What changed in this filing

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Item 1. Business

2022-03-04 compared with 2021-03-05 · 77 added, 84 removed, 173 unchanged (48% of the section changed)

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As a bank holding company, we are subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

We were organized on July 15, 1997, under the laws of the State of Michigan, primarily for the purpose of holding all of the stock of Mercantile Bank of Michigan (“our bank”), and of such other subsidiaries as we may acquire or establish.

We were organized on July 15, 1997, under the laws of the State of Michigan, primarily for the purpose of holding all of the stock of Mercantile Bank (“our bank”), and of such other subsidiaries as we may acquire or establish.

Our bank commenced business on December 15, 1997.

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(“our insurance company”), a subsidiary of our bank, commenced operations during 2002 to offer insurance products.

Mercantile Bank Real Estate Co., L.L.C., (“our real estate company”), a subsidiary of our bank, was organized on July 21, 2003, principally to develop, construct and own our facility in downtown Grand Rapids which serves as our bank’s main office and Mercantile Bank Corporation’s headquarters.

Our expenses have generally been paid using cash dividends from our bank.

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Our bank’s main office is located in Grand Rapids, and our operations are centered around the West and Central portions of Michigan.

We also have a banking office located in the metropolitan Detroit, Michigan area, and during 2020 we opened residential mortgage loan production offices in Midland, Michigan and in the Cincinnati, Ohio metropolitan area.

As part of our bank’s branch rationalization efforts, we recently announced that our bank and Lake Trust Credit Union have entered into an agreement for the sale of our banking office located in Hastings, Michigan, with the sale expected to be consummated by March 31, 2021.

Further, in late 2020 we closed banking offices located in the Lakeview, Alma and Ionia downtown areas, consolidating the banking services with nearby banking office locations.

We also have a banking office located in the metropolitan Detroit, Michigan area and opened residential mortgage loan production offices in Midland, Michigan and in the Cincinnati, Ohio metropolitan area during 2020 and Petoskey, Michigan during 2021.

Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts checking, savings and time deposits.

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To date, we have not provided the insurance products noted above and currently have no plans to do so.

Our Real Estate Company

Our real estate company was organized on July 21, 2003, principally to develop, construct and own our facility in downtown Grand Rapids that serves as our bank’s main office and Mercantile Bank Corporation’s headquarters.

This facility was placed into service during the second quarter of 2005.

The facility was transferred to our bank and our real estate company was dissolved on December 18, 2020.

Our real estate company was 99% owned by our bank and 1% owned by our insurance company.

We have five business trusts that are wholly-owned subsidiaries of Mercantile Bank Corporation.

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However, on May 24, 2018, EGRRCPA amended certain provisions of the Dodd-Frank Act to tailor them to the specific circumstances of various categories of financial institutions and transactions.

For additional information on this legislation and its potential impact, refer to the Risk Factor entitled “The effect of financial services legislation and regulations remains uncertain”

in Item 1A- Risk Factors in this Annual Report.

We face substantial competition in all phases of our operations from a variety of different competitors.

We compete for deposits, loans and other financial services with numerous Michigan-based and national and regional banks, savings banks, thrifts, credit unions and other financial institutions as well as from other entities that provide financial services.

Some of the financial institutions and financial service organizations with which we compete are not subject to the same degree of regulation as we are.

Many of our primary competitors have been in business for many years, have established customer bases, are larger, have substantially higher lending limits than we do, and offer larger branch networks and other services which we do not.

Most of these same entities have greater capital resources than we do, which, among other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit facilities than we do.

Under specified circumstances (that have been modified by the Dodd-Frank Act and EGRRCPA), securities firms and insurance companies that elect to become financial holding companies under the Bank Holding Company Act may acquire banks and other financial institutions.

Federal banking law affects the competitive environment in which we conduct our business.

The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services.

We also face new competition as a result of expansion into new markets.

Human Capital

As of December 31, 2021, we employed 585 full-time and 71 part-time persons.

Our employees are our most valuable asset.

Our human capital is the most valuable asset we have and we believe embracing human diversity makes us a better financial institution.

The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities and talent that our employees invest in their work represents a significant part of not only our culture, but our reputation and our achievements as well.

We embrace and encourage our employees’

differences in age, color, disability, ethnicity, family or marital status, gender identity or expression, language, national origin, physical and mental ability, political affiliation, race, religion, sexual orientation, socio-economic status, veteran status and other characteristics that make our employees unique.

Talent Acquisition .

We hire people who are able to connect, listen and deliver the best solutions to our customers and communicate with integrity every time.

We are devoted to attracting and retaining the best talent in the markets we serve and have implemented HireReach’s evidence-based selection process with all branch new hires.

The system utilizes a standardized, consistent process and relevant quantitative data to facilitate a multidimensional assessment of job candidates to create better matches between workers and jobs, decrease time-to-hire, reduce first-year turnover, increase workforce diversity and boost productivity.

We believe in leading through example in our communities and are proud to be part of a cohort of 15 local companies that have adopted this evidence-based hiring process to help increase diversity in the workforce.

Employee Safety and Health.

The prioritization of our people is reflected in the robust employee benefits and compensation packages offered to our staff, including health and wellness insurance plans and incentives, a 401(k) plan with matching contributions, dedicated internship programs for young professionals in finance and business, employee stock ownership plan participation, as well as clothing, home office and fitness equipment interest-free loans.

Approximately 91% of our eligible employees participate in our benefit plans and employees pay about 21% less than local benchmarks for family health savings account plans.

We offer our team paid-off time for vacations, holidays, sick time and bereavement, along with pay-it-forward initiatives and paid volunteer time.

In addition, with obstacles in maintaining balance between work responsibilities and personal time, we have enabled staff to pursue a safe and healthy work-life balance by increasing paid time off benefits for our employees.

Diversity and Inclusion .

We believe in respecting, recognizing and valuing the importance of Diversity, Equity and Inclusion (“DEI”) as a natural part of our culture.

Our exceptional team members are committed to maintaining an environment of personal growth and development.

Employees of our bank subscribe to a common goal:

To make this the best bank it can possibly be.

Our employees subscribe to a common goal:

To make this financial institution the best it can possibly be.

Diversity is an asset in the pursuit of this goal.

Employees with dissimilar backgrounds, perspectives, opinions and lifestyles help us understand the motivations and desires of our many different customers.

Thus, we will strive to maintain a workforce that reflects the increasing diversity of the communities we serve.

Employees with dissimilar backgrounds, perspectives, opinions and lifestyles help us understand the motivations and desires of the communities we serve.

We believe that each member of our workforce should be accorded the utmost respect and should be given equal opportunity and encouragement to achieve their full potential.

Cooperation and teamwork are valued as much as individual growth and contribution.

All employees are required to attend and complete foundational DEI training, and regular expanded learning opportunities are provided.

Throughout 2021, monthly live webinars were offered to our staff as well as recorded video access to a wide variety of DEI topics along with resources such as books, group discussions and supervisor support materials.

In further support of our inclusion efforts, we have a Diversity Council comprised of members representing diverse perspectives across departments and viewpoints.

The Diversity Council is designed to bring together ideas and experiences from various backgrounds to help develop respect and an appreciation for differences among employees.

Climate Change

We define sustainability as the leveraging of combined abilities to ensure our ongoing impact on people, the environment and our success is always focused on upholding long-lasting, positive results.

From an efficient branch footprint to utilizing the latest technology, we are continuously focused on seeking new and better ways to be more productive with our time and energy while remaining good stewards of the resources with which we are entrusted.

In each of our facilities, we follow LEED green certification guidelines wherever possible, evaluating all facilities for opportunities to incorporate energy efficient updates and space planning for new construction, renovations or expansion projects.

All of our new construction includes low-flow devices as well as LED lighting to enhance our efficiency of utility usage.

Over the course of the past three years, we have reduced our utility expense by almost $0.2 million, with water usage reduced by 10%, natural gas by 12% and electricity by 23%.

We are actively seeking engagements for renewable energy sources.

All renovation and expansion projects involve the donation of former office furniture to non-profit organizations.

We continue to promote the reduction of mail and paper usage through customer eStatement adoption.

The eStatement adoption rate continues to grow, and we were nearing 60% adoption at year-end 2021.

Our online accounts payable system has also enabled us to significantly reduce paper and printing, and saves time.

Every effort is made to recycle all paper, and we continue to offer community paper shredding events.

Additionally, we have implemented recycling stations at all of our office locations to divert cardboard, plastic and metal items from landfills.

Water bottle refill stations also aid to reduce plastic bottle usage.

Our Environmental, Social and Governance (“ESG”) Committee supports our ongoing commitment to environmental, health and safety, corporate social responsibility, corporate governance, sustainability and other public policy matters relevant to our organization.

The ESG Committee is a cross-functional management committee that assists executive management in:

1) setting general strategies relating to ESG matters;

2) developing, implementing and monitoring initiatives and policies based on those strategies;

3) recommending communications with employees, investors and shareholders with respect to ESG matters;

and 4) monitoring and assessing developments relating to, and improving our understanding of, ESG matters.

The ESG committee meets formally at least quarterly, and during 2021 developed various policies that were subsequently approved by the Board of Directors, including:

Environmental Policy;

Diversity, Equity and Inclusion Policy;

Human Rights Policy;

and the Supplier Diversity Program Policy.

These polices are available on our website, along with an application for diverse suppliers.

Also during 2021, we installed two electric vehicle chargers and launched a “green”

vehicle loan product to support customer purchases of electric, hybrid or fuel-efficient vehicles.

Lending Policy

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to provide a means for the investment of funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of the creditworthy businesses and individuals who are our customers.

We recognize that in the normal business of lending, some losses on loans will be inevitable and should be considered a part of the normal cost of doing business.

Our lending policy anticipates that priorities in extending loans will be modified from time to time as interest rates, market conditions and competitive factors change.

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We generally apply an in-house lending limit that is significantly less than our bank’s legal lending limit.

Provisions of recent legislation, including the Dodd-Frank Act and EGRRCPA, when fully implemented by regulations to be adopted by federal agencies, may have a significant impact on our lending policy, especially in the areas of single-family residential real estate and other consumer lending.

For additional information on this legislation and its potential impact, refer to the Risk Factor entitled “The effect of financial services legislation and regulations remains uncertain”

in Item 1A- Risk Factors in this Annual Report.

Lending Activity

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Working capital loans are often structured as a line of credit and are reviewed periodically in connection with the borrower’s year-end financial reporting.

These loans are generally secured by substantially all of the assets of the borrower and have a floating interest rate tied to the Wall Street Journal Prime Rate or 30-Day Libor Rate.

These loans are generally secured by substantially all of the assets of the borrower and typically have had a floating interest rate tied to the Wall Street Journal Prime Rate or 30-Day Libor Rate.

Loans for machinery and equipment purposes typically have a maturity of three to five years and are fully amortizing, while commercial real estate loans are usually written with a five-year maturity and amortize over a 10- to 20-year period.

Commercial loans typically have an interest rate that is fixed to maturity or is tied to the Wall Street Journal Prime Rate or 30-Day Libor Rate.

Commercial loans typically have had an interest rate that is fixed to maturity or is tied to the Wall Street Journal Prime Rate or 30-Day Libor Rate.

Effective January 1, 2022, we replaced the 30-Day Libor Rate with the CBM Term SOFR Rate for all new floating rate commercial loan commitments.

It is expected that currently outstanding commercial loans tied to the 30-Day Libor Rate will convert to an equivalent fallback SOFR Rate on or about June 30, 2023.

We evaluate many aspects of a commercial loan transaction in order to minimize credit and interest rate risk.

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policies of title insurance.

 Commercial real estate lending involves more risk than residential lending because loan balances are typically greater and repayment is dependent upon the borrower’s business operations.

We attempt to minimize the risks associated with these transactions by generally limiting our commercial real estate lending to owner-operated properties and to owners of non-owner occupied properties who have an established profitable history and satisfactory tenant structure.

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As of December 31, 2021, loans placed in nonaccrual status totaled $2.3 million, or 0.1% of total loans, compared to $3.4 million, or 0.1% of total loans, at December 31, 2020.

No loans were past due 90 days or more and still accruing interest at year-end 2020 or 2019.

Loans past due 90 days or more and still accruing interest totaled $0.2 million at year-end 2021.

We had no such loans outstanding as of December 31, 2020.

Additional detail and information relative to the loan portfolio is incorporated by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) and Note 3 of the Notes to Consolidated Financial Statements in this Annual Report.

Allowance for Loan Losses

In each accounting period, we adjust the allowance to the amount we believe is necessary to maintain the allowance at an adequate level.

Through the loan review and credit departments, we establish specific portions of the allowance based on specifically identifiable problem loans.

The evaluation of the allowance is further based on, but not limited to, consideration of the internally prepared Allowance Analysis, loan loss migration analysis, composition of the loan portfolio, third party analysis of the loan administration processes and portfolio, and general economic conditions.

The Allowance Analysis applies reserve allocation factors to non-impaired outstanding loan balances, the result of which is combined with specific reserves to calculate an overall allowance amount.

For non-impaired commercial loans, reserve allocation factors are based on the loan ratings as determined by our standardized grade paradigms and by loan purpose.

Our commercial loan portfolio is segregated into five classes:

1) commercial and industrial loans;

2) vacant land, land development and residential construction loans;

3) owner occupied real estate loans;

4) non-owner occupied real estate loans;

and 5) multi-family and residential rental property loans.

The reserve allocation factors are primarily based on the historical trends of net loan charge-offs through a migration analysis whereby net loan losses are tracked via assigned grades over various time periods, with adjustments made for environmental factors reflecting the current status of, or recent changes in, items such as:

lending policies and procedures;

economic conditions;

nature and volume of the loan portfolio;

experience, ability and depth of management and lending staff;

volume and severity of past due, nonaccrual and adversely classified loans;

effectiveness of the loan review program;

value of underlying collateral;

lending concentrations;

and other external factors, including competition and regulatory environment.

We established a Covid-19 reserve allocation factor to address the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio during the second quarter of 2020.

The creation of this factor reflected our belief that the traditional nine environmental factors did not sufficiently capture and address the unique circumstances, challenges and uncertainties associated with the Coronavirus Pandemic, which include unprecedented federal government stimulus and interventions, statewide mandatory closures of nonessential businesses and periodic changes to such and our ability to provide payment deferral programs to commercial and retail borrowers without the interjection of troubled debt restructuring accounting rules.

We review a myriad of items when assessing this new environmental factor, including virus infection rates, economic outlooks, employment data, business closures, foreclosures, payment deferments and government-sponsored stimulus programs.

The Covid-19 reserve factor resulted in a $5.3 million increase to the allowance as of December 31, 2020.

Adjustments for specific lending relationships, particularly impaired loans, are made on a case-by-case basis.

Non-impaired retail loan reserve allocations are determined in a similar fashion as those for non-impaired commercial loans, except that retail loans are segmented by type of credit and not a grading system.

We regularly review the Allowance Analysis and make adjustments periodically based upon identifiable trends and experience.

A migration analysis is completed quarterly to assist us in determining appropriate reserve allocation factors for non-impaired loans.

Our migration takes into account various time periods;

however, at year-end 2020 we placed most weight on the period starting December 31, 2010 through December 31, 2020.

We believe this period represents an appropriate range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation factors given current economic conditions and the general market consensus of economic conditions in the near future.

Although the migration analysis provides an accurate historical accounting of our net loan losses, it is not able to fully account for environmental factors that will also very likely impact the collectability of our loans as of any quarter-end date.

Therefore, we incorporate the environmental factors as adjustments to the historical data.

Environmental factors include both internal and external items.

We believe the most significant internal environmental factor is our credit culture and the relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external environmental factor being the assessment of the current economic environment and the resulting implications on our loan portfolio. 

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and the timeliness of scheduled payments.

We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value.

The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments.

We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’

rights in order to preserve our collateral position.

Financial institutions were not required to comply with the Current Expected Credit Loss (“CECL”) methodology requirements from the enactment date of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020.

The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for an extension of the required CECL adoption date to January 1, 2022, which is the date we expect to adopt.

The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022.

An economic forecast is a key component of the CECL methodology.

As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly revised with no economic forecast consensus.

Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.

As we continued to experience an unprecedented economic environment whereby a sizable portion of the economy had been significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus was provided to businesses, individuals and state and local governments and financial institutions offered businesses and individuals payment relief options, economic forecasts were regularly revised with no economic forecast consensus.

Given the high degree of uncertainty surrounding economic forecasting, we elected to postpone the adoption of CECL until January 1, 2022, and continued to use our incurred loan loss reserve model as permitted through December 31, 2021.

Additional detail regarding the allowance is incorporated by reference to Management’s Discussion and Analysis and Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report.

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Our Board of Directors may, however, alter the investment policy at any time without shareholder approval.

Our Bank’s Investments .

Our Bank ’

s Investments .

Our bank may invest its funds in a wide variety of debt instruments and may participate in the federal funds market with other depository institutions.

Subject to certain exceptions, our bank is prohibited from investing in equity securities.

Among the equity investments permitted for our bank under various conditions and subject in some instances to amount limitations, are shares of a subsidiary insurance agency, mortgage company, real estate company, or Michigan business and industrial development company, such as our insurance company and our real estate company.

Under another such exception, in certain circumstances and with prior notice to or approval of the FDIC, our bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in the acquisition and development of real property for sale, or the improvement of real property by construction or rehabilitation of residential or commercial units for sale or lease.

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Additional detail and information relative to the securities portfolio is incorporated by reference to Management’s Discussion and Analysis and Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.

We face substantial competition in all phases of our operations from a variety of different competitors.

Some of the financial institutions and financial service organizations with which we compete are not subject to the same degree of regulation as we are.

Federal banking law affects the competitive environment in which we conduct our business.

The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services.

We also face new competition as a result of expansion into new markets.

Selected Statistical Information

Management’s Discussion and Analysis beginning on Page F-4 in this Annual Report includes selected statistical information.

Return on Equity and Assets

Return on Equity and Asset information is included in Management’s Discussion and Analysis beginning on Page F-4 in this Annual Report.

Available Information

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business