Note 16 - Hedging Activities

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE

16

– HEDGING ACTIVITIES

Our interest rate risk policy includes guidelines for measuring and monitoring interest rate risk. Within these guidelines, parameters have been established for maximum fluctuations in net interest income. Possible fluctuations are measured and monitored using net interest income simulation. Our policy provides for the use of certain derivative instruments and hedging activities to aid in managing interest rate risk to within policy parameters.

In

February

2012,

we entered into an interest rate swap agreement with a correspondent bank to hedge the floating rate on the subordinated debentures issued to Mercantile Bank Capital Trust I, which became effective in

January

2013

and matures in

January

2018.

The

$32.0

million of subordinated debentures have a rate equal to the

90

-Day Libor Rate plus a fixed spread of

218

basis points, and are subject to repricing quarterly. The interest rate swap agreement provides for us to pay our correspondent bank a fixed rate, while our correspondent bank will pay us the

90

-Day Libor Rate on a

$32.0

million notional amount. The quarterly re-set dates for the floating rate on the interest rate swap agreement are the same as the re-set dates for the floating rate on the subordinated debentures. The interest rate swap agreement is accounted for under hedge accounting guidelines; therefore, fluctuations in the fair value of the interest rate swap agreement, net of tax effect, are recorded in other comprehensive income. As of

December

31,

2016

and

2015,

the fair value of the interest rate swap agreement was recorded as a liability in the amount of

$0.1

million and

$0.3

million, respectively.

Effective

January

26,

2016,

the notional amount of the interest rate swap agreement was reduced from

$32.0

million down to

$21.0

million, reflecting the

$11.0

million repurchase of the associated trust preferred securities on that date. We recorded interest expense of approximately

$154,000

in

January

2016

as part of the transaction, in large part reflecting the market value of the interest rate swap on that date of the

$11.0

million portion.