What changed in this filing

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Item 1. Financial Statements

2021-11-05 compared with 2021-08-06 · 503 added, 580 removed, 2558 unchanged (30% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

Cash and due from banks

69 unchanged sentences

40,000,000 shares authorized;

16,007,185 shares issued and outstanding at June 30, 2021 and 16,425,136 shares issued and outstanding at December 31, 2020

15,717,663 shares issued and outstanding at September 30, 2021 and 16,425,136 shares issued and outstanding at December 31, 2020

285,033,000  

5 unchanged sentences

5,486,000  

Total shareholders’

7 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Sept 30, 2021

Sept 30, 2020

Sept 30, 2021

Sept 30, 2020

Interest income

Loans, including fees

$ 33,789,000  

$ 34,322,000  

$ 66,774,000  

$ 67,764,000  

Securities, taxable

1,204,000  

2,187,000  

2,239,000  

5,628,000  

Securities, tax-exempt

598,000  

562,000  

1,195,000  

1,138,000  

Other interest-earning assets

183,000  

93,000  

351,000  

568,000  

Total interest income

35,774,000  

37,164,000  

70,559,000  

75,098,000  

Interest expense

2,346,000  

3,700,000  

5,063,000  

8,342,000  

Short-term borrowings

40,000  

55,000  

76,000  

94,000  

Federal Home Loan Bank advances

2,050,000  

2,214,000  

4,077,000  

4,427,000  

Subordinated debentures and other borrowings

467,000  

624,000  

939,000  

1,348,000  

Total interest expense

4,903,000  

6,593,000  

10,155,000  

14,211,000  

Net interest income

30,871,000  

30,571,000  

60,404,000  

60,887,000  

Provision for loan losses

( 3,100,000 )

7,600,000  

( 2,800,000 )

8,350,000  

Net interest income after provision for loan losses

33,971,000  

22,971,000  

63,204,000  

52,537,000  

Noninterest income

Service charges on deposit and sweep accounts

1,209,000  

1,045,000  

2,363,000  

2,267,000  

Mortgage banking income

7,695,000  

7,640,000  

16,495,000  

10,267,000  

Credit and debit card income

1,920,000  

1,374,000  

3,598,000  

2,735,000  

Interest rate swap fees

1,495,000  

2,148,000  

Payroll services income

405,000  

370,000  

962,000  

947,000  

Earnings on bank owned life insurance

297,000  

307,000  

574,000  

643,000  

Gain on sale of branch

1,058,000  

477,000  

248,000  

821,000  

675,000  

Total noninterest income

14,556,000  

10,984,000  

28,019,000  

17,534,000  

Noninterest expense

Salaries and benefits

16,194,000  

14,126,000  

31,279,000  

27,654,000  

1,977,000  

1,862,000  

3,991,000  

3,921,000  

Furniture and equipment depreciation, rent and maintenance

902,000  

851,000  

1,791,000  

1,629,000  

Data processing costs

2,775,000  

2,633,000  

5,392,000  

5,117,000  

Other expense

4,344,000  

3,744,000  

8,856,000  

7,835,000  

Total noninterest expenses

26,192,000  

23,216,000  

51,309,000  

46,156,000  

Total noninterest expense

Income before federal income tax expense

22,335,000  

10,739,000  

39,914,000  

23,915,000  

Federal income tax expense

4,244,000  

2,041,000  

7,583,000  

4,545,000  

$ 18,091,000  

$ 8,698,000  

$ 32,331,000  

$ 19,370,000  

Basic earnings per share

$ 1.12  

$ 0.54  

$ 2.00  

$ 1.19  

Diluted earnings per share

$ 1.12  

$ 0.54  

$ 2.00  

$ 1.19  

Cash dividends per share

$ 0.29  

$ 0.28  

$ 0.58  

$ 0.56  

Average basic shares outstanding

16,116,070  

16,212,500  

16,199,096  

16,281,391  

Average diluted shares outstanding

16,116,666  

16,213,264  

16,199,620  

16,282,341  

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

$ 18,091,000  

$ 8,698,000  

$ 32,331,000  

$ 19,370,000  

Sept 30, 2021

Sept 30, 2020

Sept 30, 2021

Sept 30, 2020

Other comprehensive income/(loss):

Unrealized holding gains/(losses) on securities available for sale

4,130,000  

1,636,000  

( 5,038,000 )

3,027,000  

Tax effect of unrealized holding gains/(losses) on securities available for sale

1,058,000  

Other comprehensive income/(loss), net of tax

3,263,000  

1,292,000  

( 3,980,000 )

2,390,000  

Comprehensive income

$ 21,354,000  

$ 9,990,000  

$ 28,351,000  

$ 21,760,000  

See accompanying notes to consolidated financial statements.

3 unchanged sentences

The following table depicts the change in shareholders’

equity for the three months ended June 30, 2021:

equity for the three months ended September 30, 2021:

($ in thousands except per

3 unchanged sentences

Shareholders’

Balances, March 31, 2021

Balances, June 30, 2021

$ 293,232  

4 unchanged sentences

Dividend reinvestment plan ( 7,904 shares)

Stock grants to directors for retainer fees ( 10,489 shares)

Stock option exercises ( 2,000 shares)

Stock-based compensation expense

1 unchanged sentence

Cash dividends ( $0.30 per common share)

Net income for the three months ended June 30, 2021

Net income for the three months ended September 30, 2021

15,051  

1 unchanged sentence

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

Balances, June 30, 2021

$ 293,232  

Balances, September 30, 2021

$ 285,033  

7 unchanged sentences

The following table depicts the change in shareholders’

equity for the six months ended June 30, 2021:

equity for the nine months ended September 30, 2021:

($ in thousands except per

11 unchanged sentences

Stock grants to directors for retainer fees ( 10,489 shares)

Stock option exercises ( 2,000 shares)

Stock-based compensation expense

1 unchanged sentence

Cash dividends ( $0.88 per common share)

Net income for the six months ended June 30, 2021

Net income for the nine months ended September 30, 2021

47,382  

1 unchanged sentence

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

Balances, June 30, 2021

$ 293,232  

Balances, September 30, 2021

$ 285,033  

7 unchanged sentences

The following table depicts the change in shareholders’

equity for the three months ended June 30, 2020:

equity for the three months ended September 30, 2020:

($ in thousands except per

3 unchanged sentences

Shareholders’

Balances, March 31, 2020

Balances, June 30, 2020

$ 300,897  

7 unchanged sentences

Cash dividends ( $0.28 per common share)

Net income for the three months ended June 30, 2020

Net income for the three months ended September 30, 2020

10,686  

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

Balances, June 30, 2020

( 532 )  

Balances, September 30, 2020

$ 301,896  

1 unchanged sentence

$ 5,553  

$ 431,900  

See accompanying notes to consolidated financial statements.

4 unchanged sentences

The following table depicts the change in shareholders’

equity for the six months ended June 30, 2020:

equity for the nine months ended September 30, 2020:

($ in thousands except per

14 unchanged sentences

Cash dividends ( $0.84 per common share)

Net income for the six months ended June 30, 2020

Net income for the nine months ended September 30, 2020

30,056  

1 unchanged sentence

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

Balances, June 30, 2020

Balances, September 30, 2020

$ 301,896  

5 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

June 30, 2021

June 30, 2020

Sept 30, 2021

Sept 30, 2020

Cash flows from operating activities

7 unchanged sentences

Provision for loan losses

( 2,800,000 )

11,550,000  

26 unchanged sentences

853,000  

654,000  

( 1,080,000 )

( 15,369,000 )

Accrued interest payable and other liabilities

( 6,269,000 )

( 4,285,000 )

Net cash (for) from operating activities

Accrued interest payable and other liabilities

910,000  

( 4,147,000 )

Net cash from operating activities

19,169,000  

16,306,000  

Cash flows from investing activities

13 unchanged sentences

270,000  

162,000  

Net cash transferred in branch sale

9 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

June 30, 2021

June 30, 2020

Sept 30, 2021

Sept 30, 2020

Cash flows from financing activities

Net decrease in time deposits

( 113,842,000 )

( 65,389,000 )

Net increase in all other deposits

585,924,000  

747,039,000  

Net increase in securities sold under agreements to repurchase

57,485,000  

54,342,000  

Maturities of Federal Home Loan Bank advances

( 20,000,000 )

Proceeds from Federal Home Loan Bank advances

60,000,000  

Proceeds from stock option exercises

50,000  

Employee stock purchase plan

35,000  

37,000  

Dividend reinvestment plan

648,000  

610,000  

Repurchases of common stock shares

( 19,798,000 )

( 6,282,000 )

Payment of cash dividends to common shareholders

( 13,880,000 )

( 13,436,000 )

Net cash from financing activities

496,622,000  

756,921,000  

Net change in cash and cash equivalents

199,355,000  

320,860,000  

Cash and cash equivalents at beginning of period

626,006,000  

233,731,000  

Cash and cash equivalents at end of period

$ 825,361,000  

$ 554,591,000  

Supplemental disclosures of cash flows information

Cash paid during the period for:

$ 15,826,000  

$ 21,798,000  

Federal income tax

14,450,000  

7,950,000  

Noncash financing and investing activities:

Transfers from loans to foreclosed assets

30,000  

146,000  

Transfers from bank premises to other real estate owned

179,000  

See accompanying notes to consolidated financial statements.

4 unchanged sentences

Basis of Presentation :

The unaudited financial statements for the six months ended June 30, 2021 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries.

The unaudited financial statements for the nine months ended September 30, 2021 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries.

These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s subsidiary Mercantile Insurance Center, Inc.

2 unchanged sentences

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 June 30, 2021 should not be considered as indicative of results for a full year.

The results for the period ended September 30, 2021 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 

3 unchanged sentences

Coronavirus Pandemic :

economy deteriorated rapidly during the latter part of the first quarter and into the second quarter of 2020 due to the ongoing pandemic of coronavirus disease 2019 (“Covid- 19”

There remains a significant amount of stress and uncertainty across national and global economies due to the ongoing pandemic of coronavirus disease 2019 (“Covid- 19”

) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”).

While the economic fallout has stabilized somewhat and the adult population in the United States is in the process of being vaccinated, there remains a significant amount of stress and uncertainty across national and global economies.

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.

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.

13 unchanged sentences

We originated approximately 2,200 loans aggregating $ 553 million.

As of June 30, 2021, we recorded forgiveness transactions on approximately 1,900 loans aggregating $ 487 million.

Net loan origination fees of $ 3.5 million were recorded during the first six months of 2021.

As of September 30, 2021, we recorded forgiveness transactions on over 2,100 loans aggregating $ 550 million.

Net loan origination fees of $ 3.7 million were recorded during the first nine months of 2021.

MERCANTILE BANK CORPORATION

5 unchanged sentences

Under the Second Draw, we originated approximately 1,200 loans aggregating $ 209 million.

As of June 30, 2021, we recorded forgiveness transactions on approximately 200 loans aggregating $ 29.2 million.

Net loan origination fees of $ 2.2 million were recorded during the first six months of 2021 under the Second Draw.

As of September 30, 2021, we recorded forgiveness transactions on about 600 loans aggregating $ 95.9 million.

Net loan origination fees of $ 4.8 million were recorded during the first nine months of 2021 under the Second Draw.

A PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies.

19 unchanged sentences

At the peak of activity in mid- 2020, nearly 750 borrowers with loan balances aggregating $ 719 million were participating in the commercial loan deferment program.

As of June 30, 2021, we had no loans in the commercial loan deferment program.

As of September 30, 2021, we had no loans in the commercial loan deferment program.

For retail borrowers, we offered 90 -day ( three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan.

As of June 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $ 23.8 million.

As of June 30, 2021, only six borrowers with loan balances aggregating $ 0.5 million remained in the retail loan payment deferment program.

As of September 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $ 23.8 million.

As of September 30, 2021, only six borrowers with loan balances aggregating $ 0.5 million remained in the retail loan payment deferment program.

(Continued) 

8 unchanged sentences

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 262,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2021.

In addition, stock options for approximately 3,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 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 and six months ended June 30, 2021.

Approximately 256,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2020.

In addition, stock options for approximately 2,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2020.

Stock options for approximately 9,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2020.

Approximately 260,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2021.

In addition, stock options for approximately 3,000 shares of common stock were included in determining diluted earnings per share for the three and nine months ended September 30, 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 and nine months ended September 30, 2021.

Approximately 255,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2020.

In addition, stock options for approximately 2,000 shares of common stock were included in determining diluted earnings per share for the three and nine months ended September 30, 2020.

Stock options for approximately 9,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and nine months ended September 30, 2020.

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.

29 unchanged sentences

Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

As of June 30, 2021 and December 31, 2020, we determined the fair value of our mortgage loans held for sale to be $ 28.9 million and $ 24.0 million, respectively.

As of September 30, 2021 and December 31, 2020, we determined the fair value of our mortgage loans held for sale to be $ 49.1 million and $ 24.0 million, respectively.

Mortgage loans held for sale are generally sold with servicing rights retained.

3 unchanged sentences

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 $ 1.20 billion and $ 1.04 billion as of June 30, 2021, and December 31, 2020, respectively.

Mortgage loans serviced for others totaled approximately $ 1.26 billion and $ 1.04 billion as of September 30, 2021, and December 31, 2020, respectively.

Mortgage Banking Activities :

54 unchanged sentences

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

As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly revised.

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

As we continued to experience an unprecedented economic environment whereby a sizable portion of the economy had been significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus was provided to businesses, individuals and state and local governments and financial institutions offered businesses and individuals payment relief options, economic forecasts were regularly revised.

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

Loans made under PPP are fully guaranteed by the Small Business Administration;

55 unchanged sentences

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

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

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

Hastings Branch Sale :

15 unchanged sentences

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

June 30, 2021

September 30, 2021

Government agency debt obligations

$ 368,990,000  

$ 350,000  

$ ( 4,954,000 )

$ 364,386,000  

Mortgage-backed securities

39,299,000  

698,000  

39,453,000  

Municipal general obligation bonds

130,681,000  

4,207,000  

134,610,000  

Municipal revenue bonds

20,468,000  

327,000  

20,615,000  

Other investments

500,000  

$ 559,938,000  

$ 5,582,000  

$ ( 5,956,000 )

$ 559,564,000  

December 31, 2020

Government agency debt obligations

$ 242,522,000  

$ 516,000  

$ ( 897,000 )

$ 242,141,000  

Mortgage-backed securities

23,869,000  

1,021,000  

24,890,000  

Municipal general obligation bonds

101,991,000  

5,833,000  

107,824,000  

Municipal revenue bonds

11,521,000  

473,000  

11,992,000  

Other investments

Securities with unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

500,000  

$ 380,403,000  

$ 7,843,000  

$ ( 899,000 )

$ 387,347,000  

Securities with unrealized losses at September 30, 2021 and December 31, 2020, 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

June 30, 2021

September 30, 2021

Government agency debt obligations

10 unchanged sentences

23,601,000  

544,000  

Municipal general obligation bonds

14 unchanged sentences

$ 1,002,000  

$ 390,206,000  

$ 5,956,000  

MERCANTILE BANK CORPORATION

6 unchanged sentences

Government agency debt obligations

$ 118,650,000  

$ 897,000  

$ 118,650,000  

$ 897,000  

Mortgage-backed securities

1 unchanged sentence

Municipal revenue bonds

423,000  

$ 119,073,000  

$ 899,000  

$ 119,073,000  

$ 899,000  

We evaluate securities for other-than-temporary impairment at least on a quarterly basis.

2 unchanged sentences

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 June 30, 2021, 209 debt securities with fair values totaling $ 299 million have unrealized losses aggregating $ 4.4 million.

At September 30, 2021, 291 debt securities with fair values totaling $ 390 million had unrealized losses aggregating $ 6.0 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 June 30, 2021, by maturity, are shown in the following table.

The amortized cost and fair value of debt securities at September 30, 2021, by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

29 unchanged sentences

$ 559,564,000  

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $ 141 million and $ 109 million at June 30, 2021 and December 31, 2020, respectively, with estimated market values of $ 145 million and $ 116 million, respectively.

Securities issued by all other states and their political subdivisions had a combined amortized cost of $ 2.7 million and $ 4.1 million at June 30, 2021 and December 31, 2020, respectively, with estimated market values of $ 2.8 million and $ 4.2 million, respectively.

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $ 148 million and $ 109 million at September 30, 2021 and December 31, 2020, respectively, with estimated market values of $ 153 million and $ 116 million, respectively.

Securities issued by all other states and their political subdivisions had a combined amortized cost of $ 2.7 million and $ 4.1 million at September 30, 2021 and December 31, 2020, respectively, with estimated market values of $ 2.7 million and $ 4.2 million, respectively.

Total securities of any other specific issuer, other than the U.S.

1 unchanged sentence

The carrying value of U.S.

Government agency debt obligations that are pledged to secure repurchase agreements was $ 170 million and $ 118 million at June 30, 2021 and December 31, 2020, respectively.

Government agency debt obligations that are pledged to secure repurchase agreements was $ 176 million and $ 118 million at September 30, 2021 and December 31, 2020, respectively.

Investments in Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer.

10 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Our total loans at June 30, 2021 were $ 3.25 billion compared to $ 3.19 billion at December 31, 2020, an increase of $ 55.4 million, or 1.7 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2021 and December 31, 2020, and the percentage change in loans from the end of 2020 to the end of the second quarter of 2021, are as follows:

June 30, 2021

Our total loans at September 30, 2021 were $ 3.31 billion compared to $ 3.19 billion at December 31, 2020, an increase of $ 120 million, or 3.8 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at September 30, 2021 and December 31, 2020, and the percentage change in loans from the end of 2020 to the end of the third quarter of 2021, are as follows:

September 30, 2021

December 31, 2020

30 unchanged sentences

$ 3,193,470,000  

Includes $ 246 million and $ 365 million in loans originated under the Paycheck Protection Program for June 30, 2021 and December 31, 2020, respectively.

Nonperforming loans as of June 30, 2021 and December 31, 2020 were as follows:

Includes $ 116 million and $ 365 million in loans originated under the Paycheck Protection Program for September 30, 2021 and December 31, 2020, respectively.

Nonperforming loans as of September 30, 2021 and December 31, 2020 were as follows:

September 30,

Loans past due 90 days or more still accruing interest

11 unchanged sentences

The recorded principal balance of nonperforming loans was as follows:

September 30,

Commercial and industrial

24 unchanged sentences

$ 3,384,000  

An age analysis of past due loans is as follows as of June 30, 2021:

An age analysis of past due loans is as follows as of September 30, 2021:

Commercial and industrial

3 unchanged sentences

$ 1,074,394,000  

$ 1,103,807,000  

Vacant land, land development, and residential construction

5 unchanged sentences

551,762,000  

550,073,000  

550,504,000  

Real estate –

11 unchanged sentences

2,842,359,000  

2,810,309,000  

Home equity and other

4 unchanged sentences

59,583,000  

59,732,000  

1-4 family mortgages

18 unchanged sentences

$ 3,313,709,000  

(Continued) 

MERCANTILE BANK CORPORATION

68 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Impaired loans as of June 30, 2021, and average impaired loans for the three and six months ended June 30, 2021, were as follows:

Second Quarter

Impaired loans as of September 30, 2021, and average impaired loans for the three and nine months ended September 30, 2021, were as follows:

With no related allowance recorded

14 unchanged sentences

163,000  

218,000  

Real estate –

multi-family and residential rental

92,000  

46,000  

23,000  

Total commercial

26 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Second Quarter

With an allowance recorded

71 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Impaired loans as of December 31, 2020, and average impaired loans for the three and six months ended June 30, 2020, were as follows:

Second Quarter

Impaired loans as of December 31, 2020, and average impaired loans for the three and nine months ended September 30, 2020, were as follows:

With no related allowance recorded

49 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Second Quarter

With an allowance recorded

7 unchanged sentences

96,000  

128,000  

Real estate –

60 unchanged sentences

Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated fair value.

Interest income recognized on accruing troubled debt restructurings totaled $ 0.4 million during the second quarters of 2021 and 2020, and $ 0.8 million and $ 0.6 million during the first six months of 2021 and 2020, respectively.

No interest income was recognized on nonaccrual loans during the second quarter and first six months of 2021 or during the respective 2020 periods.

Lost interest income on nonaccrual loans totaled less than $ 0.1 million during the second quarters of 2021 and 2020, and $ 0.1 million during the first six months of 2021 and 2020.

Interest income recognized on accruing troubled debt restructurings totaled $ 0.4 million and $ 0.2 million during the third quarters of 2021 and 2020, respectively, and $ 1.2 million and $ 0.8 million during the first nine months of 2021 and 2020, respectively.

No interest income was recognized on nonaccrual loans during the third quarter and first nine months of 2021 or during the respective 2020 periods.

Lost interest income on nonaccrual loans totaled less than $ 0.1 million and $0.1 million during the third quarters of 2021 and 2020, respectively, and $ 0.1 million and $ 0.2 million during the first nine months of 2021 and 2020, respectively.

MERCANTILE BANK CORPORATION

8 unchanged sentences

The risk assessment for retail loans is primarily based on the type of collateral.

Credit quality indicators were as follows as of June 30, 2021:

Credit quality indicators were as follows as of September 30, 2021:

Commercial credit exposure –

credit risk profiled by internal credit risk grades:

Land Development,

Real Estate -

19 unchanged sentences

13,753,000  

156,000  

Total commercial

22 unchanged sentences

credit risk profiled by internal credit risk grades:

Land Development,

Real Estate -

68 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity in the allowance for loan losses and the recorded investments in loans as of and during the three and six months ended June 30, 2021 are as follows:

Activity in the allowance for loan losses and the recorded investments in loans as of and during the three and nine months ended September 30, 2021 are as follows:

Allowance for loan losses:

Balance at March 31, 2021

Balance at June 30, 2021

$ 32,092,000  

3 unchanged sentences

Provision for loan losses

( 2,712,000 )

( 3,100,000 )

1,859,000  

1 unchanged sentence

1,900,000  

221,000  

132,000  

353,000  

Ending balance

10 unchanged sentences

Provision for loan losses

( 2,130,000 )

126,000  

( 2,800,000 )

745,000  

37 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity in the allowance for loan losses for loans during the three and six months ended June 30, 2020 and the recorded investments in loans as of December 31, 2020 are as follows:

Activity in the allowance for loan losses for loans during the three and nine months ended September 30, 2020 and the recorded investments in loans as of December 31, 2020 are as follows:

Allowance for loan losses:

Balance at March 31, 2020

$ 21,750,000  

Balance at June 30, 2020

$ 27,962,000  

$ 4,224,000  

Provision for loan losses

$ 60,000  

$ 32,246,000  

Provision for loan losses

3,499,000  

57 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Loans modified as troubled debt restructurings during the three months ended June 30, 2021 were as follows:

Loans modified as troubled debt restructurings during the three months ended September 30, 2021 were as follows:

Commercial and industrial

4 unchanged sentences

owner occupied

692,000  

Real estate –

2 unchanged sentences

multi-family and residential rental

Total commercial

93,000  

Home equity and other

Total commercial

279,000  

278,000  

Home equity and other

1-4 family mortgages

1 unchanged sentence

$ 278,000  

424,000  

422,000  

$ 3,947,000  

$ 3,945,000  

Loans modified as troubled debt restructurings during the six months ended June 30, 2021 were as follows:

Loans modified as troubled debt restructurings during the nine months ended September 30, 2021 were as follows:

Commercial and industrial

10 unchanged sentences

multi-family and residential rental

93,000  

Total commercial

15 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Loans modified as troubled debt restructurings during the three months ended June 30, 2020 were as follows:

Loans modified as troubled debt restructurings during the three months ended September 30, 2020 were as follows:

Commercial and industrial

4 unchanged sentences

owner occupied

56,000  

Real estate –

non-owner occupied

571,000  

Real estate –

1 unchanged sentence

Total commercial

634,000  

Home equity and other

8 unchanged sentences

$ 784,000  

Loans modified as troubled debt restructurings during the six months ended June 30, 2020 were as follows:

Loans modified as troubled debt restructurings during the nine months ended September 30, 2020 were as follows:

Commercial and industrial

8 unchanged sentences

non-owner occupied

571,000  

Real estate –

17 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended June 30, 2021 ( amounts as of period end):

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2021 ( amounts as of period end):

Commercial and industrial

2 unchanged sentences

owner occupied

431,000  

Real estate –

3 unchanged sentences

Total commercial

431,000  

Home equity and other

1 unchanged sentence

$ 5,000  

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the six months ended June 30, 2021 ( amounts as of period end):

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2021 ( amounts as of period end):

Commercial and industrial

$ 522,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

431,000  

Real estate –

3 unchanged sentences

Total commercial

953,000  

Home equity and other

5 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended June 30, 2020 ( amounts as of period end):

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended September 30, 2020 ( amounts as of period end):

Commercial and industrial

9 unchanged sentences

1-4 family mortgages

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the six months ended June 30, 2020 ( amounts as of period end):

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2020 ( amounts as of period end):

Commercial and industrial

17 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the three months ended June 30, 2021 is as follows:

Land Development,

Activity for loans categorized as troubled debt restructurings during the three months ended September 30, 2021 is as follows:

Real Estate -

14 unchanged sentences

$ 151,000  

$ 92,000  

Retail Loan Portfolio:

4 unchanged sentences

Net Additions/Deletions

412,000  

10,000  

Ending Balance

5 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the six months ended June 30, 2021 is as follows:

Land Development,

Activity for loans categorized as troubled debt restructurings during the nine months ended September 30, 2021 is as follows:

Real Estate -

12 unchanged sentences

686,000  

92,000  

Ending Balance

2 unchanged sentences

$ 151,000  

$ 92,000  

Retail Loan Portfolio:

13 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the three months ended June 30, 2020 is as follows:

Land Development,

Activity for loans categorized as troubled debt restructurings during the three months ended September 30, 2020 is as follows:

Real Estate -

11 unchanged sentences

Net Additions/Deletions

Ending Balance

55,000  

569,000  

Ending Balance

$ 6,537,000  

16 unchanged sentences

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the six months ended June 30, 2020 is as follows:

Land Development,

Activity for loans categorized as troubled debt restructurings during the nine months ended September 30, 2020 is as follows:

Real Estate -

14 unchanged sentences

3,710,000  

Ending Balance

569,000  

$ 80,000  

Ending Balance

$ 6,537,000  

17 unchanged sentences

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

September 30,

Commercial and industrial

35 unchanged sentences

Premises and equipment are comprised of the following:

September 30,

Land and improvements

14 unchanged sentences

$ 58,959,000  

Depreciation expense totaled $ 1.4 million and $ 1.3 million during the second quarters of 2021 and 2020, respectively.

Depreciation expense totaled $ 2.8 million during the first six months of 2021, compared to $ 2.5 million during the first six months of 2020.

Depreciation expense totaled $ 1.5 million and $ 1.3 million during the third quarters of 2021 and 2020, respectively.

Depreciation expense totaled $ 4.3 million during the first nine months of 2021, compared to $ 3.8 million during the first nine months of 2020.

Our total deposits at June 30, 2021 totaled $ 3.67 billion, an increase of $ 260 million, or 7.6 %, from December 

The components of our outstanding balances at June 30, 2021 and December 31, 2020, and percentage change in deposits from the end of 2020 to the end of the second quarter of 2021, are as follows:

June 30, 2021

Our total deposits at September 30, 2021 totaled $ 3.87 billion, an increase of $ 457 million, or 13.4 %, from December 

The components of our outstanding balances at September 30, 2021 and December 31, 2020, and percentage change in deposits from the end of 2020 to the end of the third quarter of 2021, are as follows:

September 30, 2021

December 31, 2020

24 unchanged sentences

$ 3,411,553,000  

Total time deposits of more than $250,000 totaled $ 219 million and $ 272 million at June 30, 2021 and December 31, 2020, respectively.

Total time deposits of more than $250,000 totaled $ 202 million and $ 272 million at September 30, 2021 and December 31, 2020, respectively.

(Continued) 

5 unchanged sentences

Information relating to our repurchase agreements follows:

June 30, 2021

September 30,

Twelve Months

December 31, 2020

Outstanding balance at end of period

15 unchanged sentences

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $ 394 million at June 30, 2021 and December 31, 2020, and were expected to mature at varying dates from November 2021 through June 2027, with fixed rates of interest from 0.55 % to 3.18 % and averaging 2.06 % as of both dates.

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $ 394 million at September 30, 2021 and December 31, 2020, and were expected to mature at varying dates from November 2021 through June 2027, with fixed rates of interest from 0.55 % to 3.18 % and averaging 2.06 % as of both dates.

Each advance is payable at its maturity date and is subject to a prepayment fee if paid prior to the maturity date.

The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement.

Our borrowing line of credit as of June 30, 2021 totaled $ 807 million, with remaining availability based on collateral equaling $ 407 million.

Our borrowing line of credit as of September 30, 2021 totaled $ 760 million, with remaining availability based on collateral equaling $ 360 million.

Maturities of currently outstanding FHLBI advances are as follows:

21 unchanged sentences

If required, estimated loss exposure resulting from these instruments is expensed and recorded as a liability.

There was no liability balance for these instruments as of June 30, 2021 and December 31, 2020.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, 2021 and December 31, 2020 follows:

There was no liability balance for these instruments as of September 30, 2021 and December 31, 2020.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at September 30, 2021 and December 31, 2020 follows:

September 30,

Commercial unused lines of credit

31 unchanged sentences

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings.

The estimated fair values of derivative instruments as of June 30, 2021 are reflected in the following table.

The estimated fair values of derivative instruments as of September 30, 2021 are reflected in the following table.

Notional Amount

9 unchanged sentences

5,250,000  

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of less than $ 0.1 million during the first six months of 2021.

The estimated fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $ 2.7 million as of June 30, 2021.

Cash collateral totaling $ 2.3 million was provided to the counterparty correspondent bank as of June 30, 2021.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 118.3 million as of June 30, 2021.

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of $ 0.2 million during the first nine months of 2021.

Cash collateral totaling $ 4.6 million was provided to the counterparty correspondent bank as of September 30, 2021.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 214 million as of September 30, 2021.

Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instrument that has been hedged.

1 unchanged sentence

Notional Amount

Balance Sheet Location

Balance Sheet

Derivative Assets  

17 unchanged sentences

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of June 30, 2021 and December 31, 2020 ( dollars in thousands):

June 30, 2021

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of September 30, 2021 and December 31, 2020 ( dollars in thousands):

September 30, 2021

December 31, 2020

101 unchanged sentences

We carry these bonds at historical cost, which we believe approximates fair value, unless our periodic financial analysis or other information that becomes known to us necessitates an impairment.

There was no such impairment as of June 30, 2021 or December 31, 2020.

There was no such impairment as of September 30, 2021 or December 31, 2020.

We have no Level 1 securities available for sale.

4 unchanged sentences

Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics.

As of June 30, 2021 and December 31, 2020, we determined the fair value of our mortgage loans held for sale to be $ 28.9 million and $ 24.0 million, respectively.

As of September 30, 2021 and December 31, 2020, we determined the fair value of our mortgage loans held for sale to be $ 49.1 million and $ 24.0 million, respectively.

We do not record loans at fair value on a recurring basis.

12 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 are as follows:

The balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 are as follows:

Significant Unobservable

Available for sale securities

18 unchanged sentences

$ 717,000  

There were no transfers in or out of Level 1, Level 2 or Level 3 during the first six months of 2021.

The less than $ 0.1 million reduction in Level 3 municipal general obligation bonds during the first six months of 2021 reflects the scheduled maturities of such bonds.

There were no transfers in or out of Level 1, Level 2 or Level 3 during the first nine months of 2021.

The less than $ 0.1 million reduction in Level 3 municipal general obligation bonds during the first nine months of 2021 reflects the scheduled maturities of such bonds.

The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 are as follows:

Significant Unobservable

Available for sale securities

23 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2021 are as follows:

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2021 are as follows:

Significant Unobservable

36 unchanged sentences

In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator.

At June 30, 2021 and December 31, 2020, our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since June 30, 2021 that we believe have changed our bank’s categorization.

At September 30, 2021 and December 31, 2020, our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since September 30, 2021 that we believe have changed our bank’s categorization.

Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were:

5 unchanged sentences

Action Regulations

June 30, 2021

September 30, 2021

Total capital (to risk weighted assets)

52 unchanged sentences

219,999  

Our consolidated capital levels as of June 30, 2021 and December 31, 2020 include $ 45.8 million and $ 45.5 million, respectively, of trust preferred securities.

Our consolidated capital levels as of September 30, 2021 and December 31, 2020 include $ 46.0 million and $ 45.5 million, respectively, of trust preferred securities.

Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element.

1 unchanged sentence

Our ability to include the trust preferred securities in Tier 1 capital in accordance with the guidelines is not affected by the provision of the Dodd-Frank Act generally restricting such treatment, because (i) the trust preferred securities were issued before May 19, 2010, and (ii) our total consolidated assets as of December 31, 2009 were less than $ 15.0 billion.

As of June 30, 2021 and December 31, 2020, all $ 45.8 million and $ 45.5 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.

As of September 30, 2021 and December 31, 2020, all $ 46.0 million and $ 45.5 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.

Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5 % of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule.

Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer requirement was phased in over three years beginning in 2016.

The capital buffer requirement raised the minimum required common equity Tier 1 capital ratio to 7.0 %, the Tier 1 capital ratio to 8.5 % and the total capital ratio to 10.5 % on a fully phased-in basis on January 1, 2019.

We believe that, as of June 30, 2021, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

Our and our bank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices.

On January 14, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.29 per share that was paid on March 17, 2021 to shareholders of record as of March 5, 2021.

On April 15, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.29 per share that was paid on June 16, 2021 to shareholders of record as of June 4, 2021.

On July 15, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.30 per share that will be paid on September 15, 2021 to shareholders of record as of September 3, 2021.

We believe that, as of September 30, 2021, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

MERCANTILE BANK CORPORATION

1 unchanged sentence

REGULATORY MATTERS (Continued)

Our and our bank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices.

On April 15, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.29 per share that was paid on June 16, 2021 to shareholders of record as of June 4, 2021.

On July 15, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.30 per share that was paid on September 15, 2021 to shareholders of record as of September 3, 2021.

On October 14, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.30 per share that will be paid on December 15, 2021 to shareholders of record as of December 3, 2021.

In May 2021, we announced that our Board of Directors had authorized a program to repurchase up to $ 20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations.

This program replaces a similar $ 20.0 million program that had been announced in May 2019 that was nearing exhaustion.

During the first six months of 2021, we repurchased a total of approximately 347,000 shares at a total price of $ 10.9 million, at an average price per share of $ 31.28 .

Availability under the repurchase plan totaled $ 17.3 million as of June 30, 2021.

During the first nine months of 2021, we repurchased a total of approximately 636,000 shares at a total price of $ 19.8 million, at an average price per share of $ 31.14 .

Availability under the repurchase plan totaled $ 8.4 million as of September 30, 2021.

The stock buybacks have been funded from cash dividends paid to us from our bank.

29 unchanged sentences

demand for products and services;

the degree of competition by traditional and non-traditional competitors;

the degree of competition by traditional and non-traditional financial service companies;

changes in banking regulation or actions by bank regulators;

1 unchanged sentence

changes in tax laws;

changes in accounting principles and interpretations;

changes in prices, levies, and assessments;

potential increases of federal deposit insurance premium expense, and possible future special assessments of Federal Deposit Insurance Corporation premiums, either industry wide or specific to our bank;

the impact of technological advances;

risks associated with cyber-attacks on our computer systems;

risks associated with cyber-attacks, information security breaches and other criminal activities;

governmental and regulatory policy changes;

our participation in the Paycheck Protection Program administered by the Small Business Administration;

litigation liabilities;

actions of the Federal Reserve Board;

the outcomes of contingencies;

3 unchanged sentences

changes in the national and local economies, including the significant disruption to financial market and other economic activity caused by the outbreak and continuance of the Coronavirus Pandemic;

and risk factors described in our annual report on Form 10-K for the year ended December 31, 2020, our March 31, 2021 Form 10-Q or in this report.

and risk factors described in our annual report on Form 10-K for the year ended December 31, 2020, our March 31, 2021 Form 10-Q, our June 30, 2021 Form 10-Q or in this report.

These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank of Michigan (“our bank”) and our bank’s subsidiary, Mercantile Insurance Center, Inc.

(“our insurance company”), at June 30, 2021 and December 31, 2020 and the results of operations for the three months and six months ended June 30, 2021 and June 30, 2020.

(“our insurance company”), at September 30, 2021 and December 31, 2020 and the results of operations for the three months and nine months ended September 30, 2021 and September 30, 2020.

This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report.

21 unchanged sentences

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

Loans made under the Payment Protection Program are fully guaranteed by the Small Business Administration;

Loans made under the Paycheck Protection Program are fully guaranteed by the Small Business Administration;

therefore, such loans do not have an associated allowance.

17 unchanged sentences

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

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

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

MERCANTILE BANK CORPORATION

39 unchanged sentences

Coronavirus Pandemic

economy deteriorated rapidly during the latter part of the first quarter and into the second quarter of 2020 due to the ongoing 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.

There remains a significant amount of stress and uncertainty across national and global economies due to the ongoing 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.

13 unchanged sentences

We originated approximately 2,200 loans aggregating $553 million.

As of June 30, 2021, we recorded forgiveness transactions on approximately 1,900 loans aggregating $487 million.

Net loan origination fees of $3.5 million were recorded during the first six months of 2021.

As of September 30, 2021, we recorded forgiveness transactions on over 2,100 loans aggregating $550 million.

Net loan origination fees of $3.7 million were recorded during the first nine months of 2021.

The Consolidated Appropriations Act, 2021 authorized an additional $284 billion in Second Draw PPP loans (“Second Draw”).

1 unchanged sentence

Under the Second Draw, we originated approximately 1,200 loans aggregating $209 million.

As of June 30, 2021, we recorded forgiveness transactions on approximately 200 loans aggregating $29.2 million.

Net loan origination fees of $2.2 million were recorded during the first six months of 2021 under the Second Draw.

As of September 30, 2021, we recorded forgiveness transactions on about 600 loans aggregating $95.9 million.

Net loan origination fees of $4.8 million were recorded during the first nine months of 2021 under the Second Draw.

A PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies.

20 unchanged sentences

At the peak of activity in mid-2020, nearly 750 borrowers with loan balances aggregating $719 million were participating in the commercial loan payment deferment program.

As of June 30, 2021, we had no loans in the commercial loan payment deferment program.

As of September 30, 2021, we had no loans in the commercial loan payment deferment program.

For retail borrowers, we offered 90-day (three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan.

As of June 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million.

As of June 30, 2021, only six borrowers with loan balances aggregating $0.5 million remained in the retail loan payment deferment program.

As of September 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million.

As of September 30, 2021, only six borrowers with loan balances aggregating $0.5 million remained in the retail loan payment deferment program.

Financial Overview

We reported net income of $18.1 million, or $1.12 per diluted share, for the second quarter of 2021, compared to net income of $8.7 million, or $0.54 per diluted share, during the second quarter of 2020.

Net income for the first six months of 2021 totaled $32.3 million, or $2.00 per diluted share, compared to $19.4 million, or $1.19 per diluted share, during the first six months of 2020.

Commercial loans increased $16.3 million during the first six months of 2021, reflecting the combined net growth of core commercial loans and net activity under the PPP.

Core commercial loans increased $135 million, or approximately 11% on an annualized basis, during the first six months of 2021.

Net PPP loans declined $119 million during the first six months of 2021, comprised of $209 in million PPP loans extended and $328 million in forgiveness transactions.

As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied commercial real estate (“CRE”) loans combined equaled 54.9% as of June 30, 2021, compared to 53.9% at December 31, 2020.

The new commercial loan pipeline remains strong, and at June 30, 2021, we had $167 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

We reported net income of $15.1 million, or $0.95 per diluted share, for the third quarter of 2021, compared to net income of $10.7 million, or $0.66 per diluted share, during the third quarter of 2020.

Net income for the first nine months of 2021 totaled $47.4 million, or $2.95 per diluted share, compared to $30.1 million, or $1.85 per diluted share, during the first nine months of 2020.

Commercial loans increased $48.4 million during the first nine months of 2021, reflecting the combined net growth of core commercial loans and net activity under the PPP.

Core commercial loans increased $298 million, or approximately 16% on an annualized basis, during the first nine months of 2021.

Net PPP loans declined $249 million during the first nine months of 2021, comprised of $209 million in PPP loans extended and $458 million in forgiveness transactions.

As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied commercial real estate (“CRE”) loans combined equaled 55.4% as of September 30, 2021, compared to 53.9% at December 31, 2020.

The new commercial loan pipeline remains strong, and at September 30, 2021, we had $155 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

MERCANTILE BANK CORPORATION

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.08% of total loans as of June 30, 2021.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.08% of total loans as of September 30, 2021.

Accruing loans past due 30 to 89 days remain very low.

Gross loan charge-offs totaled less than $0.1 million during the second quarter of 2021, and aggregated $0.1 million for the first six months of the year, while recoveries of prior period loan charge-offs equaled $0.4 million and $0.9 million during the respective time periods.

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.04% and 0.05% during the second quarter and first six months of 2021, respectively.

We recorded a negative loan loss provision expense of $3.1 million during the second quarter of 2021, compared to a provision expense of $7.6 million during the second quarter of 2020.

We recorded a negative loan loss provision expense of $2.8 million during the first six months of 2021, compared to a provision expense of $8.4 million during the first six months of 2020.

The negative provision expense recorded in the 2021 periods was mainly comprised of a reduced reserve allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions.

The provision expense recorded during the 2020 periods mainly consisted of an allocation associated with a newly created Coronavirus Pandemic environmental factor (“Covid-19 factor”) and an increased allocation related to the existing economic and business conditions environmental factor.

The Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio.

Gross loan charge-offs totaled $0.7 million during the third quarter of 2021, and aggregated $0.9 million for the first nine months of the year, while recoveries of prior period loan charge-offs equaled $0.4 million and $1.2 million during the respective time periods.

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.01% during the first nine months of 2021.

We recorded a loan loss provision expense of $1.9 million during the third quarter of 2021, compared to a provision expense of $3.2 million during the third quarter of 2020.

We recorded a negative loan loss provision expense of $0.9 million during the first nine months of 2021, compared to a provision expense of $11.6 million during the first nine months of 2020.

The provision expense recorded during the third quarter of 2021 mainly reflected growth in core commercial loans, while the prior-year third quarter expense was primarily comprised of increased reserve allocations associated with the downgrading of certain non-impaired commercial loan relationships to reflect stressed economic conditions stemming from the Coronavirus Pandemic.

The negative provision expense recorded during the first nine months of 2021 largely reflected reserve allocations necessitated by core commercial loan growth that were more than fully mitigated by a lower reserve allocation associated with the economic and business conditions environmental factor that was upgraded during the second quarter reflecting improvement in both current and forecasted economic conditions.

The provision expense during the first nine months of 2020 was primarily comprised of increased reserve allocations associated with the downgrades of the economic and business conditions environmental factor, the introduction of a Covid-19 pandemic environmental factor and the aforementioned third quarter 2020 commercial loan downgrades.

Interest-earning balances, primarily consisting of funds deposited at the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate risk sensitivity.

During the first six months of 2021, the average balance of these funds equaled $606 million, or 13.8% of average earning assets, compared to $203 million, or 5.6% of average earning assets, during the first six months of 2020, and a more typical $81.3 million, or 2.5% of average earning assets, during the first six months of 2019.

The elevated level during 2020 and into the first half of 2021 primarily reflects increased local deposits stemming from federal government stimulus payments and reduced business and consumer investing and spending.

The excess level of funds on deposit with the Federal Reserve Bank of Chicago had a negative impact of 35 to 40 basis points on our net interest margin during the second quarter and first six months of 2021.

Total local deposits increased $276 million during the first six months of 2021, and are up $1.1 billion since year-end 2019, equating to growth rates of about 8% and 42%, respectively.

Approximately two-thirds of the deposit increase during the first six months of 2021 and the last 18 months is comprised of increased noninterest-bearing checking account balances.

Net interest income increased $0.3 million during the second quarter of 2021 compared to the second quarter of 2020, while decreasing $0.5 million during the first six months of 2021 compared to the first six months of 2020.

Interest income and interest expense declined during the 2021 periods compared to the prior-year periods primarily due to Federal Open Market Committee’s (“FOMC”) federal funds rate cuts totaling 150 basis points in March of 2020 and a low interest rate environment since that time.

Interest income declined by $1.4 million during the second quarter of 2021 from the second quarter of 2020, and was down $4.5 million during the first six months of 2021 compared to the first six months of 2020.

During the first nine months of 2021, the average balance of these funds equaled $649 million, or 14.6% of average earning assets, compared to $288 million, or 7.7% of average earning assets, during the first nine months of 2020, and a more typical $93.8 million, or 2.8% of average earning assets, during the first nine months of 2019.

The elevated level during 2020 and year-to-date 2021 primarily reflects increased local deposits stemming from federal government stimulus payments and reduced business and consumer investing and spending.

The excess level of funds on deposit with the Federal Reserve Bank of Chicago had a negative impact of 40 basis points to 45 basis points on our net interest margin during the third quarter and first nine months of 2021.

Total local deposits increased $480 million during the first nine months of 2021, and are up $1.3 billion since year-end 2019, equating to growth rates of about 14% and 50%, respectively.

Approximately 50% of the local deposit increase during the first nine months of 2021 and the last 21 months is comprised of increased noninterest-bearing checking account balances.

Net interest income increased $1.6 million during the third quarter of 2021 compared to the third quarter of 2020, and was up $1.1 million during the first nine months of 2021 compared to the first nine months of 2020.

Both interest income and interest expense were impacted during the 2021 periods compared to the prior-year periods primarily by the Federal Open Market Committee’s (“FOMC”) federal funds rate cuts totaling 150 basis points in March of 2020 and a low interest rate environment since that time;

however, growth in earning assets, especially core commercial loans, has provided for the increase in net interest income.

Interest income increased $0.3 million during the third quarter of 2021 from the third quarter of 2020, but was down $4.2 million during the first nine months of 2021 compared to the first nine months of 2020.

During the same time periods, interest expense was down $1.3 million and $5.4 million, respectively.

Noninterest income during the second quarter of 2021 was $14.6 million, compared to $11.0 million during the prior-year second quarter.

Noninterest income during the first six months of 2021 was $28.0 million, compared to $17.5 million during the same time period in 2020.

The improved level mainly resulted from increased mortgage banking income and fee income generated from a commercial lending interest rate swap program that was introduced in the latter part of 2020.

Noninterest income during the third quarter of 2021 was $15.6 million, compared to $13.3 million during the prior-year third quarter.

Noninterest income during the first nine months of 2021 was $43.6 million, compared to $30.8 million during the same time period in 2020.

The improved levels mainly resulted from ongoing strength in our mortgage banking function and fee income generated from a commercial lending interest rate swap program that was introduced in the latter part of 2020.

In addition, a gain on the sale of a branch totaling $1.1 million was recorded during the second quarter of 2021.

Noninterest expense during the second quarter of 2021 was $26.2 million, compared to $23.2 million during the prior-year second quarter.

Noninterest expense during the first six months of 2021 was $51.3 million, compared to $46.2 million during the same time period in 2020.

A majority of the increase is in salary and benefit costs, in large part reflecting increased health insurance costs, annual employee merit pay increases, and a lower level of deferred salary costs associated with PPP loan originations.

In addition, we accrued for our bonus programs during the 2021 periods, which we did not do during the 2020 periods due to the onset of the Coronavirus Pandemic.

MERCANTILE BANK CORPORATION

Noninterest expense during the third quarter of 2021 was $26.2 million, compared to $26.4 million during the prior-year third quarter.

Noninterest expense during the first nine months of 2021 was $77.5 million, compared to $72.6 million during the same time period in 2020.

About 60% of the increase in the year-to-date overhead costs reside in salary and benefits, with almost one-half of that figure being comprised of increased medical insurance costs.

The remaining portion is primarily comprised of increased Federal Deposit Insurance Corporation (“FDIC”) insurance costs and former facility valuation write-downs.

Financial Condition

Our total assets increased $320 million during the first six months of 2021, and totaled $4.76 billion as of June 30, 2021.

Total loans increased $55.4 million, securities available for sale were up $119 million and interest-earning deposits grew by $120 million, while total deposits increased $260 million and sweep accounts were up $51.4 million, during the first six months of 2021.

Commercial loans increased $16.3 million during the first six months of 2021, and at June 30, 2021 totaled $2.81 billion, or 86.5% of the loan portfolio.

Our total assets increased $527 million during the first nine months of 2021, and totaled $4.96 billion as of September 30, 2021.

Total loans increased $120 million, securities available for sale were up $172 million and interest-earning deposits grew by $178 million, while total deposits increased $457 million and sweep accounts were up $57.5 million, during the first nine months of 2021.

Commercial loans increased $48.4 million during the first nine months of 2021, and at September 30, 2021 totaled $2.84 billion, or 85.8% of the loan portfolio.

As of December 31, 2020, the commercial loan portfolio comprised 87.5% of total loans.

The increase in commercial loans reflects the combined net growth of core commercial loans and net activity under the PPP.

Core commercial loans increased $135 million, or approximately 11% on an annualized basis, while PPP loans declined $119 million, comprised of $209 million in PPP loans extended and $328 million in forgiveness transactions, during the first six months of 2021.

Core commercial loans increased $298 million, or approximately 16% on an annualized basis, while PPP loans declined $249 million, comprised of $209 million in PPP loans extended and $458 million in forgiveness transactions, during the first nine months of 2021.

Core commercial and industrial loans increased $178 million, non-owner occupied CRE loans grew $81.3 million, owner occupied CRE loans were up $21.8 million and multi-family and residential rental property loans increased $33.0 million, while vacant land, land development and residential construction loans declined $16.7 million.

As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled 54.9% as of June 30, 2021, compared to 53.9% at December 31, 2020.

As of June 30, 2021, availability on existing construction and development loans totaled $167 million, with most of those funds expected to be drawn over the next 12 to 18 months.

As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled 55.4% as of September 30, 2021, compared to 53.9% at December 31, 2020.

As of September 30, 2021, availability on existing construction and development loans totaled $155 million, with most of those funds expected to be drawn over the next 12 to 18 months.

Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including $253 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months.

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We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits we have established within our commercial loan portfolio.

Residential mortgage loans increased $42.4 million during the first six months of 2021, totaling $380 million, or 11.7% of total loans, as of June 30, 2021.

Activity within the residential mortgage loan function was very active during the first half of 2021, primarily reflecting refinance transactions spurred by low residential mortgage loan interest rates, strength in home purchase activity, and the continuing success of strategic initiatives that have been implemented over the past several years to gain market share and increase production.

We originated $482 million in residential mortgage loans during the first six months of 2021, an increase of over 18% compared to originations during the first six months of 2020.

The production composition during the first six months of 2021 was almost equal between purchase and refinance residential mortgage loans;

however, the mix changed significantly between the first and second quarters.

Refinance residential mortgage loans comprised approximately 67% of production during the first three months of 2021, but dropped to about 39% during the second quarter.

Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, during the first six months of 2021 totaled $336 million, or approximately 70% of total residential mortgage loans originated.

During the first six months of 2020, residential mortgage loans originated for sale totaled $321 million, or about 79% of total mortgage loans originated.

Residential mortgage loans increased $73.7 million during the first nine months of 2021, totaling $412 million, or 12.4% of total loans, as of September 30, 2021.

Activity within the residential mortgage loan function was very active during the first nine months of 2021, primarily reflecting refinance transactions spurred by low residential mortgage loan interest rates, strength in home purchase activity, and the continuing success of strategic initiatives that have been implemented over the past several years to gain market share and increase production.

We originated $742 million in residential mortgage loans during the first nine months of 2021, an increase of almost 15% compared to originations during the first nine months of 2020.

The production composition during the first nine months of 2021 was almost equal between purchase and refinance residential mortgage loans;

however, the mix changed significantly during the second and third quarters compared to the first quarter.

Refinance residential mortgage loans comprised approximately 67% of production during the first three months of 2021, but dropped to about 39% during the second quarter and approximately 45% during the third quarter.

Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, during the first nine months of 2021 totaled $514 million, or approximately 69% of total residential mortgage loans originated.

During the first nine months of 2020, residential mortgage loans originated for sale totaled $512 million, or about 79% of total mortgage loans originated.

Residential mortgage loans originated not sold are generally comprised of adjustable rate residential mortgage loans.

We are pleased with the results of our strategic initiatives associated with the growth of our residential mortgage banking operation over the past few years, and remain optimistic that origination volumes will remain solid in future periods.

Other consumer-related loans declined $3.4 million during the first six months of 2021, and at June 30, 2021 totaled $58.2 million, or 1.8% of total loans.

MERCANTILE BANK CORPORATION

Other consumer-related loans declined $1.9 million during the first nine months of 2021, and at September 30, 2021 totaled $59.7 million, or 1.8% of total loans.

Other consumer-related loans comprised 1.9% of total loans as of December 31, 2020.

We expect this loan portfolio segment to decline in future periods as scheduled principal payments exceed anticipated new loan origination volumes.

MERCANTILE BANK CORPORATION

The following table summarizes our loan portfolio over the past twelve months:

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3,350,544,000

(*) Includes $246 million, $455 million, $365 million, $555 million and $549 million in loans originated under the Paycheck Protection Program for June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

(*) Includes $116 million, $246 million, $455 million, $365 million, and $555 million in loans originated under the Paycheck Protection Program for September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively.

Our credit policies establish guidelines to manage credit risk and asset quality.

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In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $3.2 million (0.1% of total assets) as of June 30, 2021, compared to $4.1 million (0.1% of total assets) as of December 31, 2020.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $2.9 million (0.1% of total assets) as of September 30, 2021, compared to $4.1 million (0.1% of total assets) as of December 31, 2020.

Given the low level of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with the manageable and steady level of watch list credits and what we believe are strong credit administration practices, we remain pleased with the overall quality of the loan portfolio.

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Valuation write-downs

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.04% and 0.05% during the second quarter and first six months of 2021, respectively.

Net loan charge-offs, as a percentage of average total loans, equaled an annualized 0.05% during the third quarter of 2021, while a net loan recovery, as a percentage of average total loans, equaled 0.01% during the first nine months of 2021.

We continue our collection efforts on charged-off loans, and expect to record recoveries in future periods;

however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.

The allowance equaled $35.9 million, or 1.11% of total loans (1.20% of total loans excluding PPP loans), and over 1,300% of nonperforming loans as of June 30, 2021.

The allowance equaled $37.4 million, or 1.13% of total loans (1.17% of total loans excluding PPP loans), and over 1,300% of nonperforming loans as of September 30, 2021.

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

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

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

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

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

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

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

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

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

We recorded a negative loan loss provision expense of $3.1 million during the second quarter of 2021, compared to a provision expense of $7.6 million during the second quarter of 2020.

We recorded a negative loan loss provision expense of $2.8 million during the first six months of 2021, compared to a provision expense of $8.4 million during the first six months of 2020.

This change resulted in a reduced required allowance balance of $3.6 million.

The provision expense recorded during the 2020 periods mainly consisted of an allocation associated with a newly created Covid-19 factor and an increased allocation related to the existing economic and business conditions environmental factor.

The Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio.

We recorded a loan loss provision expense of $1.9 million during the third quarter of 2021, compared to a provision expense of $3.2 million during the third quarter of 2020.

We recorded a negative loan loss provision expense of $0.9 million during the first nine months of 2021, compared to a provision expense of $11.6 million during the first nine months of 2020.

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

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

Our migration analysis takes into account various time periods, with most weight placed on the time frame from December 31, 2010 through June 30, 2021.

Our migration analysis takes into account various time periods, with most weight placed on the time frame from December 31, 2010 through September 30, 2021.

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

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rights in order to preserve our collateral position.

As of June 30, 2021, the allowance was comprised of $35.1 million in general reserves relating to non-impaired loans and $0.8 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings.

Troubled debt restructurings totaled $21.7 million at June 30, 2021, consisting of $0.9 million that are on nonaccrual status and $20.8 million that are on accrual status.

As of September 30, 2021, the allowance was comprised of $36.6 million in general reserves relating to non-impaired loans and $0.8 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings.

Troubled debt restructurings totaled $21.3 million at September 30, 2021, consisting of $0.8 million that are on nonaccrual status and $20.5 million that are on accrual status.

The latter, while considered and accounted for as impaired loans in accordance with accounting guidelines, are not included in our nonperforming loan totals.

Impaired loans with an aggregate carrying value of $0.7 million as of June 30, 2021 had been subject to previous partial charge-offs aggregating $1.0 million over the past ten years.

As of June 30, 2021, there were no specific reserves allocated to impaired loans that had been subject to a previous partial charge-off.

Impaired loans with an aggregate carrying value of $0.6 million as of September 30, 2021 had been subject to previous partial charge-offs aggregating $0.5 million over the past eleven years.

As of September 30, 2021, there were no specific reserves allocated to impaired loans that had been subject to a previous partial charge-off.

The following table provides a breakdown of our loans categorized as troubled debt restructurings:

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MERCANTILE BANK CORPORATION

Securities available for sale increased $119 million during the first six months of 2021, totaling $506 million as of June 30, 2021.

Securities available for sale increased $172 million during the first nine months of 2021, totaling $560 million as of September 30, 2021.

Purchases of U.S.

Government agency bonds totaled $114 million during the first six months of 2021, in part reflecting the reinvestment of proceeds from called U.S.

Government agency bonds totaled $188 million during the first nine months of 2021, in part reflecting the reinvestment of proceeds from called U.S.

Government agency bonds that totaled $61.9 million.

Purchases of U.S.

Government agency guaranteed mortgage-backed securities totaled $18.7 million during the first six months of 2021, consisting of investments in CRA-qualified securities, in part reflecting the reinvestment of $5.7 million from principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities totaled $24.4 million during the first nine months of 2021, consisting of investments in CRA-qualified securities, in part reflecting the reinvestment of $8.8 million from principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities.

Purchases of municipal bonds totaled $35.7 million during the first six months of 2021;

proceeds from matured municipal bonds totaled $5.5 million.

At June 30, 2021, the portfolio was primarily comprised of U.S.

Purchases of municipal bonds totaled $45.3 million during the first nine months of 2021;

proceeds from matured and called municipal bonds totaled $6.8 million.

At September 30, 2021, the portfolio was comprised of U.S.

Government agency bonds (65%), municipal bonds (28%) and U.S.

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All of our securities are currently designated as available for sale, and are therefore stated at fair value.

The fair value of securities designated as available for sale at June 30, 2021 totaled $506 million, including a net unrealized gain of $1.9 million.

The fair value of securities designated as available for sale at September 30, 2021 totaled $560 million, including a net unrealized loss of $0.4 million.

We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity for our daily operations.

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Government agency bonds and municipal bonds, with the securities portfolio maintained at about 12% of total assets.

FHLBI stock totaled $18.0 million as of June 30, 2021, unchanged from the balance at December 31, 2020.

FHLBI stock totaled $18.0 million as of September 30, 2021, unchanged from the balance at December 31, 2020.

Our investment in FHLBI stock is necessary to engage in their advance and other financing programs.

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We believe our valuation methodology provides for a reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.

Interest-earning balances, primarily consisting of funds deposited at the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate sensitivity.

We expect the level of interest-earning deposit balances to remain elevated through the remainder of 2021 and into 2022.

Net premises and equipment equaled $58.3 million at June 30, 2021, representing a decrease of $0.7 million during the first six months of 2021.

Interest-earning balances, primarily consisting of funds deposited at the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate risk sensitivity.

Net premises and equipment equaled $57.5 million at September 30, 2021, representing a decrease of $1.5 million during the first nine months of 2021.

An aggregate increase of $6.3 million stems from facility remodeling and new lease activities, while a decline of $3.5 million was recorded from the sale of a branch facility (along with the associated loans and deposits) to another financial institution and the sale of a former branch facility.

Depreciation expense totaled $2.8 million during the first six months of 2021.

Foreclosed and repossessed assets equaled $0.4 million as of June 30, 2021, a reduction of $0.3 million from December 31, 2020.

Total deposits increased $260 million during the first six months of 2021, totaling $3.67 billion at June 30, 2021.

Depreciation expense totaled $4.3 million during the first nine months of 2021.

Foreclosed and repossessed assets equaled $0.1 million as of September 30, 2021, a reduction of $0.6 million from December 31, 2020.

Total deposits increased $457 million during the first nine months of 2021, totaling $3.87 billion at September 30, 2021.

Local deposits increased $480 million, while out-of-area deposits decreased $23.0 million.

As a percentage of total deposits, out-of-area deposits equaled 0.8% as of June 30, 2021, compared to 1.4% as of December 31, 2020.

As a percentage of total deposits, out-of-area deposits equaled 0.6% as of September 30, 2021, compared to 1.4% as of December 31, 2020.

MERCANTILE BANK CORPORATION

Noninterest-bearing checking accounts increased $187 million during the first six months of 2021, while interest-bearing checking accounts and money market deposit accounts grew $4.1 million and $114 million, respectively.

The increases in these transactional deposit products largely reflect federal government stimulus, especially the PPP, as well as lower business investing and spending.

Noninterest-bearing checking accounts and interest-bearing checking accounts increased $214 million and $62.9 million, respectively, during the first nine months of 2021, in large part reflecting federal government stimulus, especially the PPP, as well as lower business investing and spending.

Money market deposit account balances increased $243 million during the first nine months of 2021, of which $129 million was during the third quarter.

Generally, the growth reflects federal government stimulus programs and lower business and consumer investing and spending;

however, we believe a large portion of the growth during the third quarter, primarily comprised of additional deposits by a few existing account holders, are temporary and will be withdrawn over the next three months to six months.

Savings deposits were up $54.2 million, primarily reflecting the impact of federal government stimulus programs and lower consumer investing and spending.

Local time deposits decreased $79.3 million during the first six months of 2021, primarily reflecting the maturity and withdrawal of funds from certain public unit time deposits and time deposits that were opened as part of a special time deposit campaign we ran during early 2019.

The reduction in out-of-area deposits during the first six months of 2021 reflects maturities during the period that were not replaced as the funds were no longer needed.

Local time deposits decreased $93.5 million during the first nine months of 2021, primarily reflecting the maturity and withdrawal of funds from certain public unit time deposits and time deposits that were opened as part of a special time deposit campaign we ran during early 2019.

The reduction in out-of-area deposits during the first nine months of 2021 reflects maturities during the period that were not replaced as the funds were no longer needed.

Total local deposits have increased $1.3 billion since December 31, 2019.

Noninterest-bearing checking accounts have grown $722 million during this time period, while interest-bearing checking accounts and money market deposit accounts are up $204 million and $345 million, respectively.

The increases in these transactional deposit products largely reflect federal government stimulus, especially the PPP, as well as lower business investing and spending.

The increases in these transactional deposit products largely reflect federal government stimulus programs, especially the PPP, as well as lower business investing and spending.

Savings deposits are up $123 million, primarily reflecting the impact of federal government stimulus programs and lower consumer investing and spending.

Sweep accounts increased $51.4 million during the first six months of 2021, totaling $170 million as of June 30, 2021.

Sweep accounts increased $57.5 million during the first nine months of 2021, totaling $176 million as of September 30, 2021.

The aggregate balance of this funding type can be subject to relatively large fluctuations given the nature of the customers utilizing this product and the sizable balances of many of the customers.

The average balance of sweep accounts equaled $142 million during the first six months of 2021, with a high balance of $181 million and low balance of $113 million.

The average balance of sweep accounts equaled $152 million during the first nine months of 2021, with a high balance of $196 million and low balance of $113 million.

Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-night interest-bearing repurchase agreements.

Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings.

FHLBI advances aggregated $394 million as of June 30, 2021, unchanged from the year-end 2020 balance.

FHLBI advances aggregated $394 million as of September 30, 2021, unchanged from the year-end 2020 balance.

The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family property loans, first mortgage liens on commercial real estate loans, and substantially all other assets of our bank, under a blanket lien arrangement.

Our borrowing line of credit as of June 30, 2021 totaled $807 million, with remaining availability based on collateral equaling $407 million.

Our borrowing line of credit as of September 30, 2021 totaled $760 million, with remaining availability based on collateral equaling $360 million.

Shareholders’

equity was $452 million at June 30, 2021, compared to $442 million at December 31, 2020.

The $10.3 million increase during the first six months of 2021 primarily reflects the positive impact of net income totaling $32.3 million, partially offset by the negative impact of cash dividends and common stock repurchases totaling $9.2 million and $10.9 million, respectively.

equity was $452 million at September 30, 2021, compared to $442 million at December 31, 2020.

The $10.7 million increase during the first nine months of 2021 primarily reflects the positive impact of net income totaling $47.4 million, partially offset by the negative impact of cash dividends and common stock repurchases totaling $13.9 million and $19.8 million, respectively.

Reflecting an increase in market interest rates, the change in net unrealized holding gain/loss on securities available for sale, net of tax effect, had a $5.8 million negative impact on shareholders’

equity during the first six months of 2021.

equity during the first nine months of 2021.

Liquidity is measured by our ability to raise funds through deposits, borrowed funds, and capital, or cash flow from the repayment of loans and securities.

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To assist in providing needed funds, we have regularly obtained monies from wholesale funding sources.

Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $425 million, or 10.0% of combined deposits and borrowed funds, as of June 30, 2021, compared to $441 million, or 11.2% of combined deposits and borrowed funds, as of December 31, 2020.

Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $418 million, or 9.4% of combined deposits and borrowed funds, as of September 30, 2021, compared to $441 million, or 11.2% of combined deposits and borrowed funds, as of December 31, 2020.

MERCANTILE BANK CORPORATION

Sweep accounts increased $51.4 million during the first six months of 2021, totaling $170 million as of June 30, 2021.

Sweep accounts increased $57.5 million during the first nine months of 2021, totaling $176 million as of September 30, 2021.

The aggregate balance of this funding type can be subject to relatively large fluctuations given the nature of the customers utilizing this product and the sizable balances of many of the customers.

The average balance of sweep accounts equaled $142 million during the first six months of 2021, with a high balance of $181 million and low balance of $113 million.

The average balance of sweep accounts equaled $152 million during the first nine months of 2021, with a high balance of $196 million and low balance of $113 million.

Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-night interest-bearing repurchase agreements.

Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings.

Information regarding repurchase agreements as of June 30, 2021 and during the first six months of 2021 is as follows:

Outstanding balance at June 30, 2021

Weighted average interest rate at June 30, 2021

Maximum daily balance six months ended June 30, 2021

Average daily balance for six months ended June 30, 2021

Weighted average interest rate for six months ended June 30, 2021

FHLBI advances aggregated $394 million as of June 30, 2021, unchanged from the year-end 2020 balance.

Information regarding repurchase agreements as of September 30, 2021 and during the first nine months of 2021 is as follows:

Outstanding balance at September 30, 2021

Weighted average interest rate at September 30, 2021

Maximum daily balance nine months ended September 30, 2021

Average daily balance for nine months ended September 30, 2021

Weighted average interest rate for nine months ended September 30, 2021

FHLBI advances aggregated $394 million as of September 30, 2021, unchanged from the year-end 2020 balance.

Our borrowing line of credit as of June 30, 2021 totaled $807 million, with remaining availability based on collateral equaling $407 million.

Our borrowing line of credit as of September 30, 2021 totaled $760 million, with remaining availability based on collateral equaling $360 million.

We also have the ability to borrow up to $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit.

We did not access the lines of credit during the first six months of 2021.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $564 million during the first six months of 2021.

We did not access the lines of credit during the first nine months of 2021.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $609 million during the first nine months of 2021.

We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago.

Using certain municipal bonds as collateral, we could have borrowed up to $35.2 million as of June 30, 2021.

We did not utilize this line of credit during the first six months of 2021 or at any time during the previous twelve fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of June 30, 2021, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

Using certain municipal bonds as collateral, we could have borrowed up to $34.9 million as of September 30, 2021.

We did not utilize this line of credit during the first nine months of 2021 or at any time during the previous twelve fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of September 30, 2021, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

Deposits without a stated maturity

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In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit.

As of June 30, 2021, we had a total of $1.47 billion in unfunded loan commitments and $26.2 million in unfunded standby letters of credit.

As of September 30, 2021, we had a total of $1.54 billion in unfunded loan commitments and $29.4 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.29 billion were commitments available as lines of credit to be drawn at any time as customers’

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Shareholders’

equity was $452 million at June 30, 2021, compared to $442 million at December 31, 2020.

equity was $452 million at September 30, 2021, compared to $442 million at December 31, 2020.

equity during the first six months of 2021.

equity during the first nine months of 2021.

In May 2021, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations.

This program replaces a similar $20.0 million program that had been announced in May 2019 that was nearing exhaustion.

During the first six months of 2021, we repurchased a total of approximately 347,000 shares at a total price of $10.9 million, at an average price per share of $31.28.

Availability under the repurchase plan totaled $17.3 million as of June 30, 2021.

During the first nine months of 2021, we repurchased a total of approximately 636,000 shares at a total price of $19.8 million, at an average price per share of $31.14.

Availability under the repurchase plan totaled $8.4 million as of September 30, 2021.

The stock buybacks have been funded from cash dividends paid to us from our bank.

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The capital buffer requirement was phased in over three years beginning in 2016.

The capital buffer requirement raised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019.

We believe that, as of June 30, 2021, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

As of June 30, 2021, our bank’s total risk-based capital ratio was 13.0%, compared to 13.5% at December 31, 2020.

Our bank’s total regulatory capital increased $20.5 million during the first six months of 2021, in large part reflecting the net impact of net income totaling $34.9 million and cash dividends paid to us aggregating $13.0 million.

We believe that, as of September 30, 2021, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

As of September 30, 2021, our bank’s total risk-based capital ratio was 12.4%, compared to 13.5% at December 31, 2020.

Our bank’s total regulatory capital increased $25.4 million during the first nine months of 2021, in large part reflecting the net impact of net income totaling $51.1 million and cash dividends paid to us aggregating $26.0 million.

Our bank’s total risk-based capital ratio was also impacted by a $495 million increase in total risk-weighted assets, primarily resulting from growth in core commercial loans and securities available for sale.

As of June 30, 2021, our bank’s total regulatory capital equaled $478 million, or $110 million in excess of the 10.0% minimum which is among the requirements to be categorized as “well capitalized.”

Our and our bank’s capital ratios as of June 30, 2021 and December 31, 2020 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

As of September 30, 2021, our bank’s total regulatory capital equaled $483 million, or approximately $94 million in excess of the 10.0% minimum which is among the requirements to be categorized as “well capitalized.”

Our and our bank’s capital ratios as of September 30, 2021 and December 31, 2020 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

Results of Operations

We recorded net income of $18.1 million, or $1.12 per basic and diluted share, for the second quarter of 2021, compared to net income of $8.7 million, or $0.54 per basic and diluted share, for the second quarter of 2020.

We recorded net income of $32.3 million, or $2.00 per basic and diluted share, for the first six months of 2021, compared to net income of $19.4 million, or $1.19 per basic and diluted share, for the first six months of 2020.

We recorded net income of $15.1 million, or $0.95 per basic and diluted share, for the third quarter of 2021, compared to net income of $10.7 million, or $0.66 per basic and diluted share, for the third quarter of 2020.

We recorded net income of $47.4 million, or $2.95 per basic and diluted share, for the first nine months of 2021, compared to net income of $30.1 million, or $1.85 per basic and diluted share, for the first nine months of 2020.

MERCANTILE BANK CORPORATION

The improved levels of net income during the second quarter and first six months of 2021 compared to the respective prior-year periods primarily resulted from lower provision expense and increased noninterest income, which more than offset higher noninterest expense.

Negative loan loss provisions were recorded during the second quarter and first six months of 2021, primarily reflecting a reduced allocation associated with the economic and business conditions environmental factor.

Growth in noninterest income during the current-year second quarter mainly resulted from fee income generated from an interest rate swap program that was introduced during the fourth quarter of 2020, a gain on the sale of a branch, and increased credit and debit card income, while growth in noninterest income during the first six months of 2021 primarily reflected improved mortgage banking income, along with increases in the aforementioned revenue streams.

The higher levels of noninterest expense mainly reflected increased compensation costs.

Interest income during the second quarter of 2021 was $35.8 million, a decrease of $1.4 million, or 3.7%, from the $37.2 million earned during the second quarter of 2020.

The decrease resulted from a lower yield on average earning assets, which more than offset the impact of growth in average earning assets.

The yield on average earning assets was 3.20% during the second quarter of 2021, compared to 3.85% during the second quarter of 2020.

The improved levels of net income during the 2021 periods compared to the respective 2020 periods primarily resulted from increased noninterest income and net interest income and lower provision expense.

Growth in noninterest income during the 2021 periods primarily resulted from fee income generated from an interest rate swap program that was introduced during the fourth quarter of 2020.

A higher level of mortgage banking income also significantly contributed to the growth in noninterest income during the first nine months of 2021.

The increases in net interest income during the 2021 periods resulted from the positive impact of earning asset growth, which more than offset the negative impact of lower net interest margins.

A negative loan loss provision was recorded during the first nine months of 2021, primarily reflecting a reduced allocation associated with the economic and business conditions environmental factor.

Noninterest expense decreased in the third quarter of 2021 compared to the prior-year third quarter, mainly reflecting a lower bonus accrual, and increased during the first nine months of 2021 compared to respective 2020 period, primarily reflecting higher compensation costs.

Interest income during the third quarter of 2021 was $35.9 million, an increase of $0.3 million, or 0.8%, from the $35.6 million earned during the third quarter of 2020.

The increase resulted from growth in average earning assets, which more than offset the impact of a lower yield on average earning assets.

Average earning assets equaled $4.56 billion during the current-year third quarter, up $481 million, or 11.8%, from the level of $4.08 billion during the respective 2020 period;

average interest-earning deposits were up $276 million, average securities increased $220 million, and average loans were down $15.2 million.

The yield on average earning assets was 3.13% during the third quarter of 2021, compared to 3.45% during the third quarter of 2020.

The decline primarily resulted from a change in earning asset mix.

On average, lower-yielding interest-earning deposits represented 13.9% of earning assets during the second quarter of 2021, up from 6.6% during the second quarter of 2020, while higher-yielding loans represented 75.3% of earning assets during the current-year second quarter, down from 84.8% during the prior-year second quarter.

A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 as a result of the Covid-19 environment and persisted during the remainder of 2020 and the first six months of 2021, negatively impacted the yield on average earning assets by 42 basis points during the second quarter of 2021.

On average, lower-yielding interest-earning deposits and securities represented 16.1% and 12.0% of earning assets, respectively, during the third quarter of 2021, up from 11.2% and 8.0%, respectively, during the third quarter of 2020, while higher-yielding loans represented 71.9% of earning assets during the current-year third quarter, down from 80.8% during the prior-year third quarter.

A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 as a result of the Covid-19 environment and persisted during the remainder of 2020 and the first nine months of 2021, negatively impacted the yield on average earning assets by 51 basis points during the third quarter of 2021.

The excess funds, consisting primarily of low-yielding deposits with the Federal Reserve Bank of Chicago, are mainly a product of federal government stimulus programs, lower business and consumer spending and investing, and PPP loan forgiveness activities.

Decreased yields on securities and loans also contributed to the lower yield on average earning assets in the current-year second quarter compared to the respective 2020 period.

The yield on securities was 1.54% during the second quarter of 2021, down from 3.37% during the prior-year second quarter mainly due to decreased accelerated discount accretion on called U.S.

Government agency bonds and lower yields on newly purchased bonds, reflecting the declining interest rate environment.

Accelerated discount accretion totaled $0.9 million during the second quarter of 2020;

no accelerated discount accretion was recorded during the second quarter of 2021.

A decreased yield on securities also contributed to the lower yield on average earning assets in the current-year third quarter compared to the respective 2020 period.

The yield on securities was 1.46% during the third quarter of 2021, down from 2.26% during the prior-year third quarter mainly due to lower yields on newly purchased bonds, reflecting the declining interest rate environment, and decreased accelerated discount accretion on called U.S.

Government agency bonds.

Accelerated discount accretion totaled $0.3 million during the third quarter of 2020;

a nominal level of accelerated discount accretion was recorded during the third quarter of 2021.

As part of our interest rate risk management program, U.S.

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if these bonds are called during decreasing interest rate environments, the remaining unaccreted discount amounts are immediately recognized as interest income.

The yield on loans was 3.99% during the current-year second quarter, down from 4.18% during the second quarter of 2020 primarily due to a decreased yield on commercial loans.

The lower yield on commercial loans, which declined from 4.20% during the prior-year second quarter to 4.04% during the second quarter of 2021, mainly stemmed from the origination of new loans and renewal of maturing loans in the decreased interest rate environment.

Average earning assets equaled $4.47 billion during the current-year second quarter, up $628 million, or 16.4%, from the level of $3.84 billion during the respective 2020 period;

average interest-earning deposits were up $367 million, average securities increased $150 million, and average loans were up $111 million.

MERCANTILE BANK CORPORATION

Interest income during the first six months of 2021 was $70.6 million, a decrease of $4.5 million, or 6.0%, from the $75.1 million earned during the first six months of 2020.

Interest income during the first nine months of 2021 was $106 million, a decrease of $4.2 million, or 3.8%, from the $111 million earned during the first nine months of 2020.

The decrease resulted from a lower yield on average earning assets, which more than offset the impact of growth in average earning assets.

The yield on average earning assets was 3.23% during the first six months of 2021, compared to 4.17% during the respective 2020 period.

The decline primarily resulted from a change in earning asset mix and lower yields on loans and securities.

On average, lower-yielding interest-earning deposits represented 13.8% of earning assets during the first six months of 2021, up from 5.6% during the first six months of 2020, while higher-yielding loans represented 75.9% and 84.9% of earning assets during the respective periods.

The previously mentioned significant volume of excess on-balance sheet liquidity negatively impacted the yield on average earning assets by 43 basis points during the first six months of 2021.

The yield on loans declined from 4.42% during the first six months of 2020 to 4.01% during the first six months of 2021 mainly due to a lower yield on commercial loans, which equaled 4.46% and 4.06% during the respective periods.

The yield on securities was 1.57% during the first six months of 2021, down from 4.06% during the respective 2020 period mainly due to decreased accelerated discount accretion on called U.S.

The yield on average earning assets was 3.21% during the first nine months of 2021, compared to 3.91% during the respective 2020 period.

The decline primarily resulted from a change in earning asset mix and lower yields on securities and loans.

On average, lower-yielding interest-earning deposits and securities represented 14.6% and 10.9% of earning assets, respectively, during the first nine months of 2021, up from 7.7% and 8.9%, respectively, during the first nine months of 2020, while higher-yielding loans represented 74.5% and 83.4% of earning assets during the respective periods.

The previously mentioned significant volume of excess on-balance sheet liquidity negatively impacted the yield on average earning assets by 46 basis points during the first nine months of 2021.

The yield on securities was 1.53% during the first nine months of 2021, down from 3.47% during the respective 2020 period mainly due to decreased accelerated discount accretion on called U.S.

Government agency bonds and lower yields on newly purchased bonds, reflecting the declining interest rate environment.

Accelerated discount accretion totaled $2.7 million during the first six months of 2020;

accelerated discount accretion of less than $0.1 million was recorded during the first six months of 2021.

A decreased yield on interest-earning deposits also contributed to the lower yield on average earning assets during the first six months of 2021 compared to the first six months of 2020.

The yield on interest-earning deposits was 0.12% during the first six months of 2021, down from 0.55% during the respective 2020 period, mainly reflecting the decreased interest rate environment.

Average earning assets equaled $4.38 billion during the first six months of 2021, up $787 million, or 21.9%, from the level of $3.59 billion during the first six months of 2020;

Accelerated discount accretion totaled $3.0 million during the first nine months of 2020;

accelerated discount accretion of less than $0.1 million was recorded during the first nine months of 2021.

The yield on loans declined from 4.28% during the first nine months of 2020 to 4.06% during the first nine months of 2021 mainly due to a lower yield on commercial loans, which equaled 4.32% and 4.08% during the respective periods.

The decreased yield on commercial loans primarily reflected reduced interest rates on variable-rate commercial loans resulting from the FOMC significantly decreasing the targeted federal funds rate by a total of 150 basis points in March of 2020, along with the origination of new loans and renewal of maturing loans in the lower interest rate environment and a decreased level of PPP net loan fee accretion, which totaled $8.5 million during the first nine months of 2021, down from $11.1 million during the respective 2020 period.

Average earning assets equaled $4.44 billion during the first nine months of 2021, up $684 million, or 18.2%, from the level of $3.76 billion during the first nine months of 2020;

average interest-earning deposits were up $360 million, average loans increased $175 million, and average securities were up $149 million.

Interest expense during the second quarter of 2021 was $4.9 million, a decrease of $1.7 million, or 25.6%, from the $6.6 million expensed during the second quarter of 2020.

The decrease is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled 0.74% in the current-year second quarter compared to 1.11% in the prior-year second quarter.

Interest expense during the third quarter of 2021 was $4.8 million, a decrease of $1.3 million, or 21.7%, from the $6.1 million expensed during the third quarter of 2020.

The decrease is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled 0.69% in the current-year third quarter compared to 0.99% in the prior-year third quarter.

The decline mainly reflected lower rates paid on local time deposits and a change in funding mix, consisting of an increase in average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost time deposits as a percentage of average total interest-bearing liabilities.

The cost of time deposits declined from 2.04% during the second quarter of 2020 to 1.24% during the current-year second quarter due to lower interest rates paid on local time deposits, reflecting the decreasing interest rate environment, and a change in composition, primarily reflecting a decrease in higher-cost brokered funds.

On average, lower-cost non-time deposits represented 60.0% of total interest-bearing liabilities during the second quarter of 2021, up from 49.4% during the second quarter of 2020, while higher-cost time deposits represented 17.7% and 25.0% of total interest-bearing liabilities during the respective periods.

A lower cost of borrowed funds also contributed to the decreased weighted average cost of interest-bearing liabilities in the second quarter of 2021 compared to the prior-year second quarter.

The cost of borrowed funds decreased from 1.91% during the second quarter of 2020 to 1.73% during the second quarter of 2021, mainly reflecting lower costs of FHLBI advances and subordinated debentures.

The cost of FHLBI advances was 2.06% during the second quarter of 2021, down from 2.22% during the prior-year second quarter, primarily reflecting the impact of a blend and extend transaction that was executed in June 2020 with the FHLBI to extend the duration of our advance portfolio as part of our interest rate risk management program and the declining interest rate environment.

The cost of subordinated debentures was 3.79% during the second quarter of 2021, down from 5.10% during the respective 2020 period due to decreases in the 90-Day Libor Rate.

Average interest-bearing liabilities were $2.67 billion during the second quarter of 2021, up $294 million, or 12.4%, from the $2.38 billion average during the second quarter of 2020.

The cost of time deposits declined from 1.86% during the third quarter of 2020 to 1.16% during the current-year third quarter due to lower interest rates paid on local time deposits, reflecting the decreasing interest rate environment, and a change in composition, primarily reflecting a decrease in higher-cost brokered funds.

On average, lower-cost non-time deposits represented 61.0% of total interest-bearing liabilities during the third quarter of 2021, up from 52.3% during the third quarter of 2020, while higher-cost time deposits represented 16.6% and 23.8% of total interest-bearing liabilities during the respective periods.

Average interest-bearing liabilities were $2.74 billion during the third quarter of 2021, up $293 million, or 12.0%, from the $2.45 billion average during the third quarter of 2020.

MERCANTILE BANK CORPORATION

Interest expense during the first six months of 2021 was $10.1 million, a decrease of $4.1 million, or 28.5%, from the $14.2 million expensed during the first six months of 2020.

The decrease is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled 0.78% in the first six months of 2021 compared to 1.23% in the respective 2020 period.

The decrease in the weighted average cost of interest-bearing liabilities reflected lower costs of time deposits, non-time deposit accounts, and borrowed funds and a change in funding mix, consisting of an increase in average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost time deposits as a percentage of average total interest-bearing liabilities.

The cost of time deposits declined from 2.13% during the first six months of 2020 to 1.37% during the respective 2021 period due to lower rates paid on local time deposits, reflecting the decreased interest rate environment, and a change in composition, primarily reflecting a decline in higher-cost brokered funds.

The cost of interest-bearing non-time deposit accounts decreased from 0.34% during the first six months of 2020 to 0.21% during the first six months of 2021, primarily reflecting lower interest rates paid on money market accounts;

Interest expense during the first nine months of 2021 was $14.9 million, a decrease of $5.4 million, or 26.5%, from the $20.3 million expensed during the first nine months of 2020.

The decrease is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled 0.75% in the first nine months of 2021 compared to 1.15% in the respective 2020 period.

The decline reflected lower costs of time deposits, non-time deposit accounts, and borrowed funds and a change in funding mix, consisting of an increase in average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost time deposits as a percentage of average total interest-bearing liabilities.

The cost of time deposits declined from 2.04% during the first nine months of 2020 to 1.30% during the respective 2021 period due to lower rates paid on local time deposits, reflecting the decreased interest rate environment, and a change in composition, primarily reflecting a decline in higher-cost brokered funds.

The cost of interest-bearing non-time deposit accounts decreased from 0.30% during the first nine months of 2020 to 0.21% during the first nine months of 2021, primarily reflecting lower interest rates paid on money market accounts;

the reduced interest rates mainly reflect the decreasing interest rate environment.

The cost of borrowed funds decreased from 2.09% during the first six months of 2020 to 1.75% during the respective 2021 period, primarily reflecting lower costs of FHLBI advances and subordinated debentures.

The cost of FHLBI advances was 2.06% during the first six months of 2021, down from 2.31% during the first six months of 2020, primarily reflecting the impact of the aforementioned blend and extend transaction that was executed in June 2020 with the FHLBI and the lower interest rate environment.

The cost of subordinated debentures was 3.82% during the first six months of 2021, down from 5.50% during the respective 2020 period due to decreases in the 90-Day Libor Rate.

On average, lower-cost non-time deposits represented 58.8% of total interest-bearing liabilities during the first six months of 2021, up from 49.5% during the first six months of 2020, while higher-cost time deposits represented 19.0% and 26.1% of total interest-bearing liabilities during the respective periods.

Average interest-bearing liabilities were $2.64 billion during the first six months of 2021, up $328 million, or 14.2%, from the $2.31 billion average during the first six months of 2020.

Net interest income during the second quarter of 2021 was $30.9 million, an increase of $0.3 million, or 1.0%, from the $30.6 million earned during the respective 2020 period.

The cost of borrowed funds decreased from 1.98% during the first nine months of 2020 to 1.72% during the respective 2021 period, primarily reflecting lower costs of FHLBI advances and subordinated debentures.

The cost of FHLBI advances was 2.06% during the first nine months of 2021, down from 2.22% during the first nine months of 2020, primarily reflecting the impact of a blend and extend transaction that was executed in June 2020 with the FHLBI to extend the duration of our advance portfolio as part of our interest rate risk management program and the declining interest rate environment.

The cost of subordinated debentures was 3.78% during the first nine months of 2021, down from 5.02% during the respective 2020 period due to decreases in the 90-Day Libor Rate.

A change in composition, mainly reflecting an increase in lower-cost sweep accounts, also contributed to the decreased cost of borrowed funds.

On average, lower-cost non-time deposits represented 59.5% of total interest-bearing liabilities during the first nine months of 2021, up from 50.5% during the first nine months of 2020, while higher-cost time deposits represented 18.2% and 25.3% of total interest-bearing liabilities during the respective periods.

Average interest-bearing liabilities were $2.67 billion during the first nine months of 2021, up $316 million, or 13.4%, from the $2.36 billion average during the first nine months of 2020.

Net interest income during the third quarter of 2021 was $31.1 million, an increase of $1.6 million, or 5.5%, from the $29.5 million earned during the respective 2020 period.

The increase resulted from the positive impact of an increase in average earning assets, which more than offset a lower net interest margin.

The net interest margin decreased from 3.17% in the second quarter of 2020 to 2.76% in the current-year second quarter due to a lower yield on average earning assets, which more than offset a reduction in the cost of funds.

The decreased yield on average earning assets primarily reflected a change in earning asset mix, along with lower yields on securities and commercial loans, while the decreased cost of funds mainly reflected lower rates paid on local time deposits and a change in funding mix.

The previously discussed significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 37 basis points during the second quarter of 2021.

Net interest income during the first six months of 2021 was $60.4 million, a decrease of $0.5 million, or 0.8%, from the $60.9 million earned during the first six months of 2020.

The decrease resulted from a lower net interest margin, which more than offset the positive impact of an increase in average earning assets.

The net interest margin decreased from 3.38% in the first six months of 2020 to 2.76% in the respective 2021 period due to a lower yield on average earning assets, which more than offset a reduction in the cost of funds.

The decreased yield on average earning assets primarily reflected a change in earning asset mix and lower yields on commercial loans and securities, while the decreased cost of funds mainly reflected lower costs of deposits and borrowed funds and a change in funding mix.

The aforementioned significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 37 basis points during the first six months of 2021.

The following tables set forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the second quarters and first six months of 2021 and 2020.

The net interest margin decreased from 2.86% in the third quarter of 2020 to 2.71% in the current-year third quarter due to a lower yield on average earning assets, which more than offset a reduction in the cost of funds.

The decreased yield on average earning assets reflected a change in earning asset mix, along with a lower yield on securities, while the decreased cost of funds mainly reflected lower rates paid on local time deposits and a change in funding mix.

The previously discussed significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 44 basis points during the third quarter of 2021.

Net interest income during the first nine months of 2021 was $91.5 million, an increase of $1.1 million, or 1.3%, from the $90.4 million earned during the first nine months of 2020.

The increase resulted from the positive impact of an increase in average earning assets, which more than offset a lower net interest margin.

The net interest margin decreased from 3.19% in the first nine months of 2020 to 2.76% in the respective 2021 period due to a lower yield on average earning assets, which more than offset a reduction in the cost of funds.

The decreased yield on average earning assets primarily reflected a change in earning asset mix and lower yields on securities and commercial loans, while the decreased cost of funds mainly reflected lower costs of deposits and borrowed funds and a change in funding mix.

The aforementioned significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 40 basis points during the first nine months of 2021.

The following tables set forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the third quarters and first nine months of 2021 and 2020.

Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented.

Tax-exempt securities interest income and yield for the second quarters and first six months of 2021 and 2020 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%.

Securities interest income was increased by $60,000 in the second quarter of both 2021 and 2020 and $120,000 in the first six months of both 2021 and 2020 for this non-GAAP, but industry standard, adjustment.

These adjustments equated to one basis point increases in our net interest margin for each of the 2021 and 2020 periods.

Tax-exempt securities interest income and yield for the third quarters and first nine months of 2021 and 2020 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%.

Securities interest income was increased by $60,000 in the third quarter of both 2021 and 2020 and $180,000 in the first nine months of both 2021 and 2020 for this non-GAAP, but industry standard, adjustment.

These adjustments equated to increases in our net interest margin of less than one basis point for each of the 2021 and 2020 periods.

MERCANTILE BANK CORPORATION

Quarters ended June 30,

Quarters ended September 30,

(dollars in thousands)

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MERCANTILE BANK CORPORATION

Six months ended June 30,

Nine months ended September 30,

(dollars in thousands)

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Net interest margin on earning assets

A negative loan loss provision expense of $3.1 million was recorded during the second quarter of 2021, compared to a provision expense of $7.6 million during the second quarter of 2020.

A negative loan loss provision expense of $2.8 million was recorded during the first six months of 2021, compared to a provision expense of $8.4 million during the first six months of 2020.

The negative provision expense recorded during the 2021 periods was mainly comprised of a reduced allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions.

The provision expense recorded during the 2020 periods primarily reflected an allocation associated with a newly created Covid-19 factor and an increased allocation related to the existing economic and business conditions environmental factor.

The Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact on the collectability of the loan portfolio.

A loan loss provision expense of $1.9 million and $3.2 million was recorded during the third quarters of 2021 and 2020, respectively.

A negative loan loss provision expense of $0.9 million was recorded during the first nine months of 2021, compared to a provision expense of $11.6 million during the first nine months of 2020.

The provision expense recorded during the current-year third quarter mainly reflected net core commercial loan growth, while the provision expense recorded during the prior-year third quarter was primarily comprised of increased allocations associated with the downgrading of certain non-impaired commercial loan relationships to reflect stressed economic conditions stemming from the Covid-19 environment.

The negative provision expense recorded during the first nine months of 2021 was mainly comprised of a reduced allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions, which more than offset required reserve allocations necessitated by net growth in core commercial loans.

MERCANTILE BANK CORPORATION

During the second quarter of 2021, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.4 million, providing for net loan recoveries of $0.3 million, or an annualized 0.04% of average total loans.

During the second quarter of 2020, loan charge-offs totaled $0.3 million, while recoveries of prior period loan charge-offs equaled $0.1 million, providing for net loan charge-offs of $0.2 million, or an annualized 0.02% of average total loans.

During the first six months of 2021, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.8 million, providing for net loan recoveries of $0.7 million, or an annualized 0.05% of average total loans.

During the first six months of 2020, loan charge-offs and recoveries of prior period loan charge-offs both approximated $0.4 million, providing for a nominal level of net loan recoveries.

The allowance for loans, as a percentage of total loans, was 1.1% as of June 30, 2021, 1.2% as of December 31, 2020, and 1.0% as of June 30, 2020.

Excluding PPP loans, the allowance for loans, as a percentage of total loans, equaled 1.2% as of June 30, 2021 and June 30, 2020, and 1.3% as of December 31, 2020.

Noninterest income during the second quarter of 2021 was $14.6 million, compared to $11.0 million during the prior-year second quarter.

Noninterest income during the first six months of 2021 was $28.0 million, compared to $17.5 million during the respective 2020 period.

Noninterest income during the second quarter and first six months of 2021 included a $1.1 million gain on the sale of a branch facility.

Excluding the impact of this transaction, noninterest income increased $2.5 million, or 22.9%, during the second quarter of 2021 and $9.4 million, or 53.8%, during the first six months of 2021 compared to the respective 2020 periods.

The higher level of noninterest income in the second quarter of 2021 mainly reflected fee income generated from an interest rate swap program that was introduced during the fourth quarter of 2020 and increased credit and debit card income.

The interest rate swap program provides certain commercial borrowers with a longer-term fixed-rate option and assists Mercantile in managing associated longer-term interest rate risk.

Growth in service charges on accounts and payroll service fees also contributed to the increased level of noninterest income during the second quarter of 2021.

Mortgage banking income remained solid during the second quarter of 2021, slightly exceeding the amount recorded during the prior-year second quarter as an increase in purchase mortgage loans and a higher gain on sale rate offset a decline in refinance mortgage loans.

Purchase transactions totaled $144 million during the second quarter of 2021 compared to $58.0 million during the prior-year second quarter.

Refinance transactions totaled $92.8 million during the current-year second quarter, compared to $217 million during the second quarter of 2020.

The higher level of noninterest income in the first six months of 2021 primarily resulted from increased mortgage banking income, mainly reflecting increased production and a higher gain on sale rate.

Residential mortgage loan originations totaled $482 million during the first six months of 2021, approximately 18% higher than originations during the first six months of 2020.

Purchase transactions totaled $226 million during the first six months of 2021, compared to $105 million during the respective 2020 period, representing an increase of $121 million, or approximately 116%.

Refinance transactions totaled $256 million during the first six months of 2021, compared to $304 million during the first six months of 2020, representing a decrease of $47.3 million, or approximately 16%.

Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, totaled $336 million, or approximately 70% of total mortgage loans originated, during the first six months of 2021.

During the first six months of 2020, residential mortgage loans originated for sale totaled $321 million, or nearly 79% of total mortgage loans originated.

Fee income generated from the interest rate swap program and growth in credit and debit card income, service charges on accounts, and payroll service fees also contributed to the higher level of noninterest income during the first six months of 2021.

Noninterest expense totaled $26.2 million during the second quarter of 2021, up $3.0 million, or 12.8%, from the prior-year second quarter.

Noninterest expense during the first six months of 2021 was $51.3 million, an increase of $5.2 million, or 11.2%, from the $46.1 million expensed during the first six months of 2020.

The higher level of expense in both periods primarily resulted from increased compensation costs, mainly reflecting a bonus accrual, increased health insurance costs, and annual employee merit pay increases.

A lower level of deferred salary expense related to PPP loan originations also contributed to the increased noninterest expense during the second quarter of 2021, while higher residential mortgage loan originator commissions and associated incentives contributed to the increased noninterest expense in the first six months of 2021.

Federal Deposit Insurance Corporation deposit insurance premiums were up $0.1 million in the current-year second quarter and $0.3 million in the first six months of 2021 compared to the respective 2020 periods, reflecting an increased assessment base and rate.

Noninterest expense during the first six months of 2021 includes $0.5 million in net losses on sales and write-downs of former branch facilities.

The provision expense recorded during the first nine months of 2020 mainly consisted of increased allocations related to changes in the existing economic and business conditions environmental factor during the first and second quarters and an allocation associated with the Covid-19 factor during the second quarter, along with the increased allocations resulting from the aforementioned commercial loan downgrades.

The Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact on the collectability of the loan portfolio.

During the third quarter of 2021, loan charge-offs totaled $0.8 million, while recoveries of prior period loan charge-offs equaled $0.4 million, providing for net loan charge-offs of $0.4 million, or an annualized 0.05% of average total loans.

During the third quarter of 2020, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.2 million, providing for net loan recoveries of $0.1 million, or an annualized 0.02% of average total loans.

During the first nine months of 2021, loan charge-offs totaled $0.9 million, while recoveries of prior period loan charge-offs equaled $1.2 million, providing for net loan recoveries of $0.3 million, or an annualized 0.01% of average total loans.

During the first nine months of 2020, loan charge-offs totaled $0.5 million, while recoveries of prior period loan charge-offs equaled $0.6 million, providing for net loan recoveries of $0.1 million, or an annualized 0.01% of average total loans.

The allowance for loans, as a percentage of total loans, was 1.1% as of September 30, 2021, and September 30, 2020, and 1.2% as of December 31, 2020.

Excluding PPP loans, the allowance for loans, as a percentage of total loans, equaled 1.2% as of September 30, 2021, and 1.3% as of December 31, 2020, and September 30, 2020.

Noninterest income during the third quarter of 2021 was $15.6 million, compared to $13.3 million during the prior-year third quarter.

Noninterest income during the third quarter of 2021 included a recovery of loan collection costs totaling $0.6 million.

Excluding the impact of this transaction, noninterest income increased $1.7 million, or 12.6%, during the third quarter of 2021 compared to the respective 2020 period.

Noninterest income during the first nine months of 2021 was $43.6 million, compared to $30.8 million during the first nine months of 2020.

Noninterest income during the first nine months of 2021 included a $1.1 million gain on the sale of a branch facility and the aforementioned recovery of loan collection costs.

Excluding the impacts of these transactions, noninterest income increased $11.1 million, or 36.0%, during the first nine months of 2021 compared to the respective prior-year period.

The higher levels of noninterest income in the 2021 periods mainly reflected fee income generated from an interest rate swap program, which was introduced during the fourth quarter of 2020 and provides certain commercial borrowers with a longer-term fixed-rate option and assists us in managing associated longer-term interest rate risk.

Increased mortgage banking income, primarily reflecting increased production and a higher gain on sale rate, also significantly contributed to the higher level of noninterest income during the first nine months of 2021.

Residential mortgage loan originations totaled $742 million during the first nine months of 2021, approximately 15% higher than originations during the first nine months of 2020.

Purchase transactions totaled $370 million during the first nine months of 2021, compared to $198 million during the respective 2020 period, representing an increase of $172 million, or approximately 87%.

Refinance transactions totaled $372 million during the first nine months of 2021, compared to $448 million during the first nine months of 2020, representing a decrease of $75.5 million, or approximately 17%.

Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, totaled $514 million, or approximately 69% of total mortgage loans originated, during the first nine months of 2021.

During the first nine months of 2020, residential mortgage loans originated for sale totaled $512 million, or approximately 79% of total mortgage loans originated.

Mortgage banking income remained sound in the third quarter of 2021 as sustained strength in purchase mortgage originations largely mitigated the negative impacts of an expected decrease in refinance activity, a lower mortgage loan sold percentage, and a decreased gain on sale rate.

Purchase transactions totaled $144 million during the third quarter of 2021, compared to $93.1 million during the prior-year third quarter.

Refinance transactions totaled $116 million during the current-year third quarter, compared to $144 million during the third quarter of 2020.

Growth in credit and debit card income, service charges on accounts, and payroll service fees also contributed to the increased level of noninterest income during the 2021 periods.

MERCANTILE BANK CORPORATION

During the second quarter of 2021, we recorded income before federal income tax of $22.3 million and a federal income tax expense of $4.2 million.

During the second quarter of 2020, we recorded income before federal income tax of $10.7 million and a federal income tax expense of $2.0 million.

During the first six months of 2021, we recorded income before federal income tax of $39.9 million and a federal income tax expense of $7.6 million.

During the first six months of 2020, we recorded income before federal income tax of $23.9 million and a federal income tax expense of $4.5 million.

Noninterest expense totaled $26.2 million during the third quarter of 2021, down $0.2 million from the third quarter of 2020.

The lower level of expense primarily resulted from decreased compensation costs, mainly reflecting a reduced bonus accrual and lower stock-based compensation expense, which more than offset increased regular salary expense primarily stemming from annual employee merit pay increases.

The bonus accrual during the third quarter of 2020 was increased due to a change in estimate as no accruals were recorded during the first and second quarters of the year due to Covid-19 and associated weakened economic environment.

Noninterest expense during the first nine months of 2021 was $77.5 million, an increase of $4.9 million, or 6.8%, from the $72.6 million expensed during the first nine months of 2020.

The higher level of expense mainly resulted from increased compensation costs, primarily reflecting employee merit pay increases, increased residential mortgage loan originator commissions and associated incentives, a larger bonus accrual, and increased health insurance costs.

Mainly reflecting a higher level of claims, some of which resulted from the treatment of Covid-19 related medical conditions, health insurance costs were up $0.2 million in the third quarter of 2021 and $1.2 million during the first nine months of 2021 compared to the respective 2020 periods.

FDIC deposit insurance premiums were up $0.2 million in the current-year third quarter and $0.5 million in the first nine months of 2021 compared to the respective 2020 periods, reflecting an increased assessment base and rate.

Noninterest expense during the first nine months of 2021 included $0.6 million in net losses on sales and write-downs of former branch facilities.

During the third quarter of 2021, we recorded income before federal income tax of $18.6 million and a federal income tax expense of $3.5 million.

During the third quarter of 2020, we recorded income before federal income tax of $13.2 million and a federal income tax expense of $2.5 million.

During the first nine months of 2021, we recorded income before federal income tax of $58.5 million and a federal income tax expense of $11.1 million.

During the first nine months of 2020, we recorded income before federal income tax of $37.1 million and a federal income tax expense of $7.0 million.

The increased federal income tax expense in both 2021 periods resulted from higher levels of income before federal income tax.

Our effective tax rate was 19.0% during both the second quarter and first six months of 2021 and the respective 2020 periods.

Our effective tax rate was 19.0% during both the third quarter and first nine months of 2021 and the respective 2020 periods.

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-Q

Item 1. Financial Statements