What changed in this filing

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Item 1. Business

2023-03-03 compared with 2022-03-04 · 71 added, 49 removed, 201 unchanged (37% of the section changed)

17 unchanged sentences

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 opened residential mortgage loan production offices in Midland, Michigan and in the Cincinnati, Ohio metropolitan area during 2020 and Petoskey, Michigan during 2021.

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

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.

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

Each of the trusts was formed to issue preferred securities that were sold in private sales, as well as selling common securities to Mercantile Bank Corporation.

We have five business trusts that are wholly-owned subsidiaries of Mercantile Bank Corporation but are not consolidated.

Each of the trusts was formed to issue preferred securities that were sold in private sales, as well as to sell common securities to Mercantile Bank Corporation.

The proceeds from the preferred and common securities sales were used by the trusts to purchase floating rate notes issued by Mercantile Bank Corporation.

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The Federal Reserve Board’s monetary policies have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation, maintain or encourage employment, and mitigate economic recessions.

The policies of the Federal Reserve Board have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States Government securities, and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.

Our bank maintains reserves directly with the Federal Reserve Bank of Chicago to the extent required by law.

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Regulation and Supervision

Banks and bank holding companies, among other financial institutions, are regulated under federal and state law.

These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, the FACT Act, the Gramm-Leach-Bliley Act, the Sarbanes Oxley Act, the Bank Secrecy Act, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws.

Banks and bank holding companies, like many other financial institutions, are regulated under a variety of federal and state statutes and the regulations that implement those statutes.

These statutes include, among others, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, the FACT Act, the Gramm-Leach-Bliley Act, the Sarbanes Oxley Act, the Bank Secrecy Act, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws, privacy laws, state usury statutes, and statutes relating to fiduciaries.

Our growth and earnings performance may be impacted by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities.

Those regulatory authorities include, but are not limited to, the Federal Reserve Board, the FDIC, the Michigan Department of Insurance and Financial Services, the Internal Revenue Service and state taxing authorities.

The effect of such statutes, regulations and policies, and any changes thereto, can be significant and cannot necessarily be predicted.

The effect of such statutes, regulations and policies, and any changes thereto, may significantly impact our business which cannot necessarily be predicted.

As a registered bank holding company under the Bank Holding Company Act, we are required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require.

We are also subject to examination by the Federal Reserve Board.

The Bank Holding Company Act limits the activities of bank holding companies to banking and the management of banking organizations, and to certain non-banking activities.

The permitted non-banking activities include those limited activities that the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking.

We are also subject to periodic examinations by the Federal Reserve Board.

The Bank Holding Company Act limits the activities of bank holding companies to banking and the management of banking organizations, and to certain permitted non-banking activities.

The permitted non-banking activities generally include those limited activities that the Federal Reserve Board has determined, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking.

These permitted non-banking activities include, among other things:

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Neither we nor any of our subsidiaries engage in any of the non-banking activities listed above.

On April 14, 2014, our election to become a financial holding company, as permitted by the Bank Holding Company Act, as amended by Title I of the Gramm-Leach-Bliley Act, was accepted by the Federal Reserve Board.

In order to continue as a financial holding company, we and our bank must satisfy statutory requirements regarding capitalization, management and compliance with the Community Reinvestment Act.

As a financial holding company, we are permitted to engage in a broader range of activities under the Bank Holding Company Act than are permitted to bank holding companies.

In order to maintain our status as a financial holding company, we and our bank must satisfy statutory requirements regarding capitalization, management and compliance with the Community Reinvestment Act.

As a financial holding company, we are permitted to engage in a broader range of activities under the Bank Holding Company Act that are permitted for bank holding companies.

Those expanded activities include any activity which the Federal Reserve Board (in certain instances in consultation with the Department of the Treasury) determines, by order or by regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity, and not to pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

Such expanded activities include, among others:

Such expanded activities that have been previously approved by the Federal Reserve Board include, among others:

insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent or broker for such purposes;

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and underwriting, dealing in, or making a market in securities.

While our insurance company is permitted to engage in the insurance agency activities described above by virtue of our financial holding company status, neither we nor any of our subsidiaries currently engage in the expanded activities.

Our bank is subject to restrictions imposed by federal and state laws and regulations.

Among other things, these restrictions apply to any extension of credit to us or to our other subsidiaries, to securities borrowing or lending, derivatives, and repurchase transactions with us or our other subsidiaries, to investments in stock or other securities that we issue, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales of certain types of assets to, us or our other subsidiaries.

Michigan banking laws place restrictions on various aspects of banking, including branching, payment of dividends, loan interest rates and capital and surplus requirements.

Among other things, these restrictions limit the transactions our bank conducts with us, our other subsidiaries or other affiliates, limit our securities borrowing or lending, derivatives, and repurchase transactions with us, our other subsidiaries or other affiliates, limit investments in stock or other securities that we issue, limit the taking of such stock or securities as collateral for loans to any borrower, and limit acquisitions of assets or services from, and sales of certain types of assets to, us, our other subsidiaries or other affiliates.

Michigan banking laws place additional restrictions on various aspects of banking, including branching, payment of dividends, loan interest rates and capital and surplus requirements.

Federal law restricts our ability to borrow from our bank by limiting the aggregate amount we may borrow and by requiring that all loans to us be secured in designated amounts by specified forms of collateral.

With respect to the acquisition of banking organizations, we are generally required to obtain the prior approval of the Federal Reserve Board before we can acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank or bank holding company, if, after the acquisition, we would own or control more than 5% of the voting shares of the bank or bank holding company.

Acquisitions of banking organizations across state lines are subject to restrictions imposed by federal and state laws and regulations.

Acquisitions of banking organizations across state lines are subject to additional restrictions imposed by federal and state laws and regulations.

The scope of regulations and supervision of various aspects of our business have expanded as a result of the adoption in July, 2010 of the Dodd-Frank Act, and may continue to expand as the result of implementing regulations being adopted by federal regulators.

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.

Many of the statutes and regulations under which we and our bank operate may change in the future, which may significantly impact our business.

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.

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 with other entities that provide financial services.

Some of the financial institutions and financial service organizations with whom 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.

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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.

Federal and state 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.

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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.

Approximately 84% of our eligible employees participate in our medical benefit plans which include a health savings account plan in which we pay the full monthly premiums.

We offer our employees generous paid time off 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.

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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.

In each of our facilities, we follow LEED green certification guidelines wherever practical, 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 and renovation projects include low-flow devices as well as LED lighting to enhance our efficiency of utility usage.

Over the past four years, we have reduced our use of natural gas by 7% and electricity by 29%.

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.

We continue to strive for the reduction of mail and paper usage through the promotion of customer eStatement adoption.

The eStatement adoption rate continues to grow, and we were approaching 60% adoption at year-end 2022.

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

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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:

The ESG Committee is a cross-functional management committee, led by the Chief Risk Officer, that assists us in:

1) setting general strategies relating to ESG matters;

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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.

The ESG Committee met four times during 2022.

Highlights for 2022 included the enhancement of our online financial wellness tools, the rollout of the MercStart Fresh deposit program, the development of a diverse vendor database for employee use and the creation of a Vendor and Supplier Code of Conduct.

The Vendor and Supplier Code of Conduct, along with our Environmental Policy, DEI Policy, Human Rights Policy, and the Supplier Diversity Program Policy, are reviewed and approved by our Board of Directors annually.

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.

Also during 2022, we moved Board of Director oversight of ESG matters from the Audit Committee to the Governance Committee.

The meetings were well attended.

Lending Policy

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The policy also provides general guidelines for loan to value for other types of collateral, such as accounts receivable and machinery and equipment.

In addition, the policy provides general guidelines as to environmental analysis, loans to employees, executive officers and directors, problem loan identification, maintenance of an allowance for loan losses, loan review and grading, mortgage and consumer lending, and other matters relating to our lending practices.

In addition, the policy provides general guidelines as to environmental analysis, loans to employees, executive officers and directors, problem loan identification, maintenance of an allowance for credit losses, loan review and grading, mortgage and consumer lending, and other matters relating to our lending practices.

The Board of Directors has delegated significant lending authority to officers of our bank.

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These lending authorities, however, are typically used only in rare circumstances where timing is of the essence.

Loan requests exceeding $5.0 million require approval by the Officers Loan Committee, and loan requests exceeding $15.0 million, up to the legal lending limit of approximately $97.7 million, require approval by our bank’s Board of Directors.

Loan requests exceeding $5.0 million require approval by the Officers Loan Committee, and loan requests exceeding $15.0 million, up to the legal lending limit of $101.4 million, require approval by our bank’s Board of Directors.

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

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Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition, and commercial real estate financing, including new construction and land development.

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 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 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.

In most instances, commercial line of credit facilities have a term ranging from 12 to 24 months with a floating rate tied to the Wall Street Journal Prime Rate, 30-Day London Interbank Offered Rate (“Libor”) or 30-Day Secured Overnight Funding Rate (“SOFR”).

Commercial term debt secured by real estate are generally at a floating rate tied to the Wall Street Journal Prime Rate, 30-Day Libor Rate or 30-Day SOFR.

Since the fourth quarter of 2020, a fixed rate option for commercial term debt loans secured by real estate is generally not offered for loans over $2.5 million;

instead, customers are offered participation in our back-to-back interest rate swap program to achieve a desired fixed rate.

For loans under $2.5 million, we offer a rate primarily equal to the commensurate cost of funds using Federal Home Loan Bank of Indianapolis (“FHLBI”) advance rates as a proxy and a credit spread as indicated by the credit rating we assign.

Commercial term debt secured by real estate generally balloon within five years, with payments based on amortizations ranging from 10 to 25 years.

Commercial term debt secured by non-real estate collateral are generally at a floating rate tied to the Wall Street Journal Prime Rate, 30-Day Libor Rate or 30-Day SOFR, or a fixed rate primarily equal to the commensurate cost of funds using FHLBI advance rates as a proxy and a credit spread as indicated by the credit rating we assign, and generally mature and fully amortize within three to seven years.

Effective January 1, 2022, we replaced the 30-Day Libor Rate with 30-Day SOFR for all new and renewing floating rate commercial loans and commitments.

Commercial loans tied to the 30-Day Libor Rate outstanding on June 30, 2023 will convert to an equivalent fallback SOFR Rate.

As of December 31, 2022, outstanding balances on loans tied to the 30-Day Libor Rate aggregated $368 million.

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

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As of December 31, 2022, loans placed in nonaccrual status totaled $7.7 million, or 0.2% of total loans, compared to $2.3 million, or 0.1% of total loans, at December 31, 2021.

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.

We had no loans past due 90 days or more and still accruing interest at year-end 2022, compared to $0.2 million in such loans as of December 31, 2021.

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

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.

Allowance for Credit Losses

The allowance is maintained at a level we believe is adequate to absorb estimated credit losses identified and inherent in the loan portfolio.

Our evaluation of the adequacy of the allowance is an estimate based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio.

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.

Credit losses are charged against the allowance when we believe the uncollectibility of a loan is likely.

The balance of the allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance in the future.

Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance in the future.

In either instance, unanticipated changes could have a significant impact on the allowance and operating results.

The allowance is increased through a provision charged to operating expense.

Uncollectible loans are charged-off through the allowance, while recoveries of loans previously charged-off are added to the allowance.

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 changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

This standard replaced the “incurred loss”

approach with an “expected loss”

Referred to as the current expected credit loss (“CECL”) model, it applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures.

The standard also expanded disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance.

In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

This ASU was effective for interim and annual reporting periods beginning after December 15, 2019.

Financial institutions were not required to comply with the 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 a further extension of the required CECL adoption date to January 1, 2022.

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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.

We adopted CECL effective January 1, 2022 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for reporting periods beginning after January 1, 2022, are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards.

The transition adjustment of the CECL adoption included a decrease in the allowance of $0.4 million, and a $0.3 million increase to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.

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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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