000				59,744,000				60,740,000				0
Total retail			434,000				300,000				419,000				1,153,000				75,113,000				76,266,000				0
Total past due loans		$	459,000			$	300,000			$	445,000			$	1,204,000			$	241,632,000			$	242,836,000			$	0

 

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

 

		30 – 59 Days Past Due				60 – 89 Days Past Due				Greater Than 89 Days Past Due				Total Past Due				Current				Total Loans				Recorded Balance > 89 Days and Accruing
Originated loans
Commercial:
Commercial and industrial		$	186,000			$	0			$	0			$	186,000			$	768,512,000			$	768,698,000			$	0
Vacant land, land development, and residential construction			0				0				0				0				39,950,000				39,950,000				0
Real estate – owner occupied			0				0				0				0				500,188,000				500,188,000				0
Real estate – non-owner occupied			0				0				0				0				745,127,000				745,127,000				0
Real estate – multi-family and residential rental			0				0				0				0				98,035,000				98,035,000				0
Total commercial			186,000				0				0				186,000				2,151,812,000				2,151,998,000				0
Retail:
Home equity and other			44,000				0				0				44,000				64,979,000				65,023,000				0
1-4 family mortgages			291,000				0				137,000				428,000				234,997,000				235,425,000				0
Total retail			335,000				0				137,000				472,000				299,976,000				300,448,000				0
Total past due loans		$	521,000			$	0			$	137,000			$	658,000			$	2,451,788,000			$	2,452,446,000			$	0

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

		30 – 59 Days Past Due				60 – 89 Days Past Due				Greater Than 89 Days Past Due				Total Past Due				Current				Total Loans				Recorded Balance > 89 Days and Accruing
Acquired Loans
Commercial:
Commercial and industrial		$	8,000			$	0			$	0			$	8,000			$	54,017,000			$	54,025,000			$	0
Vacant land, land development, and residential construction			19,000				0				0				19,000				4,916,000				4,935,000				0
Real estate – owner occupied			108,000				950,000				0				1,058,000				47,373,000				48,431,000				0
Real estate – non-owner occupied			62,000				0				0				62,000				71,093,000				71,155,000				0
Real estate – multi-family and residential rental			0				0				0				0				29,562,000				29,562,000				0
Total commercial			197,000				950,000				0				1,147,000				206,961,000				208,108,000				0
Retail:
Home equity and other			167,000				31,000				0				198,000				20,218,000				20,416,000				0
1-4 family mortgages			821,000				347,000				612,000				1,780,000				70,335,000				72,115,000				0
Total retail			988,000				378,000				612,000				1,978,000				90,553,000				92,531,000				0
Total past due loans		$	1,185,000			$	1,328,000			$	612,000			$	3,125,000			$	297,514,000			$	300,639,000			$	0

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Impaired originated loans as of September 30, 2019, and average originated impaired loans for the three and nine months ended September 30, 2019, were as follows:

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With no related allowance recorded
Commercial:
Commercial and industrial		$	20,280,000			$	20,280,000							$	15,144,000			$	12,117,000
Vacant land, land development and residential construction			87,000				87,000								88,000				90,000
Real estate – owner occupied			665,000				665,000								1,362,000				965,000
Real estate – non-owner occupied			0				0								0				0
Real estate – multi-family and residential rental			0				0								63,000				32,000
Total commercial			21,032,000				21,032,000								16,657,000				13,204,000
Retail:
Home equity and other			743,000				720,000								764,000				680,000
1-4 family mortgages			896,000				320,000								329,000				353,000
Total retail			1,639,000				1,040,000								1,093,000				1,033,000
Total with no related allowance recorded		$	22,671,000			$	22,072,000							$	17,750,000			$	14,237,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial		$	3,333,000			$	3,333,000			$	699,000			$	8,494,000			$	6,876,000
Vacant land, land development and residential construction			0				0				0				0				0
Real estate – owner occupied			1,533,000				1,533,000				1,000,000				767,000				1,722,000
Real estate – non-owner occupied			0				0				0				0				0
Real estate – multi-family and residential rental			0				0				0				0				66,000
Total commercial			4,866,000				4,866,000				1,699,000				9,261,000				8,664,000
Retail:
Home equity and other			411,000				397,000				312,000				385,000				395,000
1-4 family mortgages			405,000				327,000				14,000				329,000				334,000
Total retail			816,000				724,000				326,000				714,000				729,000
Total with an allowance recorded		$	5,682,000			$	5,590,000			$	2,025,000			$	9,975,000			$	9,393,000
Total impaired loans:
Commercial		$	25,898,000			$	25,898,000			$	1,699,000			$	25,918,000			$	21,868,000
Retail			2,455,000				1,764,000				326,000				1,807,000				1,762,000
Total impaired loans		$	28,353,000			$	27,662,000			$	2,025,000			$	27,725,000			$	23,630,000

 

---

 (Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Impaired acquired loans as of September 30, 2019, and average impaired acquired loans for the three and nine months ended September 30, 2019, were as follows:

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With no related allowance recorded
Commercial:
Commercial and industrial		$	307,000			$	307,000							$	330,000			$	363,000
Vacant land, land development and residential construction			0				0								0				0
Real estate – owner occupied			126,000				126,000								521,000				768,000
Real estate – non-owner occupied			209,000				207,000								209,000				120,000
Real estate – multi-family and residential rental			35,000				15,000								18,000				22,000
Total commercial			677,000				655,000								1,078,000				1,273,000
Retail:
Home equity and other			577,000				527,000								578,000				522,000
1-4 family mortgages			2,466,000				1,650,000								1,692,000				1,753,000
Total retail			3,043,000				2,177,000								2,270,000				2,275,000
Total with no related allowance recorded		$	3,720,000			$	2,832,000							$	3,348,000			$	3,548,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial		$	134,000			$	132,000			$	30,000			$	135,000			$	146,000
Vacant land, land development and residential construction			0				0				0				0				0
Real estate – owner occupied			101,000				101,000				5,000				51,000				98,000
Real estate – non-owner occupied			0				0				0				0				100,000
Real estate – multi-family and residential rental			0				0				0				0				1,000
Total commercial			235,000				233,000				35,000				186,000				345,000
Retail:
Home equity and other			247,000				245,000				120,000				243,000				306,000
1-4 family mortgages			406,000				404,000				87,000				394,000				402,000
Total retail			653,000				649,000				207,000				637,000				708,000
Total with an allowance recorded		$	888,000			$	882,000			$	242,000			$	823,000			$	1,053,000
Total impaired loans:
Commercial		$	912,000			$	888,000			$	35,000			$	1,264,000			$	1,618,000
Retail			3,696,000				2,826,000				207,000				2,907,000				2,983,000
Total impaired loans		$	4,608,000			$	3,714,000			$	242,000			$	4,171,000			$	4,601,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Impaired originated loans as of December 31, 2018, and average impaired originated loans for the three and nine months ended September 30, 2018, were as follows:

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With no related allowance recorded
Commercial:
Commercial and industrial		$	8,604,000			$	8,604,000							$	732,000			$	469,000
Vacant land, land development and residential construction			94,000				94,000								98,000				58,000
Real estate – owner occupied			632,000				632,000								383,000				1,273,000
Real estate – non-owner occupied			0				0								0				0
Real estate – multi-family and residential rental			0				0								125,000				234,000
Total commercial			9,330,000				9,330,000								1,338,000				2,034,000
Retail:
Home equity and other			607,000				586,000								719,000				717,000
1-4 family mortgages			1,053,000				390,000								402,000				420,000
Total retail			1,660,000				976,000								1,121,000				1,137,000
Total with no related allowance recorded		$	10,990,000			$	10,306,000							$	2,459,000			$	3,171,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial		$	5,011,000			$	5,011,000			$	83,000			$	3,572,000			$	3,067,000
Vacant land, land development and residential construction			0				0				0				0				0
Real estate – owner occupied			2,658,000				2,658,000				363,000				2,320,000				1,926,000
Real estate – non-owner occupied			0				0				0				0				0
Real estate – multi-family and residential rental			140,000				135,000				5,000				140,000				106,000
Total commercial			7,809,000				7,804,000				451,000				6,032,000				5,099,000
Retail:
Home equity and other			442,000				431,000				194,000				463,000				643,000
1-4 family mortgages			409,000				341,000				44,000				346,000				289,000
Total retail			851,000				772,000				238,000				809,000				932,000
Total with an allowance recorded		$	8,660,000			$	8,576,000			$	689,000			$	6,841,000			$	6,031,000
Total impaired loans:
Commercial		$	17,139,000			$	17,134,000			$	451,000			$	7,370,000			$	7,133,000
Retail			2,511,000				1,748,000				238,000				1,930,000				2,069,000
Total impaired loans		$	19,650,000			$	18,882,000			$	689,000			$	9,300,000			$	9,202,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Impaired acquired loans as of December 31, 2018, and average impaired acquired loans for the three and nine months ended September 30, 2018, were as follows:

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With no related allowance recorded
Commercial:
Commercial and industrial		$	398,000			$	398,000							$	648,000			$	763,000
Vacant land, land development and residential construction			0				0								0				0
Real estate – owner occupied			1,193,000				1,193,000								588,000				638,000
Real estate – non-owner occupied			0				0								221,000				228,000
Real estate – multi-family and residential rental			45,000				26,000								38,000				85,000
Total commercial			1,636,000				1,617,000								1,495,000				1,714,000
Retail:
Home equity and other			388,000				361,000								778,000				678,000
1-4 family mortgages			2,494,000				1,849,000								2,073,000				2,077,000
Total retail			2,882,000				2,210,000								2,851,000				2,755,000
Total with no related allowance recorded		$	4,518,000			$	3,827,000							$	4,346,000			$	4,469,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

		Unpaid Contractual Principal Balance				Recorded Principal Balance				Related Allowance				Third Quarter Average Recorded Principal Balance				Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial		$	175,000			$	166,000			$	43,000			$	0			$	0
Vacant land, land development and residential construction			0				0				0				0				0
Real estate – owner occupied			147,000				147,000				0				0				400,000
Real estate – non-owner occupied			210,000				210,000				0				0				0
Real estate – multi-family and residential rental			3,000				3,000				0				0				0
Total commercial			535,000				526,000				43,000				0				400,000
Retail:
Home equity and other			462,000				440,000				178,000				34,000				12,000
1-4 family mortgages			418,000				371,000				89,000				0				0
Total retail			880,000				811,000				267,000				34,000				12,000
Total with an allowance recorded		$	1,415,000			$	1,337,000			$	310,000			$	34,000			$	412,000
Total impaired loans:
Commercial		$	2,171,000			$	2,143,000			$	43,000			$	1,495,000			$	2,114,000
Retail			3,762,000				3,021,000				267,000				2,885,000				2,767,000
Total impaired loans		$	5,933,000			$	5,164,000			$	310,000			$	4,380,000			$	4,881,000

 

Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt restructurings totaled $0.5 million and $0.2 million during the third quarters of 2019 and 2018, respectively, and $0.9 million and $0.7 million during the first nine months of 2019 and 2018, respectively. No interest income was recognized on nonaccrual loans during the third quarter and first nine months of 2019 or during the respective 2018 periods. Lost interest income on nonaccrual loans totaled $0.1 million during the third quarters of 2019 and 2018, and $0.1 million and $0.2 million during the first nine months of 2019 and 2018, respectively.

 

---

 

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral and delinquency.

 

Credit quality indicators were as follows as of September 30, 2019:

 

Originated loans

 

Commercial credit exposure – credit risk profiled by internal credit risk grades:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4		$	510,197,000			$	25,101,000			$	330,704,000			$	562,161,000			$	69,498,000
Grades 5 – 7			314,845,000				18,828,000				194,440,000				257,495,000				32,155,000
Grades 8 – 9			23,617,000				87,000				2,436,000				87,000				146,000
Total commercial		$	848,659,000			$	44,016,000			$	527,580,000			$	819,743,000			$	101,799,000

 

 

Retail credit exposure – credit risk profiled by collateral type:

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Total retail		$	63,026,000			$	285,354,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Acquired loans

 

Commercial credit exposure – credit risk profiled by internal credit risk grades:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4		$	16,261,000			$	1,076,000			$	20,231,000			$	51,020,000			$	16,097,000
Grades 5 – 7			17,369,000				3,079,000				19,122,000				12,153,000				8,924,000
Grades 8 – 9			459,000				246,000				334,000				164,000				35,000
Total commercial		$	34,089,000			$	4,401,000			$	39,687,000			$	63,337,000			$	25,056,000

 

 

Retail credit exposure – credit risk profiled by collateral type:

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Total retail		$	15,526,000			$	60,740,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit quality indicators were as follows as of December 31, 2018:

 

Originated loans

 

Commercial credit exposure – credit risk profiled by internal credit risk grades:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4		$	508,611,000			$	28,170,000			$	325,459,000			$	526,445,000			$	75,051,000
Grades 5 – 7			238,942,000				11,686,000				163,455,000				218,682,000				22,798,000
Grades 8 – 9			21,145,000				94,000				11,274,000				0				186,000
Total commercial		$	768,698,000			$	39,950,000			$	500,188,000			$	745,127,000			$	98,035,000

 

 

Retail credit exposure – credit risk profiled by collateral type:

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Total retail		$	65,023,000			$	235,425,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Acquired loans

 

Commercial credit exposure – credit risk profiled by internal credit risk grades:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4		$	34,678,000			$	1,246,000			$	21,595,000			$	54,401,000			$	16,050,000
Grades 5 – 7			19,122,000				3,431,000				25,485,000				16,687,000				13,460,000
Grades 8 – 9			225,000				258,000				1,351,000				67,000				52,000
Total commercial		$	54,025,000			$	4,935,000			$	48,431,000			$	71,155,000			$	29,562,000

 

 

Retail credit exposure – credit risk profiled by collateral type:

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Total retail		$	20,416,000			$	72,115,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

All commercial loans are graded using the following criteria:

 

Grade 1.

Excellent credit rating that contain very little, if any, risk of loss.

 

Grade 2.

Strong sources of repayment and have low repayment risk.

 

Grade 3.

Good sources of repayment and have limited repayment risk.

 

Grade 4.

Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that render the credit more vulnerable to a negative event.

 

Grade 5.

Marginally acceptable sources of repayment and exhibit defined weaknesses and negative characteristics.

 

Grade 6.

Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if the credit does not stabilize or if further deterioration is observed in the near term, the loan will likely be downgraded and placed on the Watch List (i.e., list of lending relationships that receive increased scrutiny and review by the Board of Directors and senior management).

 

Grade 7.

Defined weaknesses or negative trends that merit close monitoring through Watch List status.

 

Grade 8.

Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral, resulting in a distinct possibility of loss requiring close monitoring through Watch List status.

 

Grade 9.

Vital weaknesses exist where collection of principal is highly questionable.

 

Grade 10.

Considered uncollectable and of such little value that continuance as an asset is not warranted.

 

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity in the allowance for loan losses and the recorded investments in originated loans as of and during the three and nine months ended September 30, 2019 are as follows:

 

		Commercial Loans				Retail Loans				Unallocated				Total
Allowance for loan losses:
Balance at June 30, 2019		$	21,073,000			$	2,161,000			$	97,000			$	23,331,000
Provision for loan losses			522,000				149,000				69,000				740,000
Charge-offs			(405,000	)			(114,000	)			0				(519,000	)
Recoveries			96,000				84,000				0				180,000
Ending balance		$	21,286,000			$	2,280,000			$	166,000			$	23,732,000
Allowance for loan losses:
Balance at December 31, 2018		$	19,442,000			$	2,068,000			$	44,000			$	21,554,000
Provision for loan losses			2,080,000				405,000				122,000				2,607,000
Charge-offs			(407,000	)			(364,000	)			0				(771,000	)
Recoveries			171,000				171,000				0				342,000
Ending balance		$	21,286,000			$	2,280,000			$	166,000			$	23,732,000
Ending balance: individually evaluated for impairment		$	1,699,000			$	326,000			$	0			$	2,025,000
Ending balance: collectively evaluated for impairment		$	19,587,000			$	1,954,000			$	166,000			$	21,707,000
Total loans:
Ending balance		$	2,341,797,000			$	348,380,000							$	2,690,177,000
Ending balance: individually evaluated for impairment		$	25,898,000			$	1,764,000							$	27,662,000
Ending balance: collectively evaluated for impairment		$	2,315,899,000			$	346,616,000							$	2,662,515,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity in the allowance for loan losses for acquired loans during the three and nine months ended September 30, 2019 is as follows:

 

		Commercial Loans				Retail Loans				Unallocated				Total
Allowance for loan losses:
Balance at June 30, 2019		$	198,000			$	524,000			$	0			$	722,000
Provision for loan losses			(23,000	)			(17,000	)			0				(40,000	)
Charge-offs			0				0				0				0
Recoveries			0				0				0				0
Ending balance		$	175,000			$	507,000			$	0			$	682,000
Allowance for loan losses:
Balance at December 31, 2018		$	177,000			$	649,000			$	0			$	826,000
Provision for loan losses			(3,000	)			(154,000	)			0				(157,000	)
Charge-offs			0				0				0				0
Recoveries			1,000				12,000				0				13,000
Ending balance		$	175,000			$	507,000			$	0			$	682,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity in the allowance for loan losses for originated loans during the three and nine months ended September 30, 2018 and the recorded investments in originated loans as of December 31, 2018 are as follows:

 

 

		Commercial Loans				Retail Loans				Unallocated				Total
Allowance for loan losses:
Balance at June 30, 2018		$	18,326,000			$	2,216,000			$	(60,000	)		$	20,482,000
Provision for loan losses			371,000				(41,000	)			143,000				473,000
Charge-offs			0				(169,000	)			0				(169,000	)
Recoveries			63,000				227,000				0				290,000
Ending balance		$	18,760,000			$	2,233,000			$	83,000			$	21,076,000
Allowance for loan losses:
Balance at December 31, 2017		$	16,456,000			$	2,584,000			$	93,000			$	19,133,000
Provision for loan losses			922,000				(307,000	)			(10,000	)			605,000
Charge-offs			(342,000	)			(493,000	)			0				(835,000	)
Recoveries			1,724,000				449,000				0				2,173,000
Ending balance		$	18,760,000			$	2,233,000			$	83,000			$	21,076,000
Ending balance: individually evaluated for impairment		$	750,000			$	248,000			$	0			$	998,000
Ending balance: collectively evaluated for impairment		$	18,010,000			$	1,985,000			$	83,000			$	20,078,000
Total loans:
Ending balance		$	2,151,998,000			$	300,448,000							$	2,452,446,000
Ending balance: individually evaluated for impairment		$	17,134,000			$	1,748,000							$	18,882,000
Ending balance: collectively evaluated for impairment		$	2,134,864,000			$	298,700,000							$	2,433,564,000

 

 

---

(Continued) 

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity in the allowance for loan losses for acquired loans during the three and nine months ended September 30, 2018 is as follows:

 

		Commercial Loans				Retail Loans				Unallocated				Total
Allowance for loan losses:
Balance at June 30, 2018		$	105,000			$	580,000			$	0			$	685,000
Provision for loan losses			9,000				(82,000	)			0				(73,000	)
Charge-offs			0				0				0				0
Recoveries			0				4,000				0				4,000
Ending balance		$	114,000			$	502,000			$	0			$	616,000
Allowance for loan losses:
Balance at December 31, 2017		$	291,000			$	77,000			$	0			$	368,000
Provision for loan losses			69,000				426,000				0				495,000
Charge-offs			(246,000	)			(15,000	)			0				(261,000	)
Recoveries			0				14,000				0				14,000
Ending balance		$	114,000			$	502,000			$	0			$	616,000

 

In accordance with acquisition accounting rules, acquired loans were recorded at fair value at the merger date and the prior allowance was eliminated.

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Loans modified as troubled debt restructurings during the three months ended September 30, 2019 were as follows:

 

		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial			1			$	28,000			$	28,000
Vacant land, land development and residential construction			1				87,000				87,000
Real estate – owner occupied			0				0				0
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total originated commercial			2				115,000				115,000
Retail:
Home equity and other			1				14,000				14,000
1-4 family mortgages			0				0				0
Total originated retail			1				14,000				14,000
Total originated loans			3			$	129,000			$	129,000
Acquired loans
Commercial:
Commercial and industrial			0			$	0			$	0
Vacant land, land development and residential construction			0				0				0
Real estate – owner occupied			1				102,000				102,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total acquired commercial			1				102,000				102,000
Retail:
Home equity and other			4				48,000				47,000
1-4 family mortgages			1				49,000				49,000
Total acquired retail			5				97,000				96,000
Total acquired loans			6			$	199,000			$	198,000

 

---

(Continued) 

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Loans modified as troubled debt restructurings during the nine months ended September 30, 2019 were as follows:

 

		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial			7			$	14,457,000			$	14,754,000
Vacant land, land development and residential construction			1				87,000				87,000
Real estate – owner occupied			1				1,567,000				1,567,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total originated commercial			9				16,111,000				16,408,000
Retail:
Home equity and other			3				37,000				37,000
1-4 family mortgages			0				0				0
Total originated retail			3				37,000				37,000
Total originated loans			12			$	16,148,000			$	16,445,000
Acquired loans
Commercial:
Commercial and industrial			0			$	0			$	0
Vacant land, land development and residential construction			0				0				0
Real estate – owner occupied			1				102,000				102,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total acquired commercial			1				102,000				102,000
Retail:
Home equity and other			10				188,000				188,000
1-4 family mortgages			5				202,000				203,000
Total acquired retail			15				390,000				391,000
Total acquired loans			16			$	492,000			$	493,000

 

---

 

(Continued)

 

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Loans modified as troubled debt restructurings during the three months ended September 30, 2018 were as follows:

 

		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial			5			$	3,118,000			$	2,964,000
Vacant land, land development and residential construction			0				0				0
Real estate – owner occupied			1				2,284,000				2,284,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total originated commercial			6				5,402,000				5,248,000
Retail:
Home equity and other			0				0				0
1-4 family mortgages			0				0				0
Total originated retail			0				0				0
Total originated loans			6			$	5,402,000			$	5,248,000
Acquired loans
Commercial:
Commercial and industrial			1			$	33,000			$	29,000
Vacant land, land development and residential construction			0				0				0
Real estate – owner occupied			1				150,000				150,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total acquired commercial			2				183,000				179,000
Retail:
Home equity and other			0				0				0
1-4 family mortgages			1				12,000				12,000
Total acquired retail			1				12,000				12,000
Total acquired loans			3			$	195,000			$	191,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Loans modified as troubled debt restructurings during the nine months ended September 30, 2018 were as follows:

 

		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial			9			$	4,186,000			$	4,126,000
Vacant land, land development and residential construction			0				0				0
Real estate – owner occupied			2				3,261,000				3,261,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total originated commercial			11				7,447,000				7,387,000
Retail:
Home equity and other			1				50,000				50,000
1-4 family mortgages			0				0				0
Total originated retail			1				50,000				50,000
Total originated loans			12			$	7,497,000			$	7,437,000
Acquired loans
Commercial:
Commercial and industrial			1			$	33,000			$	29,000
Vacant land, land development and residential construction			0				0				0
Real estate – owner occupied			1				150,000				150,000
Real estate – non-owner occupied			0				0				0
Real estate – multi-family and residential rental			0				0				0
Total acquired commercial			2				183,000				179,000
Retail:
Home equity and other			10				217,000				218,000
1-4 family mortgages			2				37,000				36,000
Total acquired retail			12				254,000				254,000
Total acquired loans			14			$	437,000			$	433,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2019 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2019 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

---

(Continued)

 

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2019 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2019 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			1				6,000
Total retail			1				6,000
Total			1			$	6,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2018 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2018 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2018 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2018 (amounts as of period end):

 

		Number of Contracts				Recorded Principal Balance
Commercial:
Commercial and industrial			0			$	0
Vacant land, land development and residential construction			0				0
Real estate – owner occupied			0				0
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			0				0
Retail:
Home equity and other			0				0
1-4 family mortgages			0				0
Total retail			0				0
Total			0			$	0

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for originated loans categorized as troubled debt restructurings during the three months ended September 30, 2019 is as follows:

 

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	23,645,000			$	0			$	1,582,000			$	0			$	0
Charge-Offs			0				0				0				0				0
Payments			(35,000	)			0				(37,000	)			0				0
Transfers to ORE			0				0				0				0				0
Net Additions/Deletions			2,000				87,000				0				0				0
Ending Balance		$	23,612,000			$	87,000			$	1,545,000			$	0			$	0

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	913,000			$	141,000
Charge-Offs			0				0
Payments			(35,000	)			(1,000	)
Transfers to ORE			0				0
Net Additions/Deletions			13,000				0
Ending Balance		$	891,000			$	140,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for acquired loans categorized as troubled debt restructurings during the three months ended September 30, 2019 is as follows:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	489,000			$	0			$	916,000			$	185,000			$	17,000
Charge-Offs			0				0				0				0				0
Payments			(50,000	)			0				(790,000	)			(4,000	)			(5,000	)
Transfers to ORE			0				0				0				0				0
Net Additions/Deletions			0				0				102,000				0				0
Ending Balance		$	439,000			$	0			$	228,000			$	181,000			$	12,000

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	553,000			$	565,000
Charge-Offs			0				0
Payments			(10,000	)			(12,000	)
Transfers to ORE			0				0
Net Additions/Deletions			47,000				49,000
Ending Balance		$	590,000			$	602,000

  

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for originated loans categorized as troubled debt restructurings during the nine months ended September 30, 2019 is as follows:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	13,590,000			$	0			$	2,682,000			$	0			$	0
Charge-Offs			0				0				0				0				0
Payments			(4,790,000	)			0				(2,387,000	)			0				0
Transfers to ORE			0				0				0				0				0
Net Additions/Deletions			14,812,000				87,000				1,250,000				0				0
Ending Balance		$	23,612,000			$	87,000			$	1,545,000			$	0			$	0

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	938,000			$	142,000
Charge-Offs			0				0
Payments			(84,000	)			(2,000	)
Transfers to ORE			0				0
Net Additions/Deletions			37,000				0
Ending Balance		$	891,000			$	140,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for acquired loans categorized as troubled debt restructurings during the nine months ended September 30, 2019 is as follows:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	548,000			$	0			$	418,000			$	210,000			$	24,000
Charge-Offs			0				0				0				0				0
Payments			(109,000	)			0				(865,000	)			(29,000	)			(12,000	)
Transfers to ORE			0				0				(97,000	)			0				0
Net Additions/Deletions			0				0				772,000				0				0
Ending Balance		$	439,000			$	0			$	228,000			$	181,000			$	12,000

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	464,000			$	436,000
Charge-Offs			(18,000	)			0
Payments			(53,000	)			(36,000	)
Transfers to ORE			0				0
Net Additions/Deletions			197,000				202,000
Ending Balance		$	590,000			$	602,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for originated loans categorized as troubled debt restructurings during the three months ended September 30, 2018 is as follows:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	2,425,000			$	229,000			$	1,784,000			$	0			$	0
Charge-Offs			0				0				0				0				0
Payments			0				(207,000	)			(439,000	)			0				0
Transfers to ORE			0				0				0				0				0
Net Additions/Deletions			3,315,000				0				2,278,000				0				0
Ending Balance		$	5,740,000			$	22,000			$	3,623,000			$	0			$	0

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	1,019,000			$	143,000
Charge-Offs			0				0
Payments			(81,000	)			(1,000	)
Transfers to ORE			0				0
Net Additions/Deletions			0				0
Ending Balance		$	938,000			$	142,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for acquired loans categorized as troubled debt restructurings during the three months ended September 30, 2018 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		$	694,000			$	0			$	393,000			$	225,000			$	32,000
Charge-Offs			0				0				0				0				0
Payments			(36,000	)			0				(15,000	)			(8,000	)			(3,000	)
Transfers to ORE			0				0				(93,000	)			0				0
Net Additions/Deletions			(80,000	)			0				151,000				0				0
Ending Balance		$	578,000			$	0			$	436,000			$	217,000			$	29,000

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	302,000			$	400,000
Charge-Offs			0				0
Payments			(2,000	)			(9,000	)
Transfers to ORE			0				0
Net Additions/Deletions			0				13,000
Ending Balance		$	300,000			$	404,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

 3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for originated loans categorized as troubled debt restructurings during the nine months ended September 30, 2018 is as follows:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	2,989,000			$	383,000			$	1,599,000			$	0			$	0
Charge-Offs			(230,000	)			0				0				0				0
Payments			(934,000	)			(361,000	)			(4,057,000	)			0				0
Transfers to ORE			0				0				0				0				0
Net Additions/Deletions			3,915,000				0				6,081,000				0				0
Ending Balance		$	5,740,000			$	22,000			$	3,623,000			$	0			$	0

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	1,127,000			$	146,000
Charge-Offs			0				0
Payments			(238,000	)			(4,000	)
Transfers to ORE			0				0
Net Additions/Deletions			49,000				0
Ending Balance		$	938,000			$	142,000

 

---

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Activity for acquired loans categorized as troubled debt restructurings during the nine months ended September 30, 2018 is as follows:

 

		Commercial and Industrial				Commercial Vacant Land, Land Development, and Residential Construction				Commercial Real Estate - Owner Occupied				Commercial Real Estate - Non-Owner Occupied				Commercial Real Estate - Multi Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance		$	1,001,000			$	0			$	427,000			$	237,000			$	41,000
Charge-Offs			(275,000	)			0				0				0				0
Payments			(69,000	)			0				(1,645,000	)			(20,000	)			(12,000	)
Transfers to ORE			0				0				(92,000	)			0				0
Net Additions/Deletions			(79,000	)			0				1,746,000				0				0
Ending Balance		$	578,000			$	0			$	436,000			$	217,000			$	29,000

 

 

		Retail Home Equity and Other				Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance		$	219,000			$	393,000
Charge-Offs			(30,000	)			0
Payments			(40,000	)			(26,000	)
Transfers to ORE			(82,000	)			0
Net Additions/Deletions			233,000				37,000
Ending Balance		$	300,000			$	404,000

 

---

 

(Continued)

 

 

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

---

 

3.     LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

The allowance related to loans categorized as troubled debt restructurings was as follows: 

 

		September 30, 2019				December 31, 2018
Commercial:
Commercial and industrial		$	729,000			$	126,000
Vacant land, land development, and residential construction			0				0
Real estate – owner occupied			1,005,000				363,000
Real estate – non-owner occupied			0				0
Real estate – multi-family and residential rental			0				0
Total commercial			1,734,000				489,000
Retail:
Home equity and other			402,000				337,000
1-4 family mortgages			98,000				110,000
Total retail			500,000				447,000
Total related allowance		$	2,234,000			$	936,000

 

 

In general, our policy dictates that a renewal or modification of an 8- or 9-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal. We believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8- or 9-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.