What changed in this filing

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Item 1. Financial Statements

2022-08-05 compared with 2022-05-06 · 863 added, 566 removed, 2318 unchanged (38% of the section changed)

75 unchanged sentences

40,000,000 shares authorized;

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

15,861,055 shares issued and outstanding at June 30, 2022 and 15,839,944 shares issued and outstanding at December 31, 2021

288,199,000  

3 unchanged sentences

174,536,000  

Accumulated other comprehensive income (loss)

Accumulated other comprehensive gain/(loss)

( 47,668,000 )

9 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Interest income

Loans, including fees

$ 33,251,000  

$ 32,985,000  

Securities, taxable

1,665,000  

1,035,000  

Securities, tax-exempt

600,000  

597,000  

Other interest-earning assets

366,000  

168,000  

Total interest income

35,882,000  

34,785,000  

Interest expense

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  

Subordinated debt and other borrowings

Total interest expense

4,997,000  

5,252,000  

Net interest income

30,885,000  

29,533,000  

Provision for credit losses

100,000  

300,000  

Net interest income after provision for credit losses

30,785,000  

29,233,000  

Noninterest income

Service charges on deposit and sweep accounts

1,416,000  

1,155,000  

Mortgage banking income

3,281,000  

8,800,000  

Credit and debit card income

1,881,000  

1,678,000  

Interest rate swap fees

1,351,000  

653,000  

Payroll processing

638,000  

557,000  

Payroll services income

Earnings on bank owned life insurance

287,000  

277,000  

423,000  

343,000  

Gain on sale of branch

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  

Charitable foundation contribution

Other expense

4,221,000  

4,511,000  

Total noninterest expenses

25,742,000  

25,117,000  

Income before federal income tax expense

14,320,000  

17,579,000  

Federal income tax expense

2,828,000  

3,340,000  

$ 11,492,000  

$ 14,239,000  

Basic earnings per share

$ 0.73  

$ 0.87  

Diluted earnings per share

$ 0.73  

$ 0.87  

Cash dividends per share

$ 0.31  

$ 0.29  

Average basic shares outstanding

15,840,801  

16,283,044  

Average diluted shares outstanding

15,841,037  

16,283,490  

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

$ 11,492,000  

$ 14,239,000  

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

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

Other comprehensive income/(loss), net of tax

Comprehensive income/(loss)

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 June 30, 2022:

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, March 31, 2022

$ 286,831  

$ 181,532  

Other comprehensive income (loss), net of tax effect

( 28,163,000 )

( 7,243,000 )

Comprehensive income (loss)

$ ( 16,671,000 )

$ 436,471  

Employee stock purchase plan ( 336 shares)

Dividend reinvestment plan ( 6,835 shares)

Stock grants to directors for retainer fees ( 10,837 shares)

Stock-based compensation expense

Cash dividends ($ 0.31 per common share)

Net income for the three months ended June 30, 2022

11,737  

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

Balances, June 30, 2022

$ 288,199  

$ 188,452  

$ 428,983  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

The following table depicts the change in shareholders’

equity for the six months ended June 30, 2022:

($ in thousands except per share amounts)

9 unchanged sentences

Dividend reinvestment plan ( 12,670 shares)

Stock grants to directors for retainer fees ( 10,837 shares)

Stock option exercises ( 1,355 shares)

1 unchanged sentence

Cash dividends ($ 0.62 per common share)

Net income for the three months ended March 31, 2022

Net income for the six months ended June 30, 2022

23,229  

1 unchanged sentence

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

Balances, March 31, 2022

Balances, June 30, 2022

$ 288,199  

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 three months ended June 30, 2021:

($ in thousands except per share amounts)

2 unchanged sentences

Shareholders’

Balances, January 1, 2021

Balances, March 31, 2021

$ 299,358  

4 unchanged sentences

Dividend reinvestment plan ( 6,263 shares)

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

Stock-based compensation expense

1 unchanged sentence

Cash dividends ($ 0.29 per common share)

Net income for the three months ended March 31, 2021

Net income for the three months ended June 30, 2021

18,091  

1 unchanged sentence

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

Balances, March 31, 2021

Balances, June 30, 2021

$ 293,232  

1 unchanged sentence

$ 1,506  

$ 451,888  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

March 31, 2022

March 31, 2021

Cash flows from operating activities

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

The following table depicts the change in shareholders’

equity for the six months ended June 30, 2021:

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, January 1, 2021

$ 302,029  

$ 134,039  

Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization

$ 5,486  

$ 441,554  

Accretion of acquired loans

Provision for credit losses

Employee stock purchase plan ( 702 shares)

Dividend reinvestment plan ( 12,910 shares)

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

Stock-based compensation expense

Share repurchase program ( 346,910 shares)

Cash dividends ($ 0.58 per common share)

Net income for the six months ended June 30, 2021

32,331  

Stock-based compensation expense

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

Balances, June 30, 2021

$ 293,232  

$ 157,150  

Proceeds from sales of mortgage loans held for sale

$ 1,506  

$ 451,888  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

June 30, 2022

June 30, 2021

Cash flows from operating activities

Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization

Accretion of acquired loans

Provision for credit losses

Stock-based compensation expense

Stock grants to directors for retainer fee

Proceeds from sales of mortgage loans held for sale

Origination of mortgage loans held for sale

2 unchanged sentences

Net gain from sales of mortgage loans held for sale

( 3,205,000 )

( 9,182,000 )

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

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  

Net loss from sales and write-downs of fixed assets

Earnings on bank owned life insurance

Gain on sale of branch

Net change in:

Accrued interest receivable

( 1,344,000 )

( 2,855,000 )

( 1,367,000 )

Accrued interest and other liabilities

15,156,000  

Net cash from (for) operating activities

27,888,000  

( 1,421,000 )

Accrued interest payable and other liabilities

Net cash from operating activities

Cash flows from investing activities

1 unchanged sentence

( 269,930,000

( 180,147,000 )

Purchases of securities available for sale

( 168,906,000

( 87,307,000 )

Proceeds from maturities, calls and repayments of securities available for sale

2,854,000  

30,974,000  

Proceeds from sales of foreclosed assets

13,000  

158,000  

Proceeds from sales of former bank premises

Proceeds from Federal Home Loan Bank stock redemption

281,000  

Proceeds from bank owned life insurance death benefits claim

Net cash transferred in branch sale

Net purchases of premises and equipment and lease activity

( 1,603,000 )

Net cash for investing activities

1 unchanged sentence

( 194,750,000

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

June 30, 2022

Six Months

June 30, 2021

Cash flows from financing activities

Net decrease in time deposits

( 35,861,000 )

( 51,961,000 )

Net (decrease) increase in all other deposits

( 131,308,000

302,650,000  

Net increase in securities sold under agreements to repurchase

6,808,000  

22,945,000  

Maturities of Federal Home Loan Bank advances

Proceeds from Federal Home Loan Bank advances

28,263,000  

Payoffs of Federal Home Loan Bank advances

( 20,000,000 )

Net proceeds from subordinated notes issuance

Proceeds from stock option exercises, net of cashless exercises

Employee stock purchase plan

10,000  

11,000  

Net proceeds from stock option exercises

36,000  

Dividend reinvestment plan

222,000  

213,000  

Proceeds from subordinated notes issuance

14,701,000  

Repurchases of common stock

( 3,538,000 )

Repurchases of common stock shares

Payment of cash dividends to common shareholders

( 4,812,000 )

( 4,636,000 )

Net cash from (for) financing activities

Net cash (for) from financing activities

( 209,653,000

265,684,000  

Net change in cash and cash equivalents

( 496,055,000

26,338,000  

Cash and cash equivalents at beginning of period

975,160,000  

626,006,000  

Cash and cash equivalents at end of period

$ 770,204,000  

$ 652,344,000  

See accompanying notes to consolidated financial statements.

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:

Federal income tax

Noncash financing and investing activities:

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

Transfers from premises and equipment to other assets

Transfers from loans to foreclosed assets

See accompanying notes to consolidated financial statements.

3 unchanged sentences

Basis of Presentation :

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

The unaudited financial statements for the six months ended June 30, 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.

1 unchanged sentence

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

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

The results for the period ended June 30, 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 

21 unchanged sentences

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

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

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

As of June 30, 2022, we recorded forgiveness transactions on all but twelve loans aggregating $ 0.7 million.

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

MERCANTILE BANK CORPORATION

4 unchanged sentences

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

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

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

As of June 30, 2022, we recorded forgiveness transactions on all but nine loans aggregating $ 2.2 million.

Net loan origination fees of $ 0.9 million were recorded during the first six months of 2022 under the Second Draw.

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.

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

Current Expected Credit Loss ( “

10 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 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.

Approximately 325,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2022.

In addition, stock options for approximately 1,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2022.

Stock options for approximately 6,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2022.

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

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

Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2021.

(Continued) 

MERCANTILE BANK CORPORATION

3 unchanged sentences

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.

As of June 30, 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.

12 unchanged sentences

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.

At June 30, 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 $ 2.2 million at June 30, 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.

Interest income is accrued on the unpaid principal balance.

13 unchanged sentences

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

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

As of June 30, 2022 and December 31, 2021, we determined that the fair value of our mortgage loans held for sale was $ 13.3 million and $ 16.7 million, respectively.

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

3 unchanged sentences

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

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

Mortgage loans serviced for others totaled approximately $ 1.37 billion and $ 1.34 billion as of June 30, 2022 and December 31, 2021, respectively.

Allowance for Credit Losses ( “

17 unchanged sentences

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.

1 unchanged sentence

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

6 unchanged sentences

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:

Our loan portfolio segments as of June 30, 2022 were as follows:

Commercial Loans

15 unchanged sentences

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.

3 unchanged sentences

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.

As of June 30, 2022, we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period.

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

The economic forecast used for our June 30, 2022 allowance calculation was not materially different from the forecast used for our March 31, 2022 allowance calculation.

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.

12 unchanged sentences

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:

As of June 30, 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.

2 unchanged sentences

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 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.

The credit loss provisions recorded during the second quarter and first six months of 2022 mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain problem commercial loan relationships, and a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the associated extended average life of the portfolio.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

The required reserve allocations resulting from these factors were largely offset by the positive impact of a change in the Covid- 19 environmental factor, the recording of net loan recoveries, and ongoing strong loan quality metrics during the periods.

Improvement in overall Covid- 19 conditions, including increased vaccination rates, the availability of booster shots, and the lifting of many economic growth-restraining restrictions, reduced the credit reserve amount related to the Covid- 19 environmental factor.

Mortgage Banking Activities :

13 unchanged sentences

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

Impairment for these loans is measured on a loan-by-loan basis similar to other impaired loans as described below under “Allowance for Loan Losses.”

Impairment for these loans is measured on a loan-by-loan basis similar to other impaired loans.

Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the allowance will be impacted by the difference between the results of these two measurement methodologies.

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

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.

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivatives :

11 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.

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

We had no derivative instruments designated as hedges as of June 30, 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 :

6 unchanged sentences

We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity.

1 unchanged sentence

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

Ended March 31,

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Service charges on deposit and sweep accounts

1 unchanged sentence

$ 1,209,000  

$ 2,910,000  

$ 2,363,000  

Credit and debit card fees

1 unchanged sentence

1,920,000  

4,015,000  

3,598,000  

Payroll processing

1 unchanged sentence

405,000  

1,102,000  

962,000  

Customer service fees

1 unchanged sentence

186,000  

444,000  

409,000  

Service Charges on Deposit and Sweep Accounts:

15 unchanged sentences

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. 

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.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

June 30, 2022

Government agency debt obligations

$ 453,512,000  

$ 74,000  

$ ( 46,177,000 )

47 unchanged sentences

$ 592,743,000  

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

Securities with unrealized losses at June 30, 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

March 31, 2022

June 30, 2022

Government agency debt obligations

69 unchanged sentences

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.

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

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

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

At June 30, 2022, 651 debt securities with estimated fair values totaling $ 569 million had unrealized losses aggregating $ 60.6 million.

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

1 unchanged sentence

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

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

The amortized cost and fair value of debt securities at June 30, 2022, by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

8 unchanged sentences

$ 3,750,000  

$ 3,738,000  

Due in 2023 through 2027

16 unchanged sentences

$ 663,977,000  

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

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

$ 603,638,000  

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $ 169 million and $ 155 million at June 30, 2022 and December 31, 2021, respectively, with estimated market values of $ 159 million and $ 158 million, respectively.

Securities issued by all other states and their political subdivisions had combined amortized costs of $ 0.3 million and $ 1.7 million and estimated market values of $ 0.2 million and $ 1.7 million at June 30, 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 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.

Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $ 203 million and $ 197 million at June 30, 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.

5 unchanged sentences

Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

(Continued) 

MERCANTILE BANK CORPORATION

1 unchanged sentence

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

Our total loans at June 30, 2022 were $ 3.72 billion compared to $ 3.45 billion at December 31, 2021, an increase of $ 270 million, or 7.8 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2022 and December 31, 2021, and the percentage change in loans from the end of 2021 to the end of the second quarter of 2022, are as follows:

June 30, 2022

December 31, 2021

30 unchanged sentences

$ 3,453,459,000  

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.

For June 30, 2022, and December 31, 2021, includes $ 2.9 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:

Home equity lines of credit totaled $ 33.3 million and $ 29.5 million as of June 30, 2022 and December 31, 2021, respectively.

Nonperforming loans as of June 30, 2022 and December 31, 2021 were as follows:

Loans past due 90 days or more still accruing interest

6 unchanged sentences

$ 2,468,000  

(Continued) 

MERCANTILE BANK CORPORATION

4 unchanged sentences

$ 248,000  

$ 663,000  

Vacant land, land development, and residential construction

7 unchanged sentences

248,000  

663,000  

1-4 family mortgages

8 unchanged sentences

$ 2,468,000  

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

An age analysis of past due loans is as follows as of June 30, 2022:

Commercial and industrial

8 unchanged sentences

598,593,000  

581,537,000  

582,732,000  

Real estate –

9 unchanged sentences

3,071,760,000  

3,003,367,000  

3,004,562,000  

1-4 family mortgages

14 unchanged sentences

652,040,000  

550,401,000  

551,228,000  

Total past due loans

5 unchanged sentences

$ 3,723,800,000  

(Continued) 

MERCANTILE BANK CORPORATION

63 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Nonaccrual loans as of June 30, 2022 were as follows:

With no allowance recorded:

Commercial and industrial

$ 248,000  

Vacant land, land development and residential construction

6 unchanged sentences

Total commercial

1-4 family mortgages

248,000  

1-4 family mortgages

Other consumer loans

1,454,000  

1,455,000  

Total with no allowance recorded

22 unchanged sentences

1,539,000  

48,000  

Total nonaccrual loans

1 unchanged sentence

$ 48,000  

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

12 unchanged sentences

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

Nonaccrual commercial loans totaled $ 0.3 million as of June 30, 2022, while nonaccrual retail loans aggregated $ 1.5 million, a vast majority of which were collateralized by residential property.

Nonaccrual loans aggregating $ 1.8 million had related specific reserve allocations of less than $0.1 million as of June 30, 2022.

No interest income was recognized on nonaccrual loans during the second quarter and first six months of 2022.

Lost interest income on nonaccrual loans totaled less than $ 0.1 million and $ 0.1 million during the second quarter and first six months of 2022, respectively.

Impaired loans as of December 31, 2021, and average impaired loans for the three and six months ended June 30, 2021, were as follows:

With no related allowance recorded

3 unchanged sentences

$ 3,129,000  

$ 4,167,000  

Vacant land, land development and residential construction

4 unchanged sentences

13,114,000  

13,607,000  

Real estate –

1 unchanged sentence

156,000  

218,000  

Real estate –

multi-family and residential rental

multi-family and residential rental

91,000  

4 unchanged sentences

16,399,000  

17,992,000  

Home equity and other

2 unchanged sentences

1,088,000  

1,054,000  

1-4 family mortgages

5 unchanged sentences

3,132,000  

3,464,000  

3,496,000  

Total with no related allowance recorded

2 unchanged sentences

$ 19,863,000  

$ 21,488,000  

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

First Quarter

With an allowance recorded

4 unchanged sentences

$ 1,661,000  

$ 1,222,000  

Vacant land, land development and residential construction

5 unchanged sentences

872,000  

826,000  

Real estate –

3 unchanged sentences

156,000  

158,000  

Real estate –

5 unchanged sentences

2,689,000  

2,206,000  

Home equity and other

3 unchanged sentences

242,000  

256,000  

1-4 family mortgages

7 unchanged sentences

192,000  

823,000  

876,000  

Total with an allowance recorded

3 unchanged sentences

$ 3,512,000  

$ 3,082,000  

Total impaired loans:

7 unchanged sentences

192,000  

4,287,000  

4,372,000  

Total impaired loans

3 unchanged sentences

$ 23,375,000  

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.

$ 24,570,000  

Impaired commercial loans for which no allocation of the allowance has been made in large part consist of performing troubled debt restructurings where the estimated collateral fair value exceeds the recorded principal balance, while impaired retail loans with no allowance allocation generally reflect situations whereby the recorded principal balance has been charged-down to estimated collateral fair value.

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

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

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

MERCANTILE BANK CORPORATION

7 unchanged sentences

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

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

Credit quality indicators were as follows as of June 30, 2022:

Commercial credit exposure –

4 unchanged sentences

Real Estate -

and Residential

Internal credit risk grade groupings:

25 unchanged sentences

credit risk profiled by collateral type:

Other Consumer

$ 28,440,000  

12 unchanged sentences

credit risk profiled by internal credit risk grades:

and Residential

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Internal credit risk grade groupings:

45 unchanged sentences

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

These are for loans for which repayment risks are satisfactory.

These are 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 rate are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any.

“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.

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 uncollectible, and of such little value that continuance as an active asset is not warranted.

“Loss”  Loans with this rating are considered uncollectable, 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

1 unchanged sentence

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):

The following table reflects loan balances as of June 30, 2022 based on year of origination (dollars in thousands):

Commercial and Industrial:

16 unchanged sentences

454,518  

415,709  

Grades 8 –

8 unchanged sentences

$ 1,187,650  

$ 550,543  

$ 1,153,814  

Vacant Land, Land Development and Residential Construction:

75 unchanged sentences

$ 1,003,118  

$ 1,007,361  

Real Estate –

69 unchanged sentences

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

Activity in the allowance for credit losses during the three months and six months ended June 30, 2022 is as follows (dollars in thousands):

and industrial

Commercial vacant land, land development and residential construction

5 unchanged sentences

multi-family and residential rental

1-4 family mortgages

Other consumer loans

Allowance for credit losses:

Beginning balance

Allowance for credit losses:

Balance at 3-31-22

$ 8,413  

4 unchanged sentences

$ 35,153  

Provision for credit losses

( 10 )  

( 251 )  

( 708 )  

( 28 )  

( 109 )  

( 15 )  

Ending balance

$ 8,608  

$ 5,578  

$ 9,614  

$ 1,274  

$ 10,267  

$ 35,974  

Balance at 12-31-21

$ 10,782  

$ 6,045  

$ 13,301  

$ 1,695  

$ 2,449  

$ 35,363  

Adoption of ASU 2016-13

6 unchanged sentences

( 55 )  

Provision for credit losses

Provision for credit losses

( 592 )  

3 unchanged sentences

( 29 )  

( 18 )  

Ending balance

8 unchanged sentences

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):

Activity in the allowance for loan losses during the three months and six months ended June 30, 2021 and the recorded investments in loans as of December 31, 2021 is as follows (dollars in thousands):

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial vacant

development and

Commercial real estate –

2 unchanged sentences

non-owner occupied

Commercial real estate –

multi-family and residential rental

Home equity and other

4 family mortgages

Commercial real

estate –

multi-family and

residential rental

Allowance for loan losses:

Beginning balance

Balance at 3-31-21

$ 10,111  

10 unchanged sentences

( 38 )  

( 125 )  

( 263 )  

( 54 )  

( 12 )  

Ending balance

5 unchanged sentences

$ 35,913  

Balance at 12-31-20

$ 9,424  

$ 8,246  

$ 13,611  

$ 1,819  

$ 3,240  

$ 37,967  

Provision for loan losses

( 181 )  

( 203 )  

( 877 )  

( 826 )  

( 32 )  

( 207 )  

( 600 )  

( 54 )  

( 15 )  

( 12 )  

( 34 )  

Ending balance

$ 9,340  

$ 7,701  

$ 12,785  

$ 1,787  

$ 2,894  

$ 35,913  

Ending balance:

individually evaluated for impairment

38 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Loans modified as troubled debt restructurings during the three months ended June 30, 2022 were as follows:

Commercial and industrial

$ 6,573,000  

Vacant land, land development and residential construction

6 unchanged sentences

Total commercial

6,573,000  

1-4 family mortgages

6 unchanged sentences

$ 6,657,000  

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

Loans modified as troubled debt restructurings during the six months ended June 30, 2022 were as follows:

Commercial and industrial

11 unchanged sentences

6,573,000  

1-4 family mortgages

212,000  

Other consumer loans

212,000  

$ 6,785,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Commercial and industrial

$ 2,831,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

692,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

3,523,000  

Home equity and other

8 unchanged sentences

$ 3,945,000  

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

Commercial and industrial

$ 2,854,000  

$ 2,853,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

692,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

3,546,000  

3,545,000  

Home equity and other

485,000  

482,000  

1-4 family mortgages

46,000  

531,000  

528,000  

$ 4,077,000  

$ 4,073,000  

MERCANTILE BANK CORPORATION

1 unchanged sentence

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):

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended June 30, 2022 ( amounts as of period end):

Commercial and industrial

7 unchanged sentences

Total commercial

Home equity and other

1-4 family mortgages

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):

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the six months ended June 30, 2022 ( amounts as of period end):

Commercial and industrial

Vacant land, land development and residential construction

Real estate –

owner occupied

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

Home equity and other

1-4 family mortgages

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Commercial and industrial

Vacant land, land development and residential construction

Real estate –

owner occupied

431,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

431,000  

Home equity and other

1-4 family mortgages

$ 431,000  

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

Commercial and industrial

$ 522,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

431,000  

Real estate –

7 unchanged sentences

$ 953,000  

(Continued) 

MERCANTILE BANK CORPORATION

1 unchanged sentence

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

Activity for loans categorized as troubled debt restructurings during the three months ended June 30, 2022 is as follows:

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Commercial Loan Portfolio:

4 unchanged sentences

$ 90,000  

( 9,677,000 )

Payments (net)

536,000  

Transfers to ORE

Net Additions/Deletions

6,573,000  

Ending Balance

$ 9,938,000  

$ 87,000  

$ 139,000  

$ 88,000  

Other Consumer

Retail Loan Portfolio:

Beginning Balance

$ 2,346,000  

$ 13,000  

Payments (net)

Transfers to ORE

Net Additions/Deletions

84,000  

Ending Balance

$ 2,339,000  

$ 3,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the six months ended June 30, 2022 is as follows:

Real Estate -

Commercial Loan Portfolio:

Beginning Balance

$ 4,973,000  

$ 10,435,000  

$ 146,000  

$ 91,000  

Payments (net)

324,000  

( 9,679,000 )

Transfers to ORE

Net Additions/Deletions

4,641,000  

Ending Balance

8 unchanged sentences

$ 1,202,000  

Payments (net)

Transfers to ORE

9 unchanged sentences

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: 

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

Land Development,

3 unchanged sentences

Real Estate -

and Residential

Multi-Family and Residential

Commercial Loan Portfolio:

3 unchanged sentences

$ 471,000  

Payments (net)

Transfers to ORE

Net Additions/Deletions

2,648,000  

686,000  

Ending Balance

$ 5,563,000  

$ 13,888,000  

$ 153,000  

Retail Loan Portfolio:

Beginning Balance

$ 1,099,000  

$ 820,000  

Payments (net)

Transfers to ORE

Net Additions/Deletions

412,000  

10,000  

Ending Balance

$ 1,396,000  

$ 699,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Real Estate -

Commercial Loan Portfolio:

Beginning Balance

$ 6,414,000  

$ 14,797,000  

$ 480,000  

Payments (net)

( 3,521,000 )

( 1,595,000 )

Transfers to ORE

1 unchanged sentence

2,670,000  

686,000  

Ending Balance

6 unchanged sentences

$ 806,000  

Payments (net)

Transfers to ORE

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET

16 unchanged sentences

$ 57,298,000  

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)

Depreciation expense totaled $ 1.5 million and $ 1.4 million during the second quarters of 2022 and 2021, respectively.

Depreciation expense totaled $ 3.1 million during the first six months of 2022, compared to $ 2.8 million during the first six months of 2021.

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.

As of June 30, 2022 and December 31, 2021, we were under lease contracts for ten of our banking facilities.

The leases had maturity dates ranging from June, 2023 through December, 2026, with a weighted average life of 2.5 years and 2.8 years as of June 30, 2022 and December 31, 2021, respectively.

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

5 unchanged sentences

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.

The weighted average discount rate for leases was 4.70 % as of June 30, 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 $ 3.0 million as of June 30, 2022, and $ 3.6 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.

Total operating lease expense associated with the leases aggregated $ 0.2 million during the second quarters of 2022 and 2021, and $ 0.4 million during the first six months of 2022 and 2021.

Future lease payments at June 30, 2022 totaled $ 4.3 million, comprised of $ 0.6 million in one year, $ 1.2 million in one to three years, $ 0.2 million in three to five years and $ 2.3 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.

As part of the relocation of our Lansing operations, we completed the sale of our Lansing facility on July 14, 2022.

For financial statement purposes in this Form 10 -Q, we transferred from premises and equipment, net to other assets the $ 2.8 million in net proceeds from the sale and recorded a loss on sale of $ 0.4 million.

(Continued) 

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

Our total deposits at June 30, 2022 totaled $ 3.87 billion, a decrease of $ 209 million, or 5.1 %, from December 

The components of our outstanding balances at June 30, 2022 and December 31, 2021, and percentage change in deposits from the end of 2021 to the end of the second quarter of 2022, are as follows:

June 30, 2022

December 31, 2021

Noninterest-bearing checking

Noninterest-bearing demand

$ 1,740,432,000  

18 unchanged sentences

23,913,000  

Total deposits

1 unchanged sentence

$ 4,083,193,000  

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

Total time deposits of more than $250,000 totaled $ 152 million and $ 207 million at June 30, 2022 and December 31, 2021, respectively.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

1 unchanged sentence

Information relating to our repurchase agreements follows:

Three Months Ended

Twelve Months Ended

March 31, 2022

December 31, 2021

Twelve Months

Outstanding balance at end of period

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

(Continued) 

MERCANTILE BANK CORPORATION

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FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

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 %.

Federal Home Loan Bank of Indianapolis (“FHLBI”) bullet advances totaled $ 334 million at June 30, 2022, and were expected to mature at varying dates from July 2022 through June 2027, with fixed rates of interest from 0.55 % to 3.18 % and averaging 1.96 %.

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:

Maturities of FHLBI bullet advances as of June 30, 2022 were as follows:

$ 54,000,000  

4 unchanged sentences

40,000,000  

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

FHLBI amortizing advances totaled $ 28.3 million as of June 30, 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:

Scheduled principal payments of FHLBI amortizing advances were as follows:

353,000  

5 unchanged sentences

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

Our borrowing line of credit as of June 30, 2022 totaled $ 932 million, with remaining availability based on collateral equaling $ 564 million.

COMMITMENTS AND OFF-BALANCE SHEET RISK

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

(Continued) 

MERCANTILE BANK CORPORATION

14 unchanged sentences

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: 

We determined allowance requirements for these credit types by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding as of June 30, 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 June 30, 2022 was $ 0.2 million.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, 2022 and December 31, 2021 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

66,431,000  

14 unchanged sentences

$ 1,565,871,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES

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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.

2 unchanged sentences

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

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

The fair values of derivative instruments as of June 30, 2022 are reflected in the following table.

Notional Amount

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$ 17,069,000  

Derivative Liabilities  

Interest rate swaps

Derivative Liabilities

Interest rate swaps  

340,692,000  

Other Liabilities

17,196,000  

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.

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

The 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 $ 17.2 million as of June 30, 2022.

Cash collateral totaling $ 18.0 million was provided by the counterparty correspondent banks as of June 30, 2022.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 341 million as of June 30, 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.

2 unchanged sentences

Balance Sheet Location

Derivative Assets  

Interest rate swaps

Derivative Assets

Interest rate swaps  

$ 279,419,000  

Other Assets  

$ 4,609,000  

Derivative Liabilities  

Interest rate swaps

2 unchanged sentences

4,857,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING INSTRUMENTS (Continued)

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.

3 unchanged sentences

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 March 31, 2022 and December 31, 2021 ( dollars in thousands):

March 31, 2022

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of June 30, 2022 and December 31, 2021 ( dollars in thousands):

June 30, 2022

December 31, 2021

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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.

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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.

18 unchanged sentences

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)

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 March 31, 2022 or December 31, 2021.

There was no such impairment as of June 30, 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 .

3 unchanged sentences

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

As of 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.

As of June 30, 2022 and December 31, 2021, we determined the fair value of our mortgage loans held for sale to be $ 13.3 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 March 31, 2022 are as follows:

The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 are as follows:

Available for sale securities

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$ 623,000  

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)

There were no transfers in or out of Level 1, Level 2 or Level 3 during the first six months of 2022.

The less than $ 0.1 million reduction in Level 3 municipal general obligation bonds during the first six months of 2022 reflects the scheduled maturities of such bonds.

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

22 unchanged sentences

$ 677,000  

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

There were no transfers in or out of Level 1, Level 2 or Level 3 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:

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2022 are as follows:

$ 7,116,000  

3 unchanged sentences

$ 7,116,000  

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:

12 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

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

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)

At June 30, 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 June 30, 2022 that we believe have changed our bank’s categorization.

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

Minimum Required

Adequacy Purposes

Minimum Required

1 unchanged sentence

Prompt Corrective

Adequacy Purposes

Action Regulations

March 31, 2022

June 30, 2022

Total capital (to risk weighted assets)

Consolidated  

$ 597,495  

21 unchanged sentences

254,001  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS (Continued)

Actual   

Minimum Required

Adequacy Purposes

Minimum Required

Capitalized Under

Prompt Corrective

Action Regulations

Amount  

December 31, 2021

Total capital (to risk weighted assets)

Consolidated  

$ 565,143  

3 unchanged sentences

323,928  

404,910  

Tier 1 capital (to risk weighted assets)

16 unchanged sentences

248,137  

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.

Our consolidated capital levels as of June 30, 2022 and December 31, 2021 include $ 46.5 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 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.

As of June 30, 2022 and December 31, 2021, all $ 46.5 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.

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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 March 31, 2022, our bank met all capital adequacy requirements under the BASEL III capital rules.

We believe that, as of June 30, 2022, our bank met all capital adequacy requirements under the BASEL III capital rules.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY MATTERS (Continued)

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

On 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 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.

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 was paid on June 15, 2022 to shareholders of record as of June 3, 2022.

On July 14, 2022, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.32 per share that will be paid on September 14, 2022 to shareholders of record as of September 2, 2022.

As of June 30, 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 six months of 2022.

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

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MERCANTILE BANK CORPORATION

Management ’

40 unchanged sentences

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;

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

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.

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.

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank (“our bank”) and our bank’s subsidiary Mercantile Insurance Center, Inc., at June 30, 2022 and December 31, 2021 and the results of operations for the three months and six months ended June 30, 2022 and June 30, 2021.

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

15 unchanged sentences

Allowance ”

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

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

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

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

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

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.

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

At June 30, 2022, there was no allowance for credit losses related to the available for sale debt securities portfolio.

Mortgage Servicing Rights :

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

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

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

As of June 30, 2022, we recorded forgiveness transactions on all but twelve loans aggregating $0.7 million.

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

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

1 unchanged sentence

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

As of 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.

As of June 30, 2022, we recorded forgiveness transactions on all but nine loans aggregating $2.2 million.

Net loan origination fees of $0.9 million were recorded during the first six months of 2022.

MERCANTILE BANK CORPORATION

12 unchanged sentences

We adopted the CECL methodology effective January 1, 2022.

First Quarter 2022 Financial Overview

We reported net income of $11.5 million, or $0.73 per diluted share, for the first quarter of 2022, compared with net income of $14.2 million, or $0.87 per diluted share, during the first quarter of 2021.

Ongoing strong core commercial loan growth, continued strength in asset quality metrics and increases in several key fee income revenue streams in large part mitigated a significant decline in mortgage banking revenue as originations come off of 2020 and 2021 record levels driven by low mortgage loan rates and resulting brisk refinancing activity.

Commercial loans increased $54.1 million during the first three months of 2022, reflecting net growth of core commercial loans and payment activities under the PPP.

Core commercial loans increased $82.0 million, or over 11% on an annualized basis, while PPP payment activities aggregated $27.9 million, during the first three months of 2022.

Financial Overview

We reported net income of $11.7 million, or $0.74 per diluted share, for the second quarter of 2022, compared with net income of $18.1 million, or $1.12 per diluted share, during the second quarter of 2021.

Net income for the first six months of 2022 totaled $23.2 million, or $1.47 per diluted share, compared to $32.3 million, or $2.00 per diluted share, during the first six months of 2021.

Higher net interest income, stemming from an improving net interest margin and ongoing strong loan growth, combined with continued strength in asset quality metrics and increases in several key fee income revenue streams, in large part mitigated a significant decline in residential mortgage banking revenue as industry-wide originations come off of the record levels of 2020 and 2021, which were driven by low residential mortgage rates and resulting refinance activity.

Our earnings performance in the 2021 periods also benefited from large negative loan loss provisions reflecting improved economic conditions and expectations during those time periods.

Commercial loans increased $121 million during the first six months of 2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP.

Core commercial loans increased $159 million, or almost 11% on an annualized basis, while PPP payment activities aggregated $37.2 million, during the first six months of 2022.

Core commercial and industrial loans increased $87.4 million, multi-family and residential rental property loans grew $48.0 million, owner-occupied commercial real estate (“CRE”) loans were up $32.8 million, and vacant land, land development and residential construction loans increased $14.6 million, while non-owner occupied CRE loans were down $24.3 million.

As a percent of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled 57.6% as of March 31, 2022, compared to 57.1% at December 31, 2021.

The new commercial loan pipeline remains strong, and as of March 31, 2022, we had $184 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.05% of total loans as of March 31, 2022.

Accruing loans past due 30 to 89 days remain very low, and we had no foreclosed properties as of March 31, 2022.

Gross loan charge-offs totaled $0.2 million during the first quarter of 2022, while recoveries of prior period loan charge-offs totaled $0.3 million, providing for net loan recoveries of $0.1 million, or 0.01% of average total loans on an annualized basis.

We recorded a provision expense of $0.1 million during the first quarter of 2022, compared to $0.3 million during the prior-year first quarter.

The provision expense recorded during both periods mainly reflected allocations necessitated by net loan growth;

the recording of net loan recoveries and continued strong loan quality metrics during the periods in large part mitigated additional reserves associated with loan growth.

As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled 58.1% as of June 30, 2022, compared to 57.1% at December 31, 2021.

The new commercial loan pipeline remains strong, and at June 30, 2022, we had $175 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans, excluding home equity lines of credit, increased $148 million during the first six months of 2022, representing a growth rate of over 66% on an annualized basis.

With the increase in residential mortgage loan rates during the first half of 2022, we have witnessed a shift in borrowers primarily now selecting adjustable rate residential mortgage loans compared to fixed rate residential mortgage loans in the previous couple of years.

Generally, we sell fixed rate residential mortgage loans to third-party investors, while we maintain adjustable rate residential mortgage loans on our balance sheet.

During the first six months of 2022, approximately 64% of our residential mortgage loan production was comprised of adjustable rate loans, compared to about 30% during the first six months of 2021.

The shift in product mix impacts the timing of revenue recognition;

it takes an estimated 24 months for the amount of interest income earned on a residential mortgage loan that is retained on our balance sheet to approximate the amount of the immediately recorded gain on sale of a residential mortgage loan that has been sold to an investor.

MERCANTILE BANK CORPORATION

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.05% of total loans as of June 30, 2022.

Accruing loans past due 30 to 89 days remain very low, and we had no foreclosed properties as of June 30, 2022.

Gross loan charge-offs totaled less than $0.1 million during the second quarter of 2022, and aggregated $0.2 million for the first six months of the year, while recoveries of prior period loan charge-offs equaled $0.3 million and $0.6 million during the respective time periods.

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.04% and 0.02% during the second quarter and first six months of 2022, respectively.

We recorded provisions for credit losses of $0.5 million and $0.6 million during the second quarter and first six months of 2022, respectively, compared to negative provisions for loan losses of $3.1 million and $2.8 million during the respective time periods in 2021.

The provision expense recorded during the second quarter of 2022 mainly reflected allocations necessitated by net commercial and residential mortgage loan growth, increased specific reserves on certain problem commercial loans, and a higher reserve on residential mortgage loans stemming from a projected increased average life of the portfolio, which were not fully mitigated by the combined impact of a reduced Covid-19 environmental allocation, net loan recoveries and continued strong loan quality metrics.

Our provision expense totaled $0.1 million during the first quarter of 2022, in large part reflecting allocations necessitated by net loan growth which was mitigated by net loan recoveries and continued strong loan quality metrics.

Our adoption of Accounting Standards Update No.

2016-13, Measurement of Credit Losses on Financial Instruments , on January 1, 2022, resulted in a $0.4 million one-time reduction to the allowance for credit losses.

MERCANTILE BANK CORPORATION

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 risk sensitivity.

During the first three months of 2022, the average balance of these funds equaled $784 million, or 16.1% of average earning assets, compared to $592 million, or 13.7% of average earning assets, during the first quarter of 2021, and $671 million, or 14.9% of average earning assets, during 2021;

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

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

During the first six months of 2022, the average balance of these funds equaled $657 million, or 13.6% of average earning assets, compared to $606 million, or 13.8% of average earning assets, during the first six months of 2021;

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

The elevated levels during 2021 and through the first quarter of 2022 primarily reflect increased local deposits from federal government stimulus programs and reduced business and consumer investing and spending, and have resulted in a significant negative impact on our net interest margin.

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.

Net interest income totaled $30.9 million during the first quarter of 2022, compared to $29.5 million during the same time period in 2021.

Interest income increased $1.1 million, as growth in average loans and securities more than offset a lower level of PPP loan net fee income accretion.

Interest expense declined $0.3 million, primarily comprised of a $0.9 million reduction in deposit interest expense reflecting lower deposit rates that more than offset increased interest-bearing deposit balances, and a $0.8 million increase in the cost of other borrowed money stemming from the issuance of $75.0 million in subordinated notes in December 2021 and a $15.0 million follow-on issuance in mid-January 2022.

Noninterest income totaled $9.3 million during the first quarter of 2022, compared to $13.5 million during the first quarter of 2021.

The lower level of noninterest income almost exclusively reflected decreased mortgage banking income, which more than offset growth in several key fee income sources, including interest rate swap income, service charges on accounts, credit and debit card income, and payroll processing fees.

Sustained strength in purchase mortgage loan 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 during the first quarter of 2022.

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

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

The higher level of expense primarily resulted from increased compensation costs, mainly depicting annual merit pay increases, market adjustments and promotions over the past twelve months.

The elevated levels during 2021 and through the first half of 2022 primarily reflect increased local deposits stemming from Covid-19-related federal government stimulus payments and reduced business and consumer investing and spending, and have had a significant negative impact on our net interest margin.

Total deposits decreased $209 million during the first six months of 2022, totaling $3.87 billion at June 30, 2022.

Local deposits decreased $185 million and out-of-area deposits declined $23.9 million.

The reduced level of local deposits primarily reflected a single customer’s anticipated withdrawal of a majority of funds that were obtained from the sale of a business and deposited in late 2021;

excluding this withdrawal, total local deposits were relatively steady during the first six months of 2022.

Net interest income increased $3.5 million and $4.8 million during the second quarter and first six months of 2022, respectively, compared to the respective time periods in 2021.

Interest income was $3.8 million and $4.9 million higher during the second quarter and first six months of 2022 when compared to the same time periods in 2021, in large part reflecting higher average balances of earning assets and an increasing interest rate environment.

Interest expense was $0.3 million and $0.1 million higher during the second quarter and first six months of 2022 when compared to the respective time periods in 2021, primarily reflecting the net impact of lower deposit interest costs and increased costs on borrowed funds associated with the $90.0 million in subordinated notes issued in December 2021 and January 2022.

Noninterest income decreased $6.8 million and $11.0 million during the second quarter and first six months of 2022, respectively, compared to the respective time periods in 2021.

Mortgage banking income was $5.7 million and $11.3 million lower during the second quarter and first six months of 2022 when compared to the same time periods in 2021, in large part reflecting increased residential mortgage loan rates which substantially reduced the volume of refinance activity.

We continued to record growth in treasury management-related fee income categories, such as service charges on accounts, credit and debit card income and payroll processing.

Combined, we recorded growth of approximately 16% when comparing the second quarter and first six months of 2022 with the respective time periods in 2021.

MERCANTILE BANK CORPORATION

Noninterest expense increased $0.8 million and $1.4 million during the second quarter and first six months of 2022, respectively, compared to the respective time periods in 2021.

During the second quarter of 2022, we contributed $0.5 million to The Mercantile Bank Foundation.

Excluding the charitable contribution, overhead costs were relatively unchanged during the 2022 periods when compared to the 2021 periods.

Financial Condition

Our total assets decreased $81.9 million during the first three months of 2022, and totaled $5.18 billion as of March 31, 2022.

Total loans increased $102 million and securities available for sale grew $12.9 million, while interest-earning deposits declined $217 million.

Total deposits decreased $107 million during the first three months of 2022.

Commercial loans increased $54.1 million during the first three months of 2022, reflecting net growth of core commercial loans and payment activities under the PPP.

Core commercial loans increased $82.0 million, or over 11% on an annualized basis, while PPP payment activities aggregated $27.9 million, during the first three months of 2022.

Our total assets decreased $199 million during the first six months of 2022, and totaled $5.06 billion as of June 30, 2022.

Total loans increased $270 million and securities available for sale were up $10.9 million, while interest-earning deposits declined $526 million.

Total deposits decreased $209 million.

Commercial loans increased $121 million during the first six months of 2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP.

Core commercial loans increased $159 million, or almost 11% on an annualized basis, while PPP payment activities aggregated $37.2 million, during the first six months of 2022.

Core commercial and industrial loans increased $87.4 million, multi-family and residential rental property loans grew $48.0 million, owner-occupied CRE loans were up $32.8 million, and vacant land, land development and residential construction loans increased $14.6 million, while non-owner occupied CRE loans were down $24.3 million.

MERCANTILE BANK CORPORATION

As of March 31, 2022, availability on existing construction and development loans totaled $184 million, with most of those funds expected to be drawn over the next 12 to 18 months.

At June 30, 2022, commercial loans totaled $3.07 billion, or 82.5% of the loan portfolio.

As of December 31, 2021, the commercial loan portfolio comprised 85.4% of total loans.

As of June 30, 2022, availability on existing construction and development loans totaled $175 million, with most of those funds expected to be drawn over the next 12 to 18 months.

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

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

Usage of existing commercial lines of credit has been on an increasing trend over the past several quarters, equaling 38% as of March 31, 2022.

Historically, the level of commercial lines of credit usage has equaled 40% to 45%;

Usage of existing commercial lines of credit averaged 34% during the first six months of 2022.

Historically, the level of commercial lines of credit usage equaled 40% to 45%;

however, the level averaged approximately 32% since the onset of the Coronavirus Pandemic through the end of the third quarter of 2021.

Residential mortgage loans increased $48.1 million during the first quarter of 2022, totaling $523 million, or 14.7% of total loans, as of March 31, 2022.

Activity within the residential mortgage loan function has declined over the past several months, in large part reflecting increased mortgage loan rates and the resulting decline in mortgage loan refinance activity that was only partially mitigated by increased purchase mortgage loan activity.

Residential mortgage loan originations totaled $168 million during the first three months of 2022, an almost 32% decline from the $245 million originated during the same time period in 2021.

Refinance mortgage loans originated comprised about 40% of the total mortgage loans originated during the first quarter of 2022, compared to over 66% during the first quarter of 2021.

Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, totaled $75.7 million during the first quarter of 2022, or about 45% of the total residential mortgage loans originated during the first three months of 2022, compared to approximately 80% during the same time period in 2021.

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

Other consumer-related loans remained relatively unchanged during the first quarter of 2022, and at March 31, 2022 totaled $28.7 million, or 0.8% of total loans.

Other consumer-related loans comprised 0.9% of total loans as of December 31, 2021.

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

Residential mortgage loans, excluding home equity lines of credit, increased $148 million during the first six months of 2022, totaling $590 million, or 15.9% of total loans, as of June 30, 2022.

The increasing interest rate environment has had a significant impact on our residential mortgage banking operations, especially in regards to the volume of refinance activity and the borrower selection of fixed rate versus adjustable rate residential mortgage products which combined have resulted in a material decline in the volume of residential mortgage loans being sold.

Residential mortgage volume totaled $359 million during the first six months of 2022, compared to $482 million during the same time period in 2021, a decline of $123 million, or over 25%.

Refinance volume declined $156 million;

however, home purchase activity increased $32.8 million.

Residential mortgage loans originated for sale generally consist of longer-term fixed rate residential mortgage loans, while adjustable rate residential mortgage loans are maintained in the residential mortgage loan portfolio.

We have experienced a significant pattern shift as it pertains to the type of residential mortgage loan product selected by our borrowers with a majority now selecting adjustable rate offerings compared to the past couple of years when a longer-term fixed rate was the most popular selection.

During the first six months of 2022, approximately 36% of residential mortgage loan production consisted of longer-term fixed rate loans, compared to a level of about 70% during the first six months of 2021.

Home equity lines of credit and other consumer-related loans increased $1.3 million during the first six months of 2022, and at June 30, 2022 totaled $61.7 million, or 1.7% of total loans.

Home equity lines of credit and other consumer-related loans comprised 1.8% of total loans as of December 31, 2021.

We expect the dollar volume of this loan portfolio segment to remain relatively stable in future periods.

MERCANTILE BANK CORPORATION

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

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1,007,361,000

1,027,415,000

Multi-Family & Residential Rental

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3,248,841,000

Includes $12.2 million, $40.1 million, $116 million, $246 million, and $455 million in loans originated under the Paycheck Protection Program for March 31, 2022, December 31, 2021, September 30, 2021, June 30, 2021, and March 31, 2021, respectively.

For March 31, 2022, home equity lines of credit balances are included in 1-4 family mortgage loans.

Includes $2.9 million, $12.2 million, $40.1 million, $116 million, and $246 million in loans originated under the Paycheck Protection Program for June 30, 2022, March 31, 2022, December 31, 2021, September 30, 2021, and June 30, 2021, respectively.

For March 31, 2022 and June 30, 2022, home equity lines of credit balances are included in 1-4 family mortgage loans.

For prior periods, home equity lines of credit balances are included in other consumer loans.

MERCANTILE BANK CORPORATION

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

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

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $1.6 million (0.03% of total assets) as of March 31, 2022, compared to $2.5 million (0.05% of total assets) as of December 31, 2021.

Nonperforming loans, comprised of nonaccrual loans and loans past due 90 days or more and accruing interest, totaled $1.8 million (0.1% of total loans) as of June 30, 2022, compared to $2.5 million (0.1% of total loans) as of December 31, 2021.

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

We had no foreclosed properties as of June 30, 2022 or December 31, 2021.

MERCANTILE BANK CORPORATION

The following tables provide a breakdown of nonperforming assets by collateral type:

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Consumer Assets

MERCANTILE BANK CORPORATION

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

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Consumer Assets

The following tables provide a reconciliation of nonperforming assets:

NONPERFORMING LOANS RECONCILIATION

MERCANTILE BANK CORPORATION

NONPERFORMING LOANS RECONCILIATION 

Beginning balance

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Loan charge-offs

MERCANTILE BANK CORPORATION

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION

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Valuation write-downs

During the first quarter of 2022, loan charge-offs totaled $0.2 million, while recoveries of prior period loan charge-offs equaled $0.3 million, providing for net loan recoveries of $0.1 million, or an annualized 0.01% of average total loans.

Loan charge-offs totaled less than $0.1 million during the second quarter of 2022, and aggregated $0.2 million during the first six months of 2022, while recoveries of prior period loan charge-offs equaled $0.3 million and $0.6 million during the respective time periods.

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.04% and 0.02% during the second quarter and first six months of 2022, respectively.

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

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

The allowance equaled $35.2 million, or 0.99% of total loans, and 2,181% of nonperforming loans, as of March 31, 2022.

The allowance equaled $36.0 million, or 0.97% of total loans, and over 2,000% of nonperforming loans as of June 30, 2022.

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.

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Our estimate of credit losses under CECL is determined using a complex model that relies on historical loss information, reasonable and supportable economic forecasts, and various qualitative factors.

MERCANTILE BANK CORPORATION

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.

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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.

As of June 30, 2022, the allowance was comprised of $35.0 million in general reserves relating to performing loans and $1.0 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.

Troubled debt restructurings totaled $12.6 million at June 30, 2022, consisting of $0.4 million that are on nonaccrual status and $12.2 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

Loans with an aggregate carrying value of $0.4 million as of June 30, 2022 had been subject to previous partial charge-offs aggregating $0.4 million over the past several years.

As of June 30, 2022, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

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

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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.

Securities available for sale increased $10.9 million during the first six months of 2022, totaling $604 million as of June 30, 2022.

Purchases of 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 bonds totaled $54.5 million during the first six months of 2022.

Purchases of U.S.

Government agency guaranteed mortgage-backed securities totaled $2.1 million during the first six months of 2022, consisting of investments in CRA-qualified securities, generally reflecting the reinvestment of $3.2 million from principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities.

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

Purchases of municipal bonds totaled $22.0 million during the first six months of 2022;

proceeds from matured and called municipal bonds totaled $8.3 million.

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

At June 30, 2022, the portfolio was primarily comprised of U.S.

Government agency bonds (67%), municipal bonds (26%) and U.S.

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

The fair value of securities designated as available for sale at 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.

The fair value of securities designated as available for sale at June 30, 2022 totaled $604 million, including a net unrealized loss of $60.3 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.

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.

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.

We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.

MERCANTILE BANK CORPORATION

Market values on our U.S.

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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 excess funds deposited at the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate sensitivity.

Federal Home Loan Bank of Indianapolis (“FHLBI”) stock totaled $17.7 million as of June 30, 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.

We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.

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.

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

MERCANTILE BANK CORPORATION

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.

Net premises and equipment equaled $51.4 million at June 30, 2022, representing a decrease of $5.9 million during the first six months of 2022.

The decline primarily reflects the sale of a branch facility located in Lansing, Michigan as part of a branch relocation project whereby we are moving our operations to a leased facility that better aligns with our operations in the greater Lansing area and provides for lower operating costs, along with depreciation expense.

We had no foreclosed or repossessed assets as of June 30, 2022, unchanged from December 31, 2021.

Total deposits decreased $209 million during the first six months of 2022, totaling $3.87 billion at June 30, 2022.

Local deposits decreased $185 million and out-of-area deposits declined $23.9 million.

The reduced level of local deposits primarily reflected a single customer’s expected withdrawal of a majority of funds that were obtained from the sale of a business and deposited in late 2021;

excluding this withdrawal, total local deposits were relatively steady during the first six months of 2022.

Noninterest-bearing deposits increased $62.5 million and savings deposits were up $15.2 million, while interest-bearing checking accounts were down $57.8 million, during the first six months of 2022.

Money market deposit balances were down $151 million, in large part reflecting the significant withdrawal from a single customer.

Local time deposits declined $54.1 million during the first six months of 2022.

We had no out-of-area deposits as of June 30, 2022, compared to $23.9 million as of December 31, 2021.

Sweep accounts increased $5.9 million during the first six months of 2022, totaling $203 million as of June 30, 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.

The average balance of sweep accounts equaled $196 million during the first six months of 2022, with a high balance of $224 million and a low balance of $173 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 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.

MERCANTILE BANK CORPORATION

FHLBI advances decreased $11.7 million during the first six months of 2022, totaling $362 million as of June 30, 2022.

Amortizing FHLBI advances aggregating $28.3 million were obtained, while bullet advances aggregating $40.0 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.

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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.

Our borrowing line of credit as of June 30, 2022 totaled $932 million, with remaining availability based on collateral equaling $564 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”).

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Shareholders’

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

equity was $429 million at June 30, 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.

equity was positively impacted by net income of $23.2 million, which was partially offset by payments of cash dividends totaling $9.6 million.

A $43.9 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

equity during the first six months of 2022.

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

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To assist in providing needed funds 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.

Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $362 million, or 8.2% of combined deposits and borrowed funds, as of June 30, 2022, compared to $398 million, or 8.5% of combined deposits and borrowed funds, as of December 31, 2021.

Sweep accounts increased $5.9 million during the first six months of 2022, totaling $203 million as of June 30, 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.

The average balance of sweep accounts equaled $196 million during the first six months of 2022, with a high balance of $224 million and a low balance of $173 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 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.

MERCANTILE BANK CORPORATION

Information regarding our repurchase agreements as of June 30, 2022 and during the first six months of 2022 is as follows:

Outstanding balance at June 30, 2022

Weighted average interest rate at June 30, 2022

Maximum daily balance six months ended June 30, 2022

Average daily balance for six months ended June 30, 2022

Weighted average interest rate for six months ended June 30, 2022

FHLBI advances decreased $11.7 million during the first six months of 2022, totaling $362 million as of June 30, 2022.

Amortizing FHLBI advance aggregating $28.3 million were obtained, while bullet advances aggregating $40.0 million matured.

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

Our borrowing line of credit as of June 30, 2022 totaled $932 million, with remaining availability based on collateral equaling $564 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 did not access these lines of credit during the first six months of 2022.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $650 million during the first six 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 $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:

Using certain municipal bonds as collateral, we could have borrowed up to $27.2 million as of June 30, 2022.

We did not utilize this line of credit during the first six 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.

The following table reflects, as of June 30, 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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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 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.

As of June 30, 2022, we had a total of $1.68 billion in unfunded loan commitments and $35.0 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.46 billion were commitments available as lines of credit to be drawn at any time as customers’

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While we believe it is unlikely that a funding crisis of any significant degree is likely to materialize, we have developed a comprehensive contingency funding plan that provides a framework for meeting liquidity disruptions.

MERCANTILE BANK CORPORATION

Capital Resources

Shareholders’

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

equity was $429 million at June 30, 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.

equity was positively impacted by net income of $23.2 million, which was partially offset by payments of cash dividends totaling $9.6 million.

A $43.9 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.

equity during the first six 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 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 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

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.

We believe that, as of June 30, 2022, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

As of June 30, 2022, our bank’s total risk-based capital ratio was 13.4%, compared to 13.6% at December 31, 2021.

Our bank’s total regulatory capital increased $30.7 million during the first six months of 2022, in large part reflecting net income totaling $27.6 million and a $15.0 million equity injection associated with the Notes issuance, which was partially offset by cash dividends paid to us aggregating $13.0 million.

Our bank’s total risk-based capital ratio was also impacted by a $285 million increase in total risk-weighted assets, primarily resulting from net growth in commercial loans and residential mortgage loans.

As of June 30, 2022, our bank’s total regulatory capital equaled $582 million, or $149 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 June 30, 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 $4.88 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.

We recorded net income of $11.7 million, or $0.74 per basic and diluted share, for the second quarter of 2022, compared to net income of $18.1 million, or $1.12 per basic and diluted share, for the second quarter of 2021.

We recorded net income of $23.2 million, or $1.47 per basic and diluted share, for the first six months of 2022, compared to net income of $32.3 million, or $2.00 per basic and diluted share, for the first six months of 2021.

The lower levels of net income during the second quarter and first six months of 2022 compared to the respective prior-year periods resulted from decreased noninterest income as well as higher credit loss provisions and overhead costs, which more than offset increased net interest income.

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

The credit loss provisions recorded during the current-year periods mainly reflected allocations dictated by commercial and residential mortgage loan growth, increased specific reserves for certain problem commercial loan relationships, and a higher reserve for residential mortgage loans resulting from an increase in the average life of the portfolio.

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

Excluding nonrecurring transactions, overhead costs decreased slightly during the second quarter of 2022 compared to the prior-year second quarter, mainly reflecting lower compensation costs, and were up less than 2% during the first six months of 2022 compared to the respective 2021 period, primarily reflecting higher data processing costs.

The higher level of net interest income during the second quarter of 2022 resulted from earning asset growth and an improved net interest margin, while the increase in net interest income during the first six months of 2022 reflected earning asset growth, which more than offset a slight decline in the net interest margin in large part driven by decreased PPP net loan fee income accretion.

MERCANTILE BANK CORPORATION

Interest income during the second quarter of 2022 was $39.6 million, an increase of $3.8 million, or 10.6%, from the $35.8 million earned during the second quarter of 2021.

The increase resulted from growth in, and a higher yield on, average earning assets.

Average earning assets equaled $4.78 billion during the current-year second quarter, up $311 million, or 7.0%, from the level of $4.47 billion during the respective 2021 period;

average loans and average securities were up $268 million and $132 million, respectively, while average interest-earning deposits decreased $88.8 million.

The yield on average earning assets was 3.32% during the second quarter of 2022, up from 3.20% during the prior-year second quarter.

The higher yield primarily resulted from an increased yield on other interest-earning assets, reflecting the rising interest rate environment, and a change in earning asset mix, comprised of a decrease in lower-yielding interest-earning deposits and an increase in higher-yielding loans as a percentage of earning assets.

On average, lower-yielding interest-earning deposits represented 11.1% of earning assets during the second quarter of 2022, down from 13.9% during the second quarter of 2021, while higher-yielding loans represented 76.0% of earning assets during the current-year second quarter, up from 75.3% during the second quarter of 2021.

The yield on average loans during the second quarter of 2022 was virtually unchanged from the yield during the second quarter of 2021 as the negative impact of a lower level of PPP net loan fee accretion was substantially offset by the positive impact of higher interest rates on variable-rate commercial loans stemming from the Federal Open Market Committee (“FOMC”) significantly raising the targeted federal funds rate by a total of 150 basis points during the period of March 2022 through June 2022.

PPP net loan fee accretion totaled $0.2 million during the second quarter of 2022, compared to $2.9 million during the prior-year second quarter.

A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 as a result of the Covid-19 environment and has persisted since that time, negatively impacted the yield on average earning assets by 28 basis points and 42 basis points during the second quarters of 2022 and 2021, respectively.

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 1.49% 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.

Interest income during the first six months of 2022 was $75.4 million, an increase of $4.8 million, or 6.9%, from the $70.6 million earned during the respective 2021 period.

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

Average earning assets equaled $4.83 billion during the first six months of 2022, up $449 million, or 10.3%, from the level of $4.38 billion during the first six months of 2021;

average loans were up $235 million, average securities increased $163 million, and average interest-earning deposits were up $51.1 million.

The yield on average earning assets was 3.16% during the first six months of 2022, compared to 3.23% during the respective prior-year period.

The decline resulted from a lower yield on loans and a change in earning asset mix, which more than offset a higher yield on other interest-earning assets, reflecting the increasing interest rate environment.

The yield on loans was 3.92% during the first six months of 2022, down from 4.01% during the respective 2021 period primarily due to a lower yield on commercial loans.

The decrease in the yield on commercial loans from 4.06% during the first six months of 2021 to 4.01% in the comparable current-year period primarily reflected a lower level of PPP net loan accretion, which more than offset the previously mentioned impact of higher interest rates on variable-rate loans resulting from FOMC rate hikes.

PPP net loan fee accretion totaled $1.0 million during the first six months of 2022, compared to $5.7 million during the first six months of 2021.

On average, higher-yielding loans represented 73.7% of earning assets during the first six months of 2022, down from 75.9% during the respective 2021 period.

The significant volume of excess on-balance sheet liquidity negatively impacted the yield on average earning assets by 37 basis points and 43 basis points during the first six months of 2022 and 2021, respectively.

Interest expense during the second quarter of 2022 was $5.2 million, an increase of $0.3 million, or 6.5%, from the $4.9 million expensed during the second quarter of 2021.

The increase is attributable to growth in average interest-bearing liabilities, which totaled $2.91 billion during the current-year second quarter compared to $2.67 billion during the prior-year second quarter, representing an increase of $239 million, or 8.9%.

The weighted average cost of interest-bearing liabilities of 0.72% during the second quarter of 2022 declined slightly compared to the respective 2021 period as a decrease in the cost of time deposits was substantially offset by an increase in the cost of borrowings.

The cost of time deposits decreased from 1.24% during the second quarter of 2021 to 0.83% during the current-year second quarter mainly due to lower interest rates paid on local time deposits.

The cost of borrowed funds increased from 1.73% during the second quarter of 2021 to 1.90% during the second quarter of 2022 primarily due to the issuance of $90.0 million in subordinated notes in December of 2021 and January of 2022 and a higher cost of subordinated debentures.

The cost of subordinated debentures was 4.63% during the second quarter of 2022, up from 3.79% during the respective 2021 period due to increases in the 90-Day Libor Rate.

MERCANTILE BANK CORPORATION

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.

Interest expense during the first six months of 2022 was $10.2 million, an increase of less than $0.1 million from the amount expensed during the first six months of 2021.

The nominal increase is attributable to growth in interest-bearing liabilities, which was substantially offset by a lower weighted average cost of interest-bearing liabilities.

Average interest-bearing liabilities were $2.99 billion during the first six months of 2022, up $353 million, or 13.4%, from the $2.64 billion average during the respective 2021 period.

The weighted average cost of interest-bearing liabilities decreased from 0.78% during the first six months of 2021 to 0.69% during the respective current-year period mainly due to a lower cost of time deposits, which more than offset an increase in the cost of borrowings.

The cost of time deposits decreased from 1.37% during the first six months of 2021 to 0.86% during the first six months of 2022 primarily due to lower interest rates paid on local time deposits.

The cost of borrowed funds increased from 1.75% during the first six months of 2021 to 1.86% during the respective 2022 period, mainly reflecting the issuance of subordinated notes and a higher cost of subordinated debentures.

The cost of subordinated debentures was 4.22% during the first six months of 2022, up from 3.82% during the first six months of 2021 due to increases in the 90-Day Libor Rate.

Net interest income during the second quarter of 2022 was $34.3 million, an increase of $3.4 million, or 11.2%, from the $30.9 million earned during the respective 2021 period.

The increase resulted from growth in average earning assets and an improved net interest margin.

The net interest margin increased from 2.76% in the second quarter of 2021 to 2.88% in the current-year second quarter due to a higher yield on average earning assets.

The increased yield primarily stemmed from a higher yield on other interest-earning assets, reflecting the rising interest rate environment, and a change in earning asset mix, comprised of a reduction in lower-yielding interest-earning deposits and an increase in higher-yielding loans as a percentage of earning assets.

The cost of funds equaled 0.44% in the second quarter of 2022, unchanged from the prior-year second quarter as an increased cost of borrowings, primarily reflecting the issuance of $90.0 million in subordinated notes, was offset by a decreased cost of time deposits.

The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 23 basis points and 37 basis points during the second quarters of 2022 and 2021, respectively.

Net interest income during the first six months of 2022 was $65.2 million, an increase of $4.8 million, or 8.0%, from the $60.4 million earned during the first six months of 2021.

The increase resulted from growth in average earning assets, which more than offset a lower net interest margin.

The net interest margin decreased from 2.76% in the first six months of 2021 to 2.73% 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 mainly resulted from a lower yield on commercial loans, in large part reflecting a reduced level of PPP net loan accretion, and a change in earning asset mix, consisting of a decrease in higher-yielding loans as a percentage of earning assets.

The cost of funds equaled 0.43% during the first six months of 2022, down from 0.46% during the respective prior-year period primarily due to a lower cost of local time deposits.

The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 32 basis points and 37 basis points during the first six months of 2022 and 2021, respectively.

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

Tax-exempt securities interest income and yield for the second quarters and first six months 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 second quarter of both 2022 and 2021 and $120,000 in the first six months 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 each of the 2022 and 2021 periods.

MERCANTILE BANK CORPORATION

Quarters ended March 31,

Quarters ended June 30,

(dollars in thousands)

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Total interest - earning assets

Allowance for credit losses

Allowance for credit losses

LIABILITIES AND SHAREHOLDERS ’

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Net interest margin on earning assets

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.

MERCANTILE BANK CORPORATION

Six months ended June 30,

(dollars in thousands)

Investment securities

Other interest-earning assets

Total interest - earning assets

Allowance for credit 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

MERCANTILE BANK CORPORATION

A provision for credit losses of $0.5 million was recorded during the second quarter of 2022, compared to a negative provision of $3.1 million during the second quarter of 2021.

A provision for credit losses of $0.6 million was recorded during the first six months of 2022, compared to a negative provision of $2.8 million during the first six months of 2021.

The provision expense recorded during the current-year periods mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain problem commercial loan relationships, and a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the associated extended average life of the portfolio.

The required reserve allocations resulting from these factors were largely offset by the positive impact of a change in the Covid-19 environmental factor, the recording of net loan recoveries, and ongoing strong loan quality metrics during the periods.

The Covid-19 environmental factor was added in the second quarter of 2020 to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact on the collectability of the loan portfolio.

Improvement in overall Covid-19 conditions, including increased vaccination rates, the availability of booster shots, and the lifting of many economic growth-restraining restrictions, lessened the required credit reserve amount related to the Covid-19 environmental factor.

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

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.

The transition adjustment of the CECL adoption included a $0.4 million decrease in the allowance 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.

During the second quarter of 2022, loan charge-offs totaled less than $0.1 million, while recoveries of prior period loan charge-offs equaled $0.3 million, providing for net loan recoveries of $0.3 million, or an annualized 0.04% of average total loans.

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

During the first six months of 2022, loan charge-offs totaled $0.2 million, while recoveries of prior period loan charge-offs equaled $0.6 million, providing for net loan recoveries of $0.4 million, or an annualized 0.02% of average total loans.

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

The allowance for credit losses, as a percentage of total loans, was 1.0% as of June 30, 2022 and December 31, 2021, and 1.1% as of June 30, 2021.

Noninterest income during the second quarter of 2022 was $7.7 million, compared to $14.6 million during the prior-year second quarter.

Noninterest income during the first six months of 2022 was $17.0 million, compared to $28.0 million during the first six months of 2021.

During the second quarter and first six months of 2022, noninterest income included a $0.5 million bank owned life insurance claim, while noninterest income during the respective prior-year periods included a $1.1 million gain on the sale of a branch.

Excluding the impacts of these transactions, noninterest income decreased $6.3 million during the second quarter of 2022 and $10.5 million during the first six months of 2022 compared to the respective 2021 periods.

The lower levels of noninterest income almost exclusively reflected decreased mortgage banking income and interest rate swap income, which more than offset increases in several key fee income sources, including service charges on accounts, credit and debit card income, and payroll processing fees.

Continued strength in purchase residential mortgage loan originations during the second quarter and first six months of 2022 partially mitigated the negative impacts of higher interest rates, reduced refinance activity, lower sold percentages, and decreased gain on sale rates on mortgage banking income during the periods when compared to the respective prior-year periods.

The residential mortgage loan sold percentage declined from approximately 59% during the second quarter of 2021 and approximately 70% during the first six months of 2021 to approximately 27% and 36% during the respective current-year periods.

The decreased sold percentages in large part reflect customers’

preferences for adjustable-rate loans in the current interest rate environment and construction loans representing an increased percentage of overall loan production.

MERCANTILE BANK CORPORATION

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.

The declines in interest rate swap income reflect lower transaction volumes.

In aggregate, service charges on accounts, credit and debit card income, and payroll processing fees were up nearly 16% during the second quarter and first six months of 2022 compared to the respective prior-year periods.

Noninterest expense totaled $26.9 million during the second quarter of 2022, up from $26.2 million during the prior-year second quarter.

Noninterest expense during the first six months of 2022 was $52.7 million, compared to $51.3 million during the respective prior-year period.

Overhead costs during the second quarter and first six months of 2022 included a $0.4 million expense associated with the sale of a branch facility and a $0.5 million contribution to The Mercantile Bank Foundation.

Overhead costs during the first six months of 2021 included $0.5 million in net losses on sales and write-downs of former branch facilities.

Excluding these transactions, noninterest expense decreased $0.2 million in the second quarter of 2022 and increased $0.9 million in the first six months of 2022 compared to the respective 2021 periods.

The slightly lower level of expense in the second quarter of 2022 primarily resulted from higher residential mortgage loan deferred salary costs as well as decreased health insurance costs and residential mortgage lender commissions and associated incentives, which more than offset increased regular salary expense and a larger bonus accrual.

The higher level of expense in the first six months of 2022 mainly reflected increased regular salary expense and data processing costs, which more than offset higher residential mortgage loan deferred costs and lower residential mortgage lender commissions and related incentives.

The increased residential mortgage loan deferred salary costs reflected the outcome of an updated loan origination cost study and resulting higher allocated cost per loan, while the decreased residential mortgage lender commissions and associated incentives resulted from reduced loan production, in large part reflecting lower refinance activity.

Health insurance costs were lower in the 2022 periods due to a lower volume of claims.

Regular salary expense, mainly reflecting annual employee merit pay increases, and data processing costs, primarily reflecting higher transaction volume and software support costs, were up in the 2022 periods compared to the prior-year periods.

Other employee costs, consisting mainly of meals, entertainment, training, travel, and mileage, increased in the 2022 periods in large part due to the easing of Covid-19 pandemic-related restrictions.

Stock-based compensation also increased in the 2022 periods.

During the second quarter of 2022, we recorded income before federal income tax of $14.6 million and a federal income tax expense of $2.9 million.

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

During the first six months of 2022, we recorded income before federal income tax of $28.9 million and a federal income tax expense of $5.7 million.

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

The decreased federal income tax expense in both 2022 periods resulted from lower levels of income before federal income tax.

Our effective tax rate was 19.8% during the second quarter and first six months of 2022 and 19.0% during the respective 2021 periods.

MERCANTILE BANK CORPORATION

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