What changed in this filing

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Item 1. Financial Statements

2022-05-06 compared with 2021-11-05 · 1043 added, 1220 removed, 1841 unchanged (55% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

Cash and due from banks

13 unchanged sentences

18,002,000  

Mortgage loans held for sale

14,746,000  

16,117,000  

Allowance for loan losses

3,555,790,000  

3,453,459,000  

Allowance for credit losses

( 35,153,000 )

13 unchanged sentences

1,351,000  

Mortgage loans held for sale

64,759,000  

2 unchanged sentences

$ 5,257,749,000  

$ 4,964,412,000  

$ 4,437,344,000  

LIABILITIES AND SHAREHOLDERS' EQUITY

17 unchanged sentences

48,244,000  

Subordinated notes

88,428,000  

73,646,000  

Accrued interest and other liabilities

10 unchanged sentences

40,000,000 shares authorized;

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

15,843,347 shares outstanding at March 31, 2022 and 15,839,944 shares outstanding at December 31, 2021

286,831,000  

3 unchanged sentences

174,536,000  

Accumulated other comprehensive gain/(loss)

5,486,000  

Accumulated other comprehensive income (loss)

( 31,892,000 )

( 3,729,000 )

Total shareholders’

7 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

Sept 30, 2021

Sept 30, 2020

Sept 30, 2021

Sept 30, 2020

Interest income

Loans, including fees

$ 33,251,000  

$ 32,985,000  

Securities, taxable

1,665,000  

1,035,000  

Securities, tax-exempt

600,000  

597,000  

Other interest-earning assets

366,000  

168,000  

Total interest income

35,882,000  

34,785,000  

Interest expense

1,825,000  

2,717,000  

Short-term borrowings

50,000  

36,000  

Federal Home Loan Bank advances

1,864,000  

2,027,000  

Subordinated debentures and other borrowings

1,258,000  

472,000  

Total interest expense

4,997,000  

5,252,000  

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

30,885,000  

29,533,000  

Provision for credit losses

100,000  

300,000  

Net interest income after provision for credit losses

30,785,000  

29,233,000  

Noninterest income

Service charges on deposit and sweep accounts

1,416,000  

1,155,000  

Mortgage banking income

3,281,000  

8,800,000  

Credit and debit card income

1,881,000  

1,678,000  

Interest rate swap fees

Payroll services income

1,351,000  

653,000  

Payroll processing

638,000  

557,000  

Earnings on bank owned life insurance

Gain on sale of branch

287,000  

277,000  

423,000  

343,000  

Total noninterest income

9,277,000  

13,463,000  

Noninterest expense

Salaries and benefits

15,510,000  

15,086,000  

2,104,000  

2,014,000  

Furniture and equipment depreciation, rent and maintenance

934,000  

889,000  

Data processing costs

2,973,000  

2,617,000  

Other expense

Total noninterest expense

4,221,000  

4,511,000  

Total noninterest expenses

25,742,000  

25,117,000  

Income before federal income tax expense

14,320,000  

17,579,000  

Federal income tax expense

Basic earnings per share

Diluted earnings per share

Cash dividends per share

Average basic shares outstanding

Average diluted shares outstanding

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

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

Other comprehensive income/(loss), net of tax

Comprehensive income

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

The following table depicts the change in shareholders’

equity for the three months ended September 30, 2021:

($ in thousands except per

share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, June 30, 2021

2,828,000  

2 unchanged sentences

$ 14,239,000  

Employee stock purchase plan ( 404 shares)

Dividend reinvestment plan ( 7,904 shares)

Stock option exercises ( 2,000 shares)

Stock-based compensation expense

Share repurchase program ( 288,863 shares)

Cash dividends ( $0.30 per common share)

Net income for the three months ended September 30, 2021

Basic earnings per share

$ 0.73  

$ 0.87  

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

Balances, September 30, 2021

Diluted earnings per share

$ 0.73  

$ 0.87  

Cash dividends per share

$ 0.31  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

The following table depicts the change in shareholders’

equity for the nine months ended September 30, 2021:

($ in thousands except per

share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, January 1, 2021

$ 0.29  

Average basic shares outstanding

15,840,801  

16,283,044  

Average diluted shares outstanding

15,841,037  

Employee stock purchase plan ( 1,106 shares)

Dividend reinvestment plan ( 20,814 shares)

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

Stock option exercises ( 2,000 shares)

Stock-based compensation expense

Share repurchase program ( 635,773 shares)

Cash dividends ( $0.88 per common share)

Net income for the nine months ended September 30, 2021

16,283,490  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

$ 11,492,000  

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

Balances, September 30, 2021

$ 14,239,000  

Other comprehensive income (loss):

Unrealized holding gains (losses) on securities available for sale

( 35,650,000 )

( 9,168,000 )

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

7,487,000  

1,925,000  

Other comprehensive income (loss), net of tax effect

( 28,163,000 )

( 7,243,000 )

Comprehensive income (loss)

$ ( 16,671,000 )

$ 6,996,000  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

The following table depicts the change in shareholders’

equity for the three months ended September 30, 2020:

($ in thousands except per

share amounts)

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’

($ in thousands except per share amounts)

Comprehensive

1 unchanged sentence

Shareholders’

Balances, June 30, 2020

$ 300,897  

Balances, January 1, 2022

$ 285,752  

1 unchanged sentence

$ 456,559  

Adoption of ASU 2016-13

Employee stock purchase plan ( 281 shares)

Dividend reinvestment plan ( 5,835 shares)

Stock grants to directors for retainer fees ( 2,068 shares)

Stock option exercises ( 1,355 shares)

Stock-based compensation expense

Cash dividends ( $0.31 per common share)

Net income for the three months ended September 30, 2020

Net income for the three months ended March 31, 2022

11,492  

1 unchanged sentence

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

( 532 )  

Balances, September 30, 2020

$ 301,896  

Balances, March 31, 2022

$ 286,831  

2 unchanged sentences

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

MERCANTILE BANK CORPORATION 

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’

EQUITY (Continued)

The following table depicts the change in shareholders’

equity for the nine months ended September 30, 2020:

($ in thousands except per

share amounts)

($ in thousands except per share amounts)

Comprehensive

8 unchanged sentences

Dividend reinvestment plan ( 6,647 shares)

Stock grants to directors for retainer fees ( 17,716 shares)

Stock-based compensation expense

1 unchanged sentence

Cash dividends ( $0.29 per common share)

Net income for the nine months ended September 30, 2020

Net income for the three months ended March 31, 2021

14,239  

1 unchanged sentence

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

Balances, September 30, 2020

$ 301,896  

Balances, March 31, 2021

$ 299,358  

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Sept 30, 2021

Sept 30, 2020

March 31, 2022

March 31, 2021

Cash flows from operating activities

6 unchanged sentences

Accretion of acquired loans

Provision for loan losses

11,550,000  

Stock-based compensation expense

Provision for credit losses

100,000  

300,000  

Stock grants to directors for retainer fee

Stock-based compensation expense

811,000  

10 unchanged sentences

Net gain from sales and valuation write-downs of foreclosed assets

Net (gain) loss from sales and valuation write-downs of former bank premises

243,000  

Net loss from sales and write-downs of fixed assets

Net loss from sales and valuation write-downs of former bank premises

250,000  

Net (gain) loss from sales and write-downs of fixed assets

312,000  

Earnings on bank owned life insurance

Gain on sale of branch

( 1,058,000 )

Net change in:

Accrued interest receivable

853,000  

( 1,344,000 )

1 unchanged sentence

( 1,367,000 )

Accrued interest payable and other liabilities

910,000  

( 4,147,000 )

Net cash from operating activities

Accrued interest and other liabilities

15,156,000  

Net cash from (for) operating activities

27,888,000  

( 1,421,000 )

Cash flows from investing activities

11 unchanged sentences

158,000  

Proceeds from sales of former bank premises

270,000  

Proceeds from Federal Home Loan Bank stock redemption

281,000  

Net cash transferred in branch sale

( 2,679,000 )

Net purchases of premises and equipment and lease activity

( 1,603,000 )

( 7,201,000 )

Net cash for investing activities

1 unchanged sentence

( 237,925,000 )

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Sept 30, 2021

Sept 30, 2020

Cash flows from financing activities

2 unchanged sentences

( 51,961,000 )

Net increase in all other deposits

585,924,000  

Net (decrease) increase in all other deposits

( 71,081,000 )

302,650,000  

2 unchanged sentences

22,945,000  

Maturities of Federal Home Loan Bank advances

( 20,000,000 )

Proceeds from Federal Home Loan Bank advances

28,263,000  

Proceeds from stock option exercises

50,000  

Payoffs of Federal Home Loan Bank advances

( 20,000,000 )

Employee stock purchase plan

1 unchanged sentence

11,000  

Net proceeds from stock option exercises

36,000  

Dividend reinvestment plan

1 unchanged sentence

213,000  

Repurchases of common stock shares

( 19,798,000 )

Proceeds from subordinated notes issuance

14,701,000  

Repurchases of common stock

( 3,538,000 )

2 unchanged sentences

( 4,636,000 )

Net cash from financing activities

496,622,000  

Net cash from (for) financing activities

( 81,714,000 )

265,684,000  

Net change in cash and cash equivalents

199,355,000  

( 204,956,000 )

26,338,000  

5 unchanged sentences

$ 652,344,000  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

March 31, 2022

March 31, 2021

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  

Transfers from loans to assets held for sale

Transfers from bank premises to assets held for sale

Transfers from deposits to liabilities held for sale

See accompanying notes to consolidated financial statements.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation :

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.

(“our insurance center”).

These consolidated financial statements have been prepared in accordance with the instructions for Form 10 -Q and Item 303 (b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of our financial condition and results of operations.

The unaudited financial statements for the three months ended March 31, 2022 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries.

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

These consolidated financial statements have been prepared in accordance with the instructions for Form 10 -Q and Item 303 (b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete presentation of our financial condition and results of operations.

In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods.

The results for the period ended September 30, 2021 should not be considered as indicative of results for a full year.

The results for the period ended March 31, 2022 should not be considered as indicative of results for a full year.

For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10 -K for the year ended December 

3 unchanged sentences

Coronavirus Pandemic :

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”

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

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

2 unchanged sentences

We continue to occupy an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income.

Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic may produce declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which may necessitate additional provisions for our allowance and reduced net income.

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

1 unchanged sentence

The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s 100% guaranteed 7 (a) loan program.

The CARES Act authorized up to $350 billion in loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors.

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) authorized up to $350 billion in loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors.

The PPP provides 100% guaranteed loans to cover specific operating costs.

6 unchanged sentences

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

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.

As of March 31, 2022, we recorded forgiveness transactions on all but six loans aggregating $ 0.9 million.

Net loan origination fees of less than $ 0.1 million were recorded during the first quarter of 2022.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

2 unchanged sentences

Under the Second Draw, we originated approximately 1,200 loans aggregating $ 208 million.

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.

As of March 31, 2022, we recorded forgiveness transactions on all but 38 loans aggregating $ 11.3 million.

Net loan origination fees of $ 0.8 million were recorded during the first quarter of 2022.

Individual Economic Impact Payments

4 unchanged sentences

Banking agencies must defer to the financial institution’s election.

We elected to suspend GAAP principles and regulatory determinations as permitted.

The Consolidated Appropriations Act, 2021 extended the suspension date to January 1, 2022.

Current Expected Credit Loss Methodology Delay  

Financial institutions are not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31, 2020.

We elected to suspend GAAP principles and regulatory determinations as permitted up to December 31, 2021.

Current Expected Credit Loss ( “

CECL ”

) Methodology Delay  

Financial institutions were not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31, 2020.

We elected to postpone CECL adoption as permitted.

The Consolidated Appropriations Act, 2021 extended the adoption deferral date to January 1, 2022.

In early April 2020, in response to the early stages of the Coronavirus Pandemic and its pervasive impact across the economy and financial markets, we developed internal programs of loan payment deferments for commercial and retail borrowers.

For commercial borrowers, we offered 90 -day ( three payments) interest only amendments as well as 90 -day ( three payments) principal and interest payment deferments.

Under the latter program, borrowers were extended a 12 -month single payment note at 0 % interest in an amount equal to three payments, with loan proceeds used to make the scheduled payments.

The single payment notes receive a loan grade equal to the loan grade of each respective borrowing relationship.

Certain of our commercial loan borrowers subsequently requested and received an additional 90 -day ( three payments) interest only amendment or 90 -day ( three payments) principal and interest payment deferment.

Under the latter program, the amount equal to the three payments was added to the original deferment note which has nine months remaining to maturity;

however, the original 0% interest rate is modified to equal the rate associated with each borrower’s traditional lending relationship with us for the remainder of the term.

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 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 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) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

We adopted the CECL methodology effective January 1, 2022.

Earnings Per Share :

3 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 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.

Approximately 335,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2022.

In addition, stock options for approximately 8,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2022.

Approximately 262,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2021.

In addition, stock options for approximately 3,000 shares of common stock were included in determining diluted earnings per share for the three months ended March 31, 2021.

Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2021.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity.

Debt securities are classified as available for sale when they might be sold prior to maturity.

As of March 31, 2022 and December 31, 2021, all of our debt securities were designated as available for sale.

Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

3 unchanged sentences

Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Declines in the fair value of debt securities below their amortized cost that are other-than-temporary impairment (“OTTI”) are reflected in earnings or other comprehensive income, as appropriate.

For those debt securities whose fair value is less than their amortized cost, we consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and whether we expect to recover the entire amortized cost of the security based on our assessment of the issuer’s financial condition.

In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, and whether downgrades by bond rating agencies have occurred.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows:

1 ) OTTI related to credit loss, which must be recognized in the income statement, and 2 ) OTTI related to other factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income.

The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost.

For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance.

For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors.

In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense.

Losses are charged against the allowance when we believe the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

At March 31, 2022, there was no allowance for credit losses related to the available for sale debt securities portfolio.

Accrued interest receivable on available for sale debt securities totaled $ 3.0 million at March 31, 2022 and was excluded from the estimate of credit losses as any accrued interest that is not expected to be collected is reversed against interest income.

Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.

1 unchanged sentence

Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income on commercial loans and mortgage loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.

5 unchanged sentences

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale :

1 unchanged sentence

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

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.

As of March 31, 2022 and December 31, 2021, we determined that the fair value of our mortgage loans held for sale totaled $ 15.2 million and $ 16.7 million, respectively.

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

Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right.

We generally lock in the sale price to the purchaser of the loan at the same time we make an interest rate commitment to the borrower.

We generally lock in the sale price to the purchaser of the mortgage loan at the same time we make an interest rate commitment to the borrower.

These mortgage banking activities are not designated as hedges and are carried at fair value.

The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income.

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

Mortgage loans serviced for others totaled approximately $ 1.36 billion and $ 1.34 billion as of March 31, 2022 and December 31, 2021, respectively.

Allowance for Credit Losses ( “

Allowance ”

In June 2016, the FASB issued ASU No.

2016 - 13, Measurement of Credit Losses on Financial Instruments .

This ASU (as subsequently amended by ASU 2018 - 19 ) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

The standard will replace the current “incurred loss”

approach with an “expected loss”

The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures.

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

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

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

Financial institutions were not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020.

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

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

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

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

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

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accrued interest receivable for loans is included in other assets on our Consolidated Balance Sheet.

We elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if we believe the collection of interest is doubtful.

We believe this policy results in the timely reversal of uncollectible interest.

The allowance is a valuation account that is deducted from the loans’

amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance is confirmed.

The allowance is measured on a collective pool basis when similar risk characteristics exist.

Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis.

Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment.

These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm.

Retail loans are divided into one of two groups based on if the loan is secured by residential real estate or not.

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

Commercial Loans

Commercial and Industrial

Owner Occupied Commercial Real Estate

Non-Owner Occupied Commercial Real Estate

Multi-Family and Residential Rental

Vacant Land, Land Development and Residential Construction

1 - 4 Family Mortgages

Other Consumer Loans

The “remaining life methodology”

is utilized for substantially all loan pools.

This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms.

Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss.

The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.

We use migration to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by the bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments.

A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period.

The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment.

We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses.

The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio.

Ideally, the economic forecast period would encompass the contractual terms of all loans;

however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods.

Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data.

As of March 31, 2022, we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period.

We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from a third -party provider that analyzes and develops forecasts of the economy for the entire United States at least quarterly.

Our methodology does provide for a potential qualitative factor that can be used in the event of local or regional conditions that depart from the conditions and forecasts for the entire country.

During each reporting period, we also consider the need to adjust historical loss information to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined.

These qualitative adjustments may increase or decrease our estimate of expected future credit losses.

Traditional qualitative factors include:

Changes in lending policies and procedures

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

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

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

Changes in the quality of the loan review program

Changes in the value of underlying collateral dependent loans

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

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

The estimation of future credit losses should reflect consideration of all significant factors that affect the collectibility of the loan portfolio at each evaluation date.

While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered.

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

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

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

Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments when appropriate.

The contractual term generally excludes potential extensions, renewals and modifications.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us.

Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income.

The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives.

The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

Mortgage Banking Activities :

12 unchanged sentences

Accruing troubled debt restructurings are generally excluded from nonperforming loans as it is considered probable that all contractual principal and interest due under the restructured terms will be collected.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

In accordance with current accounting guidance, loans modified as troubled debt restructurings are, by definition, considered to be impaired loans.

2 unchanged sentences

Loans modified as troubled debt restructurings that subsequently default are factored into the determination of the allowance in the same manner as other defaulted loans.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

The federal banking agencies issued an “

6 unchanged sentences

As part of the Consolidated Appropriations Act that was enacted in late 2020, this guidance was extended to January 1, 2022.

Allowance for Loan Losses :

The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses.

Loan losses are charged against the allowance when we believe the uncollectability of a loan is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

We estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors.

We estimate credit losses based on individual loans determined to be impaired and on all other loans grouped on similar risk characteristics.

Our historical loss component is generally the most significant of the allowance components and is based on historical loss experience by credit risk grade for commercial loans and payment status for mortgage and consumer loans.

Loans are pooled based on similar risk characteristics supported by observable data.

The historical loss experience component of the allowance represents the results of migration analysis of historical net charge-offs for portfolios of loans, including groups of commercial loans within each credit risk grade.

For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected future losses to be realized from the pool of loans.

These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative environmental factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasing interest rates, external factors, Coronavirus Pandemic environment, and other considerations.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

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

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

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;

therefore, such loans do not have an associated allowance.

Derivatives :

6 unchanged sentences

If hedge accounting does not apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense.

If designated as a hedge, we formally document the relationship between the derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions.

If designated as a hedge, we formally document the relationship between derivatives as hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions.

This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet.

2 unchanged sentences

We discontinue hedge accounting when we determine the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

We had no derivative instruments designated as hedges as of March 31, 2022 and December 31, 2021.

Goodwill and Core Deposit Intangible :

6 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES  (Continued)

Revenue from Contracts with Customers :

8 unchanged sentences

Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Adoption of New Accounting Standards:

In June 2016, the FASB issued ASU No.

2016 - 13, Measurement of Credit Losses on Financial Instruments .

The standard will replace the current “incurred loss”

approach with an “expected loss”

The new model, referred to as the current expected credit loss (“CECL”) model, will apply to:

(i) financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures.

This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees.

The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses.

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

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

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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 :

As previously disclosed in a Current Report on Form 8 -K filed on October 26, 2020, we entered into a Purchase and Assumption Agreement (“Agreement”) on October 21, 2020 regarding the sale of our Hastings, Michigan branch office to Lake Trust Credit Union (“Lake Trust”).

All regulatory approvals were received and the sale was consummated on May 14, 2021.

Under the terms of the Agreement, as amended on April 20, 2021, Lake Trust:

1 ) purchased $ 9.7 million in primarily residential mortgage loans at book balance;

2 ) purchased the branch facility at a price of $ 1.5 million;

and 3 ) assumed all deposit accounts aggregating $ 14.6 million at a premium price of 5.0 % of the book balance.

In conjunction with the sale closing, we recorded a $ 0.7 million deposit premium and a $ 0.3 million gain on the sale of the branch facility.

Out-of-Period Adjustment :

During the second quarter of 2021, a formula error was identified in the spreadsheet used to calculate and record the present values of right-to-use assets consisting of several banking offices along with various printer and copy machines.

As a result, Premises and Equipment, Net and Other Liabilities on our Consolidated Balance Sheets were understated by $ 2.8 million and $ 2.7 million as of December 31, 2020 and March 31, 2021, respectively.

There was no impact to our Consolidated Statements of Income.

We evaluated the impact, both individually and in the aggregate, and determined these out-of-period adjustments were not material to our Consolidated Balance Sheets in the respective impacted periods.

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

Ended March 31,

Service charges on deposit and sweep accounts

$ 1,416,000  

$ 1,155,000  

Credit and debit card fees

1,881,000  

1,678,000  

Payroll processing

638,000  

557,000  

Customer service fees

242,000  

223,000  

Service Charges on Deposit and Sweep Accounts:

We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services.

Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation.

Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request.

Service charges on deposit and sweep accounts are withdrawn from the customer account balance.

Credit and Debit Card Fees:

We earn interchange income on our cardholder debit and credit card usage.

Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Payroll Processing Fees:

We earn fees from providing payroll processing services for our commercial clients.

Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents.

Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.

Customer Service Fees:

We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks and money orders, and rentals of safe deposit boxes.

Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request.

Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the contract signing or renewal.

Newly Issued Not Yet Effective Standards : 

2022 - 02 Financial Instruments –

Credit Losses (Topic 326 ):

Troubled Debt Restructurings and Vintage Disclosures . 

This ASU eliminates the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310 - 40, Receivables –

Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. 

This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan. 

Additionally, the ASU requires disclosures of current period gross charge-offs by year of origination for financing receivables. 

This ASU is effective for fiscal years beginning after December 15, 2022. 

We do not believe the adoption of this ASU will have a material impact on our financial results. 

The required disclosures for gross charge-offs on our financial statements will be added upon adoption of this new standard.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

September 30, 2021

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

March 31, 2022

Government agency debt obligations

6 unchanged sentences

123,000  

( 2,592,000 )

37,746,000  

2 unchanged sentences

540,000  

( 4,785,000 )

134,671,000  

2 unchanged sentences

39,000  

( 1,773,000 )

22,166,000  

31 unchanged sentences

$ 592,743,000  

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:

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

Less than 12 Months

12 Months or More

September 30, 2021

March 31, 2022

Government agency debt obligations

11 unchanged sentences

32,704,000  

2,592,000  

Municipal general obligation bonds

3 unchanged sentences

1,386,000  

75,739,000  

4,785,000  

Municipal revenue bonds

13 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

7 unchanged sentences

$ 3,495,000  

$ 384,340,000  

$ 8,769,000  

Mortgage-backed securities

23,184,000  

652,000  

24,000  

23,208,000  

652,000  

Municipal general obligation bonds

40,748,000  

392,000  

40,748,000  

392,000  

Municipal revenue bonds

5 unchanged sentences

$ 351,062,000  

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

Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For those securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security.

$ 6,455,000  

$ 110,491,000  

$ 3,503,000  

$ 461,553,000  

$ 9,958,000  

We evaluate securities in an unrealized loss position at least quarterly.

Consideration is given to the length of time and the extent to which the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security.

In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

At September 30, 2021, 291 debt securities with fair values totaling $ 390 million had unrealized losses aggregating $ 6.0 million.

At March 31, 2022, 527 debt securities with estimated fair values totaling $ 535 million had unrealized losses aggregating $ 41.1 million.

At December 31, 2021, 333 debt securities with estimated fair values totaling $ 462 million had unrealized losses aggregating $ 10.0 million.

After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments.

As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.

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

The amortized cost and fair value of debt securities at March 31, 2022, by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

1 unchanged sentence

$ 10,171,000  

$ 547,000  

Due in 2023 through 2027

16 unchanged sentences

$ 605,661,000  

$ 559,564,000  

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.

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $ 161 million and $ 155 million at March 31, 2022 and December 31, 2021, respectively, with estimated market values of $ 155 million and $ 158 million, respectively.

Securities issued by all other states and their political subdivisions had combined amortized costs of $ 1.6 million and $ 1.7 million and estimated market values of $ 1.6 million and $ 1.7 million at March 31, 2022 and December 31, 2021, respectively.

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

1 unchanged sentence

The carrying value of U.S.

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.

Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $ 204 million and $ 197 million at March 31, 2022 and December 31, 2021, respectively.

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

LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs.

Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding.

Interest is not accrued on loans where collectability is uncertain.

Interest is not accrued on loans where collectibility is uncertain.

Accrued interest is presented separately in the consolidated balance sheet.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Our total loans at March 31, 2022 were $ 3.56 billion compared to $ 3.45 billion at December 31, 2021, an increase of $ 102 million, or 3.0 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2022 and December 31, 2021, and the percentage change in loans from the end of 2021 to the end of the first quarter of 2022, are as follows:

March 31, 2022

December 31, 2021

20 unchanged sentences

2,950,424,000  

Home equity and other

1-4 family mortgages

522,556,000  

442,547,000  

1-4 family mortgages

Other consumer loans (2)

28,672,000  

4 unchanged sentences

$ 3,453,459,000  

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,

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

In conjunction with the adoption of the CECL methodology effective January 1, 2022, home equity lines of credit were reclassified to 1 - 4 family mortgage loans from other consumer loans.

Home equity lines of credit totaled $ 31.9 million and $ 29.5 million as of March 31, 2022 and December 31, 2021, respectively.

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

Loans past due 90 days or more still accruing interest

$ 155,000  

Nonaccrual loans

4 unchanged sentences

$ 2,468,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The recorded principal balance of nonperforming loans was as follows:

September 30,

Commercial and industrial

$ 663,000  

$ 172,000  

Vacant land, land development, and residential construction

1 unchanged sentence

owner occupied

619,000  

Real estate –

non-owner occupied

22,000  

Real estate –

2 unchanged sentences

663,000  

813,000  

Home equity and other

142,000  

242,000  

1-4 family mortgages

1 unchanged sentence

1,686,000  

Other consumer loans

119,000  

1,612,000  

1,805,000  

Total nonperforming loans

1 unchanged sentence

$ 2,468,000  

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

An age analysis of past due loans is as follows as of March 31, 2022:

Commercial and industrial

1 unchanged sentence

$ 1,153,814,000  

$ 1,074,350,000  

$ 1,074,394,000  

Vacant land, land development, and residential construction

5 unchanged sentences

1,195,000  

581,537,000  

582,732,000  

Real estate –

11 unchanged sentences

3,004,562,000  

Home equity and other

103,000  

11,000  

1-4 family mortgages

567,000  

2 unchanged sentences

810,000  

1-4 family mortgages

521,746,000  

522,556,000  

Other consumer loans

17,000  

17 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

An age analysis of past due loans is as follows as of December 31, 2021:

5 unchanged sentences

$ 1,137,419,000  

Vacant land, land development, and residential construction

$ 155,000  

Vacant land, land development, and residential construction

13,000  

Real estate –

owner occupied

13,000  

1 unchanged sentence

43,239,000  

Real estate –

owner occupied

565,758,000  

4 unchanged sentences

1,027,415,000  

917,413,000  

917,436,000  

Real estate –

15 unchanged sentences

60,488,000  

61,620,000  

1-4 family mortgages

18 unchanged sentences

$ 3,453,459,000  

(Continued) 

$ 155,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Nonaccrual loans as of March 31, 2022 were as follows:

With no allowance recorded:

Commercial and industrial

$ 2,900,000  

$ 2,843,000  

$ 2,759,000  

$ 3,836,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

12,674,000  

13,374,000  

Real estate –

non-owner occupied

163,000  

Real estate –

multi-family and residential rental

92,000  

46,000  

23,000  

Total commercial

15,666,000  

15,609,000  

15,479,000  

17,396,000  

Home equity and other

1,291,000  

1,208,000  

1,223,000  

1,093,000  

1-4 family mortgages

1,585,000  

2,285,000  

2,256,000  

2,403,000  

4,787,000  

3,493,000  

3,479,000  

3,496,000  

Total with no related allowance recorded

$ 20,453,000  

$ 19,102,000  

Other consumer loans

1,587,000  

Total with no allowance recorded

$ 1,587,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

With an allowance recorded:

Commercial and industrial

$ 2,802,000  

$ 449,000  

$ 2,888,000  

$ 1,617,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

775,000  

89,000  

994,000  

813,000  

Real estate –

non-owner occupied

151,000  

152,000  

156,000  

Real estate –

1 unchanged sentence

Total commercial

3,728,000  

544,000  

4,034,000  

2,586,000  

Home equity and other

182,000  

163,000  

142,000  

197,000  

232,000  

1-4 family mortgages

1 unchanged sentence

25,000  

79,000  

472,000  

569,000  

598,000  

579,000  

221,000  

Other consumer loans

25,000  

3 unchanged sentences

$ 25,000  

$ 765,000  

$ 4,703,000  

$ 3,387,000  

Total impaired loans:

$ 19,394,000  

$ 19,337,000  

$ 544,000  

$ 19,513,000  

$ 19,982,000  

5,385,000  

4,072,000  

221,000  

4,148,000  

4,297,000  

Total impaired loans

$ 24,779,000  

Total nonaccrual loans:

1,612,000  

25,000  

Total nonaccrual loans

$ 1,612,000  

$ 25,000  

No interest income was recognized on nonaccrual loans during the first quarter of 2022.

Lost interest income on nonaccrual loans totaled less than $ 0.1 million during the first quarter of 2022.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty.

Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on an internal watch list.

Senior management and the Board of Directors review this list regularly.

Market value estimates of collateral on nonaccrual loans, as well as on foreclosed and repossessed assets, are reviewed periodically.

We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions.

Our credit policies establish criteria for obtaining appraisals and determining internal value estimates.

We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received.

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

Under CECL for collateral dependent loans, in instances where the borrower is experiencing financial difficulties, we adopted the practical expedient to measure the allowance based on the fair value of collateral.

The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral and the recorded principal balance.

If the fair value of the collateral exceeds the recorded principal balance, no allowance is required.

We had no commercial loans on nonaccrual as of March 31, 2022, while nonaccrual retail loans aggregated $ 1.6 million, a vast majority of which were collateralized by residential property.

Nonaccrual loans aggregating $ 1.5 million had no related specific reserve allocations as of March 31, 2022.

Impaired loans as of December 31, 2021, and average impaired loans for the three months ended March 31, 2021, were as follows:

First Quarter

With no related allowance recorded:

3 unchanged sentences

$ 4,913,000  

$ 8,282,000  

Vacant land, land development and residential construction

326,000  

234,000  

Real estate –

3 unchanged sentences

14,074,000  

3,053,000  

Real estate –

1 unchanged sentence

326,000  

341,000  

309,000  

199,000  

Real estate –

multi-family and residential rental

Total commercial

91,000  

Total commercial

12,658,000  

12,583,000  

Home equity and other

19,313,000  

Home equity and other

1,173,000  

8 unchanged sentences

3,513,000  

3,810,000  

3,688,000  

Total with no related allowance recorded

2 unchanged sentences

$ 22,826,000  

$ 15,459,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

First Quarter

With an allowance recorded:

4 unchanged sentences

$ 345,000  

$ 1,128,000  

Vacant land, land development and residential construction

96,000  

Real estate –

4 unchanged sentences

632,000  

538,000  

Real estate –

3 unchanged sentences

160,000  

84,000  

Real estate –

5 unchanged sentences

1,137,000  

1,846,000  

Home equity and other

3 unchanged sentences

267,000  

455,000  

1-4 family mortgages

7 unchanged sentences

932,000  

1,123,000  

1,024,000  

Total with an allowance recorded

3 unchanged sentences

$ 2,069,000  

$ 2,870,000  

Total impaired loans:

7 unchanged sentences

4,445,000  

4,933,000  

4,712,000  

Total impaired loans

3 unchanged sentences

$ 24,895,000  

$ 18,329,000  

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 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.

Impaired loans for which no allocation of the allowance for credit 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 first quarter of 2021.

No interest income was recognized on nonaccrual loans during the first quarter of 2021.

Lost interest income on nonaccrual loans totaled less than $ 0.1 million during the first quarter of 2021.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Credit Quality Indicators.

4 unchanged sentences

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

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

Credit quality indicators were as follows as of March 31, 2022:

Commercial credit exposure –

credit risk profiled by internal credit risk grades:

and Residential

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Internal credit risk grade groupings:

25 unchanged sentences

credit risk profiled by collateral type:

Other Consumer

$ 520,946,000  

4 unchanged sentences

$ 28,672,000  

$ 411,618,000  

Included in Commercial and Industrial Loans Grades 1 – 

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Credit quality indicators were as follows as of December 31, 2021:

1 unchanged sentence

credit risk profiled by internal credit risk grades:

and Residential

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Internal credit risk grade groupings:

36 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

All commercial loans are graded using the following criteria:

6 unchanged sentences

“Acceptable”  Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all regulatory requirements.

These are loans for which repayment risks are satisfactory.

These are for loans for which repayment risks are satisfactory.

“Monitor”  Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses.

2 unchanged sentences

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

“Substandard”  Loans with this rating are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any.

“Substandard”  Loans with this rate are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any.

A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt.

1 unchanged sentence

“Doubtful”  Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable.

“Loss”  Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is not warranted.

“Loss”  Loans with this rating are considered uncollectible, and of such little value that continuance as an active asset is not warranted.

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

1 unchanged sentence

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

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

rights in order to preserve our collateral position.

We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 nine months ended September 30, 2021 are as follows:

Allowance for loan losses:

Balance at June 30, 2021

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects loan balances as of March 31, 2022 based on year of origination (dollars in thousands):

Commercial and Industrial:

Grades 1 –

$ 23,869  

2 unchanged sentences

$ 14,728  

Provision for loan losses

$ 4,966  

3 unchanged sentences

$ 719,267  

Grades 5 –

27,468  

Ending balance

148,260  

2 unchanged sentences

264,306  

Allowance for loan losses:

Balance at December 31, 2020

151,403  

415,709  

Grades 8 –

10,246  

18,838  

Provision for loan losses

$ 55,010  

2 unchanged sentences

$ 25,677  

Ending balance

$ 7,900  

2 unchanged sentences

$ 550,543  

Ending balance:

individually evaluated for impairment

$ 1,153,814  

Vacant Land, Land Development and Residential Construction:

Grades 1 –

$ 7,651  

$ 21,988  

Ending balance:

collectively evaluated for impairment

$ 4,099  

1 unchanged sentence

$ 34,546  

Grades 5 –

12,444  

Total loans (*):

Ending balance

17,857  

18,031  

Grades 8 –

$ 11,668  

Ending balance:

individually evaluated for impairment

$ 34,432  

1 unchanged sentence

$ 1,394  

Ending balance:

collectively evaluated for impairment

$ 52,164  

$ 52,693  

Real Estate –

Owner Occupied:

Grades 1 –

$ 51,926  

(*) Excludes $116 million in loans originated under the Paycheck Protection Program.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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 June 30, 2020

$ 186,183  

2 unchanged sentences

$ 18,739  

Provision for loan losses

$ 14,239  

1 unchanged sentence

$ 358,249  

Grades 5 –

50,222  

87,685  

Ending balance

46,255  

2 unchanged sentences

222,095  

Allowance for loan losses:

Balance at December 31, 2019

222,095  

Grades 8 –

$ 102,148  

1 unchanged sentence

$ 111,263  

Provision for loan losses

$ 36,614  

3 unchanged sentences

$ 582,732  

Real Estate –

Non-Owner Occupied:

Grades 1 –

$ 40,445  

Ending balance

$ 199,956  

2 unchanged sentences

$ 21,200  

Ending balance:

individually evaluated for impairment

$ 17,763  

1 unchanged sentence

$ 497,951  

Ending balance:

collectively evaluated for impairment

Grades 5 –

35,131  

2 unchanged sentences

39,685  

Total loans (*):

Ending balance

15,924  

1 unchanged sentence

496,757  

Ending balance:

individually evaluated for impairment

496,757  

Grades 8 –

12,653  

Ending balance:

collectively evaluated for impairment

12,653  

1 unchanged sentence

$ 406,430  

(*) Excludes $365 million in loans originated under the Paycheck Protection Program.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

Commercial and industrial

$ 309,530  

$ 111,608  

Vacant land, land development and residential construction

Real estate –

owner occupied

Real estate –

non-owner occupied

$ 37,124  

$ 67,093  

$ 1,007,361  

Real Estate –

Multi-Family and Residential Rental:

Grades 1 –

$ 20,158  

$ 59,645  

$ 38,770  

$ 5,905  

$ 3,165  

$ 5,138  

$ 132,781  

Grades 5 –

17,570  

32,757  

15,146  

75,034  

Grades 8 –

$ 37,728  

$ 92,491  

$ 53,916  

$ 9,897  

$ 6,879  

$ 7,051  

$ 207,962  

Total Commercial

1 unchanged sentence

$ 1,175,663  

Home equity and other

$ 612,694  

$ 183,912  

$ 87,423  

$ 111,668  

$ 2,453,490  

$ 551,072  

$ 3,004,562  

1-4 Family Mortgages

1 unchanged sentence

$ 235,895  

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

Commercial and industrial

$ 101,123  

$ 16,365  

Vacant land, land development and residential construction

Real estate –

owner occupied

$ 17,173  

$ 52,618  

Real estate –

$ 491,035  

$ 31,521  

$ 522,556  

Other Consumer Loans

11,179  

17,493  

28,672  

$ 69,122  

$ 240,264  

$ 103,038  

$ 18,257  

$ 17,980  

$ 53,553  

$ 502,214  

$ 49,014  

$ 551,228  

$ 351,252  

$ 1,415,927  

$ 715,732  

$ 202,169  

$ 105,403  

$ 165,221  

$ 2,955,704  

$ 600,086  

$ 3,555,790  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity in the allowance for credit losses during the three months ended March 31, 2022 are as follows (dollars in thousands):

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial real estate –

owner occupied

Commercial real estate –

non-owner occupied

Real estate –

Commercial real estate –

multi-family and residential rental

1-4 family mortgages

Other consumer loans

Allowance for credit losses:

Beginning balance

$ 10,782  

$ 6,045  

Total commercial

$ 13,301  

$ 1,695  

Home equity and other

$ 2,449  

$ 35,363  

1-4 family mortgages

Adoption of ASU 2016-13

( 1,571 )  

4 unchanged sentences

( 411 )  

( 55 )  

Provision for credit losses

( 742 )  

( 445 )  

( 33 )  

( 170 )  

( 29 )  

Ending balance

$ 8,413  

$ 5,803  

$ 10,322  

$ 1,276  

$ 8,562  

$ 35,153  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity in the allowance for loan losses for loans during the three months ended March 31, 2021 and the recorded investments in loans as of December 31, 2021 are as follows (dollars in thousands):

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial real estate –

owner occupied

Commercial real estate –

non-owner occupied

Commercial real estate –

multi-family and residential rental

Home equity and other

4 family mortgages

Allowance for loan losses:

Beginning balance

$ 9,424  

$ 8,246  

Vacant land, land development and residential construction

Real estate –

owner occupied

$ 13,611  

$ 1,819  

Real estate –

non-owner occupied

$ 3,240  

$ 37,967  

Real estate –

multi-family and residential rental

Total commercial

Provision for loan losses

( 181 )  

( 82 )  

Home equity and other

( 337 )  

( 15 )  

1-4 family mortgages

( 33 )  

Ending balance

$ 10,111  

3 unchanged sentences

$ 2,953  

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

Commercial and industrial

$ 38,695  

Ending balance:

individually evaluated for impairment

Ending balance:

collectively evaluated for impairment

$ 10,049  

Vacant land, land development and residential construction

Real estate –

owner occupied

$ 8,257  

$ 13,744  

Real estate –

non-owner occupied

$ 1,825  

$ 2,812  

Real estate –

multi-family and residential rental

Total commercial

$ 38,208  

Total loans (*):

Ending balance

$ 1,097,309  

Home equity and other

$ 43,239  

$ 565,758  

1-4 family mortgages

$ 1,027,415  

3 unchanged sentences

$ 3,413,349  

Ending balance:

individually evaluated for impairment

$ 5,010  

$ 10,435  

$ 1,247  

$ 2,437  

$ 19,366  

Ending balance:

collectively evaluated for impairment

$ 1,092,299  

$ 43,239  

$ 555,323  

$ 1,027,269  

$ 176,502  

$ 59,241  

$ 440,110  

$ 3,393,983  

(*) Excludes $40.1 million in loans originated under the Paycheck Protection Program.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2021 ( amounts as of period end):

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Loans modified as troubled debt restructurings during the three months ended March 31, 2022 were as follows:

Commercial and industrial

7 unchanged sentences

Total commercial

Home equity and other

1-4 family mortgages

128,000  

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):

128,000  

Other consumer loans

128,000  

$ 128,000  

Loans modified as troubled debt restructurings during the three months ended March 31, 2021 were as follows:

Commercial and industrial

$ 23,000  

$ 22,000  

Vacant land, land development and residential construction

6 unchanged sentences

Total commercial

23,000  

22,000  

Home equity and other

71,000  

1-4 family mortgages

36,000  

107,000  

$ 130,000  

$ 129,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2020 ( amounts as of period end):

LOANS AND ALLOWANCE FOR CREDIT 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 March 31, 2022 ( amounts as of period end):

Commercial and industrial

7 unchanged sentences

Total commercial

Home equity and other

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 nine months ended September 30, 2020 ( amounts as of period end):

Other consumer loans

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2021 ( amounts as of period end):

Commercial and industrial

$ 593,000  

Vacant land, land development and residential construction

6 unchanged sentences

Total commercial

593,000  

Home equity and other

1 unchanged sentence

$ 599,000  

31,000  

$ 31,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the three months ended March 31, 2022 is as follows:

Land Development,

and Residential

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Commercial Loan Portfolio:

3 unchanged sentences

$ 146,000  

Transfers to ORE

Net Additions/Deletions

$ 91,000  

92,000  

Ending Balance

$ 5,655,000  

$ 13,449,000  

$ 151,000  

$ 92,000  

Retail Loan Portfolio:

Beginning Balance

$ 1,396,000  

$ 699,000  

Transfers to ORE

Net Additions/Deletions

Ending Balance

$ 1,305,000  

$ 648,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

Real Estate -

Commercial Loan Portfolio:

Beginning Balance

$ 6,414,000  

$ 14,797,000  

$ 480,000  

( 9,677,000 )

( 2,034,000 )

Transfers to ORE

Net Additions/Deletions

2,854,000  

686,000  

92,000  

( 1,932,000 )

Ending Balance

3 unchanged sentences

$ 90,000  

Other Consumer

Retail Loan Portfolio:

5 unchanged sentences

1,797,000  

46,000  

Ending Balance

$ 1,305,000  

$ 648,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

Real Estate -

Commercial Loan Portfolio:

Beginning Balance

$ 10,067,000  

$ 80,000  

$ 3,791,000  

$ 170,000  

$ 1,000  

( 1,187,000 )

Transfers to ORE

Net Additions/Deletions

55,000  

569,000  

Ending Balance

1 unchanged sentence

$ 13,000  

$ 735,000  

Retail Loan Portfolio:

Beginning Balance

$ 1,715,000  

$ 715,000  

Transfers to ORE

Net Additions/Deletions

82,000  

69,000  

Ending Balance

$ 1,577,000  

$ 767,000  

Includes $ 1.2 million in the transfer of home equity lines of credit from other consumer loans to 1 - 4 family mortgages in association with the adoption of the CECL methodology effective January 1, 2022.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the three months ended March 31, 2021 is as follows: 

Land Development,

and Residential

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Commercial Loan Portfolio:

3 unchanged sentences

$ 480,000  

$ 178,000  

$ 7,000  

( 2,676,000 )

( 1,836,000 )

Transfers to ORE

1 unchanged sentence

22,000  

3,710,000  

569,000  

Ending Balance

15 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

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

September 30,

Commercial and industrial

$ 311,000  

$ 53,000  

Vacant land, land development, and residential construction

Real estate –

owner occupied

89,000  

59,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

406,000  

120,000  

Home equity and other

113,000  

202,000  

1-4 family mortgages

79,000  

145,000  

192,000  

347,000  

Total related allowance

$ 598,000  

$ 467,000  

In general, our policy dictates that a renewal or modification of an 8 - or 9 -rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures.

Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal.

We believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants.

Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8 - or 9 -rated loans renewed or modified were done so at below market rates.

Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

Premises and equipment are comprised of the following:

September 30,

Land and improvements

14 unchanged sentences

$ 57,298,000  

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 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

Depreciation expense totaled $ 1.6 million and $ 1.4 million during the first quarters of 2022 and 2021, respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET (Continued)

We enter into facility leases in the normal course of business.

As of March 31, 2022 and December 31, 2021, we were under lease contracts for ten of our banking facilities.

The leases had maturity dates ranging from June, 2022 through December, 2026, with a weighted average life of 2.6 years and 2.8 years as of March 31, 2022 and December 31, 2021, respectively.

All of our leases have multiple three - to five - year extensions;

however, those were not factored in the lease maturities and weighted average lease term as it is not reasonably certain we will exercise the options.

Leases are classified as either operating or finance leases at the lease commitment date, with all of our current leases determined to be operating leases.

Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Right-of-use assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease.

Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments over the lease term.

We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments.

The weighted average discount rate for leases was 4.70 % as of March 31, 2022 and December 31, 2021.

The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, each totaled $ 2.6 million as of March 31, 2022, and $ 2.9 million as of December 31, 2021.

As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheet.

Total operating lease expense associated with the leases aggregated $ 0.2 million during the first quarters of 2022 and 2021.

Future lease payments at March 31, 2022 totaled $ 3.4 million, comprised of $ 0.8 million in one year, $ 1.2 million in one to three years, $ 0.3 million in three to five years and $ 1.1 million in over five years.

Future lease payments at December 31, 2021 totaled $ 3.6 million, comprised of $ 0.8 million in one year, $ 1.4 million in one to three years, $ 0.3 million in three to five years and $ 1.1 million in over five years.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our total deposits at March 31, 2022 totaled $ 3.98 billion, a decrease of $ 107 million, or 2.6 %, from December 

The components of our outstanding balances at March 31, 2022 and December 31, 2021, and percentage change in deposits from the end of 2021 to the end of the first quarter of 2022, are as follows:

March 31, 2022

December 31, 2021

Noninterest-bearing demand

Noninterest-bearing checking

$ 1,686,203,000  

22 unchanged sentences

$ 4,083,193,000  

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

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Time deposits of more than $250,000 totaled $ 181 million and $ 207 million at March 31, 2022 and December 31, 2021, respectively.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

1 unchanged sentence

Information relating to our repurchase agreements follows:

September 30,

Twelve Months

Three Months Ended

Twelve Months Ended

March 31, 2022

December 31, 2021

Outstanding balance at end of period

13 unchanged sentences

Repurchase agreements are secured by securities with an aggregate market value equal to the aggregate outstanding balance.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

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 September 30, 2021 totaled $ 760 million, with remaining availability based on collateral equaling $ 360 million.

Maturities of currently outstanding FHLBI advances are as follows:

Federal Home Loan Bank of Indianapolis (“FHLBI”) bullet advances totaled $ 354 million at March 31, 2022, and were expected to mature at varying dates from April 2022 through June 2027, with fixed rates of interest from 0.55 % to 3.18 % and averaging 1.98 %.

FHLBI bullet advances totaled $ 374 million at December 31, 2021, and were expected to mature at varying dates from January 2022 through June 2027, with fixed rates of interest from 0.55 % to 3.18 % and averaging 2.00 %.

Maturities of FHLBI bullet advances as of March 31, 2022 were as follows:

$ 74,000,000  

4 unchanged sentences

40,000,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FHLBI amortizing advances totaled $ 28.3 million as of March 31, 2022, with an average rate of 2.52 %.

We had no FHLBI amortizing advances outstanding as of December 31, 2021.

FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.

Schedule principal payments of FHLBI amortizing advances as of March 31, 2022 were as follows:

353,000  

826,000  

862,000  

899,000  

25,323,000  

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

Our borrowing line of credit as of March 31, 2022 totaled $ 932 million, with remaining availability based on collateral equaling $ 544 million.

COMMITMENTS AND OFF-BALANCE SHEET RISK

5 unchanged sentences

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet.

2 unchanged sentences

Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on our credit assessment of the borrower.

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 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,

We are required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us.

The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives.

The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

We have determined that our commercial-related lending commitments are unconditionally cancellable.

Additionally, the vast majority of unfunded commercial loan commitments consist of revolving lines of credit wherein the aggregate amounts outstanding and available remain relatively stable, and any seasonality of line usage is nominal.

Line of credit draws, irrespective of the maximum credit or individual note amount, are governed by borrowing or advance formulas, while draws off of commercial and residential construction loans are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements.

Letters of credit are rarely drawn.

For retail lines of credit, including home equity lines of credit, overdraft protection lines of credit and personal unsecured lines of credit, and credit cards, average outstanding balances as a percent of total available credit have remained relatively steady over the past several years.

We determined allowance requirements for these credit types by calculating the difference between the average percent outstanding of funded commitments over the past several years to actual percent outstanding as of March 31, 2022 and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon.

The calculated allowance for the retail lines of credit and credit cards as of March 31, 2022 was less than $ 0.1 million.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2022 and December 31, 2021 is as follows: 

Commercial unused lines of credit

1 unchanged sentence

$ 1,098,951,000  

Unused lines of credit secured by 1 –

4 family residential properties

Unused lines of credit secured by 1–4 family residential properties

65,112,000  

14 unchanged sentences

$ 1,565,871,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES

3 unchanged sentences

Derivative financial instruments may also be used to assist in managing economic risks.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers.

We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers.

We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with correspondent banks to offset the impact of the interest rate swaps with the commercial banking customers.

The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions.

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 September 30, 2021 are reflected in the following table.

The fair values of derivative instruments as of March 31, 2022 are reflected in the following table.

Notional Amount

Balance Sheet

Balance Sheet Location

Derivative Assets  

7 unchanged sentences

10,246,000  

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.

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 $ 5.3 million as of September 30, 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.

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest income of less than $ 0.1 million during the first quarter of 2022.

The 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 $ 10.2 million as of March 31, 2022.

Cash collateral totaling $ 10.3 million was provided by the counterparty correspondent banks as of March 31, 2022.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 338 million as of March 31, 2022.

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

The estimated fair values of derivative instruments as of December 31, 2020 are reflected in the following table.

The fair values of derivative instruments as of December 31, 2021 are reflected in the following table.

Notional Amount

Balance Sheet

Balance Sheet Location

Derivative Assets  

7 unchanged sentences

4,857,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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 year-ended December 31, 2020.

Cash collateral totaling $ 1.1 million was provided to the counterparty correspondent bank as of December 31, 2020.

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of $ 0.2 million during the year-ended December 31, 2021.

Cash collateral totaling $ 3.6 million was provided to the counterparty correspondent banks as of December 31, 2021.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 279 million as of December 31, 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.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2021 and December 31, 2020 ( dollars in thousands):

September 30, 2021

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of March 31, 2022 and December 31, 2021 ( dollars in thousands):

March 31, 2022

December 31, 2021

31 unchanged sentences

12,248  

15,445  

Accrued interest receivable

1 unchanged sentence

10,655  

Interest rate swaps

10,053  

Financial liabilities:

18 unchanged sentences

48,284  

Subordinated notes

88,428  

88,429  

73,646  

Accrued interest payable

Interest rate swaps

10,246  

See Note 11 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities.

1 unchanged sentence

therefore, fair value is estimated at carrying amount.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterest-bearing checking accounts and securities sold under agreements to repurchase.

3 unchanged sentences

The fair value of mortgage servicing rights is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions.

The fair values of subordinated debentures and FHLBI advances are based on current rates for similar financing.

The fair values of subordinated debentures, subordinated notes, and FHLBI advances are based on current rates for similar financing.

The fair value of off-balance sheet items is estimated to be nominal.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

17 unchanged sentences

or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Significant unobservable inputs that reflect our own conclusions about the assumptions that market participants would use in pricing an asset or liability. 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

Significant unobservable inputs that reflect our own conclusions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and liabilities that are recorded at fair value on a recurring or nonrecurring basis:

8 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 September 30, 2021 or December 31, 2020.

There was no such impairment as of March 31, 2022 or December 31, 2021.

We have no Level 1 securities available for sale.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

Derivatives .

1 unchanged sentence

Mortgage loans held for sale .

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis.

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

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.

As of March 31, 2022 and December 31, 2021, we determined the fair value of our mortgage loans held for sale to be $ 15.2 million and $ 16.7 million, respectively.

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

8 unchanged sentences

respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

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 September 30, 2021 are as follows:

Significant Unobservable

The balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 are as follows:

Available for sale securities

15 unchanged sentences

500,000  

Interest rate swaps

10,053,000  

1 unchanged sentence

$ 615,714,000  

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.

$ 615,037,000  

$ 677,000  

There were no transfers in or out of Level 1, Level 2 or Level 3 available for sale securities during the first three months of 2022.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 are as follows:

Significant Unobservable

Available for sale securities

15 unchanged sentences

500,000  

Interest rate swaps

4,609,000  

1 unchanged sentence

$ 597,352,000  

There were no transfers in or out of Level 1, Level 2 or Level 3 during 2020.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

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 September 30, 2021 are as follows:

Significant Unobservable

Impaired loans

$ 596,675,000  

$ 677,000  

Foreclosed assets

There were no transfers in or out of Level 1, Level 2 or Level 3 available for sale securities during 2021.

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 March 31, 2022 are as follows:

$ 1,338,000  

Foreclosed assets

$ 1,338,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2021 are as follows:

Significant Unobservable

Impaired loans

4 unchanged sentences

$ 3,807,000  

$ 3,581,000  

The carrying values are based on the estimated value of the property or other assets.

5 unchanged sentences

In a vast majority of cases, we assign a 10 % discount factor for estimated selling costs.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS

8 unchanged sentences

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

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.

At March 31, 2022 and December 31, 2021, our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since March 31, 2022 that we believe have changed our bank’s categorization.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS (Continued)

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

Minimum Required

Adequacy Purposes

Minimum Required

1 unchanged sentence

Prompt Corrective

Adequacy Purposes

Action Regulations

September 30, 2021

March 31, 2022

Total capital (to risk weighted assets)

4 unchanged sentences

416,984  

388,495  

Tier 1 capital (to risk weighted assets)

16 unchanged sentences

256,761  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS (Continued)

December 31, 2021

5 unchanged sentences

404,910  

338,995  

Tier 1 capital (to risk weighted assets)

16 unchanged sentences

248,137  

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.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS (Continued)

Our consolidated capital levels as of March 31, 2022 and December 31, 2021 include $ 46.3 million and $ 46.2 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 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.

As of March 31, 2022 and December 31, 2021, all $ 46.3 million and $ 46.2 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 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS (Continued)

We believe that, as of March 31, 2022, our bank met all capital adequacy requirements under the BASEL III capital rules.

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 13, 2022, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.31 per share that was paid on March 16, 2022 to shareholders of record as of March 4, 2022.

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 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.

On April 14, 2022, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.31 per share that will be paid on June 15, 2022 to shareholders of record as of June 3, 2022.

As of March 31, 2022, we had the ability to repurchase up to $ 6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $ 20.0 million common stock repurchase program announced in May 2021.

No shares were repurchased during the first three months of 2022.

Historically, stock repurchases have been funded from cash dividends paid to us from our bank.

Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank.

MERCANTILE BANK CORPORATION

Management ’

28 unchanged sentences

changes in banking regulation or actions by bank regulators;

changes in the method of determining Libor and the phase out of Libor;

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, 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;

potential cyber-attacks, information security breaches, and other criminal activities on our computer systems;

litigation liabilities;

actions of the Federal Reserve Board;

the outcomes of contingencies;

governmental and regulatory policy changes;

the outcomes of existing or future contingencies;

trends in customer behavior as well as their ability to repay loans;

changes in local real estate values;

damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, the failure to meet client expectations and other facts;

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, our June 30, 2021 Form 10-Q or in this report.

damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, and the failure to meet client expectations and other facts;

adoption of SOFR and changes in the method of determining SOFR;

direct and indirect climate change matters;

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

unstable political and economic environment;

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

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

(“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.

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., at March 31, 2022 and December 31, 2021 and the results of operations for the three months ended March 31, 2022 and March 31, 2021.

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

5 unchanged sentences

Critical Accounting Policies  

GAAP is complex and requires us to apply significant judgment to various accounting, reporting and disclosure matters.

Accounting principles generally accepted in the United States of America (“GAAP”) are complex and require us to apply significant judgment to various accounting, reporting and disclosure matters.

We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical.

5 unchanged sentences

MERCANTILE BANK CORPORATION

Allowance for Loan Losses :

The allowance for loan losses (“allowance”) is maintained at a level we believe is adequate to absorb probable incurred losses identified and inherent in the loan portfolio.

Allowance for Credit Losses ( “

Allowance ”

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

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

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

Loan losses are charged against the allowance when we believe the uncollectability of a loan is likely.

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

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

1 unchanged sentence

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

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

therefore, such loans do not have an associated allowance.

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

Uncollectable loans are charged-off through the allowance.

Recoveries of loans previously charged-off are added to the allowance.

A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement.

Impairment is evaluated on an individual loan basis.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

The timing of obtaining outside appraisals varies, generally depending on the nature and complexity of the property being evaluated, general breadth of activity within the marketplace and the age of the most recent appraisal.

For collateral dependent impaired loans, in most cases we obtain and use the “as is”

value as indicated in the appraisal report, adjusting for any expected selling costs.

In certain circumstances, we may internally update outside appraisals based on recent information impacting a particular or similar property, or due to identifiable trends (e.g., recent sales of similar properties) within our markets.

The expected future cash flows exclude potential cash flows from certain guarantors.

To the extent these guarantors provide repayments, a recovery would be recorded upon receipt.

Loans are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship.

Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status.

We put loans into nonaccrual status when the full collection of principal and interest is not expected.

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

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

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

In June 2016, the FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments .

This ASU (as subsequently amended by ASU 2018-19) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

The standard will replace the current “incurred loss”

approach with an “expected loss”

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

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

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

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

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

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

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

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.

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

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

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

See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance.

See also Note 3 –

Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.

As of March 31, 2022, the allowance was comprised of $34.9 million in general reserves relating to performing loans and $0.3 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings.

Specific reserve allocations relating to nonaccrual loans were nominal in amount.

Troubled debt restructurings totaled $5.5 million at March 31, 2022, consisting of $0.4 million that are on nonaccrual status and $5.1 million that are on accrual status.

The latter are not included in our nonperforming loan totals.

Loans with an aggregate carrying value of $0.4 million as of March 31, 2022 had been subject to previous partial charge-offs aggregating $0.4 million over the past several years.

As of March 31, 2022, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

MERCANTILE BANK CORPORATION

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

Nonperforming

Although we believe the allowance is adequate to absorb loan losses in our originated loan portfolio as they arise, there can be no assurance, especially given the current uncertainties related to the Coronavirus Pandemic and its impact on the U.S.

economic environment, that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.

MERCANTILE BANK CORPORATION

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 $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.

Although we believe the allowance is adequate to absorb loan losses in our originated loan portfolio as they arise, there can be no assurance that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.

Securities available for sale increased $12.9 million during the first three months of 2022, totaling $606 million as of March 31, 2022.

Purchases of 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 bonds totaled $43.7 million during the first quarter of 2022.

There were no purchases of U.S.

Government agency guaranteed mortgage-backed securities during the first three months of 2022;

however, we did receive $1.6 million in principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities.

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

Purchases of municipal bonds totaled $8.0 million during the first quarter of 2022;

proceeds from matured and called municipal bonds totaled $1.1 million.

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

At March 31, 2022, the portfolio was primarily comprised of U.S.

Government agency bonds (68%), municipal bonds (26%) and U.S.

Government agency issued or guaranteed mortgage-backed securities (7%).

Government agency guaranteed mortgage-backed securities (6%).

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 September 30, 2021 totaled $560 million, including a net unrealized loss of $0.4 million.

The fair value of securities designated as available for sale at March 31, 2022 totaled $606 million, including a net unrealized loss of $40.4 million.

The net unrealized loss equaled $4.7 million as of December 31, 2021;

the increase in the net unrealized loss during the first quarter of 2022 reflects significant increases in market interest rates during that time.

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 September 30, 2021, unchanged from the balance at December 31, 2020.

Federal Home Loan Bank of Indianapolis (“FHLBI”) stock totaled $17.7 million as of March 31, 2022, compared to $18.0 million as of December 31, 2021.

The reduction reflects the FHLBI’s repurchase of excess stock.

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 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 $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 0.6% as of September 30, 2021, compared to 1.4% as of December 31, 2020.

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

these levels are substantially higher than our typical average balance of $75 million, or approximately 2% of average earning assets.

MERCANTILE BANK CORPORATION

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

Net premises and equipment equaled $56.1 million at March 31, 2022, representing a decrease of $1.2 million during the first three months of 2022.

The decline was primarily attributable to depreciation expense of $1.6 million.

We had no foreclosed or repossessed assets as of March 31, 2022 or December 31, 2021.

Total deposits decreased $107 million during the first three months of 2022, totaling $3.98 billion at March 31, 2022.

Local deposits decreased $99.2 million, while out-of-area deposits declined $7.7 million.

The reduced level of local deposits primarily reflected a single customer’s withdrawal of a majority of funds that were deposited in late 2021;

excluding this withdrawal, local deposits were up approximately $50 million during the first three months of 2022.

As a percent of total deposits, out-of-area deposits equaled 0.4% as of March 31, 2022, compared to 0.6% as of December 31, 2021.

Noninterest-bearing deposits increased $8.3 million during the first three months of 2022, while interest-bearing checking accounts and savings deposits were up $5.4 million and $12.2 million, respectively.

Money market deposit balances were down $96.9 million on an actual basis and up approximately $53 million excluding the previously mentioned large withdrawal from a single customer.

Local time deposits declined $28.1 million during the first three months of 2022.

The reduction in out-of-area deposits during the first three months of 2022 reflects maturities not replaced as the funds were no longer needed.

Sweep accounts increased $6.8 million during the first three months of 2022, totaling $204 million as of March 31, 2022.

The aggregate balance of this funding type is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances maintained by many of the customers.

The average balance of sweep accounts equaled $199 million during the first quarter of 2022, with a high balance of $224 million and a low balance of $176 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 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 September 30, 2021 totaled $760 million, with remaining availability based on collateral equaling $360 million.

FHLBI advances increased $8.3 million during the first quarter of 2022, totaling $382 million as of March 31, 2022.

Amortizing FHLBI advance aggregating $28.3 million were obtained, while bullet advances aggregating $20.0 million matured.

Amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans.

Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk.

FHLBI 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 March 31, 2022 totaled $932 million, with remaining availability based on collateral equaling $544 million.

On January 14, 2022, we entered into Subordinated Note Purchase Agreements with certain institutional accredited investors pursuant to which we issued and sold $15.0 million in aggregate principal amount of its 3.25% fixed-to-floating rate subordinated notes (“Notes”).

The Notes have a stated maturity date of January 30, 2032, are redeemable by us at our option, in whole or in part, on or after January 30, 2027 on any interest payment date at a redemption price of 100% of the principal amount of the Notes being redeemed.

The Notes are not subject to redemption at the option of the holder.

The Notes will bear interest at a fixed rate of 3.25% per year until January 29, 2027.

Commencing on January 30, 2027 and through the stated maturity date of January 30, 2032, the interest rate will reset quarterly at a variable rate equal to the then-current Three-Month Term SOFR plus 212 basis points.

On January 14, 2022, we injected $15.0 million of the issuance proceeds into our bank as an increase to equity capital.

This $15.0 million issuance was a follow-on to the $75.0 million issuance that was completed on December 15, 2021, in which $70.0 million of the issuance proceeds were injected into our bank as an increase to equity capital.

Shareholders’

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 nine months of 2021.

equity was $436 million at March 31, 2022, compared to $457 million at December 31, 2021.

Shareholders’

equity was positively impacted by first quarter net income of $11.5 million, which was partially offset by the $4.8 million payment of a cash dividend.

A $28.2 million after-tax decline in the market value of our available for sale securities portfolio, reflecting significant increases in market interest rates, negatively impacted shareholders’

equity during the first three months of 2022.

MERCANTILE BANK CORPORATION

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.

These funds are used to fund loans, meet deposit withdrawals, maintain reserve requirements and operate our company.

Liquidity is primarily achieved through local and out-of-area deposits and liquid assets such as securities available for sale, matured and called securities, federal funds sold and interest-earning deposit balances.

Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity.

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

To assist in providing needed funds and managing interest rate risk, we periodically obtain monies from wholesale funding sources.

Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $398 million, or 8.7% of combined deposits and borrowed funds, as of March 31, 2022, compared to $398 million, or 8.5% of combined deposits and borrowed funds, as of December 31, 2021.

Sweep accounts increased $6.8 million during the first three months of 2022, totaling $204 million as of March 31, 2022.

The average balance of sweep accounts equaled $199 million during the first quarter of 2022, with a high balance of $224 million and a low balance of $176 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 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 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 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.

Information regarding our repurchase agreements as of March 31, 2022 and during the first three months of 2022 is as follows:

Outstanding balance at March 31, 2022

Weighted average interest rate at March 31, 2022

Maximum daily balance three months ended March 31, 2022

Average daily balance for three months ended March 31, 2022

Weighted average interest rate for three months ended March 31, 2022

FHLBI advances increased $8.3 million during the first quarter of 2022, totaling $382 million as of March 31, 2022.

Amortizing FHLBI advance aggregating $28.3 million were obtained, while bullet advances aggregating $20.0 million matured.

Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk.

Our borrowing line of credit as of March 31, 2022 totaled $932 million, with remaining availability based on collateral equaling $544 million.

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

We did not access these lines of credit during the first three months of 2022.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $776 million during the first three months of 2022.

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 $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:

Using certain municipal bonds as collateral, we could have borrowed up to $31.1 million as of March 31, 2022.

We did not utilize this line of credit during the first three months of 2022 or at any time during the previous 13 fiscal years, and do not plan to access this line of credit in future periods.

MERCANTILE BANK CORPORATION

The following table reflects, as of March 31, 2022, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

Deposits without a stated maturity

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Subordinated debentures

Subordinated notes

Other borrowed money

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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 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.

As of March 31, 2022, we had a total of $1.51 billion in unfunded loan commitments and $33.0 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.35 billion were commitments available as lines of credit to be drawn at any time as customers’

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We regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management.

MERCANTILE BANK CORPORATION

We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, a reduction in earnings performance, declining capital levels or situations beyond our control could cause liquidity challenges.

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Shareholders’

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

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 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.

Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank.

equity was $436 million at March 31, 2022, compared to $457 million at December 31, 2021.

Shareholders’

equity was positively impacted by first quarter net income of $11.5 million, which was partially offset by the $4.8 million payment of a cash dividend.

A $28.2 million after-tax decline in the market value of our available for sale securities portfolio, reflecting significant increases in market interest rates, negatively impacted shareholders’

equity during the first three months of 2022.

We and our bank are subject to regulatory capital requirements administered by state and federal banking agencies.

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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 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 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 $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.

We believe that, as of March 31, 2022, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

MERCANTILE BANK CORPORATION

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.

As of March 31, 2022, our bank’s total risk-based capital ratio was 13.8%, compared to 13.6% at December 31, 2021.

Our bank’s total regulatory capital increased $22.3 million during the first three months of 2022, in large part reflecting net income totaling $13.6 million and a $15.0 million equity injection associated with the Notes issuance, which was partially offset by cash dividends paid to us aggregating $6.5 million.

Our bank’s total risk-based capital ratio was also impacted by a $121 million increase in total risk-weighted assets, primarily resulting from net growth in commercial loans and the securities portfolio.

As of March 31, 2022, our bank’s total regulatory capital equaled $574 million, or $157 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.”

Our and our bank’s capital ratios as of March 31, 2022 and December 31, 2021 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

Results of Operations

We recorded net income of $11.5 million, or $0.73 per basic and diluted share, for the first quarter of 2022, compared to net income of $14.2 million, or $0.87 per basic and diluted share, for the first quarter of 2021.

The decline in net income resulted from decreased noninterest income and increased noninterest expense, which more than offset improved net interest income and a lower provision for credit losses.

The reduction in noninterest income primarily reflected decreased mortgage banking income, which outweighed increases in all other key fee income categories.

Noninterest expense increased in the first three months of 2022 compared to the respective prior-year period mainly due to higher compensation and data processing costs.

The higher level of net interest income during the first quarter of 2022 resulted from the positive impact of earning asset growth, which more than offset the negative impact of a lower net interest margin, in large part driven by reduced PPP net loan fee income accretion.

The credit loss provision expense recorded during both the first quarter of 2022 and the prior-year first quarter was primarily necessitated by net loan growth;

the recording of net loan recoveries and ongoing strong loan quality metrics during both periods in large part offset additional reserve allocations stemming from loan growth.

Interest income during the first quarter of 2022 was $35.9 million, an increase of $1.1 million, or 3.2%, from the $34.8 million earned during the first quarter of 2021.

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 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.

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.

Government agency bonds are periodically purchased at discounts during rising interest rate environments;

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

MERCANTILE BANK CORPORATION

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 3.21% 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 $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 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.

Average earning assets equaled $4.88 billion during the current-year first quarter, up $553 million, or 12.8%, from the level of $4.33 billion during the respective 2021 period;

average securities were up $194 million, average interest-earning deposits increased $193 million, and average loans were up $166 million.

The yield on average earning assets was 2.99% during the first quarter of 2022, compared to 3.26% during the first quarter of 2021.

The decline primarily resulted from a change in earning asset mix and a decreased yield on loans.

On average, lower-yielding interest-earning deposits and securities represented 16.1% and 12.5% of earning assets, respectively, during the first quarter of 2022, up from 13.7% and 9.7%, respectively, during the first quarter of 2021, while higher-yielding loans represented 71.4% and 76.6% of earning assets during the respective periods.

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 has persisted since that time, negatively impacted the yield on average earning assets by approximately 45 basis points during the first quarters of 2022 and 2021.

The excess funds, consisting almost entirely of low-yielding deposits with the Federal Reserve Bank of Chicago, are mainly a product of local deposit growth and PPP loan forgiveness activities.

The yield on loans was 3.87% during the first three months of 2022, down from 4.03% during the respective prior-year period mainly due to a decreased yield on commercial loans, which declined from 4.07% during the first quarter of 2021 to 3.94% during the first quarter of 2022.

The reduced yield on commercial loans primarily reflected a lower level of PPP loan fee accretion, which totaled $0.8 million and $2.8 million in the first quarters of 2022 and 2021, respectively.

Interest expense during the first quarter of 2022 was $5.0 million, a decrease of $0.3 million, or 4.9%, from the $5.3 million expensed during the first quarter of 2021.

The decrease is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled 0.66% in the current-year first quarter compared to 0.82% in the prior-year first 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 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.

The cost of time deposits declined from 1.49% during the first quarter of 2021 to 0.89% during the current-year first quarter primarily due to lower interest rates paid on local time deposits, reflecting a decreasing interest rate environment.

On average, lower-cost non-time deposits represented 63.9% of total interest-bearing liabilities during the first quarter of 2022, up from 57.4% during the first quarter of 2021, while higher-cost time deposits represented 13.1% and 20.5% of total interest-bearing liabilities during the respective periods.

Average interest-bearing liabilities were $3.07 billion during the first three months of 2022, up $468 million, or 18.0%, from the $2.60 billion average during the respective 2021 period.

MERCANTILE BANK CORPORATION

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 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 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.

Net interest income during the first quarter of 2022 was $30.9 million, an increase of $1.4 million, or 4.6%, from the $29.5 million earned during the prior-year first quarter.

The increase resulted from the positive impact of an increase in average earning assets, which more than offset a lower net interest margin, in large part reflecting a reduced level of PPP net loan fee income accretion.

The net interest margin decreased from 2.77% in the first quarter of 2021 to 2.57% in the current-year first 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 mainly reflected a change in earning asset mix and a lower yield on commercial loans, while the reduced cost of funds primarily 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 approximately 40 basis points during the first quarters of 2022 and 2021.

The following table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarters of 2022 and 2021.

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 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 September 30,

(dollars in thousands)

Investment securities

Other interest-earning assets

Total interest - earning assets

Allowance for loan losses

LIABILITIES AND SHAREHOLDERS ’

Interest-bearing deposits

Short-term borrowings

Federal Home Loan Bank advances

Other borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Shareholders’

Total liabilities and shareholders’

Net interest income

Net interest rate spread

Net interest spread on average assets

Net interest margin on earning assets

Tax-exempt securities interest income and yield for the first quarters of 2022 and 2021 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 first quarter of both 2022 and 2021 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 the first three months of 2022 and the respective 2021 period.

MERCANTILE BANK CORPORATION

Nine months ended September 30,

Quarters ended March 31,

(dollars in thousands)

2 unchanged sentences

Total interest - earning assets

Allowance for loan losses

Allowance for credit losses

LIABILITIES AND SHAREHOLDERS ’

12 unchanged sentences

Net interest margin on earning assets

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

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.

A credit loss provision expense of $0.1 million and $0.3 million was recorded during the first quarters of 2022 and 2021, respectively.

The provision expense recorded during both periods mainly reflected allocations stemming from net loan growth;

the recording of net loan recoveries and continued strong loan quality metrics during the periods essentially offset additional reserve allocations associated with loan growth.

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

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

MERCANTILE BANK CORPORATION

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 third quarter and first nine months of 2021 and the respective 2020 periods.

During the first quarter of 2021, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.5 million, providing for net loan recoveries of $0.4 million, or an annualized 0.05% of average total loans.

The allowance for loans, as a percentage of total loans, was 1.0% as of March 31, 2022, and December 31, 2021, and 1.2% as of March 31, 2021.

Excluding PPP loans, the allowance for loans, as a percentage of total loans, equaled 1.0% as of March 31, 2022, and December 31, 2021, and 1.3% as of March 31, 2021.

Noninterest income during the first quarter of 2022 was $9.3 million, compared to $13.5 million during the prior-year first quarter.

Sustained strength in purchase mortgage originations partially mitigated the negative impacts of reduced refinance activity, rising mortgage loan interest rates, a lower mortgage loan sold percentage, and a decreased gain on sale rate on mortgage banking income during the first quarter of 2022.

Purchase transactions totaled $101 million during the first three months of 2022, compared to $81.5 million during the respective 2021 period, representing an increase of $19.9 million, or approximately 24%.

Refinance transactions totaled $66.8 million during the first quarter of 2022, compared to $164 million during the first quarter of 2021, representing a decrease of $96.9 million, or approximately 59%.

Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, totaled $75.7 million, or approximately 45% of total mortgage loans originated, during the first three months of 2022.

During the first three months of 2021, residential mortgage loans originated for sale totaled $196 million, or approximately 80% of total mortgage loans originated.

Noninterest expense totaled $25.7 million during the first quarter of 2022, compared to $25.1 million during the first quarter of 2021.

Overhead costs during the first three months of 2021 included write-downs of former branch facilities totaling $0.5 million.

Excluding these transactions, noninterest expense increased $1.2 million, or 4.8%, during the first quarter of 2022 compared to the respective 2021 period.

The higher level of expense primarily resulted from increased salary costs, mainly depicting annual merit pay increases, lower residential mortgage loan deferred salary costs stemming from decreased production, and higher stock-based compensation expense.

Increased data processing costs, in large part reflecting higher transaction volume and software support costs, also contributed to the increase in overhead costs during the first three months of 2022.

During the first quarter of 2022, we recorded income before federal income tax of $14.3 million and a federal income tax expense of $2.8 million.

During the first quarter of 2021, we recorded income before federal income tax of $17.6 million and a federal income tax expense of $3.4 million.

The decrease in federal income tax expense during the first quarter of 2022 compared to the prior-year first quarter resulted from the lower level of income before federal income tax.

Our effective tax rate was 19.8% and 19.0% during the first quarters of 2022 and 2021, respectively.

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