MERCANTILE BANK CORP [MBWM] Filings

10-Q 1 mbwm20220331_10q.htm FORM 10-Q mbwm20220331_10q.htm

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 000-26719

MERCANTILE BANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan	38-3360865
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

310 Leonard Street, NW, Grand Rapids, MI 49504

(Address of principal executive offices) (Zip Code)

(616) 406-3000

(Registrant’s telephone number, including area code)

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	MBWM	The Nasdaq Stock Market LLC

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

Yes ☐ No ☐

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

Yes ☐ No ☒

At April 29, 2022, there were 15,843,442 shares of common stock outstanding.

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MERCANTILE BANK CORPORATION

INDEX

PART I.	Financial Information	Page No.

	Item 1. Financial Statements

	Consolidated Balance Sheets (Unaudited) - March 31, 2022 and December 31, 2021	1

	Consolidated Statements of Income (Unaudited) - Three Months Ended March 31, 2022 and March 31, 2021	2

	Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2022 and March 31, 2021	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2022 and March 31, 2021	4

	Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2022 and March 31, 2021	6

	Notes to Consolidated Financial Statements (Unaudited)	8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	49

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	66

	Item 4. Controls and Procedures	69

PART II.	Other Information

	Item 1. Legal Proceedings	70

	Item 1A. Risk Factors	70

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	70

	Item 3. Defaults Upon Senior Securities	70

	Item 4. Mine Safety Disclosures	70

	Item 5. Other Information	70

	Item 6. Exhibits	71

	Signatures	72

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MERCANTILE BANK CORPORATION

PART I --- FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2022			2021
ASSETS
Cash and due from banks	$	71,480,000		$	59,405,000
Interest-earning deposits		698,724,000			915,755,000
Total cash and cash equivalents		770,204,000			975,160,000

Securities available for sale		605,661,000			592,743,000
Federal Home Loan Bank stock		17,721,000			18,002,000
Mortgage loans held for sale		14,746,000			16,117,000

Loans		3,555,790,000			3,453,459,000
Allowance for credit losses		(35,153,000	)		(35,363,000	)
Loans, net		3,520,637,000			3,418,096,000

Premises and equipment, net		56,078,000			57,298,000
Bank owned life insurance		75,508,000			75,242,000
Goodwill		49,473,000			49,473,000
Core deposit intangible, net		1,112,000			1,351,000
Other assets		64,759,000			54,267,000
Total assets	$	5,175,899,000		$	5,257,749,000

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	1,686,203,000		$	1,677,952,000
Interest-bearing		2,290,048,000			2,405,241,000
Total deposits		3,976,251,000			4,083,193,000

Securities sold under agreements to repurchase		204,271,000			197,463,000
Federal Home Loan Bank advances		382,263,000			374,000,000
Subordinated debentures		48,415,000			48,244,000
Subordinated notes		88,428,000			73,646,000
Accrued interest and other liabilities		39,800,000			24,644,000
Total liabilities		4,739,428,000			4,801,190,000

Commitments and contingent liabilities (Note 8)

Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized; none issued		0			0
Common stock, no par value; 40,000,000 shares authorized; 15,843,347 shares outstanding at March 31, 2022 and 15,839,944 shares outstanding at December 31, 2021		286,831,000			285,752,000
Retained earnings		181,532,000			174,536,000
Accumulated other comprehensive income (loss)		(31,892,000	)		(3,729,000	)
Total shareholders’ equity		436,471,000			456,559,000
Total liabilities and shareholders’ equity	$	5,175,899,000		$	5,257,749,000

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months		Three Months
	Ended		Ended
	March 31,		March 31,
	2022		2021
Interest income
Loans, including fees	$	33,251,000	$	32,985,000
Securities, taxable		1,665,000		1,035,000
Securities, tax-exempt		600,000		597,000
Other interest-earning assets		366,000		168,000
Total interest income		35,882,000		34,785,000

Interest expense
Deposits		1,825,000		2,717,000
Short-term borrowings		50,000		36,000
Federal Home Loan Bank advances		1,864,000		2,027,000
Subordinated debentures and other borrowings		1,258,000		472,000
Total interest expense		4,997,000		5,252,000

Net interest income		30,885,000		29,533,000

Provision for credit losses		100,000		300,000

Net interest income after provision for credit losses		30,785,000		29,233,000

Noninterest income
Service charges on deposit and sweep accounts		1,416,000		1,155,000
Mortgage banking income		3,281,000		8,800,000
Credit and debit card income		1,881,000		1,678,000
Interest rate swap fees		1,351,000		653,000
Payroll processing		638,000		557,000
Earnings on bank owned life insurance		287,000		277,000
Other income		423,000		343,000
Total noninterest income		9,277,000		13,463,000

Noninterest expense
Salaries and benefits		15,510,000		15,086,000
Occupancy		2,104,000		2,014,000
Furniture and equipment depreciation, rent and maintenance		934,000		889,000
Data processing costs		2,973,000		2,617,000
Other expense		4,221,000		4,511,000
Total noninterest expenses		25,742,000		25,117,000

Income before federal income tax expense		14,320,000		17,579,000

Federal income tax expense		2,828,000		3,340,000

Net income	$	11,492,000	$	14,239,000

Basic earnings per share	$	0.73	$	0.87
Diluted earnings per share	$	0.73	$	0.87
Cash dividends per share	$	0.31	$	0.29
Average basic shares outstanding		15,840,801		16,283,044
Average diluted shares outstanding		15,841,037		16,283,490

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021

Net income	$	11,492,000		$	14,239,000

Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale		(35,650,000	)		(9,168,000	)
Tax effect of unrealized holding gains (losses) on securities available for sale		7,487,000			1,925,000
Other comprehensive income (loss), net of tax effect		(28,163,000	)		(7,243,000	)

Comprehensive income (loss)	$	(16,671,000	)	$	6,996,000

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands except per share amounts)	Preferred Stock		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balances, January 1, 2022	$	0	$	285,752	$	174,536		$	(3,729	)	$	456,559

Adoption of ASU 2016-13						316						316

Employee stock purchase plan (281 shares)				10								10

Dividend reinvestment plan (5,835 shares)				222								222

Stock option exercises (1,355 shares)				36								36

Stock-based compensation expense				811								811

Cash dividends ($0.31 per common share)						(4,812	)					(4,812	)

Net income for the three months ended March 31, 2022						11,492						11,492

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect									(28,163	)		(28,163	)

Balances, March 31, 2022	$	0	$	286,831	$	181,532		$	(31,892	)	$	436,471

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY (Continued)

(Unaudited)

($ in thousands except per share amounts)	Preferred Stock		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balances, January 1, 2021	$	0	$	302,029		$	134,039		$	5,486		$	441,554

Employee stock purchase plan (331 shares)				11									11

Dividend reinvestment plan (6,647 shares)				213									213

Stock-based compensation expense				643									643

Share repurchase program (118,261 shares)				(3,538	)								(3,538	)

Cash dividends ($0.29 per common share)							(4,636	)					(4,636	)

Net income for the three months ended March 31, 2021							14,239						14,239

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect										(7,243	)		(7,243	)

Balances, March 31, 2021	$	0	$	299,358		$	143,642		$	(1,757	)	$	441,243

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months			Three Months
	Ended			Ended
	March 31, 2022			March 31, 2021
Cash flows from operating activities
Net income	$	11,492,000		$	14,239,000
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		3,458,000			3,457,000
Accretion of acquired loans		0			(34,000	)
Provision for credit losses		100,000			300,000
Stock-based compensation expense		811,000			643,000
Proceeds from sales of mortgage loans held for sale		79,622,000			189,018,000
Origination of mortgage loans held for sale		(75,046,000	)		(197,245,000	)
Net gain from sales of mortgage loans held for sale		(3,205,000	)		(9,182,000	)
Net gain from sales and valuation write-downs of foreclosed assets		(13,000	)		(81,000	)
Net loss from sales and valuation write-downs of former bank premises		0			250,000
Net (gain) loss from sales and write-downs of fixed assets		(1,000	)		312,000
Earnings on bank owned life insurance		(287,000	)		(277,000	)
Net change in:
Accrued interest receivable		(1,344,000	)		(971,000	)
Other assets		(2,855,000	)		(1,367,000	)
Accrued interest and other liabilities		15,156,000			(483,000	)
Net cash from (for) operating activities		27,888,000			(1,421,000	)

Cash flows from investing activities
Loan originations and payments, net		(102,241,000	)		(180,147,000	)
Purchases of securities available for sale		(51,705,000	)		(87,307,000	)
Proceeds from maturities, calls and repayments of securities available for sale		2,854,000			30,974,000
Proceeds from sales of foreclosed assets		13,000			158,000
Proceeds from Federal Home Loan Bank stock redemption		281,000			0
Net purchases of premises and equipment and lease activity		(332,000	)		(1,603,000	)
Net cash for investing activities		(151,130,000	)		(237,925,000	)

Cash flows from financing activities
Net decrease in time deposits		(35,861,000	)		(51,961,000	)
Net (decrease) increase in all other deposits		(71,081,000	)		302,650,000
Net increase in securities sold under agreements to repurchase		6,808,000			22,945,000
Proceeds from Federal Home Loan Bank advances		28,263,000			0
Payoffs of Federal Home Loan Bank advances		(20,000,000	)		0
Employee stock purchase plan		10,000			11,000
Net proceeds from stock option exercises		36,000			0
Dividend reinvestment plan		222,000			213,000
Proceeds from subordinated notes issuance		14,701,000			0
Repurchases of common stock		0			(3,538,000	)
Payment of cash dividends to common shareholders		(4,812,000	)		(4,636,000	)
Net cash from (for) financing activities		(81,714,000	)		265,684,000

Net change in cash and cash equivalents		(204,956,000	)		26,338,000
Cash and cash equivalents at beginning of period		975,160,000			626,006,000
Cash and cash equivalents at end of period	$	770,204,000		$	652,344,000

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Three Months		Three Months
	Ended		Ended
	March 31, 2022		March 31, 2021
Supplemental disclosures of cash flows information
Cash paid during the period for:
Interest	$	4,240,000	$	5,509,000
Noncash financing and investing activities:
Transfers from loans to assets held for sale		0		9,709,000
Transfers from bank premises to assets held for sale		0		3,450,000
Transfers from deposits to liabilities held for sale		0		17,280,000

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The unaudited financial statements for the three months ended March 31, 2022 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank (“our bank”) and our bank’s subsidiary, Mercantile Insurance Center, Inc. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 2022 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, 2021.

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

Coronavirus Pandemic: There remains a significant amount of stress and uncertainty across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”). This uncertainty is heightened as certain geographic areas continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes in circumstances, including supply chain disruptions and inflationary pressures.

The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a material negative impact on our financial condition and results of operations. We continue to occupy an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic may produce declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which may necessitate additional provisions for our allowance and reduce net income.

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

●

Paycheck Protection Program

The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s 100% guaranteed 7(a) loan program. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) authorized up to $350 billion in loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors. The PPP provides 100% guaranteed loans to cover specific operating costs. PPP loans are eligible to be forgiven based upon certain criteria. In general, the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent and utilities incurred or paid by the business during a prescribed period beginning on the loan origination date. Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the loan. The interest rate on the loan is fixed at 1.00%, with the financial institution receiving a loan origination fee paid by the Small Business Administration. The loan origination fees, net of the direct origination costs, are accreted into interest income on loans using the level yield methodology. The program ended on August 8, 2020. We originated approximately 2,200 loans aggregating $553 million. As of March 31, 2022, we recorded forgiveness transactions on all but six loans aggregating $0.9 million. Net loan origination fees of less than $0.1 million were recorded during the first quarter of 2022.

(Continued)

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MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Consolidated Appropriations Act, 2021 authorized an additional $284 billion in Second Draw PPP loans (“Second Draw”). The program ended on May 31, 2021. Under the Second Draw, we originated approximately 1,200 loans aggregating $208 million. As of March 31, 2022, we recorded forgiveness transactions on all but 38 loans aggregating $11.3 million. Net loan origination fees of $0.8 million were recorded during the first quarter of 2022.

●

Individual Economic Impact Payments

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

●

Troubled Debt Restructuring Relief

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

●

Current Expected Credit Loss (“CECL”) Methodology Delay

Financial institutions were not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31, 2020. We elected to postpone CECL adoption as permitted. The Consolidated Appropriations Act, 2021 extended the adoption deferral date to January 1, 2022. We adopted the CECL methodology effective January 1, 2022.

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 335,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2022. In addition, stock options for approximately 8,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2022. Approximately 262,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2021. In addition, stock options for approximately 3,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2021. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2021.

(Continued)

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MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. As of March 31, 2022 and December 31, 2021, all of our debt securities were designated as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Federal Home Loan Bank stock is carried at cost.

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

For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2022, there was no allowance for credit losses related to the available for sale debt securities portfolio. Accrued interest receivable on available for sale debt securities totaled $3.0 million at March 31, 2022 and was excluded from the estimate of credit losses as any accrued interest that is not expected to be collected is reversed against interest income.

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.

(Continued)

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MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of March 31, 2022 and December 31, 2021, we determined that the fair value of our mortgage loans held for sale totaled $15.2 million and $16.7 million, respectively.

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the mortgage loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income. Mortgage loans serviced for others totaled approximately $1.36 billion and $1.34 billion as of March 31, 2022 and December 31, 2021, respectively.

Allowance for Credit Losses (“Allowance”): In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended 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 CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. 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 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 CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022. An economic forecast is a key component of the CECL methodology. As we 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.

We adopted CECL effective January 1, 2022 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included a decrease in the allowance of $0.4 million, which included a $0.3 million increase to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accrued interest receivable for loans is included in other assets on our Consolidated Balance Sheet. We elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if we believe the collection of interest is doubtful. We believe this policy results in the timely reversal of uncollectible interest.

The allowance is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance is confirmed.

The allowance is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on if the loan is secured by residential real estate or not.

Our loan portfolio segments as of March 31, 2022 were as follows:

Commercial Loans

■

Commercial and Industrial

■

Owner Occupied Commercial Real Estate

■

Non-Owner Occupied Commercial Real Estate

■

Multi-Family and Residential Rental

■

Vacant Land, Land Development and Residential Construction

Retail Loans

■

1-4 Family Mortgages

■

Other Consumer Loans

The “remaining life methodology” is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.

We use migration to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by the bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate.

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1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of March 31, 2022, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period.

We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from a third-party provider that analyzes and develops forecasts of the economy for the entire United States at least quarterly. Our methodology does provide for a potential qualitative factor that can be used in the event of local or regional conditions that depart from the conditions and forecasts for the entire country.

During each reporting period, we also consider the need to adjust historical loss information to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses.

Traditional qualitative factors include:

Changes in lending policies and procedures

Changes in the nature and volume of the loan portfolio and in the terms of loans

Changes in the experience, ability and depth of lending management and other relevant staff

Changes in the volume and severity of past due loans, nonaccrual loans and adversely classified loans

Changes in the quality of the loan review program

Changes in the value of underlying collateral dependent loans

Existence and effect of any concentrations of credit and any changes in such

Effect of other factors such as competition and legal and regulatory requirements on the level of estimated credit losses

The estimation of future credit losses should reflect consideration of all significant factors that affect the collectibility of the loan portfolio at each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered.

As of March 31, 2022, we employed two additional qualitative factors:

The Coronavirus Pandemic Factor was established effective June 30, 2020 to address the unique circumstances, challenges and uncertainties associated with the Coronavirus Pandemic.

The Historical Loss Information Factor was established effective January 1, 2022 to address the low level of loan losses during the look-back period.

Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments when appropriate. The contractual term generally excludes potential extensions, renewals and modifications.

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1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

Mortgage Banking Activities: Mortgage 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.

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(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, which was subsequently revised on April 7, 2020. This guidance encourages financial institutions to work prudently with borrowers that are or may be unable to meet their contractual obligations because of the effects of the Coronavirus Pandemic. Pursuant to the guidance, the federal banking agencies concluded, in consultation with FASB staff, that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current prior to any relief are not troubled debt restructurings. This guidance complements Section 4013 of the CARES Act, which specified that Coronavirus-related modifications made on loans that were current as of December 31, 2019 and that occur between March 1, 2020 and the earlier of 60 days after the date of termination of the National Emergency declared by President Trump on March 13, 2020 (the “National Emergency”) or December 31, 2020, as applicable, are not troubled debt restructurings. As part of the Consolidated Appropriations Act that was enacted in late 2020, this guidance was extended to January 1, 2022.

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

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

If designated as a hedge, we formally document the relationship between derivatives as hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized immediately in current earnings as noninterest income or expense.

We discontinue hedge accounting when we determine the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended. We had no derivative instruments designated as hedges as of March 31, 2022 and December 31, 2021.

Goodwill and Core Deposit Intangible: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We may elect to perform a qualitative assessment for the annual impairment test. If the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value.

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

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(Unaudited)

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 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.

The following table depicts our sources of noninterest income that are scoped within Topic 606:

	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Service charges on deposit and sweep accounts	$	1,416,000	$	1,155,000
Credit and debit card fees		1,881,000		1,678,000
Payroll processing		638,000		557,000
Customer service fees		242,000		223,000

Service Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.

Credit and Debit Card Fees: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Payroll Processing Fees: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.

Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks and money orders, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the contract signing or renewal.

Newly Issued Not Yet Effective Standards: ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan. Additionally, the ASU requires disclosures of current period gross charge-offs by year of origination for financing receivables. This ASU is effective for fiscal years beginning after December 15, 2022. We do not believe the adoption of this ASU will have a material impact on our financial results. The required disclosures for gross charge-offs on our financial statements will be added upon adoption of this new standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.	SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2022
U.S. Government agency debt obligations	$	442,500,000	$	74,000	$	(31,996,000	)	$	410,578,000
Mortgage-backed securities		40,215,000		123,000		(2,592,000	)		37,746,000
Municipal general obligation bonds		138,916,000		540,000		(4,785,000	)		134,671,000
Municipal revenue bonds		23,900,000		39,000		(1,773,000	)		22,166,000
Other investments		500,000		0		0			500,000

	$	646,031,000	$	776,000	$	(41,146,000	)	$	605,661,000

December 31, 2021
U.S. Government agency debt obligations	$	398,874,000	$	266,000	$	(8,769,000	)	$	390,371,000
Mortgage-backed securities		41,906,000		549,000		(652,000	)		41,803,000
Municipal general obligation bonds		133,894,000		4,092,000		(392,000	)		137,594,000
Municipal revenue bonds		22,289,000		331,000		(145,000	)		22,475,000
Other investments		500,000		0		0			500,000

	$	597,463,000	$	5,238,000	$	(9,958,000	)	$	592,743,000

Securities with unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
March 31, 2022
U.S. Government agency debt obligations	$	190,990,000	$	11,971,000	$	215,783,000	$	20,025,000	$	406,773,000	$	31,996,000
Mortgage-backed securities		26,110,000		1,783,000		6,594,000		809,000		32,704,000		2,592,000
Municipal general obligation bonds		63,139,000		3,399,000		12,600,000		1,386,000		75,739,000		4,785,000
Municipal revenue bonds		13,671,000		999,000		5,842,000		774,000		19,513,000		1,773,000

	$	293,910,000	$	18,152,000	$	240,819,000	$	22,994,000	$	534,729,000	$	41,146,000

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(Unaudited)

2.	SECURITIES (Continued)

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 2021
U.S. Government agency debt obligations	$	274,287,000	$	5,274,000	$	110,053,000	$	3,495,000	$	384,340,000	$	8,769,000
Mortgage-backed securities		23,184,000		652,000		24,000		0		23,208,000		652,000
Municipal general obligation bonds		40,748,000		392,000		0		0		40,748,000		392,000
Municipal revenue bonds		12,843,000		137,000		414,000		8,000		13,257,000		145,000

	$	351,062,000	$	6,455,000	$	110,491,000	$	3,503,000	$	461,553,000	$	9,958,000

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

At March 31, 2022, 527 debt securities with estimated fair values totaling $535 million had unrealized losses aggregating $41.1 million. At December 31, 2021, 333 debt securities with estimated fair values totaling $462 million had unrealized losses aggregating $10.0 million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.

The amortized cost and fair value of debt securities at March 31, 2022, 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.

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(Unaudited)

2.	SECURITIES (Continued)

	Weighted
	Average		Amortized		Fair
	Yield (%)		Cost		Value

Due in 2022		1.98	$	10,171,000	$	10,171,000
Due in 2023 through 2027		1.11		263,429,000		251,105,000
Due in 2028 through 2032		1.74		295,377,000		273,366,000
Due in 2033 and beyond		2.13		36,339,000		32,773,000
Mortgage-backed securities		1.95		40,215,000		37,746,000
Other investments		3.75		500,000		500,000

Total available for sale securities		1.52	$	646,031,000	$	605,661,000

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $161 million and $155 million at March 31, 2022 and December 31, 2021, respectively, with estimated market values of $155 million and $158 million, respectively. Securities issued by all other states and their political subdivisions had combined amortized costs of $1.6 million and $1.7 million and estimated market values of $1.6 million and $1.7 million at March 31, 2022 and December 31, 2021, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.

The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $204 million and $197 million at March 31, 2022 and December 31, 2021, respectively. Investments in Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer.

3.	LOANS AND ALLOWANCE FOR CREDIT 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 collectibility 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.

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(Unaudited)

3.	LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Our total loans at March 31, 2022 were $3.56 billion compared to $3.45 billion at December 31, 2021, an increase of $102 million, or 3.0%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2022 and December 31, 2021, and the percentage change in loans from the end of 2021 to the end of the first quarter of 2022, are as follows:

											Percent
	March 31, 2022					December 31, 2021					Increase
	Balance		%			Balance		%			(Decrease)

Commercial:
Commercial and industrial (1)	$	1,153,814,000		32.4	%	$	1,137,419,000		32.9	%		1.4	%
Vacant land, land development, and residential construction		52,693,000		1.5			43,239,000		1.3			21.9
Real estate – owner occupied		582,732,000		16.4			565,758,000		16.4			3.0
Real estate – non-owner occupied		1,007,361,000		28.3			1,027,415,000		29.7			(2.0	)
Real estate – multi-family and residential rental		207,962,000		5.9			176,593,000		5.1			17.8
Total commercial		3,004,562,000		84.5			2,950,424,000		85.4			1.8

Retail:
1-4 family mortgages		522,556,000		14.7			442,547,000		12.8			18.1
Other consumer loans (2)		28,672,000		0.8			60,488,000		1.8			(52.6	)
Total retail		551,228,000		15.5			503,035,000		14.6			9.6

Total loans	$	3,555,790,000		100.0	%	$	3,453,459,000		100.0	%		3.0	%

(1)

For March 31, 2022, and December 31, 2021, includes $12.2 million and $40.1 million in loans originated under the Paycheck Protection Program, respectively.

(2)

In conjunction with the adoption of the CECL methodology effective January 1, 2022, home equity lines of credit were reclassified to 1-4 family mortgage loans from other consumer loans. Home equity lines of credit totaled $31.9 million and $29.5 million as of March 31, 2022 and December 31, 2021, respectively.

Nonperforming loans as of March 31, 2022 and December 31, 2021 were as follows:

	March 31,		December 31,
	2022		2021

Loans past due 90 days or more still accruing interest	$	0	$	155,000
Nonaccrual loans		1,612,000		2,313,000

Total nonperforming loans	$	1,612,000	$	2,468,000

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(Unaudited)

3.	LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The recorded principal balance of nonperforming loans was as follows:

March 31,